Papetti’s Hygrade Egg Products, Inc.

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Papetti’s Hygrade Egg Products, Inc.

1 Papetti Plaza
Elizabeth, New Jersey 07206
U.S.A.
Telephone: (908) 354-4844
Toll Free: (952) 851-7249
Web site: http://www.michaelfoods.com/papettis.htm

Wholly Owned Subsidiary of Michael Foods Inc.
Founded: 1908
Employees: Not Available
Sales: $300 million (1998 est.)
NAIC: 112310 Chicken Egg Production

A subsidiary of Michael Foods since 1997, Papetti’s Hygrade Egg Products, Inc. of Elizabeth, New Jersey, is the world’s largest egg products producer. Third and fourth generations of the Papetti family are still involved in the running of the 100-year-old company that “breaks” approximately 18 million eggs a day (more than 25 percent of all eggs broken in the United States). Papetti’s sells the machine-separated eggs—either as whites, yolks, or blended together—to food service, industrial, and retail markets. The company also manufactures extended shelf-life liquid eggs and specialty products such as prepared omelets and egg patties.

Emergence of American Poultry Industry After the Civil War

Laying a large number of eggs is contrary to the instincts of game birds, but many thousands of years ago man discovered that taking an egg from a nest would induce a hen to lay a compensatory egg, a process that could be repeated for an extended period of time. Chickens were, therefore, domesticated and bred for eggs as well as meat. They were brought to America by European settlers and were raised on almost every farm, mostly for family consumption. Excess products were sold in town or exchanged for goods at the general store. Chickens also were commonly kept by people in town. It was not until the post-Civil War era that a large-scale poultry industry began to develop.

The Papetti family became involved in poultry in 1908 when for $3,000 Antonio De Stefano purchased a dairy farm in Elizabeth, New Jersey. His daughter, Santina De Stefano-Papetti, ran the poultry and fresh egg business. (Traditionally, raising chickens was considered women’s work. As the poultry industry grew, however, men began to exert more and more control.) To make extra money, her sons, Anthony and Arthur, would break surplus eggs by hand, and in the process they established a trade with local bakers. What would begin as a sideline to a sideline of the family business would evolve one day into a mainstay.

As Papetti’s egg business took shape, the poultry industry began to undergo significant changes in the 1920s. Poultry science programs were instituted at American colleges, as the small-farm chicken enterprises run by women and children gave way to large organizations. Hatcheries gained wide use in the 1920s, as did research facilities funded by the major feed companies: Ralston Purina, Quaker Oats, and General Mills’ predecessor, Larrowe Milling. In 1934 Kimber Farms was established in Fremont, California, to engage in genetic research to develop chickens for desirable traits, such as the ability to lay a large number of eggs. Vaccines also were developed to cope with the results of not only the chickens’ compromised immune systems caused by genetic hybridization, but also the spread of disease caused by the increasingly more crowded conditions under which chickens were kept. Battery cages arranged in rows and tiers became standard in the 1940s, as did the practice of using confinement sheds for broiler chickens. These practices were in many ways a response to the increased demand for poultry and eggs that would be the result of red meat rationing during World War II. Many dairy barns were then converted to the factory system to meet the new market for fresh eggs and broiler chickens after the war.

As with many industries, poultry underwent vertical integration. Single companies, such as Tyson and Perdue, began to acquire all sectors of production: breeder and commercial flocks, eggs, hatcheries, feed mills, medications, slaughter, processing, and delivery. Small farmers were contracted to maintain the chickens at great expense with little reward and less security.

Papetti’s Focus on Egg Products in the 1950s

During the 1950s, the Papetti family left the chicken and fresh egg business and moved entirely into the eggs products business. The company now bought the eggs that it broke, using machines to separate the whites from the yolks. After undergoing a pasteurization process, the whites and yolks would be sold to food manufacturers, either separately or as a blend. Customers could supply the company with the required formula for its product, then Papetti’s would mix the proper blend of yolks and whites. In the case of ice cream producers, Papetti’s added the required amount of sugar. Because of the seasonality of some products, Papetti would find itself with a surplus of yolks. The company would then pack and freeze the yolks for later sale to the ice creamer makers who needed more yolks than whites. It also searched for new foods in which to use surplus whites and yolks. As Papetti’s egg products business grew, it opened egg-breaking facilities in Pennsylvania and Iowa and created a large fleet of delivery trucks.

