What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
Professor Keith Woodford, Lincoln University, says Australian supermarkets Woolworths and Coles have huge power, making life tough for food manufacturers.
Fonterra is revamping its struggling Australian business, slashing the number of brands to rein in losses and hinting at more factory closures. The number of brands will be cut from 21 to five.
Woodford says in the next one to two years the competition is likely to get even stronger because of as the move to supermarket house brands. “Fonterra is reacting to this by consolidating its brands,” he told Dairy News.
“The driving force is the move by Coles and Woolworths to their own private label or house brands, not only for fresh milk, but for all processed dairy products such as butter, cheese and dairy. This is putting a big squeeze on all other branded products.”
For six months ending January 31, 2013, Fonterra’s ANZ business earned $98 million, 32% less than the previous year’s $145m. The ANZ business includes brands in Australia and New Zealand.
In New Zealand the business, including Tip Top and Anchor, is doing well, but the Australian operation faces a double whammy: increased competition for milk supply at the farmgate and greater trade spending to maintain market share by consumer brands.
Fonterra chairman John Wilson says shareholders will be concerned the Australian business is losing money, but is confident a management plan now under way can return the Australian operations to profit.
Despite the poor performance, Wilson says Australia is a “home market” and there are no plans to withdraw. “We’re there to stay in Australia. The board is confident in the management’s plan to rationalise the business.”
Fonterra has eight processing plants in Australia; it is closing a 100-year-old plant in Cororooke, Victoria.
Fonterra chief executive Theo Spierings says at the end of the revamp the co-op’s assets in Australia will look different. “We will continue to rationalise our Australian operations and there’s more to come.”
The co-op will also use milk collected in Australia for value-added products at the expense of commodity products.
Spierings points out that the Australian business is facing pressure on both ends of the supply chains. Fonterra is fighting Australia’s biggest dairy co-op Murray Goulburn for milk at the farmgate. In the consumer business, two major retailers, Woolworths and Coles, are dictating prices.
“We have a large number of brands and we’re rationalising [them]. We want less brands and more focus on advertising and promotion and innovation.”
Fonterra’s food service business is said to be performing well and a network of chefs is expected to grow operations.
“Our food service is strong business and we’re investing in that…. We’re rationalising the underperforming businesses and stepping up pace in the business doing well.”
