Dairy co-operative reveals plan to re-allocate resources from support functions to front-line 'market' people

Dairy co-operative reveals plan to re-allocate resources from support functions to front-line 'market' people

Dairy giant Fonterra may cut "hundreds" of jobs from its head office and support functions as soon as later this year as it attempts to rebalance its operations and, in the words of chief executive Theo Spierings, "trim the sails".

In an interview with Radio New Zealand Spierings gave more detail around an internal review that Fonterra apparently commenced in December, but has referred to previously only in oblique terms publicly.

Spierings conceded that Fonterra needed more frontline people "in market" and fewer in support. At the moment it is believed to have about 1500 people in support and head office functions.

“You talk about hundreds of people more in market and that means less in group functions," Spierings said, conceding that the "hundreds" more in market would be pretty much offset by the same number being chopped from head office and support.

And he indicated that the moves to chop head office and support staff would come before growth in frontline staff occurs. Draft proposals are set to be discussed by the board next week and then a confirmed plan is set to be put to farmers by the start of August.

“...It’s a shift of people and capabilities – and that will have some consequences. But that is what I mean by trimming the sails.

“...Potentially in the first phase we would address the group function harder because growth of sales it goes step by step. So we would address the group function in one go and growing and selling milk - that goes gradually.”

The review is being led by a Fonterra team of "15 key talents from all over the world" and with outside assistance being provided with "benchmarking" and "a fresh set of eyes" from external consultants McKinsey & Co.

The review comes as Fonterra starts to come under criticism from its shareholder farmers in the face of rapidly declining global dairy prices and with a forecast milk price for farmers of just $4.40 per kilogram of milk solids in the season just finished, compared with $8.40 a year ago, while the opening forecast for the new season is $5.25.

The Reserve Bank has expressed concern and estimated that about a quarter of farmers were experiencing negative cash flow in the 2014-15 season.

Spierings.believed that Fonterra "absolutely have our house in order" but conceded that "the volatility we see right now is really so severe that there is definitely pressure on farmer balance sheets".

“When we announced in December a milk price of $4.70 [subsequently reduced to $4.40] that’s when we as management started to review weather conditions. They have changed. It’s much tougher out there. So, where do we need to amend? Where do we need to trim the sails?

“…We need to trim the sails because the weather is rough…

“...Everything is in scope. This is a complete business review from our management team.

“...It is really turnover line, growth,  it’s cost and it’s cash.”

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No surprises there .

This was going to happen given the dairy price fall.

I suspect that we are actually feeling the brunt of a DEFLATIONARY scenario in commodity prices

Does this mean all those people were not really needed at all?

They try to be a "one stop shop" for everything dairy, and 100% quality across all services.

They give away milk to schools, they try to buy townie approval by environmental sponsorship, and sponsoring huge numbers of awards and events.

Rather than email/website-ing payout changes, they used to _hire_a_KSY_channel!! To announce it.

They're constantly running huge meetings to tell shareholders and farmers what they are going to do "aka "consulting the farmers"" and all these events are pure dog'n'pony to showcase the company.

They subsidise massive numbers of training schemes and testing regimes.

If a problem pops up they just throw money and contractors at it until it goes away (I was one of the contractors doing a computer thin client roll out...dairy factories are rural and thus don't get ISDN, so Fonterra just said to Telecom "put it in").

They try to run "big corporate US/Europe" style on a NZ margin. So those people are highly skilled worked damn hard and well...but it's not cost effective on a commodity item.

From what I've heard the Fonterra head office has plenty of fat to cut, apparently run like a 1970's government department - Gliding On style. Hundreds of overpaid desk jockies pretending to work while their farmer employers are slaving their butts off and struggling in difficult times. About time!

They are paid well, but they do work hard and well. It's just the margin in the milk price at commodity auction simply doesn't cover that kind of activity/payroll unfortunately. Again this _was_ said pre-TAF. Sadly the real "Everything is Amazing" folks at the top that make the daft decisions will probably be the ones who "are a positive influence" and stay.... hmm

Not sure the image used is correct. I'd be more expecting a indiscriminate axe to chop off those working to hard to talk their way into being perceived as useful. Yea cynical I know.

I'm confused. All the reference to why they are trimming costs relates to the declining milk price. But don't head office overheads only affect share price/dividends?

No I'm not sure it is you who is confused. I'd suggest looking at their accounts but I'm not sure anyone understands them.

I'm not sure anyone understands them

Fonterra's accounts are state of the art in that respect. Anything less and confidence in the company would shatter.

Well, let's look at it this way - will downsizing the head office improve the milk price?

Have you ever heard their reply to the question "who pays for the $7/kg gaureented milk price". You would think that was easier to answer but turns out no one does.

Fonterra's history has been one of constant restructuring. If they are restructuring again then that suggests they still haven't got it right. They must just about support an industry that lives off the process.

