Fonterra eyes Chinese infant formula growth

Fonterra eyes Chinese infant formula growth

New Zealand dairy group Fonterra and Chinese infant food business Beingmate have established a "global partnership" to capitalise on growing Chinese demand for infant formula.

The companies will work together to create a "fully integrated global supply chain" that will utilise Fonterra's milk pools and manufacturing sites in New Zealand, Australia and Europe to bring product "from the farm gate direct to China's consumers".

As part of the agreement, Fonterra will take a stake of "up to" 20% in Beingmate. Following regulatory clearance, Fonterra and Beingmate will then establish a joint venture to buy Fonterra's Darnum plant in Australia. The venture will also establish a distribution agreement to sell Fonterra's Anmum brand in China.

Fonterra CEO Theo Spierings said the link-up with Beingmate - a leading Chinese formula brand - will be a "game changer" for the world's largest dairy exporter, which is pursuing a strategy to add value to milk by producing high-value ingredients for the infant formula sector, as well as driving branded growth.

Spierings added the deal will promote quality and safety standards in the Chinese infant formula sector, which has been dogged by safety scares including the 2008 melamine scandal that killed six babies and sickened around 300,000 more.

"Our partnership with Beingmate will show the benefits of an integrated and secure supply chain, starting in New Zealand - our number one milk pool - where we are fast-tracking investment in milk processing capacity to meet global demand," he said.

Spierings said Fonterra and Beingmate have a "shared commitment to international best practice quality standards and are committed to stringent processes and controls" around procurement of raw materials, fresh milk collection, production process testing, the addition of nutrients, pre-delivery inspection and tracking and tracing of manufactured product.

Beingmate chairman Wang Zhentai concurred. "Working together with Fonterra, we will create globally competitive, safe and secure supply chains to deliver high quality, advanced dairy nutrition to meet the needs of China's growing population as well global consumers," Zhentai said.

Zhentai added the partnership will also enable Beingmate to take a "significant step forward" in its globalisation ambitions.

Fonterra was itself caught up in a safety scare in China last year, when it recalled whey powder concentrate over concerns that it was contaminated with a bacteria that can cause botulism. Although the recall turned out to be a false alarm, Fonterra's image was tarnished.

Check back for our analysis of the tie-up and the JV's prospects in the Chinese infant formula category.

Show the press release

FONTERRA AND BEINGMATE INITIATE GLOBAL PARTNERSHIP IN CHINA'S HIGH-VALUE INFANT FORMULA MARKET Key points
· New Zealand dairy co-operative Fonterra Co-operative Group Limited and a leading Chinese infant food manufacturer Beingmate intend to form a global partnership that will help meet China's growing demand for infant formula.
· The partnership will create a fully integrated global supply chain from the farm gate direct to China's consumers, using Fonterra's milk pools and manufacturing sites in New Zealand, Australia, and Europe.
· The partnership is intended to increase the volume and value of Fonterra's ingredients and branded products exported to China.
· It will be achieved in two phases:
Fonterra will shortly start the process to issue a partial tender offer to gain up to a 20 per cent stake in Beingmate
After gaining regulatory approvals and Fonterra satisfactorily completing the partial tender offer, Fonterra and Beingmate will set up a joint venture to purchase Fonterra's Darnum plant in Australia and will establish a distribution agreement to sell Fonterra's AnmumTM brand in China.
Fonterra strategy in action
Fonterra Chief Executive Theo Spierings said the partnership between two leading dairy nutrition companies will be a game changer that will provide a direct line into the infant formula market in China, which is the biggest growth story in paediatric nutrition in the world. The partnership will also play a part in promoting leading product quality and safety standards in the infant formula market in China, participating in the ongoing development of the Chinese dairy industry, and supporting the development of Beingmate's business.
"By working together with Beingmate, we will strengthen our infant formula brand presence in China and link China to high quality ingredients from New Zealand, high value paediatric products made at Darnum in Australia, and whey specialty ingredients manufactured at our new plant in Heerenveen in the Netherlands and in alliance with Dairy Crest in the United Kingdom," said Mr Spierings. "We will also work with Beingmate to evaluate mutual investments in dairy farms in China.
"This will be another milestone in our strategy to create additional demand for ingredients and high-value paediatric and maternal nutrition products made from our New Zealand milk, complemented by milk drawn from our other international milk pools.
"China is our number one market and the proposal to join forces with Beingmate will be an important building block in Fonterra driving volume and value, and taking a step forward in terms of being a globally relevant co-operative.
"Our partnership with Beingmate will show the benefits of an integrated and secure supply chain, starting in New Zealand - our number one milk pool - where we are fast-tracking investment in milk processing capacity to meet global demand."
Beingmate Chairman Mr. Wang Zhentai said, "Working together with Fonterra, we will create globally competitive, safe and secure supply chains to deliver high quality, advanced dairy nutrition to meet the needs of China's growing population as well global consumers. The partnership will see our business take a significant step forward in its globalisation ambitions."
The China dairy industry and infant nutrition market
Fonterra Chairman John Wilson said Fonterra has been committed to being a part of China's dairy industry and contributing to its development for many years.
"Fonterra is already playing its part in the creation of a vibrant, local dairy industry through our farms investment, sharing technical expertise, providing high-quality imported ingredients to local food manufacturers and innovative dairy solutions to the foodservice sector," said Mr Wilson.
"We are looking for this global partnership to take our relationship with China and its consumers to a whole new level. It will benefit Fonterra, Beingmate and all our stakeholders and is part of our drive to increase returns to our farmer shareholders."
Mr. Wang from Beingmate said, "The proposed partnership is well-aligned with the Chinese government's desire to see a strengthened focus on quality and consumer safety in the local dairy industry. We believe this global partnership will play a constructive role in the development of China's and the global dairy industry as both parties work together to drive a two-way flow of capital, technology, supply and distribution."
Mr Spierings said by working alongside Beingmate, the partnership will participate in growth in a category where there is huge demand.
"The infant formula market in China is worth about NZ$18 billion today and is expected to be worth NZ$33 billion by 2017. This growth is driven by increasing urbanisation, higher disposable incomes, a preference for premium brands, and relaxation of the one child policy," he said.
Mr Spierings said Fonterra and Beingmate have a shared commitment to international best practice quality standards and are committed to stringent processes and controls around procurement of raw materials, fresh milk collection, production process testing, the addition of nutrients, pre-delivery inspection and tracking and tracing of manufactured product.
"In addition, Beingmate has an extensive distribution network and local knowledge that complements Fonterra's commitment to food safety and quality.
"What Fonterra brings to the table is world-leading expertise in dairy, particularly in the areas of farm management, milk production, dairy processing, quality control, tracking and tracing, dairy nutrition and innovation," said Mr Spierings.

Original source: Fonterra