Fonterra Essay Writing
[This is the third of five articles on Fonterra written in early 2015 and published in the Fairfax NZ Sunday Star Times. This one was published on 15 February 2015. Earlier articles in the series were titled ‘The evolution of Fonterra’ and ‘Fonterra’s Journey’ ]
Within Fonterra, there is inevitable tension as to its role on the global stage. From a farmer perspective, Fonterra is a business with assets of about $20 billion (about half equity and half debt) which processes the milk produced by five million New Zealand cows. It then markets the resultant dairy products across the world.
Most of the value of these dairy products lies in the farm gate price of the milksolids contained therein. Accordingly, ask any of Fonterra’s farmer owners as to what they most expect and demand of Fonterra, it is likely to be that this farm gate price is maximised.
For every kg of milksolids, it costs farmers anywhere from about $3.50 to more than $5 in farm working expenses. Then there is interest on debt which on average takes up about another $1.50, and then with luck there is some profit left over. In years like 2013/14 there were big profits. In the current year there will be some big losses. So let there be no doubt: it is the farm gate price of the milksolids that is on the mind of every farmer.
In total, Fonterra’s New Zealand dairy farmers have assets of about $100 billion (about 70 percent equity and 30 percent debt). This is five times Fonterra’s assets. So for most farmers the economic health of their farms is more important than the economic health of Fonterra itself. They see Fonterra’s prime role as being to service their need for a high milk price.
However, Fonterra’s decisions affect a lot more people than the approximately 10,000 dairy farmer owners. Indeed Fonterra’s fortunes affect everyone in New Zealand. Depending on the year, Fonterra’s export earnings comprise anywhere from 20 percent to about 33 percent of national export income. That is somewhere between $2500 and $4000 for every person in New Zealand. We also know that each of these dollars of export income supports several dollars of internal economic activity.
As well as processing New Zealand milk, Fonterra processes and markets a lot of milk that has nothing to do with New Zealand. Currently, about 27 percent of Fonterra’s milk is sourced from overseas. Australia and Chile are the biggest supply sources, with China now becoming increasingly important. The difference with China is that Fonterra owns the farms rather than purchasing the milk from local farmers. Currently, Fonterra does not process its own Chinese milk, although that will likely change in the future.
Fonterra’s Australian milk processing business goes back to the Dairy Board days. Back in 2000, the Dairy Board agreed to take a 25 percent share in ailing Australian co-operative Bonlac. At the time I suggested to a Government-appointed Dairy Board director that Bonlac would prove to be a ‘lemon’. This director disagreed with me. ”No, it is not a lemon, it is an absolute dog. But we will turn it around!” Well, turning Bonlac around proved more difficult than expected.
Eventually Bonlac became 100 percent owned by Fonterra, and it became the foundation for Fonterra’s Australian operations. But being a dairy processor and marketer in Australia is a tricky business. In structural terms, the industry there has had over-capacity issues consequent to national production declining since the turn of the century from about 13 billion litres down to about 9 billion litres.
Fonterra’s Australian challenges have had remarkable similarities to the processing overcapacity and farm gate competition issues of the New Zealand red meat industry. To keep up the supply, Fonterra on occasions has had to pay more for milk than they would have liked. Fonterra does not publish separate accounts for its Australian operations, but there is no doubt that at times there has been plenty of red ink.
In Chile, Fonterra owns Soprole, which once again is consequent to a Dairy Board legacy investment. Fonterra’s partner there initially was a trust controlled by the Catholic Church. Eventually the Catholic Church decided to quit, and fortunately for Fonterra they did not see the opportunities ahead. So Fonterra came out of those negotiations rather well, and it has been a highly profitable business.
Soprole is the largest dairy processor and marketer in Chile. Depending on how the calculation are done, their market share is anywhere between about 22 percent and 30 percent.
Fonterra also has interests elsewhere in South America, and Fonterra’s Brazilian plans in particular are worth watching. But at this stage, in regard to South America, it is Chile that is Fonterra’s ‘cash cow’.
The story of Fonterra’s China operations is too big a story for just a few paragraphs. So that can wait for another time. Suffice to say that the San Lu debacle reinforced the importance of having the right partner. In contrast, Fonterra’s milk production farms near Beijing have met most of their key performance indicators, both physical and financial. Further expansion is planned.
In the modern Fonterra, the profits or losses from global operations are supposed to go to the dividend and not the commodity milk price. But the last financial year did not work out that way. It was a great year for commodities but a difficult year for value-add. If Fonterra had paid its New Zealand farmers the commodity price as calculated by the formula, then Fonterra itself would have made a considerable loss.