It may not be head office head count but external consultants that are responsible for their bloated overheads.

It is worth remembering that Fonterra did away with its commodities sales force in favour of using global dairy trade. It was noted at the time as probably not being that smart.

Will downsizing head office improve the milk price? Maybe, but possibly only as the result of going back to where where they used to be and building relationships with commodity buyers using sales people. That could take a long time.

No but it will improve the shareholders dividend price, which is far more important to corporate. Not to mentioned RBNZ might rip them a new one considerng the farmers have negative income yet Fonterra is business as usual.

...meanwhile, in other countries, with lower cost of milk production and lower farm costs processors are paying their farmers $12+ NZ dollars per kg ms.......

Any reference or link available for those assertions, please?

No. I cannot provide this. The details are of course, confidential. So, I cannot provide links. However, these are the figures. No subsidies involved either.

Thanks for responding. Can you name the countries? That can't be confidential.

Had meetings with ppl from regional Fonterra offices to deal with non-core businesses.

Those employees were primarily shareholders' (farmers) relatives.

So, you figure.

They usually are because townies frequently have no interest in going towards the agricultural sector which creates many openings for "brought up rurally" which is a hiring advantage with Fonterra contact employees who have to appreciate the nuances of farm demands. (unfortunately they're also seldom people involved in the productive side of the farm, and are used to getting services without regard for cost)

Saw The Ground We Won last night, milking cows with a hangover must be tough.

stay drunk.

at field days they were not giving out as much free stuff as per previous years,

Good, now someone do something about Auckland Council.

Still waiting for the head to roll in that puffed up Directors office! Can't wait to hear the huge new absolutely necessary 'to entertain our corporate clients from overseas' Auckland waterfront corporate office is on the back burner...

That's pretty much the problem. As long as they are a commidity supplier trying to act like a high margin dominant brand things will fail. They actually have to earn/build that consumer brand and the margin businesses to do that kind of stuff.

It doesn't matter good your team can dig, whether you've got the most efficient diggers, and top digging gear, if your digging in the wrong place digging at top performance still won't find buried treasure. They miscalculated where the treasure (payout) was and how big, so doesn't matter how well, or how good they are, they will pay the price.

maybe Fonterra need to know the BigMac "rule"

Actually not surprised Fonterra cutting staff.

At TAF they gave strong assurances that the share price would not be _permitted_ to go below $4.52 (the base buy-in price at the time).

Coming down off a peak $6.13 in the last 12 months (and over $7 year before that) that a pretty significant drop for an established large company that has the influence Fonterra claims. With poor dividend payout.

They've got to do something as they're $4.69 at the moment, so another 0.17 will see them drop below the promised mark. They claimed to have a TAF reversal plan in the wings if things went south so I wonder if that's getting dusted off, as promised.....

well seems things not running to theory:

thinking out aloud [numbers off top of head] year before farmgate price 50 cents less than cals by the book, but dividend 10 c, last year farm gate maybe $4.40 with a maybe 20 to 30 cent dividend (but dividend pool reduced by 12cents as year before stock on hand needed be valued down)
- so looking back the was the year befores dividend there to pay

Hamilton said he made the most of TAF when the co-op turned his old "nomimal" production-based shares into a tradeable asset through TAF.

The value of TAF shares peaked after debut in late 2012 at $7. Hamilton's shares which had previously been worth $12 million, ballooned in value to $20m.

He had used the $8m gain to buy more farms and spread his dairy supply among other processors, Westland Milk Products and Synlait Milk. His company, THE, had bought three farms in the past two years as part of a diversification strategy.

THE owns three farms in the Rotorua area and one in Hawke's Bay, supplying Fonterra. In Canterbury THE will soon have five farms supplying either Synlait and Westland Milk.

Q: What The?

Fonterra corporate finance and strategy head Alex Duncan, who is heading the project, said the trust could mitigate a perennial funding problem for agriculture by providing farm enterprises with long-term equity.

"Agri-land needs a different model to access long, patient pension fund capital with a 30-year horizon. There has been a gap in the market to find long-dated equity for farmers," he said.

Mr Duncan helped pioneer Fonterra's innovative Trading Among Farmers scheme and the group's GlobalDairyTrade auction.

He was a key part of the Fonterra Shareholders' Fund, a dual-share structure unit trust listed on the ASX and NZX.


Yes Henry, What the? all right!

"Fonterra corporate finance and strategy head Alex Duncan..."

Are we expecting his head to roll as well, or is he high enough up the ladder to avoid the sword? Conspiracy theory might suggest he's a plant in the company to action "public ownership" sooner rather than later...

He made a lot of the old guard plenty of money, it was only the small holders, sharemilkers, and current generation of new farmers that he smashed. Like they say the best time to get in on a good thing was yesterday :(

What a joke, heard on the radio this morning that 17 of them get paid over $1M a year and 2590 of them are on $100K or more !