SON OF A CHICKEN MAN
As he struggles to remake his family's poultry business into a $24 billion meat behemoth, John Tyson must prove he has more to offer than just the family name.

By Nicholas Stein
FORTUNE   May 13, 2002

JOHN TYSON LIKES TO TELL A STORY ABOUT ONE OF HIS EARLIEST experiences at Tyson Foods. The year was 1969, and his father, Don, then the company's chief executive and one of the most powerful men in the state, had arranged for his teenage son to spend the summer at a Tyson poultry-processing plant in Green Forest, Ark. One morning an old poultry hand was assigned to teach the boss' son how to unload chicken coops. "He said, 'Pay attention, just watch how I do this,' " says Tyson in his broad Arkansan twang. "Of course, being a 16-year-old kid, you sometimes don't pay attention as well as you should." Tyson's co-worker reached into the back of a truck, removed a coop, and set it down on a conveyor belt. "I said to myself, 'That didn't look difficult,' " he says. So Tyson reached in, grabbed a coop, and lifted it up. But he tilted it the wrong way, and then he watched helplessly as the excrement lining the bottom of the coop slid toward him. "It hit me right in the face," he says, "and slid down the front of my shirt."

John is amused by this folly-of-youth anecdote as only a successful man can be. After all, he's now CEO of the company, which has $24 billion in annual revenues and supplies 25 billion pounds of chicken, beef, and pork a year to Wal-Mart, McDonald's, and most of the country's major supermarkets and restaurant chains. So it's easy to look back and laugh. Except the chicken coop incident wasn't such an aberration. In fact, John's youthful follies lasted well into adulthood. After shuttling from one company post to the next, John descended in the late 1980s into a haze of alcohol and cocaine addiction that frayed his relationship with his father and pushed him to the periphery of the business. Even after he returned to the fold in the early 1990s, following a well-publicized recovery and reconciliation, few imagined him capable of assuming his birthright and succeeding his legendary father as CEO. "They put him in [somewhere] and gave him the title," says one former Tyson senior executive of John's string of management posts, "but he never really managed anything."

Now Tyson must prove he has more to offer than just the family name. Barely two years into his tenure as CEO, he is coping with two of the greatest challenges in the company's 67-year history. First, his grand plan to redefine Tyson as a diversified meat company by last fall's acquisition of beef and pork behemoth IBP is fraught with problems. As a chicken company, Tyson was faring poorly. Earnings dropped 42% last year, to $88 million; over the past three years, net profit margins have eroded from 3% to less than 1%. To acquire IBP, Tyson had to more than triple its debt load. And the supposed synergies of the deal have proved elusive so far. As a result, Tyson's stock is trading around $13, down from $23 in 1999.

At the same time, Tyson's labor practices are under scrutiny. In December, after a lengthy undercover investigation, the Department of Justice indicted Tyson Foods and six of its executives for conspiring to smuggle illegal immigrants into the U.S. If convicted, the company faces up to $100 million in fines. Though Tyson denies the smuggling charges, there's no doubt that over the past decade it has become increasingly reliant on immigrant workers. Coming on the heels of the government's post-Sept. 11 crackdown on illegal immigration, the indictment has made it difficult for Tyson to find enough low-cost, unskilled labor to staff its plants.

John Tyson acknowledges these are trying times for the company founded by his grandfather and transformed into a giant by his father. But he insists that he's ready for the task. "I had to reestablish myself in this company and really work on my credibility," he says. "Had those things not been done, I can tell you that my father...would have looked me in the face and said, 'Hey, you need to go.' "

It's never easy proving yourself when you're the boss' son, especially if your father built not just a company but an entire industry. When 22-year-old Don Tyson entered his father's chicken business in 1952, it consisted of a modest farm and some delivery trucks. Few Americans ate much chicken--annual consumption was a meager nine pounds per capita. Over the next 40 years, Don would help change all that. He was among the first to recognize that if you owned the chicken throughout the production cycle--from farm to grocery case--you could reduce manufacturing costs, streamline production, improve quality, and, therefore, increase profit margins. Divining America's growing love affair with convenience, Don worked with McDonald's to develop the chicken nugget and appealed to the legions of women entering the work force by selling his own brand of boneless breasts and breaded chicken patties in supermarkets. These products helped Tyson stand out from its competitors, command higher prices, and lessen the impact of fluctuating commodity markets.

