Fonterra to focus on NZ in shift from volume to value
DAIRY giant Fonterra Cooperative Group is bringing its focus squarely back to New Zealand as it prioritises value over volume.
It is not the first time the cooperative has focused on value but the difference is a shift away from volume.
This time it is being more selective.
‘‘From where we’ve come from to where we are now is a radical change,’’ chief executive Miles Hurrell said after unveiling the new strategy yesterday.
The previous leadership and board had a vision of achieving $35 billion of revenue from the equivalent of 30 billion litres of liquid milk.
Given it did not see much volume growth in New Zealand, it was focused on setting up five or six milk pools by 2025 and invested accordingly, including sinking millions into farms in China.
The strategy was known as ‘‘V3’’ or ‘‘driving more volume into higher value at velocity’’.
The strategy resulted in Fonterra reporting its first loss, in the year ended July 31, 2018, and the value of units in the Fonterra Shareholders’ Fund and farmerowned shares both tumbling 35% during the past 12 months.
Under new leadership — both management and board — Fonterra launched a cooperativewide strategic review that has led to it divesting a number of what it considers to be noncore assets. On Wednesday, for example, it announced the sale of its 50% stake in DFE Pharma for $633 million.
Mr Hurrell said he inherited a cooperative that ‘‘tried to be all things to all people’’ and was marked by a constrained capital balance sheet that needed to be cleaned up.
It was well on its way with more than $1 billion available to pay down debt.
‘‘We have bought, built and borrowed globally’’ and not all those assets were fit for purpose today, Mr Hurrell said.
The focus was now on becoming ‘‘more of a premium offering’’ rather than being preoccupied with having a 30% share of the global dairy export market, he said.
‘‘We don’t need to think of ourselves as a global dairy giant,’’ chief financial officer Marc Rivers said.
The new strategy, for example, was backing away from the need for global milk pools.
‘‘The reason we exist is to collect New Zealand milk,’’ Mr Hurrell said.
He specifically cited China, where the ownership of its farms is up for review.
Set up almost 10 years ago, they comprise seven farms across two hubs with about 31,000 cows. In the 2018 financial year, the China farms recorded a direct loss of $9 million.
Being active members of the wider Chinese community was still a priority.
‘‘You can’t simply send product,’’ he said.
However, ‘‘we just don’t think it needs to be 35,000 milking cows’’.
The new strategy was also marked by a shift away from the consumer business except where it could deliver superior value. The focus would now be squarely on ingredients and food service.
‘‘We will definitely have a smaller consumer play,’’ Mr Rivers said.
The focus would now be on products where there was alignment between ingredients and consumer such as butter, cheese and powders.
‘‘We make significantly more money doing that,’’ he said.
Otherwise, it would focus on where it could differentiate, such as its instant cheese, a powder that when mixed with water turned into a cheese solid after 30 minutes.
It would back away from things such as flavoured yoghurts and dairy desserts, Mr Rivers said.
Mr Hurrell said a key example was the divestment of Tip Top, bought by global ice cream company Froneri.
Tip Top was a confectionery company and therefore did not align with the new strategy.
Both he and Mr Rivers emphasised the new strategy was about making choices and the dairy giant had to pick and choose its categories. Those categories were now core dairy, food services, paediatrics, and sports and active.
It could also pick the areas it operated in.
‘‘We have a good footprint in Australia and Chile is a great business but generally our business is in Aotearoa,’’ Mr Hurrell said. — BusinessDesk
❛ From where we’ve come from to where we are now
is a radical change