The “Anchor Essence” cream offers a fresh option for China’s foodservice operators, including chefs, bakeries, cafes and restaurant chains. While primarily a B2B (business-to-business) model, Fonterra’s foodservice products are ultimately geared toward urban, middle-class consumers who are increasingly seeking higher-quality, indulgent but healthy food experiences.
“We’re focused on premium natural ingredients that drive value add,” says Katie McClure, Fonterra’s director of innovation and marketing. “Our customers are looking for that grass-fed standard, cleaner label, healthier and more natural ingredients. Those are the cues driving a willingness to pay.”
About 71% of consumers are willing to pay more for products that are simpler and more natural, she adds.
Fonterra says its Greater China foodservice business is a key part of its value-add strategy, with products reaching hundreds of cities. It has six application centres in China, based in Beijing, Shanghai, Guangzhou, Chengdu, Shenzhen and Wuhan, where chefs work with customers to develop ideas and recipes, catering to local market trends and preferences.
The co-op has built a network of foodservice chefs across its application centres in China, where they work alongside bakeries, tea chains and restaurant groups to develop recipes, solve product challenges and train staff at scale.
Teoh Joo Cheong, one of Fonterra’s senior chefs in the market, says his focus is on helping customers grow in an intensely competitive environment.
“We work with the customers to develop recipes, find the pain points and also do the analysis for the trade marketing for the consumer.”
He says bakeries are targeting multiple selling points and a customer spend of 100RMB ($26) per person in store.
“There is fierce competition, so we have to try and stay ahead of the game.”
It quickly becomes clear why Bakery China is a key date on the foodservice calendar for Fonterra.
The four-day event ran from May 20-23, spanning more than 330,000sq m across 13 halls. It drew 2267 brands and companies from 79 countries and regions, showcasing more than 10,000 products, and attracted nearly 400,000 professional visitors from 144 countries.
“Bakery China is a mega event for us because essentially we are a B2B business for food service and the majority of the visitors we see here come from the baking industry,” says Justin Dai, Fonterra’s vice-president for foodservice in Greater China.
“We have tens of thousands of customers we probably only meet once a year, so this is the occasion we can thank them for their business and show them the new products, new applications, the best we have.”
It’s even more significant this year because just weeks earlier, on March 31, Fonterra completed the $4.22 billion sale of its global consumer business to French dairy giant Lactalis – a deal that handed over household names like Mainland and Anchor in many markets and marked the most dramatic strategic pivot in the co-operative’s history.
Fonterra retained the Anchor brand and the Anchor Food Professionals brand in China, which is seen as a vital channel into the world’s largest foodservice market.
The consumer sale delivered a $3.2b capital return to farmer shareholders, while leaving up to $1b to be deployed into Fonterra’s ingredients and foodservice businesses.
Commenting on Fonterra’s third-quarter update late last month, new chief executive Richard Allen said the sale marked a significant step in the co-operative’s future strategy, which is focused on growing the high-value Ingredients and Foodservice businesses.
He also highlighted additional investment already going in to support the remaining businesses.
“We advanced work on our new $35 million pastry butter sheet capacity at Edgecumbe, reached product validation stage on our $75m Studholme protein hub, and made good progress on our $75m butter expansion at Clandeboye and $150m UHT cream build at Edendale.”
CEO Richard Allen has highlighted the extra investment in Fonterra’s remaining businesses. Photo / Alyse Wright
A dynamic market
Bakery China is an ideal place to understand the bet Fonterra is making.
“China is a very dynamic market,” says Teh-Han Chow, Fonterra’s Greater China chief executive.
“The consumer is willing and actually demands to experience something new every day. So, as you go through this market, you’ll notice that dynamism means that you get constant change and something new always happening.
“Whether you’re walking down the street and there’s suddenly a new building that just came up, or your standard of living significantly improving every five years, we see this translate into new products, new flavours, new ways of eating things.