The result was unabated growth. When Don became president of Tyson in 1966, the company had annual revenues of $38 million; when he stepped down as senior chairman in 2001, revenues had grown to $7.4 billion--making Tyson the largest poultry producer in the U.S., with 23% of the market. In the process, chicken had become the country's most popular protein. In 2000, Americans ate 78 pounds per capita, a 770% increase over 1953.

By the time his only son, John, took over the company two years ago, however, the growth had slowed. Competitors like Perdue had caught up by producing their own high-quality branded products and by undercutting Tyson on price. And as more chicken came to market in the 1990s, chicken parts went unsold in grocery cases, and prices slumped. Meanwhile, the price of grain used in chicken feed skyrocketed.

Don had attempted in the early 1990s to maintain Tyson's growth by transferring its poultry-processing expertise to beef, pork, and seafood. But what seemed a sound idea in theory proved disastrous in practice. When given a precise amount of feed over a specific period of time, chickens reach fairly uniform sizes and weights. Not so with cattle and pigs. That makes it far more difficult to create machinery to process the meat--and far more costly to sell processed beef and pork products. "The term 'value added' meant that Tyson was doing the work for the customer," says one former Tyson executive. "But every time you put a knife to a piece of meat, you add cents per pound. A lot of the stuff we developed was priced out of range." The company's flirtation with seafood yielded similarly disappointing results. By 1999, Tyson Foods was ready to acknowledge that its entire foray outside the chicken business had been an abysmal failure.

Don had put John in charge of the meat and seafood businesses in 1993, a severe test for a man, then nearing 40, who had yet to prove himself in the business world. Though he held a variety of farm, sales, and purchasing positions at Tyson, and had been on the board since 1984, John spent much of his time in the late '80s drinking and doing drugs. "The only reason I was on the payroll is because I was the son of the boss," John testified during a legal proceeding in 1998. "Any other corporation, I would have been thrown to the wolves." In 1990, John went through recovery, found God, and rededicated himself to the business. When his father named him president of the meat division, John regarded the assignment as a vote of confidence. "They put me in places where I had to make tough decisions," he says.

Still, John admits that his elevation to president in 1998 and then CEO 18 months later caught him off guard. "Everyone thought that [the decision] was still three or four years away," he says. Some saw the move to name John as CEO as Don's attempt to continue his own reign. "I don't think many people have a whole lot of confidence in John," says a former senior executive. "He's never really done anything to distinguish himself. He's always just been daddy's kid."

John's first decision as CEO was a monumental one. He opted to revisit the strategy that had failed his father a decade earlier: expansion into beef and pork. IBP, a meat behemoth with more than double the annual sales of Tyson, had put itself in play in 2000. In January 2001, after a bidding war with Smithfield Foods, Tyson agreed to acquire the company for $4.6 billion in cash and stock. Why did John think he could succeed where his legendary father had failed? John's answer, in a word, is scale. "The lesson we learned the last time is that if you don't have size and scale, you can't effectively service your customers," says Tyson, who notes that because of consolidation, five food retailers now control nearly 50% of the market. And with the largest share of the U.S. beef market (27%) and second largest share of the pork market (19%), IBP certainly had the size.

Also important was that IBP already had a processed-meat strategy on which Tyson could build. IBP carved out its dominant market position by selling low-margin bulk meat to fast-food chains and supermarkets, but in recent years the company had taken steps to move into higher-margin products. In 2000, after investing millions of dollars in research and development, IBP launched a series of raw and cooked processed meats under a new brand name: Thomas E. Wilson. A centerpiece of the processed-meat initiative is the IBP plant in Council Bluffs, Iowa, a former hog-processing facility that rises from the rural countryside like a gleaming apparition imagined by a '60s-era science-fiction writer. Every week up to 3.5 million pounds of meat enter the plant as freshly slaughtered carcasses and leave as neatly packaged steaks, chops, and roasts. The raw cuts are known as "case ready." They arrive at the supermarket in a sealed package and go right from the delivery truck to the shelf--just like a box of Cheerios. The precooked items, including beef pot roasts and lemon-pepper pork roasts, can sit in the refrigerator for 90 days and need only five minutes of cooking time in a microwave.

Thomas E. Wilson was a major reason John Tyson bought IBP, so much so that he asked Dick Bond, IBP's former president, to run the meat division of the merged company. Bond projects sales in 2002 of $1.3 billion for the Wilson brand alone, an amount he says "will far exceed any introduction in the history of branded products." The "case ready" concept has already found favor with one of Tyson's largest customers: Wal-Mart. Most of the meat processed at Council Bluffs is headed for the retail giant, which announced in 2000 that it would only sell case-ready beef and pork in its supercenters. Now Wal-Mart can convert its backroom butcher shops into floor space and replace high-priced meat cutters with stock boys. "We used to have to employ eight to ten butchers at $15 an hour," says Gretchen Adams, a former Wal-Mart co-manager in Florida. "[With case-ready,] a single butcher and a $5-per-hour stock boy can manage the meat case."