So Fonterra held back money from the milk price, and it still paid a small dividend. That dividend was necessary to keep the non-farmer investors happy. And there lies the tension in the modern Fonterra.
About Keith WoodfordKeith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
View all posts by Keith Woodford →
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Strategic management / Fonterra company /Executive summary
Strategic management; topic Fonterra company.do is an “Executive summary” should be max 500 words
refrences could be upper or lower .
Executive Summary 2
Main Report 2
Fonterra Products, Services and Market and Customers 2
Analysis of company’s current vision and mission 3
Company’s goals 4
Analysis of the company’s operating environment 4
External Environment 4
Internal Environment 4
Strategic Issues/Problems/Challenges 7
Strategic Options 7
Selection Criteria 7
Justification of Selected Strategy 7
Fonterra Co-operative Group Ltd is dairy business that farms, manufactures and distributes dairy products both nationally and internationally, from Australia, North America, Asia, Middle East, Africa and Latin America to name a few. Fonterra continues to export around 95% of their local production to more than 100 countries and at peak they close the door on a container out of New Zealand every three minutes, (Fonterra.com, 2014).
Fonterra Products, Services and Market and Customers
Products produced by Fonterra include:
• Anchor: powdered milk, milk, cheese, yoghurt, spreads and butter
• Anlene: milk, milk powder, ready to drink milk, and yoghurt.
• Anmum: milk based products for expecting mothers and their young children.
• Some of Fonterra’s other brands include: Mainland, Fresh & Fruity, Calci-Yum, Primo, DeWinkle, Perfect Italiano, Tip Top, Kapiti, Piako, Mammoth, Symbio and Ferndale.
Milk is, in itself, an essential nutrient for all people. Milk is considered the richest natural food source of bio-available calcium and contributes to many of the other essential nutrients including protein, vitamin A, riboflavin, vitamin B12 and zinc, (Fonterra.com/Fonterra+Brands+Nutrition+Policy, 2014). In saying that it is hard to establish a consumer market as the product Fonterra produces can be consumed by all groups, but certain products can be aimed at certain consumers, for example Anmum products are purely for expecting mothers and their children. The services that Fonterra offers are aimed at dairy companies whether it be for ingredient purchasing or business information like the fluctuation of dairy prices and how to maintain them.
With Fonterra being such a large and dominating company within the Dairy Industry it is no surprise that the company offers a range of services that benefit the company. These services include:
• Technical services
o Product Risk Management
o Product Solution And Support
o Performance Diagnostics
o Engineering and Manufacturing Solutions
• Packaging and Third Party Manufacturing
• Price Risk and Commercial Solutions
• Fonterra Food Service
These services are handled by the experienced hands meaning that the range of technical and risk management services help the dairy business and customers make the most of the products that Fonterra offer to a vast amount of the world. Also these services help to ensure the household name of its products are made of world class packaging and contain the highest quality of contents ranging from infant formula to butter as well as improving the quality and productivity in kitchens across the world.
Analysis of company’s current vision and mission
“Our vision is to be the natural source of dairy nutrition for everybody, everywhere, every day. We have generations of dairy expertise behind us and generations of dairy innovation to come. Every day, our knowledge, people and products combine to bring the best of dairy to the world and the best returns back to our farmers.”
Fonterra’s vision statement identifies that their vision for the future is to be the dairy industries leading providers and exporter worldwide. In order to achieve this vision the ‘generations of dairy expertise’ will be the key to this success, this expertise will include the dairy farmers, research scientists, food engineers, research scientists and many other key people. The combination of knowledge, people and world leading products bring the ‘best dairy’ to the world satisfying the needs of their consumers and with that, the farmers benefit from this as Fonterra is a co-operative based relationships with their farms meaning they put a lot into New Zealand rural farms so that the return is bountiful. In turn Fonterra will strive to be at the forefront of the innovative future of the dairy industry. These are the key things that Fonterra strive for in order to achieve their vision for the business.
It’s this passion that is reflected in our vision to share dairy with the world. Around the world we want our customers to think ‘Fonterra’ first when they think dairy. In our branded markets we want our consumers to have our brands top-of-mind as the leaders of dairy. If we achieve this we will have achieved our vision of being the natural source of dairy nutrition for everybody, everywhere, every day. Its’ a bold goal, but it’s grounded in reality. We have what it takes.
In relation to Fonterra’s vision statement, their mission statement is similar in regard to wanting to be the leading dairy provider world-wide, wanting consumers to think ‘Fonterra’ first. By achieving this concept Fonterra will have achieved their vision of providing the world with a natural source of calcium ‘for everyone, everywhere, everyday’. They also acknowledge that the aspect of this is something that seems hard to achieve by state that they have what it takes to achieve this and more as they go on to say that “For us, tomorrow is not just another day – it’s an opportunity to make our vision real” on their website.
