For us, the focus is on growing value and future success. It’s not about losing the Consumer business. It’s about focusing Fonterra’s energy and efforts on where we do our best work and enabling the Consumer brands that we all know and love to be fostered by a true global consumer giant for mutual gain.
Fonterra’s relative success in recent years comes from an understanding of where we have a comparative advantage that can deliver real value back to our farmers through the milk price or earnings.
By far, we do this best through our business-to-business (B2B) Ingredients and Foodservice channels, which collectively generate the majority of our returns to shareholders through both the price we pay farmers for their milk, and dividends.
The key components of our strategy are to move more of our farmers’ milk into higher-returning products, improve the efficiencies of our operations and be disciplined with our capital.
Fonterra “adds value” to our farmers’ milk by putting an ever-increasing proportion of it into our ingredients and foodservice products. This is where we have scale and can achieve efficiencies.
Fonterra sells dairy ingredients into more than 100 countries. Photo / 123RF
These are specialty dairy formulations you’ll find in pre-mixed protein shakes in the US, the super-stretch mozzarella on a delivery pizza in China,or high-performance creams in a range of desserts in Southeast Asia.
Through these businesses we sell products derived from New Zealand milk to more than 100 countries.
The innovations behind the products are also home-grown. We spend more than $100 million every year on science and innovation to optimise the value from every drop of milk.
Our innovation pedigree includes more than 500 patents and 60 global partnerships – numbers we expect to grow now that some of our largest customers – Nestle, Mars and Lactalis – can truly call us a partner, and not a competitor. We will have much more meaningful relationships with our B2B customers. Their consumer insights will be much deeper than what we ever had. Combined with our century of dairy science, I think we’ll innovate much faster.
The other way Fonterra “adds-value” is through a return on our farmers’ invested capital.
The Consumer business consistently delivers a return on capital below our target range and, compared to our Ingredients business, does not make a material contribution to the milk price we pay farmers.
Even with significantly improved performance, Consumer is a riskier business, requires much higher operational expenditure and still is well below our target rate on a market value basis. Given it utilises less than 8% of our New Zealand milk, it’s also not an effective hedge against the risk of milk price volatility.
This is not a question of capability or ambition. Our management team includes some of the brightest minds in global dairy. The simple truth is we are not the natural owner of a global consumer business.
To be competitive in a consumer business, you need scale efficiencies, which is challenging in a country of five million people at the bottom of the world. In contrast, think of some of the world’s biggest consumer brands – Unilever, Kraft Heinz and Danone – globally headquartered with strong regional interoperability.
We are not naturally set up to compete with monoliths of this scale, but we can partner with them for mutual benefit. Fonterra farmers will continue to benefit from their success, with Lactalis set to become one of our most significant Ingredients customers through a long-term strategic partnership and milk supply agreement.
This whole process has been about strategy – what Fonterra can be the best in the world at. Then having the focus and discipline to deliver on that.
The hard work of our farmers and global teams over many years has Fonterra in a position of real strength. That gives us choices.
We choose to focus on B2B Ingredients and Foodservice because we have a proven competitive advantage and global reach. We are confident this is the best option for our farmers’ futures, and therefore New Zealand.
Sign up to Herald Premium Editor’s Picks, delivered straight to your inbox every Friday. Editor-in-Chief Murray Kirkness picks the week’s best features, interviews and investigations. Sign up for Herald Premium here.