Tyson Foods Works to Fix Its Chicken Operations as Orders Pile Up

“We’ve not been where we want to be from a performance perspective, from an execution perspective,” Mr. King said. Improving Tyson’s chicken supply is one of the biggest issues facing the company, Mr. King said.

The Arkansas-based company has struggled for years to meet demand and turn a consistent profit in its poultry business. The problems have persisted through a succession of chief executives, with five different CEOs leading the company in as many years.

Tyson’s challenges have played out across its sprawling operations, from problems hatching enough of the tens of thousands of chicks scampering inside cavernous barns that dot the Arkansas countryside near Tyson’s headquarters, to short-handed processing lines in the plants that slaughter and process the birds into chicken breasts or wings.

Demand for chicken is hot, from supermarkets to fast-food chains battling over crispy chicken sandwiches. Tyson’s problems have meant that the biggest U.S. chicken processor hasn’t been able to consistently fulfill growing customer orders, while its profitability has suffered. The company has had to pay more for grain to feed its chickens and wages to keep plants staffed. To meet orders, Tyson has sometimes bought chicken from rival processors, Mr. King said, at a time when boneless skinless breast prices have tripled since the start of 2021.

Tyson posted a $625 million operating loss in its chicken business for its 2021 fiscal year. Profits for Tyson’s smaller rivals in poultry have surged:

Pilgrim’s Pride Corp.

PPC -2.28%

and

Sanderson Farms Inc.

SAFM 1.02%

reported 2021 operating incomes of $211 million and $599 million, respectively.

Shares of Tyson are up about 17% over the past 12 months, but have lagged behind the 38% increase for Pilgrim’s, the second-largest U.S. chicken processor by volume. Sanderson Farms, the third-largest chicken company, has gained about 15%, while that company awaits Justice Department approval for its planned sale to Cargill Inc. and agricultural investment firm Continental Grain Co.

Tyson’s chicken earnings and adjusted operating margins have trended down since 2016, when former CEO

Donnie Smith

retired after overseeing years of growth. In June, Mr. Smith joined California-based poultry company Foster Farms as its new chief executive.

Mr. King, who started at the company’s poultry division in 1982 and went on to run that business and others for Tyson before taking over as CEO last year, has chicken profits back on the rise. On farms, the company is phasing out a certain chicken breed that wasn’t working and bringing back older varieties that performed better. The company said in December that it plans to spend $1.3 billion to automate parts of processing-plant production lines across the company, including the most labor-intensive segments. Tyson also plans to cut $1 billion in costs from the company overall by 2024. Staffing levels have improved in its plants as the company has rolled out new worker benefits programs.

In his office, wearing a heart-shaped sticker on his collared shirt with the words “yes”—the response Mr. King wants his executives to give to plant managers’ requests—Mr. King said the key is to speed up decision making. In May, he pledged to stay on as CEO for five years.

“Donnie and the entire team have made clear Tyson’s laser focus is restoring the competitiveness of the chicken business,” said poultry unit president

David Bray

in a December presentation to investors.

Tyson’s beef business has boosted the company since the pandemic, with a more than $3 billion profit in 2021. As the supply of cattle is projected to decline in the coming months and more consumers are expected to switch to chicken from pricier beef options, the company will need to lean on the business that propelled it into a $30 billion company, industry analysts and executives say.

Goldman Sachs Group Inc.

analysts said that Tyson is making progress in automating some of the hardest jobs in its chicken plants, including deboning, and that the business is turning around. Despite improvements,

Piper Sandler

Cos. analysts said that Tyson’s progress in chicken will be more than offset by declining profits from its beef and pork divisions.

At a Tyson processing plant in Rogers, Ark., that produces four million pounds of chicken nuggets and tenders a week, a new machine was installed in recent months that filters out used oil from chicken nugget flakes off the production line, giving the plant more use out of its cooking oil. The machine is expected to save the company about $200,000 a month, according to plant employees.

Elsewhere at the plant, a room where several dozen employees used to bag chicken nuggets now requires fewer than 10 after the process was partly automated. A bin for discarded chicken nuggets that used to be about 200 feet away was moved closer to the line, to save walking time for employees. Mr. King said small improvements like these will add up to improve plant efficiency.

Other factors are harder for Tyson to control. Inside hatcheries that incubate the company’s eggs, Tyson has worked to solve why fewer chicks are hatching.

In the second half of 2020, a new male breeder was rolled out to produce more efficient chickens, but it backfired and resulted in unexpectedly large numbers of unhatched eggs over the next year. This “hatch issue” affected the company’s entire chicken supply chain, said Mr. Bray.

Tyson said its hatch rates are expected to improve later this year. The company is using two former breeds of male chickens that worked well in past years, down from the half dozen genetic lines it was using, executives have said. Over the next couple of months, the company hopes to phase out the failed breed.

Some conditions are working in Tyson’s favor. Demand from grocery stores and restaurants remains strong, executives have said, contributing to higher meat prices. Restaurants are once again willing to pay Tyson a premium to help develop new products for their stores, officials have said. Boneless, skinless chicken breast prices are up about 41% since the start of this year, according to the Agriculture Department.

“We’re sitting here today with the capacity to produce 47 million chickens. We’re not producing 47 million chickens,” said Mr. King. “We have to be the very best.”