Signing up the country's largest supermarket chain is a crucial first step. But Tyson must also woo other major grocers, and that won't be easy. The meat industry has been talking about case-ready meat for nearly 30 years, but retailers have been slow to accept it. One reason is that labor unions have fought bitterly against replacing highly paid butchers. More important, retailers would have to overhaul the way they evaluate their meat departments, which are judged on gross margins--the difference between the price they pay for meat and the price for which they sell it. Case-ready meats cost them as much as 80 cents more per pound, while the cost to the consumer remains about the same. So in the short term, performance appears to get worse. Only in the long term, after retailers see the impact of lower labor costs, reduced waste and spoilage, and additional floor space does case-ready start to make sense. "The challenge for Tyson is to convince retailers that the pricing mechanism must change," says Steve Kay, editor and publisher of industry newsletter Cattle Buyers Weekly.

For now the Council Bluffs plant is operating well below capacity, and the company's third plant, in Texas, has been put on hold. "The capital expenditures on case-ready plants are phenomenal," says Kay. And, he adds, the production difficulties that sank Tyson's 1990s experiment with processed meat still remain: "One has to wonder whether they will ever see a return." For precisely this reason, Tyson competitor ConAgra has decided not to pursue case-ready meat.

By the time Tyson Foods announced its acquisition of IBP in January 2001, John Tyson was prepared to overlook these hazards and the company's previous failures. After all, the deal was his chance--with one bold stroke--to restore the company to its former glory. But John's father didn't see things quite the same way.

Don Tyson worried that his son was spending too much to get IBP. After all, Wall Street was in a tailspin, Tyson and IBP were suffering through disastrous quarters, and recent mad-cow and foot-and-mouth epidemics had soured the public on beef. And while the elder Tyson had been removed from day-to-day operations for years, he still held more than 80% of the voting stock and a seat on the board. On March 28, 2001, Don called a meeting of the company's senior management team to discuss the pending acquisition. After voicing his concerns, Don withdrew for a private conference with board members Buddy Wray and Leland Tollett, who had been his chief lieutenants when he ran the company. None of the company's current management--and certainly not his son--were invited to join them. When Don returned a short while later, he instructed Tyson management to find a way to back out. The next day, Tyson Foods issued a press release announcing it had terminated its agreement with IBP. This despite the fact that only two days earlier John had told the merger integration team to "move full speed ahead." So instead of stepping out of his father's shadow, John Tyson once again found himself behind it.

Sitting one March afternoon in the chief executive suite at Tyson's sprawling northwestern Arkansas headquarters, John Tyson waxes philosophical about his father's intervention in the IBP deal. The spacious oval office, which Don Tyson modeled after the U.S. Presidents', is filled with traditional furnishings and decorated with sculptures of cowboys on horses, giant bronze chickens, and a black-and-white photograph of John's grandfather, the company's founder, his arms cradling a fluffy, white hen. The only reminder of John's wild days is a photograph taken at a Crosby Stills Nash & Young concert. John, now 48, is wearing the khaki-colored workingman's uniform favored by his father: The red-and-gold Tyson crest is affixed above his left shirt pocket; his name is embroidered in red above the right. "What went on is no different than [Walter Hewlett's involvement with] Compaq/HP or what Warren Buffett did to Doug Daft when Coke wanted to buy Gatorade," he says. "We as a management team were reporting to a large shareholder.... He just happened to be my dad."

There's one reason Tyson can offer such affable perspective: the Delaware Chancery Court. After Tyson Foods backed out, IBP sued, and the Delaware judge ordered Tyson to consummate the merger. So after all that, John Tyson still got his chance to pursue his vision of the company as a "multiple protein provider"--and to resuscitate his reputation. But first he'll have to find a solution to the company's labor woes.