Analysis of the company’s operating environment
Trans-Pacific Partnership (TPP) is a free trade agreement among 12 Pacific-rim countries that will liberalise trade and investment. TPP will give New Zealand better access to significant markets globally and create more certainty and security for New Zealand companies doing business overseas, (tppa.mfat.com, 2015). This TPP deal will be signed into existence in New Zealand in early February 2016. (herald.com, 2016)
The Green Party of Aotearoa New Zealand reported a success story of a farmer (couple) who turned into organic dairy farmer, where all feed is grown on the farm. Organics requires only organic feed to be brought in and the couple are growing moss and adding rock dust, fine lime and biodynamic preparations to the manure pit so that it composts and this gives 2-300 tonnes a year which is applied to the pasture when it is dry. This avoids runoff to streams in wet weather. One significant advantage of this organics is the reduction of climate change emissions, whereby emissions of nitrous oxide, the most powerful agricultural greenhouse gas, are much lower without the pugging. And this is in line with the Kyoto agreement. In addition, the animal health improved markedly after conversion to organics with no further metabolic diseases. And unlike their neighbours, they are still making profit at the current low pay-out. (greenparty.com, n.d.)
The Gross Domestic Product (GDP) in September 2014 was 0.3% and 0.6% in September 2015, with an increase of 0.3% for the overall GDP during that period. This mean that the economy has grown by 0.3% for the same period. (Appendices b) (rbnz.co.nz, 2015). The economic modelling commissioned by the Government estimates that once fully in effect, TPP would add at least $2.7 billion a year to New Zealand’s GDP by 2030. (Appendices c and d) (tppa.mfat.govt.nz, 2015).
The percentage of women in workforce in September 2015 (latest report from MBIE) has grown to 1.3%. (mbie.govt.nz, 2015)
The global dairy price between February and August 2015 fell by more than 65 percent in US dollar term due to increased global supply, sanctions on Russian imports, and reduced Chinese demand. Dairy prices have since increased from August lows, and prices remain well below their long-term average. This has a direct impact on dairy farmers resulting in significant cash flow pressures. (rbnz.govt.nz, 2015). However, there is an increased demand for dairy in China and is expected to grow by 7% in 2020. (Appendices a)
Internal Analysis of Fonterra Company
The internal analysis of Fonterra will include two parts; value chain analysis and VRIN that will enable to derive the strengths and weaknesses of the company.
The value chain analysis
The model will help us to understand the activities that enable Fonterra to create values for its customers. The analysis will include appraisal of Fonterra’s primary processes and support services (see appendix 1).
Value Chain analysis of FonterraCo-operative
VRIN Analysis of Fonterra
Value Rareness Imitability Non-substitutability
Strong global presence Yes – Fonterra has unrivalled industry position in NZ exporting over 90 percent of their products to over 140 countries. Yes – Fonterra is the single largest contributor to NZ economy as it generates estimated NZ$19 billion annual export revenues (25% of merchandise exports). Yes – Fonterra global presence is not only based on exports but also on trading platforms that have made it to move form expert based company. No – The emerging low cost countries with abundant resources and workforce threatens the competitiveness of Fonterra.
Research and Innovation Yes – The core values of NZ economy inspire Innovation at Fonterra creating a competitive edge. Yes – Fonterra dairy products are renowned globally for their quality, which is a key differentiator. Yes – Fonterra has the world largest dairy research centre that features the biggest global dairy pilot plants. In addition, Fonterra possess over 600 patents and their application to protect intellectual property they derive from research. Yes – Fonterra innovativeness that is supported by strategic innovation group is unique and ensures sustainability of their dairy products.
Strong brand portfolio Yes – Has wide range of brands catering for the different needs of various markets around the world. Yes – Fonterra brands have a distinctive position in the market and are highly differentiated by quality with brands such as Tip Top and Anchor having strong presence in developed countries. Yes – Fonterra R&D function enable them to keep adding products their portfolio and developing new products Yes – Faces low risk of substitution.
High quality products Yes – Fonterra is committed to producing high quality products that creates value for both customers and the company and is a strength they have honed for over hundred years The unwavering commitment to surpass customer satisfaction, deliver safe and quality products and comply with regulatory frameworks enable Fonterra to stand out and gain competitive edge. Yes – Fonterra has a trained team that supports the Quality System to ensure products comply with food safety, regulatory compliance, exceed customer satisfaction. Yes – The quality of Fonterra products is a key differentiator in the international market.
