As Fonterra grapples with sharply declining global prices for dairy commodities, the group has tempered its ambitions in some emerging markets – such as China and India. However, it is still forging ahead into new territory and recently announced plans to enter Egypt. In this month’s just-food interview, Katy Humphries spoke to Amr Farghal, managing director of Fonterra’s Middle Eastern unit, to find out more about the company’s plans for this strategically important region.
Fonterra has had a rocky few months. After the dairy price highs of 2007 and 2008, the world’s largest dairy exporter has suffered as the global economic downturn dampened demand for dairy products, driving prices to record lows.
Responding to the decline in dairy commodity prices, Fonterra said that it would increase its focus on value-added products and services and drive growth of its “power brands”, such as Anchor, Anlene and Anmum.
In emerging markets, Fonterra has endured mixed fortunes. After getting its fingers burned in China’s melamine scandal, when it was forced to take a NZ$139m (US$87.8m) impairment charge to write-off its stake in local dairy firm Sanlu, Fonterra has said that it is continuing to look at our opportunities in China, but is not making investment decisions in the short term.
The company also recently announced that it intends to quit its venture in India after deciding too much investment was needed behind the business. Announcing the move, Fonterra said that India’s fragmented market was a barrier that meant “significant” investment was required to build a worthwhile business.
Nevertheless, Fonterra still has ambitions to expand in the emerging markets – most notably in the Middle East and Africa, the region’s managing director Amr Farghal tells just-food.
“The primary focus for us is on the GCC markets [Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE] but we span beyond the GCC to other geographies, including the east Mediterranean, East Africa and CIF countries, where we have smaller operations,” Farghal says.
“The GCC countries definitely represent a big opportunity for us in this part of the world because it is a market that will always rely on companies like Fonterra to supply the dairy requirement,” he adds.
Fonterra has witnessed double-digit growth in the Middle East for the past three years and Farghal suggests that the company intends to continue to drive this rapid rate of expansion.
However, he emphasises, Fonterra’s strategy for the region is one of “disciplined expansion”. The group will first focus on establishing its products and brands in a given market before further stretching its geographic reach.
“We are prioritising our entry into new markets based on a set of criteria. We had an existing business in the GCC so we are maintaining, protecting and growing this core business while we are expanding in other geographies as well,” Farghal explains.
In establishing whether a potential market is worth pushing into, Fonterra looks at the size of the opportunity, the ease of entry and whether it can find the right local partner – a company that shares Fonterra’s “vision, values and belief in quality” – Farghal says.
In the Middle East, Fonterra usually chooses to operate in partnership with a local player, bringing its full product support to the table but relying on its local partner’s knowledge of the market and distribution channels.
In April, Fonterra announced a deal establishing a partnership with Egypt’s Arab Dairy Products Co. Under the agreement, the Egyptian dairy company manages the processing and distribution of the New Zealand firm’s Anchor brand throughout Egypt.
According to Farghal, the initial signs for Fonterra’s foray into the “promising” yet “competitive” Egyptian market are positive.
The company launched in Egypt with the introduction of processed cheese portions to the market and will shortly look to expand within the processed cheese category.
“In Egypt the focus is on processed cheese, which is a big category in the area. We started with one segment within the category – cheese portions. In a few months we will be expanding beyond the triangles in another segment of the processed cheese category, so we will continue expanding but within the came category for, say, another 18-24 months before we consider moving into other categories.”
While the pace of expansion in Egypt remains slow in order to ensure that Fonterra’s brands are firmly established, Farghal says that eventually Fonterra expects its operations in the country to act as a springboard for expansion into the rest of Africa.
“Egypt is not an easy market to penetrate. We are confident that Egypt is going to be a good foundation for us to get into North Africa but we have got to make sure that we take it one step at a time, that we go through the learning curve and capitalise on all our learnings before we expand further. Yes, we have plans to expand further in the Middle East. But I am being very careful… let’s make sure we secure success in the markets we are already in before we get into new ones.”
Although Farghal is reticent on which new markets Fonterra is eyeing in the region, he confirms that the company is “constantly” evaluating new opportunities and is currently examining its options in “several” new markets.
At the centre of Fonterra’s expansion strategy in the Middle East is a deep understanding of the importance of brand building, which is in-line with the group’s global focus on value-added products.
“Our processed cheese agenda is definitely a perfect fit with the value-added approach we are trying to take,” he says. “The recent launch of Anlene in the GCC is another example of how we are focusing on value-added. I strongly believe value-added is the only way forward as far as Fonterra’s presence is concerned in this part of the world. That is the only way we can have the sort of differentiation that we need to build our business.”
Another factor driving Fonterra’s brand-building approach, Farghal reveals, is that “value-added immediately equates to better margins”.
The company has concentrated bringing three so-called “power brands” – Anchor, Anlene and Anmum – to Middle Eastern markets and building brand equity through clear communication with local consumers.
“Anchor is a brand that stands for nutrition and you will find a lot of consistency in our communication. As far as Anlene is concerned, it is a brand developed to prevent osteoporosis and our communication with consumers reinforces that we are the bone experts,” Farghal says. “While we have a global thread to our marketing, the message is localised.”
Nevertheless, according to Farghal, consumers have become more value-conscious in the wake of the global economic downturn. However, he insists that rather than abandoning branded products, consumers are instead increasingly buying smaller pack sizes.
Accordingly, Fonterra aims to position itself as offering consumers “the best value for money” in Middle Eastern markets, Farghal says. “This does not mean that we are the cheapest products on the market, but we are the best value for money in terms of the functionality of the product, the quality of the product,” he adds.
While Farghal acknowledges that Fonterra’s Middle Eastern businesses have not been immune to the global economic crisis and declining dairy prices, he remains upbeat on the prospects for growth in the region.
“The deterioration of dairy prices globally is affecting all businesses, not only in the Middle East. Any change of prices and pricing affects our business… but the Middle East allows us to pass on some of this decrease – so when prices dropped we passed significant savings onto our consumers.”
Farghal adds: “I strongly believe the Middle East is going to be the growth engine for Fonterra brands for years to come. We have proved it in the last three years, where we have been growing the business year-on-year in the solid double-digits.
“Last year, the world changed in September or August. In the Middle East we were still able to deliver very solid growth during that particular fiscal year, which is again a testimony of how significant the opportunity is to grow in this part of the world.”