Put simply, Tyson is struggling to find enough cheap, unskilled labor to staff its processing plants. Turnover is extremely high, between 40% and 100% annually, meaning each of the company's 83 plants needs between 400 and 2,000 new workers every year. "Finding enough labor is a problem the entire industry is facing," acknowledges Tyson co-COO Greg Lee. Meat and poultry processing is unappealing work; it's difficult, dirty, and dangerous. Tasks involve repetitive movements (workers sometimes perform the same motion 30,000 times a shift), and knife-wielding employees work perilously close together as they struggle to keep up with the production line. Injury statistics from the Occupational Safety and Health Administration (OSHA) for 2000 reveal that one out of every seven poultry workers was injured on the job, more than double the average for all private industries. Poultry workers are also 14 times more likely to suffer debilitating injuries stemming from repetitive trauma--like "claw hand" (in which the fingers lock in a curled position) and ganglionic cysts (fluid deposits under the skin). Meatpacking is even more hazardous.

Most processing plants are located in rural areas, far from big-city labor pools, presenting a recruiting challenge. Moreover, the economic boom in the 1990s created the tightest labor market in decades, making it difficult for the company to find workers willing to toil for $7 an hour in its plants when they could earn the same or more at McDonald's. Increasingly, both Tyson and IBP came to rely on immigrants--mainly from Mexico and Central America. They began actively searching for these workers along the U.S. border with Mexico, and in the case of IBP, launched targeted recruiting drives within several Mexican towns. By the late 1990s the Tyson work force was very heavily Hispanic--40% according to Tyson, 60% or more according to union officials.

The DOJ indictment of Tyson last December charges that the company went beyond simply recruiting Hispanic workers. The 36-count indictment accuses the company and several of its executives--including a vice president at headquarters and a plant manager--of conspiring to smuggle illegal immigrants across the border, transport them to 15 Tyson plants in nine states, and provide them with false documentation. (One of the former executives, Jimmy Rowland, was found dead on April 18, apparently from a self-inflicted gunshot wound to the chest.) If found guilty, the company would be liable for "the financial gain derived from the offense alleged." Prosecutors won't comment on the amount, but a letter they sent Tyson states that "illegal hiring practices at several plants resulted in a financial gain...in excess of $100 million."

The indictment was the culmination of a 2 1/2 year federal investigation into Tyson's labor practices that originated at a poultry processing plant in Shelbyville, Tenn., where four of the six indicted executives were employed. Like many rural towns home to a meat or poultry plant, Shelbyville has seen its Hispanic population rise dramatically in the past few years, from a few hundred in 1990 to more than 3,000 today. "Prior to 1994, seeing a Hispanic in Shelbyville was like seeing a unicorn," says Bill Logue, an officer on the town's police force, who estimates that the actual Hispanic population is closer to 6,000. Logue and another officer on the force, Don Barber, began an investigation of Tyson after noticing that many of the Hispanics they pulled over for minor traffic violations had phony resident alien cards. "Every time we stopped one," says Logue, "it turned out they worked for Tyson." Their efforts to find the source of the phony documents led them to Amador Anchondo-Rascon, a local shopkeeper who once worked for Tyson. In the words of one Hispanic Shelbyville resident, Rascon was the guy who could get you in at Tyson, and the guy you went to see if you needed forged identity documents. After FBI and INS agents trapped him in an undercover sting operation, Rascon agreed to testify against Tyson in exchange for leniency.

The company vigorously denies it ever engaged in smuggling, saying any illegal activity was limited to a handful of managers acting outside company policy. "We work hard every day to make sure everyone that works for us is documented," says John Tyson. He says his company is trapped in a catch-22: Not every Hispanic who applies for a job is illegal, and the company has been prosecuted in the past for being too stringent in its documentation requirements. And even if many of its Hispanic workers are in the country illegally, it doesn't mean Tyson did the smuggling.

But the company's critics--including some of its own workers--charge that Tyson deliberately exploits the economic benefits of an immigrant labor force. "The industry has targeted women and immigrants because they are less likely to organize, less able to find alternative [employment], and more easily manipulated," says Donald Stull, a professor at the University of Kansas who has studied the industry extensively. More than a dozen Hispanic Tyson employees, both former and current, spoke with FORTUNE about their experiences inside the company's poultry processing plants in Shelbyville and Lancaster, Pa. They describe an environment in which Hispanic workers were reluctant to speak up for fear of reprisals. "Supervisors knew who had green cards and who didn't," says Lucy, an illegal alien who worked at the Shelbyville plant (and who asked us not to use her real name). "And they used it against us. If we didn't do what they wanted, they would threaten to call immigration." As a result, they say, Hispanics were forced to work harder than their American peers and were given the most arduous and hazardous jobs.

