Fonterra 'national champion' strategy ends ambition for global dairy dominance

Thursday, 26 September 2019

The year was 'incredibly tough' for Fonterra, which has posted a record loss. First published September 2019.

Fonterra no longer aims for global dairy dominance.

Instead it will be a national champion taking precious 'Aotearoa New Zealand' dairy to the world.

The ethos of global dairy dominance was the idea that to stay relevant, Fonterra needed to maintain a 30 per cent share of the global dairy market, according to Fonterra chief executive Miles Hurrell.

It was an idea that underpinned a 'big chequebook' strategy with Fonterra buying, building and bankrolling overseas dairying operations in places like China, Chile and Sri Lanka.

**READ MORE:

Fonterra chief executive Miles Hurrell says the dairy cooperative must become a 'national champion' and end its fixation on dominating global dairy supply.

* Fonterra's $633m sale of DFE Pharma gives it over $1 billion to reduce debt

* Fonterra to suffer loss after fails to sell stake in Beingmate

Fonterra says it must be a champion for 'Aotearoa New Zealand', which may one day lead to branding that feels like it represents that aspiration.

* Fonterra makes half year profit of $80m, will sell European operation

* Fonterra sells Tip Top to global ice cream giant Froneri for $380m

* 'Dirty dairy' farmer Philip Woolley to sue Fonterra for refusing to take his milk**

Fonterra has sold its Tip Top ice cream business to global ice cream giant Froneri for $380m.

That strategy cost Fonterra dearly, with massive write-downs causing anger among farmers, and leading Kiwi households to scratch their heads as how Fonterra's overseas ventures were doing any good for New Zealand at all.

Fonterra has set a new strategy, which Hurrell, chief strategist Chris Greenough and chief financial office Marc Rivers briefed journalists about on Tuesday, September 23 in advance of the big reveal at Thursday's financial reveal.

Every part of the operation would have to deliver a sound financial return, or it would be closed, or sold, they said.

Debt had to be reduced, and the sale on Wednesday of a 50 per cent share of DFE Pharma, which provides 'bulking agents' for pills and powder inhalers, for $633 million, means it had more than $1 billion to reduce debt, and some good news to take to farmers this week.

Hurrell said Fonterra hadn't been good at selling under-performing businesses, or 'harvesting' value by selling well-performing businesses when offered top dollar.

Fonterra chief financial officer Marc Rivers is seen as a modernising force in the cooperative, and is focused on maintaining Fonterra's strong credit rating.

Instead, like rusty bits of machinery they were allowed to remain on the farm, propped up against a shed, 'just in case' they were needed.

'If your hero measure is volume, you don't sell anything, Hurrell said.

Fonterra had tried to be everything to everyone, Hurrell said, including in its consumer products.

Fonterra was strong in its ingredients business (to food manufacturers), and turned a decent profit on consumer products that were consumer versions of the wholesale ingredients like milk and butter, said Greenough.

Protesters outside Fonterra's Edendale plant earlier this year.

It also earned good profits on truly distinctive consumer products like Kapiti.

But it had too many consumer products on which it did not make good margins.

'We can make our choices, and be more focused,' he said.

Hurrell did not regret the sale of Tip Top for $380 million in May, saying the ice cream business was not well-aligned to Fonterra's other businesses, and was not globally scalable.

Fonterra was a world leader in dairy protein science, but needed a more targeted approach to commercialising its science, and would focus where it could command a premium in areas like sports nutrition, he said.

The cooperative would even explore 'non dairy' opportunities, as indicated by its investment earlier this year in United States company Motif Ingredients, which grows dairy-like proteins in labs, but that shouldn't send a chill down farmers' spines, Hurrell said.

Fonterra's new mission statement was for the cooperative to match its unique strengths to consumer needs creating sustainable value from the milk of its 10,000 farming families.

'It's very clear we will be prioritising our New Zealand milk base,' said Greenough.

'Anything offshore is discretionary,' he said.

Fonterra wants to be seen as an environmental champion.

It will now report a 'triple bottom line', measuring and reporting annually across three areas: Healthy people, healthy financial returns and healthy environment.

This would involve year-on-year reducing waste on farms and in Fonterra operations with an aim to get to zero waste, lowering its carbon footprint, and 'restoring nature'.

The cooperative has faced criticism from environmentalists for its use of coal, which has led to talks with the government, and for the environmental impact of high intensity dairying, though it has refused to take milk from some farmers when not satisfied they are meeting its environmental requirements, such as fencing off waterways from cattle.

Each year the cooperative lifted teh environmental standards it expected of farmers, Hurrell said.

He hoped in time the new Fonterra strategy could lead to a reduction in the sense there was a divide between town and country.

Hurrell was at pains to say the new strategy, and some statements strategy documents contained, should not be taken as criticism of Fonterra past.

The statement: 'We'll be open and honest, even when there are challenges along the way,' was not meant to indicate Fonterra had not been open and honest in the past, he said.

But there would be a greater depth of financial and environmental reporting from Fonterra, including on the incentive schemes for senior executives, which would be based on improvements in 'hero' financial measures like return on capital, and earnings per share.