Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The co-op's ANZ business, which includes consumer products in Australia and New Zealand, was the worst performer during the financial year ending July 31 2012. Normalised earnings dropped 20% to $204 million.
While earnings in New Zealand were slightly up, Australia suffered as a result of a downturn in consumer spending and aggressive competition. Fonterra also spent more on trade and promotions to maintain its market share in Australia.
Fonterra chief executive Theo Spierings says the result is "not satisfactory". "A plan has been approved by the board to improve our portfolio mix. It has to be aligned with increasing profitability and maximising cash flow."
However, Spierings says a $200m surplus is a good result given the challenging trading conditions in Australia. In 2010-11, the ANZ business earned $256m. He says the food service and ingredients businesses performed well.
The ANZ business represents fast moving consumer goods in the two countries, exports to Pacific Islands, ingredients, milk collection and manufacturing in Australia and food service sales.
In Australia, Fonterra's cheese, yoghurts, flavoured milk and dairy desserts face strong competition from other major processors: Lion (which owns National Foods) and Dairy Farmers, Murray Goulburn and Warrnambool Butter and Cheese.
Fonterra Shareholders Council chairman Ian Brown says it's disappointing the ANZ business once again failed to deliver a healthy return. "Unfortunately ANZ has not delivered to target. We are aware that market conditions are particularly tough at present and understand plans are in place to ensure the business improves."
Brown says it is encouraging to see the Latin America and Asia/Middle East business units delivered a good result at a local level. In Asia/Africa, Middle East (Asia/AME) region, normalised earnings increasing 1% to $194m.
Spierings says in constant currency terms, Asia/AME achieved an increase in normalised earnings of 8%. Sales volumes increased by 3% contributing to revenue growth of $62 million, with strong performance in Sri Lanka, Vietnam Hong Kong, Philippines and Malaysia contributing to this result.
Spierings says the "three As" - Anmum, Anlene and Anchor/Fernleaf, all achieved revenue growth, with Anlene now the established market leader in over 10 countries across Asia, and the Middle East.
In Latin America, normalised earnings increased by 16% on a constant currency basis.
Spierings says sales volumes increased by 2%, driving a constant-currency increase in revenue of 4%, with growth achieved in milk powder and beverages.
"Improved product mix, along with product innovation and higher volumes in higher margin products such as mature cheese contributed to the result."
