Wal-Mart Gets Schooled

By Roland Hughes - February 4, 2012 | Tickers: MCD, WMT | 0 Comments

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It’s no secret that 1975 was the last year America had a trade surplus.  Few people know that same year Sam Walton created the Wal-Mart (NYSE: WMT) cheer after visiting a Korean tennis ball plant.  Many claim this is the year Wal-Mart officially turned its back on American manufacturing and lead most of Wall Street in the direction of cheap knock-offs from third world countries with horrific labor practices.  Wal-Mart’s low-quality, low-margin mentality even extended to its beef, at least until the U.S consumer taught the chain a serious lesson. Countless complaints were voiced by consumers, many of them recorded on-line to remain until the internet ceases to exist.

For those of you who didn’t attend Grilling 101 at Man School, here are the U.S.D.A. Grades:

1. U.S. Prime - less than 3% of all carcasses achieve this grade. Abundant marbling and from a very young carcass.
2. U.S. Choice - Roughly 50% of all carcasses. Prime has a higher quantity and more even distribution of fat marbling. Choice isn’t as evenly distributed and could have slightly less fat content.
3. U.S. Select - lacking in marbling. Not as tender as above grades. Will lack juice and flavor due to reduced marbling
4. U.S. Standard - “store brand” meat. Extremely lean which causes it to lack juice and flavor. Has very little marbling. Sometimes sold as “ungraded”
5. U.S. Utility
6. U.S. Cutter
7. U.S. Canner

You don’t often see Utility, Cutter, or Canner sold to the retail customer. These tend to be older cattle, despite marbling. Canner will be both older and lack marbling. While many people will tell you these last three grades are sold off as ground beef, it is really Cutter through Standard sold off as ground. Much Canner grade meat is priced out of the ground market by canned food manufacturers who tend to heat their products upwards of 300 degrees Fahrenheit after the can is sealed. If the beef had fat, the fat would melt and pool at the top of the can creating a very appetizing white grease ring at the top for whoever opened the can.

Until November 2011, Wal-Mart primarily purchased Select meat for sale in its stores. This was a direct extension of “always the cheapest all of the time”. Why weren’t they buying Standard you ask? It’s hard to come by. Especially since the beginning of 2011 when McDonald’s (NYSE: MCD) stopped using Select lean beef trimmings (SLBT) treated with ammonia. When most burger chains are trying to say they have 90% lean beef, Standard ends up being ground. (Those of you grilling over charcoal want 70% lean. Those of you grilling over gas aren’t going to get flavor no matter what you use.)

Wal-Mart now purchases what many other retailers purchase, Choice. In the world of agriculture this caused the Choice-Select price spread to widen from $3 to $19. Why? Given the current economy, many people have to pay as little as possible, despite all of the complaints about Wal-Mart beef, if they bought beef, they had to buy it there. This economic tragedy means that Wal-Mart accounts for up to 15% of all retail beef sales in the United States during any given year, and they rarely fall below 10%.

If you did the math above you learned that roughly 53% of all beef in the U.S. is graded Choice or higher. Now you also understand why a high end steak house charges $45 for a meal.  Despite what you want to believe, you cannot cook that steak at home.  Unless you raise your own cattle and are personal friends with the owner of the slaughter house, you are never going to see that quality of beef in your home. This leaves 47% falling into the other grades. The simple tragedy is that Select grade has always been somewhat of an orphan. The fat content is too high for the fast food ground beef market, unless you do something like McDonald’s is no longer doing. The fat content is also too low for the steak market. Any cut which is typically marinated and slow cooked for a prolonged period is fine, but the rest doesn’t have a large market. This orphan status is what initially looked good to the MBAs at Wal-Mart.  Tiny minds with little spreadsheets can make a case for selling Select at Choice price, until they get schooled by the consumer for doing it. This is America.

Beef: It’s what’s for dinner.

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