Strong financial position Yes- It is among the world leading dairy companies in terms of turnover Yes -Fonterra plays a key role in NZ prosperity as it contributes estimated 28 percent of total exports. No -The increased competition from countries with low cost structures threatens Fonterra competitiveness in global market. No – largest FMCG producers competing internationally are better positioned.
Stable supply of milk Yes – NZ milk has always been number one for Fonterra, contributing over 75 percent to their total milk supply.
Pilot dairy farms. Yes – Estimated 96 percent of dairy farmers in NZ supply Fonterra with milk No – The milk supply is unsecured and competitors can offer farmers better price. No – The growth of milk supply in NZ is limited and cannot keep up with global demand
Justification of Selected Strategy
Champions Trophy, NZ. (2013). Fonterra company overview. Case competition 2013. Retrieved from http://www.champions-trophy.co.nz/wp-content/uploads/2012/11/Fonterra-Company-Overview.pdf
Fonterra. (2016). Company overview. Retrieved from https://www.fonterra.com/global/en/About/Company+Overview
IUF. (2011). Fonterra co-operative group company. IUF Dairy division. Retrieved from http://www.iuf.org/sites/cms.iuf.org/files/FONTERRA.pdf
KPMG. (2015). Prosperity, dairy and unleashing the giant: an analysis of the Fonterra signals. KPMG. Retrieved from https://www.kpmg.com/NZ/en/IssuesAndInsights/ArticlesPublications/Documents/Fonterra-flight-path-v3.pdf
Inbound logistics for Fonterra is associated with purchasing milk from more than 10, 500 farmers (most of whom are shareholders) all over New Zealand and also include managing their dairy farms. The farmers supply over 16 billion litres of milk annually. The company has a vertically integrated supply chain not only in the domestic market but also in foreign markets where they form partnerships with businesses. The company prioritizes the quality of its raw ingredients and products and in countries with less regulation of dairy products, Fonterra outsources some activities to increase flexibility and efficiency.
Fonterra distributes its broad range of consumer dairy products to retail market search as supermarkets, shops and food outlets and their most of their products are delivered from distribution centres and manufacturing sites to retail outlets by tracks. They have integrated their freight forwarding and transportation, packaging and quality control to ensure their supply chain practices are effective. Together with Nestle, Fonterra opened an open dairy distribution centre in Brazil. Also, they have formed various partnerships with multinationals such as Dairy friends of America, Dairy America, Clovers, and Royal Friesland among others.
Fonterra operates in more than 140 countries around the world and gets over 75 percent of its milk from New Zealand. In foreign markets, Fonterra operates distribution brands and control their international operations from global offices. The company has over sixty manufacturing sites in their eight locations that include New Zealand (33 sites), China, Latin America, Asia, Europe, North America, Australia, and Africa and the Middle East. Fonterra exports 95 percent of their products and accounts for over thirty percent of global dairy trade.
Sales and Marketing
Being a leading exporter and a top dairy company in the world, Fonterra enjoys a high brand awareness, which support its sales. However, the company has a dedicated sales team and a centralized marketing team behind its brand positioning. The marketing team ensures consistency in messaging and communication tools and materials are customized to account for subtle variance in various markets.
Fonterra recognizes customer service as an area that can significantly impact on their top and bottom lines and therefore, they created a global customer service centre (Auckland) that offer consistent and excellent level of service. The centre also links order fulfilment and sales activities and offer worldwide support with multilingual facilities. Fonterra also has online and telephone customer and encourage customers to provide feedback.
Fonterra gets the supply of their main raw ingredient from farmers in New Zealand which accounts for over 75 percent of their milk. In 2014, the company launched a milk sourcing subsidiary – Called Mymilk- to increase market share of milk pool. Their procurement function involves category management, strategic sourcing and vendor management that are supported by SAP systems to ensure there is procurement compliance; costs are low, and there is process efficiency. They have pilot dairy farms in China to increase milk supply.
Fonterra has specialist knowledge in processing and production technology and to enhance innovativeness, Fonterra places emphasis on R&D, that enable the company to pursue efficient processes. The company has innovation centres in NZ, China and Singapore and has a subsidiary, ViaLactia Biosciences dedicated to biotechnology.
Fonterra invests in its human resources through training and development programmes that enable employees to develop professional skills, move into new roles and acquire specialist training in dairy technology and products.
Fonterra has assets estimated at over NZ$ 15.5 billion allowing the company to have an operational scale. It has a strong global presence, with over sixty manufacturing facilities and most efficient milk dryers. The company corporate structure is organized around five business segments of its diversified portfolio that include value added ingredients, speciality ingredients, dairy ingredients, food services and consumer products. Their unique cooperative structure ensures every shareholder is a farmer.