Fonterra’s challenge: Keeping to its new plan
Board and management will have to do better than they have so far
Readers of a certain vintage will remember talk of the “Honey I shrunk the company” video that Michael Blumenthal is purported to have directed in 1990 when Unisys hit the rocks.
There is standard playbook for companies — like Fonterra — that have expanded too fast.
Effectively, it comes down to “slash the palace” — that’s the overstaffed executive “leadership” teams that far too many CEOs rely on far too much to pander to their egos, instead of challenging strategy and getting results through focused execution.
It also comes down to someone “taking one for the team” — in this case chairman John Monaghan, who should have followed Sir Ralph Norris’ example at Fletcher Building and announced his intention to step down from the chairman’s role now the lengthy reset is finally in place, so a fresh chair can take the company forward.
In Fonterra’s case, challenging the CEO has resulted in some very good executives being pushed out over the years. That’s something that Fonterra directors could have probed through some searching and confidential exit interviews as they asked themselves how come our senior leadership teams are being reshuffled on such a regular basis.
The kind of interviews that would have revealed to what extent directors were also being snowed when it came to the on-the-ground reality of strategies like the 3Vs — Volume, Value, Velocity — which were championed by former CEO Theo Spierings.
But that resulted in far too much debt-fuelled expansion, ultimately putting the company at risk, and a failure to mark to market doubtful investments like Fonterra’s stake in Beingmate when that should have been done, instead of holding to the vain hope things would come right.
If the directors had used their back channels in a skilful fashion, much of what has come to light in the past 18 months could have been highlighted earlier and triage applied.
In the case of Monaghan, he might even have challenged his predecessor John Wilson instead of loyally waiting for the latter’s departure to begin work on a reset.
At Fonterra HQ this week — where my question over just how many floors the company will really need in the future got short shrift — it was like being locked in a time warp.
Fonterra’s top trio — Monaghan, chief executive Miles Hurrell and chief financial officer Mark Rivers — produced a very shorn down presentation. It was disappointingly light on in-depth analysis.
The annual report was beautifully put together to illustrate the Kiwi nature of the company that its PR people were endeavouring to convey rather than that of an multinational company.
While Fonterra may have turned a corner with its strategy reset, many of its shareholder base are exposed and could yet be enticed away
Fonterra had already warmed up journalists with an invitation to attend the Fanshawe St HQ in downtown Auckland to be talked through the new strategy, which in essence came down to abandoning any pretensions, let alone ambition, to be ranked among the world’s dairy giants.
It was back to basics New Zealandstyle, with a focus on putting the interests of NZ farmers and their milk pools first, instead of endeavouring to dominate the global dairy market through a barely disguised thrust to be the price maker
Hurrell outlined that Fonterra will prioritise investment to areas that will deliver sustainable value. These have been identified as core dairy (powders and ingredients), food service, paediatrics, sports and active nutrition, medical and aging nutrition. Even non-bovine milk got a mention, playing to the changing zeitgeist over animal proteins.
But none of this — including Monaghan’s admonition to journalists that Fonterra got far too much negative coverage — could disguise the reality that they had just posted a net loss of $605 million for the year to July, after writing down assets to the tune of $826m and selling some of their crown jewels like Tip Top and a 50 per cent share in DFE Pharma to reduce debt.
In my view, this reset has taken far too long to achieve.
The strategy should surely have been accompanied with details of the new structure.
Fonterra may have pulled back on its dairy giant ambitions but it is still in a very competitive environment. Particularly, from the three major Chinese competitors that have built major processing operations in New Zealand and stand ready to snaffle some of Fonterra’s supplier base if the payout forecasts are not delivered.
For investors in Fonterra’s Shareholders’ Fund, they face a busted flush. There are other looming issues. The banks are already pressuring some of the more marginal dairy farmers to reduce capital as Reserve Bank governor Adrian Orr suggested yesterday, ahead of any higher capital requirements.
Monaghan confirmed this is an issue for the company’s farmershareholder base. Fonterra had met with all the chairs and CEOs of the major banks to discuss this.
Then there is the prospective double whammy many farmers will face if and when tough new water quality rules go into effect.
So while Fonterra may have turned a corner with its strategy reset, many of its shareholder base are exposed and could yet be enticed away.
It will take much more focused management and oversight from the Fonterra board to ensure the socalled corner remains turned and the company does not end up in another pickle.