Chinese strategy
OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.
Fonterra Chief Executive Theo Spierings said the Strategy Refresh was built on an in-depth look at the co-op's strengths, social and economic trends as well as underlying projections for a marked increase in global demand for milk.
"Strong economic and population growth in emerging markets is driving a situation where global demand for milk is forecast to grow by more than 100 billion litres by 2020, with New Zealand expected to contribute only 5 billion litres of additional supply by that date," Spierings said.
Spierings said the strategy refresh contained elements to grow volumes, target high-value areas of nutritional need and execute these plans at speed: "We call it the Three Vs – volume, value and velocity.
"With overall demand growing, we need to grow volumes to protect our position as the world's leading dairy exporter. In addition, nutritional needs, particularly among the young and the elderly are getting more urgent and specific, which is where we have the capability to add significant value," Spierings said.
The full strategic refresh amounts to over 100 discrete projects – many already underway - to focus Fonterra's efforts going forward. It includes:
• A strong push on the fast-growing emerging markets of China, ASEAN and Latin America where Fonterra already has a strong presence.
• Optimising the New Zealand milk business to drive cash and improve return on capital.
• Building integrated milk pools (secure, high-quality sources of milk integrated with Fonterra's business) offshore to bring higher returns back to New Zealand.
• Growing volumes of higher value consumer branded and out-of-home nutrition.
• A tighter focus on meeting the advanced nutrition needs of mothers and babies, as well as ageing populations.
Emerging markets
Spierings said Fonterra would continue to focus on the fast growing markets in China, ASEAN and Latin America, as well as Middle East and Africa.
Fonterra already has established businesses in these regions, so it is a case of really building on these and driving growth with greater intensity.
"With limited milk supply, we can't do it all. We see much lower growth of dairy exports from New Zealand to the mature markets of Europe and North America so will need to refocus our operations there, with a greater emphasis on working with local partners, local added-value processing, and exports through the network.
"Although there is lower growth in our home market of Australia and New Zealand, these are great businesses generating good cash flows that we will defend at all costs."
Optimise New Zealand milk
New Zealand milk would always be #1 for Fonterra: "Our farmer shareholders receive most of their income from their milk cheques so we need to continue to drive the business that collects New Zealand farmers' milk, processes it, then sells and ships it overseas.
"We already have big projects underway to improve the way we use our manufacturing plant in New Zealand, drive efficiencies and add value for customers so we can beat base commodity prices," he said.
Integrated milk pools
"When we looked at the unique strengths of the Co-op the first obvious thing is that we know how to produce safe, high-quality and relatively low cost milk. That's a strength we've honed in New Zealand for well over a hundred years, and are now doing in Australia and Latin America," Spierings said.
"Going forward we see the potential to significantly grow milk volumes outside of New Zealand by developing a high quality local milk supply and integrating it more closely with our business in China.
"Our pilot dairy farms in China are now producing some of the highest quality milk in the country and we are looking to accelerate the development of a quality milk supply in China and integrate that with our local business by manufacturing products for Chinese customers.
"This approach means we bring back higher returns to our shareholders in New Zealand and demonstrate our long term commitment to the development of the China dairy industry.
"We don't have to fully own the farms or factories – we can achieve the same result through partnerships and supply agreements, which is how we run our integrated businesses in Australia and Latin America."
Growing volume in higher value nutrition
Spierings said Fonterra would continue to move higher up the value chain, selling more consumer branded and out-of-home nutrition.
"We currently have some great high margin consumer products and there is an opportunity to grow sales further by pushing into new markets and with new products.
"Also, we see the opportunity to develop more base nutrition and grow sales volumes in emerging economies – particularly in China and ASEAN."
Mr Spierings said Fonterra's foodservice business had enormous potential: "This is already a billion dollar a year business for us. With the worldwide trend to eating out and on-the-go we want to really invest in growing this business in China, ASEAN and Middle East-North Africa, while exploring options for a similar business in Chile and Brazil."
Advanced Nutrition
"A big part of this Strategy Refresh has been about making choices – we can't do it all. We want to make fewer bets and really focus our resources where we know we can win," said Spierings.
"In the area of advanced nutrition, we will focus on the nutritional needs of mothers and babies and healthy ageing."
Paediatric nutrition was the fastest-growing dairy category in the world and Fonterra already had a substantial business manufacturing high standard ingredients for multinational infant nutrition companies.
"There is an opportunity for us to build on this and also manufacture for leading Chinese nutrition companies, using New Zealand milk and our local assets."
On the branded consumer side, Fonterra would continue to extend its Anmum™ maternal nutrition brand to also provide trusted nutrition for mothers and babies across Asia.
It would also support the recent strong growth of its Anlene™ bone health brand by pushing into new markets and extending the brand to include joint and muscle health. "With rapidly ageing populations in the west and in China, Anlene™ is a true power brand for us with the scope to stand for total mobility not just bone health."
Spierings said this tighter focus would allow Fonterra to also focus its innovation on the three priorities – mother and child nutrition, healthy ageing and out-of-home nutrition. The innovation effort would continue to develop science led ingredients and products for both customers and Fonterra's own brands.
Spierings said the Strategy Refresh underlined the need to introduce Fonterra's new farmer-only share trading market, Trading Among Farmers: "We simply can't deliver on this strategy unless we have access to secure, permanent capital.
"The world is moving fast, which demands speed of execution – and that is why velocity is so important. Fonterra is a strong Co-op with great people – but it is velocity that will move us forward."
Fonterra Chairman Henry van der Heyden said the Strategy Refresh was timely as the Co-op embarks on its second decade of operations.
"This is an exciting time for Fonterra. For well over 100 years, New Zealand dairy farmers have gone out in the world to seek markets for our safe, high quality dairy products. Equipped with this strategy we are now taking decisive steps to understand and meet nutritional needs in some of the world's most exciting growth markets to fulfil Fonterra's unique vision to be the natural source of dairy nutrition for everyone, everywhere, every day," van der Heyden said.
