Rainbow Chicken spreads its wings

Since unbundling from its parent company a little over a year ago, Rainbow Chicken has come into its own by focusing on what it can control and getting the basics right.

Now, the company has set its sights on the lofty goal of becoming South Africa’s market-leading, best-in-class, and low-cost chicken producer.

Rainbow Chicken’s future did not always look as bright as it does today, with the company having come under severe pressure in recent years.

Established in 1960 by Stanley Methven, Rainbow started as a small stall selling chicken in central Durban.

However, the company quickly outgrew this format as demand for its product skyrocketed, and, within 16 years, it opened three processing plants.

A highlight in the company’s history came in 1984, when it won the tender to supply KFC in South Africa. Five years later, Rainbow was listed on the JSE.

As the years went on, Rainbow continued its rapid expansion and, by 2013, acquired Foodcorp, one of South Africa’s largest food producers.

Following this acquisition, the company changed its name to RCL Foods, which became one of South Africa’s leading food manufacturers.

While the company continued to grow its operations, it suffered a significant blow in 2019, when it swung to a major loss.

The company continued to be in the red in 2020, the same year it announced plans to transition Rainbow to a standalone business.

Dumped imports, particularly from the United States, and the impact of the Covid-19 lockdowns hit the company hard.

This necessitated the implementation of a turnaround strategy in 2021, which was focused on returning the consumer foods giant to profitability.

While this plan started to bear some fruit and the consumer giant returned to profitability, more headwinds weighed heavily on the chicken producers’ operations in 2023 and part of 2024.

This includes a widespread avian flu outbreak and South Africa’s many structural challenges, including incessant load-shedding, water cuts and logistical inefficiencies.

In March 2024, RCL Foods decided to pursue the formal separation of Rainbow via an unbundling and separate listing. 

The company believed this would enable both businesses to pursue their respective growth ambitions and investment theses in a focused manner and with improved alignment on capital allocation priorities.

In July 2024, Rainbow Chicken’s unbundling was completed, and the chicken producer was left to spread its wings and recover from the past few years of hard knocks.

Back to basics

Now a stand-alone business, Rainbow hit the ground running, with the path forward guided by its “Brilliant Basics” strategy.

This plan, in essence, narrowed Rainbow’s focus to the issues it could control in a trading environment where much was outside the company’s control.

South African chicken producers are often highly vulnerable to uncontrollable factors like maize harvests, feed costs and poultry prices.

Therefore, Rainbow’s plan, focused on ensuring better feed, farming practices, and processing, all intended to drive lower-cost outcomes, proved to be a boon to the chicken producer.

In its first full-year results as a stand-alone company, Rainbow reported 9% revenue growth and a 216.9% increase in earnings.

Rainbow CEO Marthinus Stander told Daily Investor that, when Rainbow first started implementing its turnaround plan in 2021, it faced historically high maize prices and severely constrained South African consumers.

Faced with these headwinds that were completely outside its control, Rainbow decided to turn its focus to the controllables, or its “engine room”, as Stander called it.

He explained that Rainbow’s value chain consists of feed, breed, agriprocessing, and distribution, and there is a constant build-up of costs across this chain.

“So, we had this approach of a horizontal income statement, basically just saying that if you add all those costs and you look at your average realisation in the market, if that is more than the sum of all the costs, you’re in profit territory,” he explained.

Then, the company ensured that each of those controllable costs is underpinned by key performance indicators (KPIs).

For example, egg cost is linked to the number of eggs that each hen can produce, the hatchability of that egg, and its fertility.

Isolating the KPIs allowed each link in Rainbow’s value chain to focus on finding the right balance between cost and performance.

This process was also aided by assigning an MD to each of its processing plants in Hammarsdale, Worcester, and Rustenburg.

The company also created individual teams for each division that could focus on one bottom line and find the lowest cost at the end of their distinct value chain.

Innovation

Stander told Daily Investor that, while focusing on the basics was crucial to the company’s turnaround, Rainbow also prioritised innovation.

Rainbow had a distinct advantage in this regard, as its 2021 restructuring saw the company move towards a decentralised but integrated regional model.

Following this restructuring, Rainbow now operates through three regional poultry units – Northern, KwaZulu-Natal and Western Cape.

These units are responsible for the poultry value chain from rearing to processing chickens, with this regional focus resulting in faster decision-making.

Stander explained that this also allowed the company to get creative when cutting costs, as there was “competition” between the different regions and provided measurable and comparable targets.

The company also switched to a different breed of chickens, although this takes two years to flow through the system, and the results of this change, therefore, remain to be seen. “Watch this space,” Stander said.

On the management level, Rainbow also made the decision to take its short-term incentive schemes right down to the lowest level.

The short-term incentive is effectively a bonus scheme based on the achievement of specified financial targets.

In contrast, the long-term incentives include a value creation plan for executive directors based on growth in Rainbow’s equity value, measured against a pre-determined target.

“Every quarter, there’s a measured outcome that could result in a bonus in your pocket that’s paid every quarter,” Stander explained.

“So then we went and we said it’s one team, one dream. We’re just going to focus on one bottom line and not take the silos out.”

He also emphasised the importance of maintaining a culture of accountability by building deep trust relationships that empower people to take ownership of their roles in their business.

Stander explained that the success of these strategies was also enabled by Rainbow’s unbundling from RCL Foods, which created a “pure play environment”.

“We’re, in essence, farmers. We’re chicken pluckers and we’re passionate about chicken, so it created a pure play environment,” he said.

Looking forward, Stander said Rainbow still has many opportunities to expand the reach of its current offerings, with no immediate plans to diversify outside chicken.

For now, the company is happy to be “chicken people doing chicken things”, with a strong focus on being best in class and growing the business through innovation and getting the basics right.