Fonterra ‘found wanting’, claims report
A review of NZ dairy companies reveals new benchmarks
Anew dairy industry report says for the first time Fonterra’s financial performance can be benchmarked against its growing New Zealand competitors — and claims the big dairy company has been found wanting.
A review of New Zealand dairy companies by financial and economics consultancy TDB Advisory said taking a2 Milk, Synlait and Open Country Dairy as being representative of Fonterra’s consumer brands, ingredients and commodity businesses respectively, there is now a performance benchmark for Fonterra.
It showed Fonterra has not produced adequate risk-adjusted return for its supplier-shareholders.
Fonterra’s competitors now had aggregate revenues of more than $2.5 billion, a 16 per cent share of the milk processing market at more than 3.5b litres a year, and returns on invested capital of more than 10 per cent, said the report, whose authors have close links to Open Country.
TDB said that over the past three years, Waikato’s Tatua co-operative had achieved the highest adjusted return on assets of the traditional milk processors at 18 per cent per year, followed by privately-owned Open Country Dairy at 11 per cent, Synlait at 9 per cent, with the co-operative Fonterra at 7 per cent.
ATM was the benchmark for the consumer market segment.
“We found that the often promoted
Bundle them all together and for the first time you get a comparable market-based benchmark to make judgements about Fonterra’s performance. Geoff Taylor
‘move up the value chain’ from commodities to more specialist products had not been necessary to achieve strong risk-adjusted financial returns,” the report said.
One of its authors, TDB director Geoff Taylor, said the main message was the industry had moved beyond two “theoretical” performance benchmarks.
One was the premise for Fonterra’s creation from an industry merger in 2001 in a “privileged, monopoly position”. The merger gave Fonterra 96 per cent of the country’s raw milk supply, which has since fallen to 82 per cent.
The other benchmark, now redundant, was Tatua’s enviable reputation as the country’s milk payout leader. The relatively small volumes of milk it processed made it flawed as a valid industry benchmark.
For the first time farmers and the industry had the market benchmarks of Open Country being a standout commodity-based processor, Synlait being the standout ingredients processor, and a2 being the standout consumer business,” said Taylor.
“Bundle them all together and for the first time you get a comparable market-based benchmark to make judgements about Fonterra’s performance.”
Taylor and fellow TDB director and report author Nigel Atherfold are former directors of Open Country. Taylor is a shareholder in Open Country and said TDB are retained by consumer goods retailer Goodman Fielder, which has guaranteed access to Fonterra milk at a regulated price.
Taylor said he is also a direct investor in Fonterra and on the board of several large Fonterra suppliers. Fonterra has been approached for comment on the report. The Fonterra Shareholders Council, which represents Fonterra’s cooperative farmerowners, declined to comment.
The 42-page report said when the return-on-assets segment performances of Open Country, Synlait and ATM were taken together they provided a comparator that suggested Fonterra’s global “volume into value” strategy had not produced additional shareholder value beyond what could have been expected from a New Zealand-based commodity and ingredients processor.
Fonterra’s two main competitors, Open Country and Synlait, now represented 60 per cent of the nonFonterra market and had processing volume growth of 15 per cent last year.
The report estimated that with milk growth now stalled, Fonterra’s market share would fall to about 78 per cent by 2020.
Open Country’s processing volumes were projected to rise by 8 per cent per year and Synlait’s by 7 per cent a year until 2020. No growth was assumed for Westland Milk, Tatua and Miraka. Growth of 28 per cent a year was anticipated for the Oceania company.
TDB said if Fonterra was allowed to pay a higher milk price to defend its volumes, competitors would likely to continue to offer premiums. Introduction of risk-transferring pricing structures could also speed up. Such arrangements could include longer-term milk supply agreements, fixed milk price contracts or toll processing pricing.