“That dynamism means there’s always a lot of opportunity, but also a lot of challenges. So, you’ve got to be innovative, you’ve got to keep up and develop new propositions … so you’re always testing, checking and adjusting.”
China’s economy is experiencing increasing unevenness, with retail sales falling for the first time in more than three years and investment also slumping. At the same time, industrial output has picked up pace.
Economic growth in the second quarter is expected to slow to 4.5% from 5% in the first.
However, it’s still a market that suits producers like Fonterra, says Dai.
He describes demand as “relatively soft” compared with the past decade, but argues that reflects scale rather than weakness.
Teh-han Chow, here at Bakery China, says China is “a very dynamic market”. (Photo / Fonterra
“You cannot keep that growth rate for such a gigantic market,” he says. “China’s economy is also moving into a different phase, and I would say it’s probably more of a natural evolution of the economy, rather than a kind of a simple slowing down.”
Even at 5% growth, China is adding the equivalent of a large, developed economy every year, and the nature of that growth is shifting.
“Consumption is getting more and more important,” Dai says, as Beijing pivots away from export-led growth toward domestic demand, a move that directly benefits sectors like foodservice.
The great unwind, what comes next
The sale of Consumer to Lactalis is the latest step in a years-long process of dismantling Fonterra’s global expansion.
Since 2019, the co-operative has raised more than $7b through asset sales – including Tip Top ice cream, DFE Pharma, its Beingmate stake, farms in China and Chile’s Soprole business.
The message from the board has been consistent. The old model – owning brands, factories and distribution networks around the world – was capital-intensive and delivered lower returns.
Chairman Peter McBride has framed the consumer business divestment as a defining moment, with the focus now on growing further through its core business as a New Zealand farmer-owned global B2B dairy provider.
Not everyone agrees.
Critics like New Zealand First leader Winston Peters argue Fonterra farmers have given away more than a century of work and iconic assets for a “short-term sugar hit” in a move that puts at risk the security of supply for their milk.
Fonterra has pushed back, emphasising long-term supply agreements that will see it continue providing milk and ingredients into those brands for years.
Bakery delights
On paper, the case looks compelling.
Fonterra’s ingredients division generated $17.5b in revenue in 2025, with $1.1b in operating profit.
Foodservice, smaller at $6.4b in revenue, delivered $340m in operating profit and is growing quickly. During the third quarter of the 2026 financial year, the Foodservice underlying operating profit was up $304m, or 143%, to $516m, driven by pricing and product mix.
Ingredients, which comprises bulk and specialty dairy products such as milk powders, dairy fats, cheese and proteins, saw its underlying profit fall 18% to $965m in Q3, because of a lower contribution from core operations reflecting a higher cost of protein being expensed.
Fonterra’s Anchor Food Professionals products for sale at Sam’s Club in central Shanghai. Photo / Duncan Bridgeman
While margins are not dramatically higher at the headline level, the foodservice channel offers proximity to customers and influence over how dairy is used.
That is evident inside China, which accounts for roughly a third of New Zealand’s milk production, making it the single most important market for Fonterra’s value-added strategy.
A visit to Sam’s Club, a giant Walmart-owned membership retail outlet similar to Costco, reveals shelves stacked with Fonterra products, including UHT milk, whipped creams and cheeses.
The bakery section is stocked with all manner of treats, including flower-shaped egg tarts, cheese Danish pastries, sausage cheese bread and pistachio Mario – all featuring Anchor Food Professionals ingredients.
In central Shanghai, Fonterra’s bakery customers have stores in high-footprint shopping malls.
At Du Su Shijia, traditional pastries are on display alongside new-style bakery items such as Guizhou Matcha Cake, a green dessert prepared as a light sponge with Anchor cream and butter.
Fonterra-produced cream is being used in products sold at bakeries across greater China, like this one in a Shanghai Mall. Photo / Duncan Bridgeman
In another mall, Proust Moment displays its star product – a preservative-free “raw toast” which uses natural ingredients and slow fermentation for a fluffy, moist outcome.
Fonterra’s six “application centres” in major Chinese cities are central to this pipeline.
