New Zealand cooperative Fonterra, already the largest dairy exporter in the world, is looking to expand internationally and bring greater focus to its brand portfolio. David Robertson reports on current developments at a giant of the global dairy market.
Despite being the largest dairy exporter in the world, Fonterra has traditionally kept a low profile in the food industry, but this is changing as the company begins to expand production and develop its branded products. New Zealand-based Fonterra controls about 40% of global dairy trade and has annual sales of NZ$12bn (US$7.47bn).
But unlike other dairy companies, Fonterra has not been able to rely on its domestic market to soak up supply. The New Zealand population would have to consume 4,000 litres of milk each per year for Fonterra to stay within its domestic market, so the company has pushed hard into overseas markets. As a result, it now accounts for a fifth of New Zealand’s non-service export earnings.
This drive into overseas markets has been made possible by increased supply from New Zealand farmers, 13,000 of whom collectively own Fonterra, but as supply growth has stagnated in recent years, the company has begun seeking new ways to expand.
“Over the last 30 years we’ve grown at a rate of 4.5% a year as our New Zealand farmers have supplied us with more and more milk,” says Graham Stuart, group director of strategy. “As a result we’ve extended overseas and found new markets for our products. But in the last five years, we’ve seen a slowing in the supply of milk and in the last three there has been no growth so we’ve had to look at other ways to grow, and that has led to us being more noticeable and higher profile externally.”
One of the strategies Fonterra has implemented is the development of milk production in other countries, particularly neighbouring Australia. Fonterra completed the acquisition of Bonlac Foods last year, giving the New Zealand company an 18% share of the Australian milk market.
However, Fonterra lost out to San Miguel in the bidding war for National Foods, which would have significantly boosted Fonterra’s Australian market share. But analysts expect the company to seek further acquisitions – probably Dairy Farmers, a New South Wales-based cooperative that is rumoured to be up for sale.
China is another market where Fonterra is building production capability, buying 43% of the San Lu dairy group last December for US$107m. Fonterra has been in China for 20 years, primarily selling milk powder, but urban Chinese are now buying more dairy products and Fonterra believes its partnership with San Lu will allow it to increase production, particularly on the heavily populated East Coast.
Fonterra’s Stuart said: “China is a white space for us and we are able to go in and build from scratch so it is a huge opportunity. San Lu is growing at 20% a year and we will be able to help them do more. We are supplying them with capital, business know-how and also dairy technology.”
Another of Fonterra’s strategies has been to increase sales in the Asian market. Dairy has never been a particularly large part of the Asian diet and average per capita consumption in Asia is just 5% of that seen in the US. However, as incomes rise and people adopt more Western-style tastes the dairy market is growing.
According to Euromonitor, the Asian dairy market is growing at 4% a year, which is at least double the rate of mature markets like Europe and North America.
There are also health considerations: according to the World Health Organisation average calcium consumption in Asia is half recommended levels and Fonterra has been highlighting this in its marketing efforts. It has put bone scanners in supermarkets to allow customers to see how much less dense their bones are than the recommended levels.
In addition, Fonterra is developing milk products to fit Asian tastes, such as light vanilla flavourings, great tea, honey, ginger and wheatgrass. “Because they don’t have as much of a milk drinking culture you have to explain to consumers what the benefits of this product are,” says Stuart. “It has to be a functional proposition, which is why we are talking about things like osteoporosis.”
Fonterra has also turned its attention to its branded products division, which has come in for criticism in recent years because of a lack of focus. The company sells 133 brands in 35 countries, which is arguably not the most efficient use of resources. One food industry insider said that many of these brands had great potential but were “drowning for lack of love”. The company now plans to concentrate on between five and ten ‘power’ brands, like Anchor butter and Mainland cheese.
“We have to create an emotional tie to these brands rather than just making it about their functionality,” Stuart told just-food. “That is where the real value-added benefits are and by focusing on a few power brands we hope to develop them further.”
Although most analysts do not monitor Fonterra closely because it is owned by farmer-shareholders, there is concern in the financial community about how the company will fight off developing agro-economies. If Brazil does in the milk sector what it has done in coffee, beef or orange juice then Fonterra could lose ground in its export markets.
Expanding production in places like China and focusing on core branded products should help insulate Fonterra from rivals. However, such moves will inevitably take Fonterra further away from its primary function of selling New Zealand milk, creating a dilemma for executives over whether to make decisions to benefit the company or to serve the interests of Waikato dairy farmers.