Fran O'Sullivan & Alexander Spiers: Small and independent, yet Tatua is a big wheel

By Alexander Speirs, Fran O'Sullivan

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After 100 years in business and enormous changes in the dairy industry, Waikato company is still getting it right for shareholders and customers.
After 100 years in business and enormous changes in the dairy industry, Waikato company is still getting it right for shareholders and customers.

Business writers Fran O'Sullivan and Alexander Speirs call the shots here every Thursday

New Zealand's oldest dairy co-op celebrated its centenary anniversary on Monday evening. Staunchly independent and refreshingly different, Tatua has evolved from a dairy company of 10 farmers to an international business with nearly 400 staff and revenue approaching $250 million.

Based on the outskirts of Morrinsville in Central Waikato, CEO Paul McGilvary describes the company as being founded on a "mixture of we'll show you independence, optimism, excitement and I'll bet some trepidation as well".

Throughout its history, Tatua has separated itself from the pack and consistently achieved a premium milk price for its shareholders.

There are some lessons here for the broader New Zealand dairy industry and the number of smaller "start-up" cooperatives that Tatua expects may spring up to emulate its success.

We visited Tatua this week to get an understanding of how it accomplished its forward-leaning positioning. Although it has changed from generation to generation, capturing that premium has remained an underlying theme.

From cheese production to whey protein, aerosol cream through to bionutrients, it's been a story of adaptability. As market dynamics changed and demand for high-value products shifted, Tatua has changed its product mix and market offerings to stay ahead of the curve. For the most part however, Tatua has stayed out of the commodities game - instead targeting high-value niche markets where competitiveness isn't necessarily dictated by scale.

This is clearly a sensible move in a world where the global dairy commodities play - think whole milk and skim milk powders -and is dominated by large companies like Fonterra.

Says McGilvary: "We are on a journey to add value to our shareholders' milk. We want to add more value [to] that milk than any of our competitors either in New Zealand or globally. That will be the source of our earnings advantage in the next 10 years as it has been for the last 50 years."

Today, Tatua focuses its efforts on building the future of specialised dairy. Using a variety of value-adding activities across its six business units, highly bespoke products are produced primarily for the international market - 94 per cent of all Tatua's products are exported.

But here's the thing: a commitment to beating the New Zealand milk price -- effectively Fonterra's Farmgate payout in today's market -- has played a decisive role in Tatua's ability to remain independent. When sharing his outlook for the company at Monday's 100th-year celebrations, McGilvary confidently told guests that he anticipates Tatua will fend off a number of takeover attempts in the coming decade.

As demand for the products produced at Tatua rises in Asia, investment is the name of the game for the foreseeable future. Capacity is set to receive a significant boost, with a third dryer now under construction and targeted to come online for the second half of next year. The $65 million project is the largest in Tatua's history and will produce hydrolised protein, an ingredient used in infant formula, sports supplements and nutritional products for the elderly.

With increasing proportions of Tatua's products destined for Asia, an office in China is being established to help support local customers.

Five years ago China represented 1 per cent of Tatua's business - today that figure is up to 17 per cent and expected to pass 20 per cent quickly.

The move is reminiscent of Tatua's 2003 move into Tokyo as Japan became an increasingly important market for the company.

James Gordon - a former Tatua business manager, has been selected to head the office from November.

With experience as commercial director of dairy ingredients for Glanbia in Shanghai, McGilvary will be looking to Gordon to lead growth locally as China closes in on Japan as the largest market for Tatua.

All the signs are that Tatua's next 100 years will be as profitable for its farmer shareholders as its first.

We'll be reporting more on Tatua's strategies in next week's NZ Herald Agribusiness Report 2014.

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