by Brian Hutchinson

The on-off mega-merger of New Zealand’s dairy sector has dominated headlines in recent years. As the merger reaches completion and a new CEO for the integrated giant company GlobalCo is appointed, Brian Hutchinson takes stock of what it will mean for the sector.

New Zealand’s 14,000 dairy farmers voted on Monday to merge their two largest dairy processing co-operatives, with the industry’s export marketing company and form an integrated dairy manufacturing and marketing company, currently known as GlobalCo.

This company will be New Zealand’s largest company and the ninth largest dairy company in the world, with an annual turnover of US$5bn.

The journey has taken ten years to reach this point. Between 1995 and 1999 the dairy processing sector in New Zealand consolidated through mergers and acquisitions from 15 co-operatives down to two major companies, New Zealand Dairy Group and Kiwi Co-operative Dairies. Together they held 90% of the production capacity in the industry, and joint ownership of the export marketing company, New Zealand Dairy Board. After cooperating on the preparation of a joint industry strategy, which identified a unified structure for the industry as the preferred option for the future in 1999, the two processing companies entered into merger negotiations.

Despite disagreements between the management negotiating teams and political obstacles, it was always apparent that there was a strong undercurrent of support from farmer shareholders. They recognised that without a strong integrated company they would find growing competition in the global dairy market difficult to counter. In contrast, the merger business case indicated the opportunity to grow the combined business at 9% per annum from year three (versus 5% in the status quo), as well as delivering significant cost reductions and efficiency gains in years one to three (NZ$120m p.a. cost savings, NZ$70m p.a. efficiency gains).

Most of the debate in New Zealand in the last six months has been about how to ensure that the merger does not remove competition in the local market leaving local consumers at the mercy of a monopolistic dairy company; and how the deal is structured to ensure that farmers can get a fair price for their milk and can realise the value of their shareholding when they exit the industry.

These issues have been dealt with by new legislation requiring the disposal of one of the company’s major domestic supply subsidiaries and the appointment of an independent milk price arbitrator.

The focus now turns to leveraging the company’s position in international markets, where it already has over 30% share of internationally traded dairy products. In the past the marketing company, New Zealand Dairy Board, with it’s 89 fully owned subsidiaries and associate companies in 100 countries, has been targeted with selling New Zealand produced dairy products. The future strategy will be to secure number one or number two position in each of its consumer and food ingredient markets, including products using milk sourced outside New Zealand. This will involve acquisitions and joint ventures in a range of developing markets, such as Latin America and South East Asia, and growing the fresh milk and cultured product business alongside established powder, cheese, butter and ingredients businesses.

The biggest challenge for the new organisation will be the melding of three quite distinctly different organisations into an effectively functioning, agile, international food company. The existing organisations have different corporate cultures:

  • New Zealand Dairy Group: the traditional, conservative, prudent cooperative
  • Kiwi Dairy Cooperative: the strident, ambitious new “upstart” with a more entrepreneurial style
  • New Zealand Dairy Board: the global corporate with 89 subsidiaries, constrained in the past by shareholders holding the purse strings tightly

To get the best elements from each of these organisations and blend them into a dynamic, global food company, capable of competing with Nestlé, Kraft, Danone and Parmalat around the world, will require clear vision and drive to cut through and clear out the non-productive elements of the old organisations.

The choice of chief executive for GlobalCo will therefore be critical in setting the course for this new business, with its lengthy and complex heritage. Unable to finalise a decision prior to the farmers’ vote on the merger, the selection committee is still deliberating the merits of three candidates, the Chief Executive of Kiwi Dairies and two senior executives from the New Zealand Dairy Board. They will make their decision outside the glare of shareholder scrutiny, but their choice will be eagerly awaited by the farmer shareholders and employees of the new GlobalCo. The new appointee must drive the organisation early and hard in the transition process to ensure that all the promise of the new company is delivered.

The new chief executive will be announced along with the chosen name for the new company, within the next few weeks. Competing dairy companies around the world will be watching for signs of whether the New Zealand dairy industry will stir into life and deliver the challenge of a Maori warrior or be held back by the “anchors” of its past incarnations.

Brian Hutchinson is a director of In 2 Action Limited, of Auckland, New Zealand.

In 2 Action is an organisation specialising in the design and delivery of initiatives and projects that transform business performance. It has had no involvement in the New Zealand dairy merger process.

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