Start a Vertically Integrated Chicken Business

Today we are looking at the American “integrator” business model and ask can this be adapted to small business in South Africa?

Chicken is an affordable food and an important source of protein and with consumption increasing, it is in theory a good business with lots of demand. Yet South Africa has one of the least efficient poultry industries in the world – even billion rand companies with enormous economies of scale cannot compete with imports – even though they are pumping their chicken with brine to fatten them up. Can the efficient integrated + contract chicken farming model popular in the US disrupt the local small business market or is it a western concept not suited to South African culture?

In the model, I am about to discuss there are two separate entities: the integrator and the contract grower operating the growout house where the chickens are raised. The integrator hatches the chicks and takes them to the contract grower to be raised, the integrator then collects the chickens when they are ready, slaughter, package and sell them to their clients (usually retailers or restaurants). This is part 1 of a 2 part series. This part looks at the integrator the next looks at the contract grower.

The US model
In the US more than 90 percent of all chickens raised for human consumption are produced by independent farmers working under contract with (vertically) integrated chicken production and processing companies. Most of the other ten percent are company-owned farms and less than one percent are raised by individual growers.

In this model, the integrated company hatches the broilers (chickens raised for meat), immediately vaccinates the day-old chicks and delivers them to growout houses the next day which are operated by an independent “grower” under contract (I will look at that next) who will look after the chicks until slaughter age/weight.

The integrator usually supplies the feed and the medication while the contract grower provides the housing, labour and other operating needs (electricity, water etc.)

When the chickens reach market age (6-7 weeks) they are collected from the contract grower (who is usually paid on weight) and taken to the processing plant which is operated by the integrator where they are slaughtered, processed and packaged and sent off to retail outlets (usually not owned by the integrator).

This model is one of the most efficient business models in the chicken industry in the world. The integrator controls the production of hatching to feed to slaughter but outsources the least profitable, labour intensive,  part in the vertically integrated value chain which is the growing process, this allows them to rapidly scale. While the growers are babysitting the chickens growing up the integrators sales team can get to work finding buyers for the chicken and can add more contract growers as they need without outlaying capital to buy new farms. For the growers (which I am going to talk about next), it is a constant and consistent source of income without the need to outlay capital for chicks, feed and most importantly find buyers.

Will this model work verbatim in South Africa and become the preferred way or does it have to be adapted?

When I build a value chain I look at it like lego blocks each part can be changed accordingly to suit you.

So let’s look at this business:
Chicks are hatched at hatchery
Chicks are vaccinated
Chicks are delivered to growout houses along with feed and medicine
Grower grows the chicks (outsourced)
Grown chickens are collected
Chickens are slaughtered
Chickens are processed and packaged
Chickens are sold and delivered to B2B buyer (retail outlet, restaurants etc.)
B2B buyer sells to consumer

So we have roughly 9 steps to get from the hatchery to the plate of the consumer. The integrator does 7 of them (I’ve not included feed production and also not included logistics as separate, to keep it simple). If we think in logo blocks we can switch roles do less than the 7 do more than the 7, but remember the growing is always going to be outsourced, there is a reason. The integrators in America has optimized and perfected this model over many years they take care of the parts that are most profitable to them and outsource the not so profitable part (I look at that next).

However, that does not mean that in South Africa the final step has to be outsourced. I’m not saying any more than that because I still want to try something in SA in this industry.

Anyway next we look at the contract growing business.

The problem with outsourcing is that the people you outsource to has to be reliable. In America this model operates on scale, there is about 20 000, even 30 000 chickens raised in one growout house and growers often manage more than one growout house at a time. So you can imagine how big these houses are. But to my point, it is usually outsourced to experienced farmers growers who have their own facility. So it is not really a business that outsources to just a random person. The main issue with small business entrepreneurs in South Africa is their mentality it is very hard to find reliable partners. But we’ll talk about that next.

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