Fonterra’s three-way dilemma

[This post was first published in the Fairfax NZ Sunday Star Times on 22 February 2015. It is the fourth of a series of five on Fonterra.  The earlier posts were ‘The evolution of Fonterra’, ‘Fonterra’s jouney’, and ‘Fonterra’s global reach’.]

One of the big challenges for Fonterra has been to determine its overall market position. Is it a marketer of commodities? Or is it a marketer of fast moving consumer goods (fmcgs)? Or is it a marketer of specialist ingredients? Can it be all three?

The challenge of trying to be all three is that the appropriate business culture is different for each market positioning. Commodity marketing is all about logistics, efficiency, and financial discipline. Fmcgs are all about entrepreneurship, creation of brands, being fast on one’s feet, and willingness to take risks. Specialised ingredients require a focus on science and technology.

Very few companies succeed in being more than one of these. So where does Fonterra sit and where should it sit?

Over the years, Fonterra has struggled to know where it should fit. As a consequence, it has arguably not fulfilled its full potential. Its core strength has been as a commodity marketer, and for much of the time its business culture has reflected this. But there has been lots of to-ing and fro-ing.

Fonterra’s first CEO was Craig Norgate on a two year interim appointment subsequent to serving as CEO of Kiwi, one of the two big co-operatives that preceded Fonterra. Norgate has always been an entrepreneur who focused on vision and opportunity. When Henry van der Heyden (later Sir Henry) became Chair of Fonterra, he wanted someone more steady, experienced, and disciplined as CEO. He shoulder-tapped Canadian Andrew Ferrier for the job.

Fonterra inherited many brands from the Dairy Board. In fact they had too many brands, more than 150, but not enough so-called ‘power brands’. Ferrier brought in brand specialist Sanjay Khosla to sort out the mess and create the global power brands.
But Khosla and Fonterra Brands did not survive very long under that global focus.

Fonterra came to the conclusion that it was fifty years too late to be competing with the likes of Nestle and Danone. It never said this publicly, but privately it was stated clearly.
So the new emphasis was to be on specialised ingredients. Fonterra would position itself as the preferred supplier for the big international companies such as Nestle.

To operationalise the new positioning, Fonterra set up new Chicago regional headquarters in 2008, and from there identified key accounts with leading marketers which would be given priority. Specialised casein-based ingredients into America, which unlike other dairy products were not subject to American tariffs, were seen as particularly important.

Unfortunately, the specialised ingredients business has not worked as well as what Fonterra hoped. The American dairy industry has itself become internationally competitive, and they have built their own capacity in specialised ingredients. New Zealand does still export casein and related protein ingredients to America, but it has not been the hoped for goldmine.

Fonterra has also found that some of its desired big-name partners are uncomfortable with being reliant on Fonterra. For risk management, they prefer to have multiple suppliers from multiple parts of the world. And following the 2013 botulism fiasco, Danone in particular has gone right off the idea of dealing with Fonterra.

The real New Zealand success story with specialised dairy ingredients is undoubtedly the small Waikato co-operative Tatua. Tatua has known for more than 20 years that this was its niche position. It sells no whole milk powder and it has only a small focus on consumer brands – led by the amazingly successful Dairy Whip product, which itself has a technology base. Tatua does have lots of food technologists and food scientists.

A key lesson with specialised ingredients is that it is a long journey. It requires a strong science underpinning, and it needs a long term mindset. Arguably, Fonterra has exhibited neither of these in its history so far. Indeed its science capacity is really quite limited and appears to have declined since the Dairy Board days.

When Fonterra decided to reduce its focus on fast moving consumer goods, it never saw the forthcoming boom in China. Back in 2007 some of us could see the opportunities for UHT (ultra heat treated) milk shipped in consumer-ready form on a slow boat from New Zealand and with a shelf life exceeding six months. But Fonterra could not see that. It certainly had a strong interest in China but its choice of San Lu as a partner demonstrates the extent to which it mis-read the market and where it would go.

In the last two years Fonterra has recognised the fmcg opportunities in China but is not well positioned to take advantage of them. Fonterra’s big hope now is that it can consummate a relationship with Chinese company Beingmate and piggy-back on Beingmate’s logistical strengths to get the Anchor, Anlene, and Anmum brands to market. However, Beingmate has also been exploring relationships with European companies as well as Fonterra. It is increasingly looking as if Fonterra needs Beingmate more than Beingmate needs Fonterra.

Regardless of how the Beingmate relationship develops, a sad reality is that Fonterra still has only limited processing capacity for UHT milk. Currently, the Europeans are totally winning the battle for market share.

The real problem for Fonterra in relation to value-add opportunities is that Fonterra lacks the financial capacity to take on the big boys. All the big international dairy companies are fighting the brand war in China. There will be big winners but also some big losers.