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Fonterra prioritising value over volume

By Rebecca Howard

Sept. 26 (BusinessDesk) - Dairy giant Fonterra Cooperative Group is bringing its focus squarely back to New Zealand as it prioritises value over volume.

It’s not the first time the cooperative has focused on value but the difference is a shift away from volume. This time it’s being more selective.

“From where we’ve come from to where we are now, is a radical change,” said chief executive Miles Hurrell after unveiling the new strategy.

The previous leadership and board had a vision to achieve $35 billion of revenue from the equivalent of 30 billion litres of liquid milk. Given it didn’t 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 saw Fonterra report its first loss in the year ended July 31, 2018 and has seen the value of units in the Fonterra Shareholders’ Fund and farmer-owned shares both tumble 35 percent during the past 12 months.

Under new leadership – both management and board – Fonterra launched a cooperative-wide strategic review that has seen it divest a number of what it considers to be non-core assets. Wednesday, for example, it announced the sale of its 50 percent stake in DFE Pharma for $633 million.

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's 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 are fit for purpose today, said Hurrell.

The focus is now on becoming “more of a premium offering” rather than obsessing about having a 30 percent share of the global dairy export market, he said.

"We don’t need to think of ourselves as a global dairy giant,” said chief financial officer Marc Rivers.

The new strategy, for example, is backing away from the need for global milk pools. “The reason we exist is to collect New Zealand milk,” said Hurrell.

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, however, is 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 is also marked by a shift away from the consumer business except where it can deliver superior value. The focus will now be squarely on ingredients and food service.

“We will definitely have a smaller consumer play,” Rivers said.

The focus will now be on products where there is alignment between ingredients and consumer such as butter, cheese and powders. “We make significantly more money doing that,” he said.

Otherwise, it will focus on where it can differentiate, such as it’s so-called instant cheese. Instant cheese is a powder mixed with water that turns into a cheese solid after 30 minutes.

It will back away from things like flavoured yogurts and dairy desserts, said Rivers.

Hurrell said a key example was the divestment of Tip Top, bought by global ice cream company Froneri. According to Hurrell, Tip Top is a confectionary company and therefore didn’t align with the new strategy.

Both he and Rivers emphasised the new strategy is about making choices and the dairy giant has to choose and pick its categories. Those categories are now: core dairy, food services, paediatrics, and sports and active.

It can also pick the geographies it operates in.

“We have a good footprint in Australia and Chile is a great business but generally our business is in Aotearoa,” Hurrell said.

He downplayed speculation that Fonterra could pull out of either but said “they need to stand on their own two feet” as “anything offshore is discretionary.”

Moving forward, Fonterra will measure its performance against a so-called triple bottom line that includes healthy people, a healthy environment and a healthy business. The business focus includes a sustainable payout, a return on capital and a reliable dividend, said Rivers.

Hurrell said a key challenge for the cooperative is increasing competition in New Zealand, where farmers now have more options for where to send their milk. “Farmers have to choose to stay” and having a strong payout is key.

He also said the cooperative is not expecting the milk growth of the past, which makes having a much more targeted approach even more critical.

Hurrell said as the cooperative moves from being a “global giant with headquarters in New Zealand” there will be “some changes in the way we go to market” that will see some structural changes.

He said there would be no talk of redundancies today but “with any change comes uncertainty.”



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