New Zealand dairy giant Fonterra has increased its focus on emerging economies as the battle among global dairy companies for a share of high-growth markets in Asia, the Middle East and Latin America intensifies. This strategy has proven fruitful, with emerging markets making a sizeable contribution to group revenues and offering scope for future growth. just-food’s Jonathan Dyson spoke to Fonterra CFO Jonathan Mason in Auckland yesterday (27 March) about how the world’s leading dairy exporter plans to exploit this opportunity.

The demand for dairy products in Asia, Latin America and the Middle East has exploded in recent years, driven by rising populations, higher incomes, an expanding middle class and an increasing acceptance of western-style diets. In response, New Zealand dairy co-operative Fonterra has increasingly looked to offset weak growth in static and stagnant European and US dairy markets, seeking out opportunities to meet this rapidly expanding demand.

As a result of this drive, a growing proportion of Fonterra’s revenue is generated in these regions, where sales gains have outpaced revenue growth in more established markets.

Unveiling its first-half numbers yesterday, Fonterra revealed growing demand from Asia, the Middle East and Latin America had led its sales growth. Total revenues were up 8% during the first six months of the year, it revealed. Sales volumes were up 13% in Fonterra’s Asia and the Middle East reporting segment, while volumes increased 11% in Latin America.

Talking to just-food in the wake of the results, Fonterra’s CFO Jonathan Mason emphasised Fonterra’s “transformation” into an emerging market facing company.

“The big picture is that in the last five to seven years we’ve been transformed from a co-op that had to find markets for its products – and its two most important markets were the US and Europe – to last year, where the US and Europe took only 15% of our ingredients sales and emerging markets took more than 70%. Emerging markets have become very important,” Mason insisted.

Emerging markets are not only out-performing developed markets within Fonterra’s portfolio. The group is also experiencing market-beating growth and gaining share, Mason suggested.

“If you look at how we’ve done – 11% volume growth in Latin America is a very good number, 13% volume growth in Asia and the Middle East is a very good number. The markets aren’t growing this fast. We’re growing faster than the markets.”

Mason said that, while growth was strong in these regions, there were some bright spots where the company performed particularly well. “We’ve done very well in Indonesia with everyday nutrition products, and we’re continuing to do well in Vietnam and in Malaysia,” he says. Fonterra is also performing “very well” in the Middle East, Mason added. “These are the strong points that drove the 13% figure for Asia and the Middle East.”

While Fonterra has made significant progress in bolstering its presence in emerging markets, the company is not about to rest on its laurels and is continuing to forge ahead with expansion in several increasingly valuable territories, Mason said.
In May last year, Fonterra unveiled a new structure designed to grow its business in emerging markets. The group established operational management for the China and India, Latin America and south-east Asia, the Middle East and north Africa regions. The move, which came as part of a management reshuffle, was designed to provide the group with a greater regional focus and came into effect in August, the beginning of Fonterra’s financial year.

The company also established its first sales office in India, in a bid to gain a “better understanding” of the world’s fastest-growing dairy market.

As Fonterra strengthens its presence in emerging markets, the group is also adjusting its mix to focus on more profitable value added products, Mason said.

“We’re executing our strategy of growing faster in emerging markets and improving our product mix, with more value added products,” he explained. “What we’ve been focusing on is trying to grow more through the consumer business, foodservice, mobility, paediatrics, and so on.”
In China, the company is expanding sales of its nutritional milk products brand Anmum, while its roll-out of its bone-strengthening Anlene line is on track. Fonterra also plans to expand into infant formula in China, after exiting the category following the disastrous involvement of local partner Sanlu in the melamine contamination scandal in 2008.

In spite of this significant setback, which saw Fonterra write off its stake in Sanlu, the group remains bent on expansion in China. To this end, Fonterra has opened an innovation centre in Shanghai to develop “innovative” dairy products and “premium” ingredients designed to meet the needs of local consumers and Chinese food manufacturers.

While NPD and local know-how are necessary to drive growth in any market, past experience and Chinese concerns over food safety mean that a key plank in Fonterra’s Chinese growth strategy is the development of a reliable and trusted local milk supply.

As Fonterra looks to emerge from the long shadow of the tainted milk scandals of recent years, the company is investing in developing local milk production, with the goal of producing 1bn litres of milk in China by 2020. The group has already opened five large-scale farms in Hebei Province, completing the first of its planned “farm hubs” in the country.

Fonterra is also investing in the development of a local milk supply in Latin America. The company is expanding its milk production footprint supplying into its local joint-venture with Nestle, Dairy Partners Americas, having opened its first farm in the region in Brazil in 2011.

As in China, Fonterra is also focused on developing its value-added line in Latin America. Mason says that this region is proving to be an increasingly fruitful market for Fonterra. In Chile, for instance, Fonterra’s local subsidiary Sociedad de Productores de Leche is the market leader with a near-30% market share, ahead of rivals Colun and Nestle.

According to market research firm Market Line, Chile’s dairy sector is expected to grow by 2.9% to a value of around US$1.63bn by 2015. In order to take a larger bite out of this growing market – and skew its portfolio toward more profitable products – Fonterra has looked to product development, recently launching new desserts and yoghurts in the market. Mason adds sales of both flavoured and white milk are also growing strongly there. 

As Fonterra expands the number of products on offer in key emerging markets, Fonterra is also working to extend its geographic reach by increasing distribution and routes to market, Mason said yesterday.

“We are expanding our footprint – for example we are going into more and more cities in China with our foodservice products,” he explained.

Fonterra is upbeat on the opportunities on offer in developing geographies. However, Mason emphasised the company is aware of a number of challenges ahead. Specifically, in the near term Fonterra cautioned markets in Asia could witness a drop in demand in the back half of the year following recent sharp rises in milk prices.

“We want to be cautious on this. When the milk price spikes in the emerging markets, because they are somewhat price sensitive, if you have that big a change in the key input cost it could burn off demand. It’s happened in the past – so we want to be cautious,” Mason said.

Meeting the demands of divergent regulatory requirements can also present a challenge, as highlighted by the recent dicyandiamide scare that emerged following the discovery of traces of the agricultural chemical in some New Zealand dairy products earlier this year. Mason said Fonterra has “been working with regulatory authorities with multiple governments on this issue”. Fonterra has been looking to reassure officials in key export markets that the country’s milk supply is safe, he added.

While Fonterra has witnessed stellar growth in emerging markets, Mason stresses that the group has also kept its eyes on the prize in more developed regions.

The slower US and Europe markets remain vital to the company, he said. “These markets are still very important,” he suggested. “We’re doing very well there. We have very good market positions in the US and Europe for selected product sales. They don’t tend to be commodity markets – they are more specialised. The US has been a very good casein market for us over the last six months.”
Fonterra is also working to build profitability closer to home and is planning to rationalise its consumer brands, focusing largely on the Australia and New Zealand markets. “The rationalisation of consumer brands is pretty much concentrated on Australia and New Zealand,” Mason observed.

As Fonterra looks to maintain its solid base in the developed world, the higher rate of growth in developing economies nevertheless means that the world’s largest dairy exporter will increasingly see sales and profits skewed to the key regions of Asia, Latin America and the Middle East in the long-term.