“Our product is completely transformed before the consumer sees it,” Chow says. “That makes it more complex, but it also creates far more opportunity.
“A channel-led approach means we can focus our resources and innovation much more tightly on foodservice.”
McClure is at the coalface of innovation, providing a link between Fonterra’s research and development in Palmerston North, factories like the Waitoa UHT plant, near Matamata, and the marketing and distribution channels in Greater China.
“We’ve got global dairy expertise … but you have to have local knowledge to complement that. So we’ve got local sensory teams, technical teams, insights, and that balance is where the magic happens.
“Our general principle with innovation should be starting from a customer problem. But sometimes, if you ask the question of what people are going to want to buy in 10 years’ time, you might not have the answer. So we also balance that with longer-term science and technology shifts.”
McClure talks about China’s coffee culture, for example.
“Coffee is growing in what has historically been a tea market,” she says, while beverages are also becoming a platform for functional nutrition, such as high-protein drinks.
This is creating a new avenue for dairy, not just as an ingredient, but for lifestyle and health trends.
Fonterra chefs demonstrate foodservice products at Bakery China 2026 in Shanghai.
The emphasis on innovation at Bakery China is unmistakable.
Chow points out that more than 570 applications have already been developed from a single product launch.
“There are a lot of different things you can do with a one-litre pack of cream,” he says.
Fonterra also emphasises its grass-fed dairy credentials and New Zealand’s competitive edge, with the FernMark logo helping to protect those claims from companies seeking to appropriate them.
“Our position in China is driven by this grass-fed proposition … it’s become the standard everyone aspires to,” Chow says.
McClure sees it as a competitive weapon just as much as a marketing tool.
“Having that mark on [a] pack will ensure our customers ask questions of our competitors,” she says.
Going deeper inland
Until now, Fonterra’s growth in China has been built around megacities like Shanghai, Beijing, Shenzhen and Guangzhou, with tier-one and tier-two urban centres.
But that’s starting to change as China enters a new phase of development.
“The real shift is toward lower-tier cities,” Dai says. “That’s where the next decade of growth will come from.”
Fonterra launched a new whipping cream at Bakery China 2026.Photo / Duncan Bridgeman
China’s so-called tier-three, -four and -five cities, with hundreds of counties, account for more than 60% of the population and are now emerging as the next target for food producers.
“When we look at our target population, we still have population growth. And so that means there’s plenty of opportunity for us as we look into going deeper into these lower-tier cities that are still small cities with a few million people,” Dai says.
“We need to continue to penetrate and to defend the position we have. It’s just becoming more and more sophisticated. In the lower-tier cities, we will aggressively expand. But we need to again strike the right balance in terms of investment return.
“Because there’s a reason why they’re lower-tier cities. They’re further inland in terms of travel distance, logistics distance, and reaching customers. We don’t want to invest blindly; we need to do it in a staged process.”
In some markets, that means blending dairy with non-dairy ingredients to build familiarity, or designing offerings that can cope with weaker infrastructure.
In others, it means relying on distributors and local partners to reach customers at scale.
The risk factor
Fonterra’s new strategy is not without risk, some of which are beyond the co-op’s control, such as geopolitics.
“New Zealand and China have a very strong bilateral relationship. And that means that there are free trade flows, unimpeded trade flows. And that’s critical for us to do business.”
Any disruption to that environment would be very damaging to Fonterra.
“If trade flows are disrupted, then everything else … becomes pointless,” Chow says bluntly.
Competition is another constant pressure, and there is execution risk.
“The market is dynamic, and competitors are getting better,” Dai says. “We just need to work harder to stay ahead.”
McClure is confident Fonterra can deliver.
“I think the new direction gives us focus and clarity,” she says. “That focus will actually mitigate risk rather than create more.”
Duncan Bridgeman is the managing editor of NZME Business News, overseeing the Business Herald and BusinessDesk. His travel to Shanghai, China, was funded by the Asia New Zealand Foundation.
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