After a rapid international expansion in recent years, JBS has become the world leader in beef production, the second-largest producer of chicken and the third-largest producer and processor of chicken in the United States.

A decade ago, JBS was mainly focused on selling in Brazil. But by acquiring American giants such as Swift and Pilgrim’s Pride, JBS grew from a $1bn private company into the $41.9bn giant that slaughters 100,000 head of cattle a day, employs 185,000 workers and operates 300 processing facilities exporting to 150 countries across the five continents.

History

JBS was founded in Brazil in 1953 by José Batista. For over five decades, it operated as a private company until it was publicly floated on the Brazilian stock exchange in 2007. The Batista family still owns 28% of the company.

The company began a process of expansion in the 1990s, making opportunistic and strategic acquisitions which has given JBS a scale unequalled worldwide.

The company is made up of three business operations – JBS USA, JBS Mercosul and JBS Foods.

JBS USA is responsible for all beef, pork and poultry operations in the USA, Canada and Australia and it accounts for 73% of group revenue. JBS Mercosul encompasses the company’s operations in South America (Brazil, Argentina, Paraguay and Uruguay) and accounts for 27% of group revenue.

JBS Foods, created in 2014 on the acquisition of Seara Brazil, includes all poultry and pork operations in Brazil.

Eating up the competition

The JBS business model is based on opportunistic acquisitions centred around buying huge companies at a discount for cash and taking on large amounts of debt. The acquisition frenzy has landed JBS with $11bn in debt.

JBS’s buying spree took place at a time when cattle operations in the United States, and elsewhere, were struggling due to soaring grain prices and a more price-conscious consumer.

The first major purchase was Swift Foods, the third-largest US processor of beef and pork for $1.4bn, in 2007. It paid $225m in cash and assumed $1.2bn of Swift’s debt.

Swift was the worst-performing company in the US beef market and presented JBS with the perfect opportunity. The acquisition allowed JBS access to the US market where the company had been restricted up to then because of US food safety laws banning the importation of Brazilian beef.

The following year, it purchased Smithfield Beef which included the Five Rivers feedlot. This has the capacity to finish 2m head of cattle per year, more than the entire annual Irish beef kill.

In 2009, JBS became a multi-species processor when it acquired Pilgrim’s Pride, the Texas-based chicken company, for $2.8bn. As part of the deal, it took on debts of $2bn.

Last year, JBS acquired Seara Brazil from Marfrig, a rival Brazilian meat company. The total cost of the buyout to JBS was $2.75bn.

Despite the scale of the company and sustained revenue growth, JBS has often struggled to return a profit. For example, in 2010 and 2011, it lost $113m and $143.6m, respectively. The company appears to have turned a corner; it made steady profits of $320m in 2012 and $412m in 2013.

How has this acquisition binge been possible?

Since its flotation in 2007, JBS’s main funding has come from the Brazilian Economic Development Bank (BNDES). The bank now owns 30% of JBS, having invested more than $3.6bn in the group.

The BNDES was established in 1952 as a government agency with the aim of developing and carrying out national economic development policies.

Initially, the BNDES invested heavily in developing Brazilian infrastructure but, by the 1960s, the bank began lending to companies in the cattle-raising and agricultural sector, as well as small and medium-sized Brazilian companies. Currently, the bank’s loan book is nearly four times the size of the World Bank’s.

Routes to market

One of the major advantages that JBS has, with its aggressive acquisition policy and global scale, is the ability to enter any market.

Every year, 8.9bn tonnes of beef is exported around the world. Three countries, Brazil, Argentina and the US, control 50% of all of these exports. Unsurprisingly, JBS operate in these three regions while they also control 25% of the Australian processing industry.

Because of US safety rules, no Brazilian meat producer can export cuts to the US. To get around this obstacle, JBS bought Swift Foods in 2007, giving them access to a market of 340 million people, a relationship with large retailers and a sustainable cattle supply.

Furthermore, in 2008, when the EU restricted Brazilian meat, because of traceability measures, JBS took advantage of its Australian subsidiary to export meat into Europe.

Down through the years, it diversified into processing other proteins to offer supermarkets the full range of meat, building on established relationships.

Challenges

What happens at JBS is fundamental to everybody else due to its sheer scale. To support its aggressive strategy, JBS has relied on its extensive knowledge of the beef sector.

Factors which have hurt the company’s profitability are its large size and the assumption of the liabilities of its acquisitions, particularly the American ones, which had substantial debts on their balance sheets.

In addition to financial problems, JBS has had to adapt to different business styles and cultures across its locations. From this perspective, the company today faces the challenge of managing a gigantic structure on almost all of the continents, while seeking improvement in a commodity sector where volume and scale are essential in the recognition of results.

Another significant challenge facing the company is that the Brazilian industry is consolidating further to compete globally.

In Brazil, its strongest competitor, Marfrig, acquired Alimentos from Cargill, while Brasil Foods (BRF) was formed with the merger of Sadia and Perdigão.

Analysis

The single factor that sets JBS apart is its use of Brazil’s strengthening currency as an opportunity to expand abroad.

A key element of its success was the strong financial support, through financing and lines of credit from the BNDES. However, with debts of $11bn, can this be sustained and how long is the BNDES willing to wait for repayment of the loans?

With such tight margins demanding increasingly higher economies of scale, strategies of diversification and vertical integration are the next logical step to ensure company performance.

The agricultural market is becoming more globalised, but trade barriers still block access to markets in the US and Europe. So far, Ireland has been relatively insulated from an influx of JBS products.

Given the increasingly strong demand for food worldwide, Brazil’s significant competitive advantage, and its access to global markets, leaves JBS ideally positioned to differentiate and innovate, seeking products and markets with higher added value.