New Zealand Dairy Board: The Facts (Part Two)
The consumer side of the business has its own matrix now with a completely separate management organisation based on core product categories as shown in the table.
Africa, India and Middle East (AIME)
Australasia and Pacific
Spreads (Yellow fats)
Milks is the leading category and the one that has gone furthest so far with the strategy of exploiting health and wellbeing using the slogan "Nutrition for Life". Approximately 30% of the turnover of the Milks category comes from liquid milk (of which 80% is now from local i.e. non New Zealand supplies especially in such markets at Chile and Venezuela) and 70% is in the form of milk powders. Much of the product development effort over the last five years has gone into developing a range of specialist milk powders (and increasingly liquid milks) offering functional advantages to the consumer at every stage in his or her life before the cradle to, it is hoped, well before the grave.
Richard Manaton, Global Category Director, Milks, displaying the range
The first product chronologically in the range is ANMUM, a high folate and calcium whole milk powder. This is aimed at mothers to be.
ANMUM 2 is high in calcium but also contains iron and is aimed at breast feeding mothers. The next product is ANMUM FOLLOW ON, which is aimed at children of between six months and two years - New Zealand Milk steers clear of the tendentious infant formula sector (where of course the separate ingredients SBU is very active).
All of these products were introduced around four years ago and are now available throughout Asia (particularly Malaysia, Taiwan, the Philippines and Singapore) and in the more open Latin American markets such as Venezuela.
ANLENE low fat, high calcium powder, which did not exist six years ago, is now a product worth around US$75 million world-wide and has even been introduced in the last six months in liquid UHT form in Venezuela. ANLENE is targeted especially at women to help prevent osteoporosis. However the most recent developments have been in differentiating still more in this area and achieving added value compared with standard retail whole milk powder. This is based on the premise that the amount of Calcium and fat needed by the body varies according to the age of the consumer. The ANDEC products (introduced just eighteen months ago and in 6+ and 9+, plain and chocolate flavoured versions) are targeted at young children with a high rate of growth of bone mass and who can suffer "growing pains" indicating that not enough calcium is available to the body.
At 50, the consumer again needs a higher level of Calcium but without the fat of a whole milk powder. ANLENE GOLD, which contains more Calcium than the standard product, was launched in 1998 initially in the Philippines, Malaysia and China to fill this niche.
Apart from products differing in their Calcium content, there is PROLENE and, the most recent introduction, DR10 bifidus. PROLENE is a low fat, high Calcium, high Iron product for women of child bearing age. DR10 bifidus, which achieves a retail price 1.6 times that of standard retail whole milk powder in Taiwan, where it was launched late last year, contains "good bacteria to fight bad bacteria". This was a probiotic development of the Dairy Research Institute (DRI) in Palmerston North (see separate panel) to help maintain immunity in the digestional tract.
It is noticeable that New Zealand Milk has not chosen to concentrate on flavours in its milk powder range (in contrast to Klim for example) but has based its strategy on health. Only Taiwan and Malaysia currently have the whole of the Nutrition for Life product range. The potential for sales expansion elsewhere is clear and the "nutritional angle" could also be applied to other consumer categories. With the exception of a spray drying operation in Venezuela, all of New Zealand Milk's retail milk powders are produced in New Zealand.
While cheese accounts for close to half the business of the ingredients SBU, it is only just over 15% of the consumer SBU. Cheese is a difficult product area. Most countries in the world have their own cheese types and are keen to protect their industry with access restrictions. Until about two decades ago, nearly all the cheese produced in New Zealand was cheddar. This is still the main type but it has been joined by others such as Egmont, especially developed for the Japanese market, Edam and Colby and the New Zealand industry now produces around 30,000 tonnes of Mozzarella annually. The main markets for New Zealand consumer natural cheeses are Japan, the US, Australia and the UK (where ANCHOR cheddar is the brand leader).
Approximately one third of the 272,000 tonnes of natural cheese to be supplied by the NZDB this year from New Zealand production will be marketed by New Zealand Milk as consumer or food service products. Around 5% of the total volume of New Zealand cheese goes for reprocessing in New Zealand Milk production operations overseas, mainly to produce processed cheese or "cheese food". There are such plants in the Philippines, China, South Korea and Saudi Arabia. In Mexico and Chile local cheese types are made from domestic milk but with the use of some New Zealand cheese and some feta is made in the Saudi joint venture. Total processed cheese volume is roughly half the level of consumer natural cheese. Although the processed cheese business is relatively small, it has seen some innovation such as the development of recombined cream cheese jar spread with a toy included in the cap, which has enjoyed some success in Middle East markets.