Consumers’ egg-eating habits slowly changed after World War II and would have an impact on all facets of the poultry industry. Per capita consumption dropped from 400 eggs to 321 eggs by 1960. In 1990 consumption would stand at only 234 eggs per capita. In 1961 eggs accounted for 61 percent of revenues generated in the chicken business, but by 1975 broiler chicken sales outpaced eggs. Egg revenues would fall below 25 percent of revenues by the early 1990s. Much of the decline was due to Americans’shift away from a big breakfast, but there were also health concerns. In 1990 there were more than 2,000 cases of food poisoning and at least two deaths caused by salmonella poisoning, which is passed from the hen to the egg even before the shell is formed. Some of the large restaurant chains began to substitute pasteurized liquid eggs for fresh eggs, but the liquid variety was not as flavorful or versatile. Concern about the high level of cholesterol found in eggs was another troubling issue with consumers, who were becoming increasingly more fearful of heart disease.

Pappetti’s and its competitors began to look for ways to allay consumer concerns, as well as to save money by extending the shelf life of liquid eggs. In the late 1980s Papetti’s and Michael Foods both introduced extended shelf-life products. Michael Foods sued Papetti’s and other companies over patent infringement, litigation that would linger for several years while the rival companies battled on other product fronts. In essence, everyone was looking for one process that would kill salmonella, reduce cholesterol levels, and extend shelf life. Whoever could combine those attributes in a good-tasting, liquid egg product would stand to generate a great deal of business from large institutional food service companies, restaurants, hospitals, and schools.

In 1991 Bon Dente International Inc. announced that it had developed a method of pasteurizing eggs in the shell called Hyperpasteurization. By forcing oxygen into the eggs at high pressure, the new process would kill off Salmonella enteritidis. It could also be applied to liquid eggs, which sparked the interest of Papetti’s and the other egg product companies. In addition, attempts were made to create a cholesterol-stripped egg to supercede cholesterol-free egg products that did not use yolks (which contains most of an egg’s cholesterol). In the early 1990s a Pennsylvania company began to sell C.R. Eggs, produced by chickens fed on kelp, with the promise that the eggs could help lower cholesterol levels. By 1991, however, the eggs were pulled from the shelves when it was learned that they contained extremely high levels of iodine. A liquid alternative seemed to be the only viable way to produce cholesterol-free (or reduced) eggs. The question was how to include the yolks in the product.

Michael Foods would be Papetti’s main competitor in extended shelf-life and cholesterol-free egg products. The company was a 1987 spin-off from North Star Universal, a Minneapolis-based conglomerate. Unlike Papetti’s, Michael Foods was a publicly traded company, making its management extremely responsive to the fluctuating price of its stock. In the late-1980s, Michael Foods licensed a process from North Carolina State University that killed salmonella and other bacteria and made it possible to refrigerate liquid eggs for several weeks. Employing this method, Michael Foods began to sell a product it called Easy Eggs. But when sales were less than expected, Michael Foods’stock dropped and two disgruntled shareholders sued the company, claiming that it misled investors about the potential of Easy Eggs. Michael Foods would next apply a process that extracted 90 percent of the cholesterol from yolks that were then recombined with the whites. The resulting product was called Simply Eggs. Papetti’s would respond with its version, called Better’n Eggs.

The eggs products industry in the early 1990s would engage in a period of intense litigation. Michael Foods sued Papetti’s and Bartow Food Company over patent infringement regarding the North Carolina State process. Cargill, to preempt a suit against its Sunny Fresh Eggs entry in the extended shelf-life product line, sued Michael Foods, maintaining that the North Carolina State process was not original. As a result of the Cargill filing, Michael Foods’stock was affected adversely. In November 1992 the courts ruled against Papetti’s in the Michael Foods suits, and the company entered into a consent order, agreeing to refrain from using the extended shelf-life process licensed by Michael Foods.

