By Keith Woodford*
Fonterra’s recently appointed Chairman John Monaghan, in announcing the appointment of interim CEO Miles Hurrell, said that Fonterra wants to pause and reassess the way ahead. This could be a breath of fresh air. It needs to be a wind of change.
A starting question has to be why has Fonterra been doing so badly with its international ventures? This includes both international processing of milk and marketing of consumer-branded products. In the case of China, it also includes farming.
The so-called Fonterra Communications Division, but in reality the Fonterra Propaganda Division, has done a stalwart job over many years of painting over the cracks. But even those skilled operators have been unable to cover up some of the recent messes, particularly in China, but also elsewhere.
There are likely to be more awkward disclosures to come. More of that further down.
There is no doubt that Fonterra is a very efficient producer of commodities. Every day the milk is collected from more than 10,000 farms and converted into a range of products, led by commodity whole milk powder. It is a slick operation.
When it comes to consumer products or other international ventures, Fonterra struggles to take a trick. This is despite owning longstanding brands such as Anchor, although Fonterra did sell the European rights to even that brand.
There is a small number of Asian countries where Fonterra does well with its stable of Anchor, Anlene and Anmum products. Fonterra Communications is very good at singing these songs of success. In contrast, failures are well hidden for as long as possible.
Fonterra has used multiple tricks to cover its poor performance. Back in 2013/14, Fonterra retained over a billion dollars that should have been milk payments to farmers so as to shore up the balance sheet. It is playing that trick again this year but only to a lesser extent.
Another trick is to focus on ‘normalised’ profits in its public utterances, which are the profits Fonterra would have made if not for the saga of ‘stuff ups’. This year’s examples include the distress at Beingmate and the $183 million compensation to Danone. Historically, losses at China Farms have also been buried this way. In fact, scrubbing up the results this way is standard fare.
If anyone thinks I am exaggerating, then they might like to think about the value of Fonterra shares which are down more than 20% this year and only marginally above their value when Fonterra was formed 17 years ago. In the meantime, other companies have prospered.
There are many examples of international dairy companies that have been prospering but the most spectacular is The a2 Milk Company which now has a capital value greater than Fonterra’s.
I recall back in 2008 a Fonterra director saying to me how, if need be, Fonterra could take over The a2 Milk Company (then called A2 Corporation) whenever it wanted to. Back then there was some truth to that – at that time Fonterra was worth more than 100 times the value of The a2 Milk Company. Now, Fonterra is worth less than The a2 Milk Company.
Most New Zealand farmers are very loyal to Fonterra. Accordingly, over the years I have made my share of enemies by pointing out deficiencies. So, let me make one point clear: I am a strong believer in the importance of Fonterra, but for everyone’s sake it does need to do better.
Fonterra is the emperor of New Zealand dairying. But the emperor is down to his underwear and it is not a pretty sight. Underwear might be OK for producing commodities but it does not resonate with overseas consumers. We need to get more clothes on the emperor.
There will be some who say that Fonterra should stick to long-life commodities at which it is so good, and for which there is a unique synergy with our seasonal production systems. That argument does need to be heard. To a large extent, it may become the only realistic path forward for Fonterra, which is now capital constrained as a result of so many mistakes.
If that commodity focus and argument is to become the company mantra going forward, then there has to be more room created for dairy entrepreneurs outside the Fonterra framework.
The genesis of the current situation goes back a long way. I recall just before Fonterra was formed when the New Zealand Dairy Board was doing supposed due diligence on the purchase of struggling Australian dairy co-operative Bonlac.
At the time, I was living in Australia and I knew something about Bonlac. In conversation with a New Zealand Dairy Board director I asked whether the Dairy Board understood that Bonlac was a ‘lemon’. The reply came back with some passion: ‘Bonlac is not a lemon; it is a dog. But we, the Dairy Board can turn it around’.
It really is only in the last two years that this Australian dog, owned and fed for 17 years since 2001 by Fonterra, has started to wag its tail. Even then, the historic purchase only ‘came right’ because Murray Goulburn, Australia’s one remaining dairy co-operative and the largest Australian dairy company, shot itself in both feet, so that even limping along became impossible. Many of the Murray Goulburn farmers fled to Fonterra.
Now that Canadian-owned Saputo has taken over Murray Goulburn, we can expect to see renewed competition for milk supply in Australia. Life for Fonterra in Australia will get more challenging again.
Fonterra’s other big overseas enterprise has been the Soprole/Prolesur conglomerate in Chile. In the last nine years, under Fonterra’s ownership, it has declined from the premier dairy company in Chile with 25% market share to becoming Number 2 with 19% share and still dropping. In the market, it is being seriously outperformed by local co-operative Colun.
The word is that Fonterra’s farmer-suppliers in Chile, including both locally-owned farms and two very large New Zealand-owned operations, are not happy. These suppliers are looking at their options.
So far, there has not been a whisper from Fonterra back to its New Zealand farmers about the Chilean issues. It will be an interesting test case for the new Fonterra Chairman and his new CEO.
Why is it that with a Board of highly qualified people, both farmer-elected and internally-appointed, that Fonterra keeps making so many mistakes in the international marketplace?
I have asked myself this same question many times. The key answer I come up with is that these directors, although well qualified, do not have outside information as to what is happening in the markets. Rather, they have to rely on the internal communications machine which polishes everything up before they receive it.
Yes, the directors do travel internationally, and indeed most of them spent several weeks travelling internationally just last month. I agree that this travel is important. I hear that they came back impressed with many good things Fonterra is doing.
The problem is that they lack sufficient networks external to Fonterra to find out what else is happening in these countries. And if you are a Fonterra employee, you sure don’t want to be the bearer of bad news. So, the cycle continues.
*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at email@example.com