The spreads business now amounts to about 80,000 tonnes of consumer butter and butter ghee. Three quarters of this is from the long established packet sweet cream butter business in the UK under the ANCHOR brand (now undergoing a relaunch with new packs and increased promotional support), which the British housewife, in spite of the blandishments of continental lactic suppliers not only refuses to give up but would probably spend more on were it not for the capped quota.
In fact the whole recent story of New Zealand consumer butter in Britain is an embarrassment to any European who believes in free market economics. It is even a case study of how protection can prevent the consumer from having a superior product. New Zealand was the first country to develop and patent a completely natural butter, which could be spread straight from the refrigerator. This was achieved by identifying and removing the fat fractions in standard butter which cause hardening and was another development of the DRI. The British consumer took avidly to the new product. In the end Brussels tried to establish that the product broke the quota agreement. The New Zealand product was withdrawn from the market leaving the way open for European spreadable products containing vegetable oil to be introduced at lower price points. New Zealand followed suit. The net result is the consumer no longer has a pure spreadable butter and the NZDB has been forced to pay around US$10 million in legal costs before proving its point. New Zealand has since been innovative in the area of spreadable products containing vegetable oils with the launch of SoSoft containing more butter than competing products and recently organic spreadable butter using sunflower oil and (ironically) organic Danish butter. This last point does however illustrate the new marketing approach being used by New Zealand. The organic movement is not strong in New Zealand - consumers see their local products as already pure and there is no pressure for strict organically grown products - so New Zealand Milk is quite ready to go elsewhere for the necessary components. Similarly, British cream is used for the innovative ANCHOR aerosol cream products.
After the UK, the Russian market is the next most important for New Zealand packet butter and here New Zealand not only has the number one brand with ANCHOR but has recently introduced a special butter called DOYARUSHKA, made to traditional Russian recipes, which has taken second place in the market.
The general branding policy for New Zealand Milk is for ANCHOR to be the major brand but with ANLENE and derivatives for nutritional products. FERNLEAF is used only where there are conflicts and ANCHOR is already used by other products (e.g. beer in some Asian markets). MAINLAND is established in the Australian market and will not be introduced elsewhere.
Food service, as a US$155 million business is too small to benefit from the total category management treatment and it is therefore run as a stand alone operation within the Consumer products SBU, New Zealand Milk. It is however one of the fastest growing parts of the business with annual growth rates already of between 15-20%.
There are regional food service managers in the five regions. They generally have local line management responsibility and report to their respective regional managers but in addition come under the Global Director of Food Service, (currently Tony Gunnis in Wellington but soon to be Ashley Waugh in Australia) for strategic direction. Australia is a natural strategic centre for this business as it is the most important food service market for New Zealand products at the moment, accounting for around 15% of the total food service business and it is there that the first e commerce food service programmes are being pioneered..
Further growth in Food Service is coming from developing other, new markets (a new operation was launched in South Africa in 1999) and by developing specific food service products. In the past the Food Service has usually taken products either from the ingredients or the consumer business. Two recently launched examples of specially developed products (see photograph of Tony Gunnis) are a shredded Parmesan cheese in a 1.5kg bag and a sprayable butter in a 450 gram aerosol. The sprayable butter, which provides the flavour of butter but with greater convenience, emerged from focus groups consisting of food service operatives, bakers and restaurant owners held in Australia.
The food service operation divides its market into three main customer groups - quick service restaurant chains, other restaurants/caterers and retail bakeries. McDonalds and Pizza Hut are two key food service accounts, which are managed directly out of Wellington, although there is a trend evident for contract caterers to run their businesses globally and the number of centrally managed key accounts can be expected to grow.
Apart from the sluggish state of the CIS and Japan markets, the last one to two years have generally been good for the New Zealand dairy business. In particular:
- The current year to the end of May 2000 will set a new production record of more than 975 million kgs of milk solids, up 12% over the admittedly poor previous year.
- Double digit growth has returned to the key Asian and Latin American markets. At the same time, the EU as the largest exporter of dairy products has reduced subsidies and concentrated its efforts on markets closer to home.
- European health scares such as BSE and the Belgian dioxin episode have meant that international buyers have had a preference for Australasian products.
- The New Zealand dollar has stayed relatively weak at around half the US dollar
- High new product activity especially with retail milk powders based on the Nutrition for Life programme, has boosted revenues
- Acquisitions in Latin America have begun to come through with significant profit contributions, although the continent remains commercially and economically volatile.
- The legal battle in the UK over spreadable butter has been resolved although at considerable expense
It has undoubtedly been an impressive achievement to introduce the complex concept of category management and get all the workforce "singing to the same hymn sheet" but such a complex arrangement (the most ambitious project ever undertaken by the Board) requires considerable expense and resources (travel/meetings/documentation etc) to maintain the cohesion achieved and how easy will it be to get the complex message over to the customers? While the jury is still out on this, the early signs are encouraging and there is no doubting the commitment of staff across the world to making the initiative a comprehensive success. The whole area of e commerce has yet to be tackled in a concerted manner and the new matrix approach probably makes this harder to do than would have been the case under the old, highly centralised structure.
