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.
“We have just gone to the number-one position in China when we measure our reputation,” he says.
Fonterra’s market share is 11% -- 5 billion L sales in a market consuming 45b L of milk per year.
“When I [refer to] share in litres of milk sold in China by our ingredients, consumer and food service business, we are by far number-one,” Spierings said at the release of the annual results last week.
In food service Fonterra has gone from zero in 2011, to 400m L in 2013 and now 1b L of milk of high added value.
“All the milk comes from New Zealand so that is massive value creation for our farmers.”
Spierings says Fonterra is building its partnership with Beingmate, the co-op’s first priority because China is its top market.
“A whole lot of things have changed in China… the regulations will change drastically. The regulations will say that each legal entity in China can have only three brands with three recipes.”
That may eliminate about 1800 of the country’s 2000 brands in the next 15-18 months.
“You need to have a local partnership in China to be in the game. That is the strategic rationale.”
Spierings believes investing in a listed company in China will give Fonterra a dividend. But most important for the company is the global supply agreement with Beingmate and the necessarily huge volume of NZ milk. They also have the Darnum joint venture in Australia for which the co-op just got approval from the Chinese authorities.
Beingmate is a “massive partnership” which is tapping into Fonterra’s entire strategy and its milk hub strategy, Spierings says.
Chairman John Wilson says China inventories and demand growth are back to normal levels. The co-op’s business in China is an integrated strategy with many facets and on balance the business is performing well there, he says.
“The China farms business has been through a significant period of growth with the two main farming hubs completed and operating well.”
However, the Chinese business has been hit by very low global dairy prices, as have NZ farmers.
Wilson says now that milk has reached critical mass, Fonterra is confident it will integrate into the Chinese consumer and food service business.