While Papetti’s appealed the court’s decision, it strengthened its position in the refrigerated egg product business by acquiring for $9 million the Worthington Foods’ product line as well as its egg-processing equipment in the company’s Zanesville, Ohio plant. Worthington decided to drop out of the volatile egg products business, opting to focus on vegetarian meat substitutes. Its egg business, which accounted for about $8 million a year in revenue, would now contribute to the bottom line of Papetti’s.

Company Perspectives:

Papetti’s breaks over 18 million eggs per day to make products including extended shelf-life liquid eggs (Table Ready), dried and frozen yolks, whites and blends, hard-cooked eggs, egg substitutes and specialty egg products such as prepared omelets and egg patties.

In 1995 the U.S. Federal Court of Appeals upheld the earlier patent infringement case, and Michael Foods’stock soared on news of the ruling. Arthur Papetti, president of Papetti’s, discounted the importance of the court’s decision, maintaining that all that Michael Foods had gained was a chance to return to the patent board. Less than two weeks later an examiner for the U.S. Patent and Trademark Office would reject a number of claims that were made in the two patent applications involving the process for extending the shelf life of liquefied eggs. Stock for Michael Foods would again tumble.

Papett’s and Michael Foods Merger in 1996

After several years of litigation and uncertain business conditions, Michael Foods and Papetti’s decided that both sides would be better off if they joined forces. In July 1996, in a move that would resolve all litigation between the two companies, Michael Foods agreed to acquire Papetti’s for approximately $85 million in stock and cash. The Papetti family would continue to run the company as a wholly owned subsidiary of Michael Foods. At the time of the deal, Papetti’s was generating about $300 million in annual sales. The transaction, following government review, would be finalized in February 1997. Not only would there be a savings on legal costs, the combination of Michael Foods and Papetti’s would consolidate costs in a number of areas, including cost of goods, distribution and freight, supplies and packaging. Michael Foods would also re-merge with its parent company, North Star Universal, with Michael Foods becoming the surviving entity. This combination, plus the Papetti’s deal and other aggressive acquisitions, would propel the price of Michael Foods stock to new heights in 1997.

The Egg Products Division of Michael Foods consisted of Papetti’s and another subsidiary, M.G. Walbaum Company, which along with producing egg products maintained more than 12 million hens in production. In 1999 the Division would control more than 40 percent of the U.S. egg products market, generating some 60 percent of Michael Foods’sales and contributing to 80 percent of the company’s operating profits. The Egg Products division was able to achieve a six percent operating profit increase over the previous year, despite a seven-year low in egg pricing.

The outlook for Papetti’s, and the poultry industry in general, depended on several factors mostly related to the consumer’s evaluation of the product. The poultry industry had received increasing criticism about its practices. For years, moreover, animal rights activists complained about the conditions under which chickens have been kept and the methods employed to produce eggs. Government and academic scientists also began to question whether the care of chickens might cause disease that could spread to humans. While a movement to improve the conditions of all farm animals took hold in Europe, American activists shifted their attention from producers to the major buyers of chickens and eggs. In 2000 the McDonald’s restaurant chain, responded to public pressure (generated in part by a popular animated film, Chicken Run, which compared a chicken farm to a prisoner of war camp) by announcing guidelines for the care of chickens that it expected to be followed by the companies that supplied it with the 1.5 billion eggs its restaurants bought each year. Whether the McDonald’s edict was an indication of widespread consumer concern about chicken and eggs remained to be seen. If consumer confidence in fresh eggs was adversely affected, it was still uncertain what impact might be felt by egg products producers like Papetti’s. Moreover, as a subsidiary of a larger concern with an enormous investment in laying hens, Papetti’s might realize gains that would simply be offset by losses elsewhere in Michael Foods. In the end, as always, the consumer would decide.