Workers say these pressures, combined with a lack of understanding of U.S. employment practices, also made them far less likely to report injuries or file for workers' compensation. "I would often see people go to the infirmary for a serious cut," says Bernardo de Asencio, who worked for three years in Lancaster. "They would give them a Band-Aid and send them right back to the line. Some supervisors even started to carry Band-Aids in their pockets so workers wouldn't lose time going to the infirmary." OSHA statistics for the 1990s seem to bear this out: Between 1990 and 1994, the rate of injury and illness in poultry-processing plants fluctuated between 22% and 27%; since 1995, the year the Hispanic influx began, rates have dropped steadily to their current level of 14%. This reduction saved the company millions of dollars in workers' compensation and insurance claims. Tyson attributes the drop in injuries to improved safety measures. But an internal memo written by the company's own vice president of labor relations, Timothy McCoy, suggests the workers might be right. According to court papers filed by plaintiffs lawyers in a Pennsylvania suit, the memo explicitly encouraged the hiring of Hispanics because their lack of understanding of English and of their legal rights meant they were less likely to take any action, legal or otherwise, against the company.

The situation worsened a few years ago, say workers, when Tyson increased line speeds in order to ratchet up production. "The speed varied," says Bernardo's wife, Melania, who spent four years at Lancaster and is a plaintiff in a class-action lawsuit against Tyson. "Sometimes it was normal, but other times it was so fast we couldn't keep up. We would finally refuse to work if they didn't slow it down." Plant bosses, say workers, used the hazards of the job to their advantage, specifically to leverage sexual favors from female workers. "Supervisors would say, 'If you want an easier job, go out with me,' " says Robert, who still works at Lancaster (and, therefore, asked us not to use his name). "Two women complained to their superior about one guy and even called [the employee hot line in] Arkansas. Yet he still has his job." Lucy says the same thing went on in Shelbyville. "It was basically prostitution," she says.

Not surprisingly, Tyson has a very different view of life inside its processing plants. "This whole idea that you are exploiting immigrant labor is neither born out by the facts nor is a desirable way to run our business--period," says co-COO Lee. "Labor is such an important part of our business. They are just too valuable to us to have a pall cast over the meatpacking industry as being abusers of labor." Lee points to the toll-free hot line available to any worker who wants to make a harassment complaint, and he disputes workers' claims that Tyson deliberately places Hispanics in more hazardous jobs. "We pace our lines for the best combination of quality, productivity, and doability," he says. "The last thing we want is an injury."

When Tyson Foods expanded into processed, branded chicken products in the late 1970s, the company developed an insatiable appetite for labor to perform the necessary cutting, deboning, and breading. Between 1980 and 1990, the company's work force increased from 8,000 to 44,000. Now that John Tyson is poised to take IBP down the same path, moving it increasingly toward Thomas E. Wilson-type products, it is likely that the company will need an even larger labor force than the one it is now struggling to maintain. Meanwhile, the indictment has led to increased scrutiny of Tyson's work force. Workers in Shelbyville say Tyson recently asked all of them for their resident alien cards; those with improper identification were dismissed. Lucy estimates that at the Shelbyville plant alone, between 200 and 300 have been laid off since December--and that doesn't include the day shift. Workers in Tyson's Lancaster plant reported similar mass layoffs.

When asked for a solution to the company's chronic labor troubles, Tyson executives all point to automation, which they say is increasingly being used to replace the most difficult and dangerous jobs. "We will have capital expenditures of $400 million this year," says Lee. "A lot of that money will be spent on automation...looking for labor-saving activities so you can do more with less. Had we not continued to automate, we would have much larger labor demand than we have now." Joe Luter, the CEO of the country's largest pork producer, Smithfield Foods, has suggested another solution: higher wages, which would make processing jobs more attractive to American workers. Labor makes up only about 10% of the total cost of production, meaning that raising wages to more attractive levels will result in only minor cost increases for consumers. But in a business in which two cents a pound can mean the difference between winning or losing a deal with a retailer, no company seems willing to make the first move.

Meanwhile, Tyson is vigorously contesting the indictment. The case is currently in discovery, and the trial is set to begin next February. Between that and the integration of IBP, John Tyson has had a challenging year. Though he still talks to his father about the business virtually every day, he is by all accounts finally establishing his own style as CEO--that of a delegator. "I've got some philosophical things that I believe in, and one of them is for people to make their own decisions," he says. "My responsibility is to be the head cheerleader for the organization and its new culture." In fact, he is so comfortable with his leadership team that he has recently left them to run the show while he headed off for a couple of three- or four-day trips riding the tour bus with his old buddies Crosby Stills Nash & Young. When his father headed the company, it was clearly the Don Tyson show. No one's calling it the John Tyson show just yet.