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.
Fonterra will complement NZ milk with “milk components” from offshore: the co-op will start rationalising its offshore milk pools.
Fonterra chief executive Miles Hurrell says the strategy, released today, recognises “we are a New Zealand co-op, doing amazing things with New Zealand milk to enhance people’s lives and create value for customers and farmers”.
“It’s a strategy that’s rich in innovation, sustainability and efficiency. It unlocks value and sees us focusing on three goals – healthy people, healthy environment and healthy business.
“This is the right strategy for us, but it requires us to make some hard choices. We’ve looked at the big opportunities and risks for a New Zealand dairy co-op today. We’ve also got clear on what our strengths are and the hard realities we have to face up to. I’m pleased that we now have a strategy that is built from the belief that our farmers’ milk here in New Zealand is the best and most precious in the world.
“Recognising this, while we will complement our farmer owners’ milk with milk components sourced offshore when required, we will start rationalising our off-shore milk pools over time.”
Fonterra will now focus on world-class dairy ingredients for customers around the world, and innovative ingredients that meet nutrition needs right across people’s life stages.
It will focus on ingredient categories: Paediatrics, Medical and Ageing, Sports and Active, and Core Dairy.
“We will also create new opportunities in new ways for foodservice,” says Hurrell.
This will include building on its foodservice success in China and developing new markets, particularly in Asia Pacific.
“This focus on dairy ingredients and foodservice will see us playing to our strengths and driving more value from the parts of our business that consistently perform.
“We will still be in Consumer and will focus on markets throughout Asia Pacific. The majority of the products we sell in these markets are made from New Zealand milk and are similar to those we sell in our Ingredients business.
“This creates efficiencies and helps us play to our strengths. It also means we will reduce our consumer product portfolio to those that create superior value.”
Fonterra chairman John Monaghan said the new strategy sounds simple but the best strategies often are.
“Simplicity shouldn’t be confused with a lack of ambition. Our forecast earnings range for FY20 starts at 15-25 cents per share, but the five-year plan is to deliver a target of 50 cents per share.
“Our starting earnings range reflects our change in culture. We will earn the right to make ambitious decisions by first doing the basics right and returning our balance sheet to a position of strength. That will give us options to go for the opportunities that we create in the future.”
As announced at half year, the board reviewed the dividend policy guidelines within the context of the new strategy. Monaghan says the new guidelines better reflect the annual performance and financial strength of the cooperative.
“Under the new guidelines, we would expect the dividend payment to be 40-60% of reported Net Profit After Tax, excluding any abnormal gains, from what was previously 65-75% of adjusted Net Profit After Tax over a period of time. An interim dividend will not be more than 40% of the forecast total dividend and no more than net earnings at half year.
“In addition to the new percentage of earnings, two additional key principles will guide our board when considering the payment of a dividend. A dividend should not require our co-op to take on more debt, and a dividend should not reduce our co-op’s ability to service existing debt.”