Although it is not stated as such, the implications of the strategies now being followed are for the NZDB to exploit the opportunities in developed markets largely through the ingredients SBU (the UK is an historic exception) and opportunities in developing markets through the consumer SBU.
In broad terms, the whole business has set itself the need to grow revenues by 15% per annum. It can achieve 4-5% of this by natural, organic volume increase (i.e. more milk) but that still leaves a gap of at least 11%. Only 4% of this could reasonably be covered by increased productivity. The Group's strategists feel that "tweaking" the old ways of doing things might have contributed another couple of percentage points but that still leaves 5-6% annual growth - about the level the business has managed to achieve in the past - and this is the measure of the challenge facing the new organisation. It plans to do this by becoming an international dairy based organisation, making acquisitions where these make sense. It will use non New Zealand milk where necessary and increasingly in the area of shortlife products (at present less than 5% of the consumer business is shortlife but it is number one in Chile with more than 50% of the market and in a strong number two position in Venezuela) and to enable the business to exploit opportunities in markets presently closed to it. It needs to do all of this with or without the undoubted benefits of the proposed mega merger.To read the last article Click Here
A Note on The Dairy Advisory Bureau (DAB)
The DAB was set up within the NZDB about ten years ago and has been something of an anomaly in that it has provided nutritional advice and organised generic promotions for the domestic market - a throwback to the days when the NZDB was a conventional produce marketing board. Much of its work and approach is now seen to have potential in international markets and it is due to become a centre for nutritional communications within a new Nutrition and Health Group, itself part of the Consumer SBU, later this year. Whereas now 90% of the DAB's work is still aimed at the domestic market, this ratio is expected to reverse so that it will underpin much of the marketing strategy of the consumer SBU.
Typical activities of the DAB are producing publications for health professionals e.g. on osteoporosis or allergies and organising lecture tours by recognised experts on topics such as the role of fats in the development of coronary heart disease. Publications originally developed for the New Zealand market have been adapted for use in Venezuela and linked to the marketing of ANLENE milk powder. Other work will address the concerns of Sri Lankan doctors regarding the alleged effects of dairy products producing excess mucus.
A new internet site (www.milkzone.com) is due to start up mid year aimed as an information resource for children, initially in New Zealand, but eventually internationally.
A Note on Research and Development and the NZDB
According to benchmarking exercises, the average food company in the US has been found to spend around 0.7% of sales on R&D. (in contrast Nestlé spends 1.7%).Until recently the NZDB has been spending slightly under 1% at $US32 million. It now plans to increase R&D expenditure by 50% over the next five years in the process moving the level of expenditure above the 1% mark. Funding comes from the two separate Strategic Business Units and NZDB Corporate.
R&D is perceived as a vital factor for meeting two ambitious targets adopted for the organisation overall - 25% of turnover to come from products commercialised in the last five years and with a profit of at least $US42 million for these products. The organisation is reported to be on target to achieve this with 19%, the most recent level.
Another ambitious target requiring a major contribution from R&D is an aimed for 4% per annum increase in productivity over all production activities from the farm to manufacturing.
Three quarters of R&D expenditure goes on product development and improving manufacturing technology in New Zealand. 15% is spent off shore e.g. in development centres with pilot plants such as Santa Rosa and Harrisburg in the US, Swindon in the UK, Rellingen in Germany and Guadalajara and Santiago in Latin American. The remaining 10% is devoted to on farm research.
Half the annual R&D budget currently goes to the New Zealand Dairy Research Institute based at Palmerston North and employing 260 people. It was the DRI which did the research behind two of the most important recent developments providing significant technical advantage to the NZDB - technology to increase the natural calcium levels in available milk and producing pure butter spreadable straight from the refrigerator.
Most of the on farm research is undertaken by the Dairying Research Institute Corporation based at Hamilton, a joint venture with one of the Crown Research Institutes. Another joint venture, responsible for much of the basic "health and wellness" research is the Massey Health Research Centre of the Massey University, Palmerston North. There are contracts too with other New Zealand Universities and some of the dairy co-operatives have technical development centres to which projects are allocated. The Livestock Improvement Corporation in Hamilton is wholly owned by the NZDB and carries out work in the area of artificial breeding. Not all the research effort is aimed at obtaining immediate commercial advantage. There is much interest in biotechnology and the basic genomics of cows and plants and this is where much of the increased spending will be directed.
Responsibility for the total research effort comes under Dr Kevin Marshall, Group Director for Global Research and Development based in Wellington.
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