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Jamie Gray

Jamie Gray is a business reporter for the NZ Herald and APNZ

Spierings and team make mark on Fonterra

Theo Spierings  and his management team are moving Fonterra from being a global milk-powder company to an international branded-foods business.
Theo Spierings and his management team are moving Fonterra from being a global milk-powder company to an international branded-foods business.

Fonterra's announcement that it would spend $1.17 billion on new plant and on taking a stake in a Chinese infant formula company is its biggest move yet in what has been an 18-month-long strategic plan to shift the company up the food value chain.

This week, the co-operative said it would spend $615 million on buying a 20 per cent stake in China's Beingmate Baby & Child to boost its baby formula aspirations there.

In addition, it said it would spend $555 million on installing new processing capacity in the Waikato and in Southland, thereby increasing New Zealand production capacity by 10 per cent.

The plan shows chief executive Theo Spierings and his new management team have clearly made their mark on the company as it shifts from being a global milk powder company to an international branded foods company.

Last year, Fonterra announced a plan to build a cheese plant and dairy ingredient factory in the Netherlands with Dutch dairy firm A-Ware Food Group.

Later in the same year, it took a 10 per cent stake in Australia's Bega cheese, then bought assets of the Tasmanian yoghurt business Tamar Valley Dairy.

Early this year, it realigned its 10-year-old Dairy Partners Americas 50/50 joint venture Nestle. Fonterra took a 51 per cent controlling stake in DPA Brazil, with Nestle holding the rest.

In July, it formed a joint venture with American food and pharmaceuticals giant, Abbott, to spend $342 million on developing a dairy farm hub in China.

In the same month, Dairy Crest Group, Britain's largest dairy food company, signed a five-year deal that will involve Fonterra marketing and selling Dairy Crest's infant milk formula ingredient.

Fonterra's decision to spend more on stainless steel follows the construction of the giant milk powder plant at Darfield, in Canterbury, and a move to install a $200 million drier at Pahiatua, in the Wairarapa.

Once the projects are complete, Fonterra's investment on new plant since 2011 will have topped $1.8 billion.

"All these investment deals that you have seen over the last few months have a clear strategic rationale and framework, which will deliver value for our shareholders," Fonterra's chief financial officer Lukas Paravicini said after this week's presentation.

ANZ rural economist Con Williams said the $555 million investment in more "stainless steel" for South Waikato and Southland was in part driven by stronger-than-anticipated growth in supply - with more and more farms being converted to dairy - along with higher productivity.

The investment in hardware would create more flexibility to deal with the influx of milk at the peak of the season in October, he said.

"In the last two years, the peak has been incredibly strong, which probably caught them by surprise."

The influx of milk meant Fonterra had to opt for a sub-optimal product mix, which meant they left money on the table, Williams said.

The investment in Waikato and Southland had also acted to stave off potential investment by Fonterra's competitors in those regions, he said.

"Fonterra wants to keep critical mass and market share, so there was probably some extra motivation in terms of that investment as well," Williams said.

The Beingmate deal looks good on paper. Under an agreement, Fonterra's Anmum formula would be distributed, via a licensing arrangement, through Beingmate, which has 30 branches and access to 80,000 outlets in China.

Fonterra is looking at sales of $100 million of Anmum in China by 2018 and for the brand to grow much quicker than it would have done if left to its own devices.

While the Beingmate initiative is a bold move, it is not without risk.

Several infant formula companies were bolstered when the Chinese Government opted to relax its controversial one-child policy last year, causing a sharp appreciation in their share prices on what many expected would be a baby boom.

Relaxation of the one-child policy is part of the government's broadest expansion of economic freedoms since at least the 1990s. The only trouble is, Chinese couples don't seem to have received the email.

In a report from Beijing this month, Bloomberg milk powder producers, including Biostime International Holdings and Yashili International Holdings, saw their share prices rally sharply after the Communist Party relaxed its one-child policy, only to see them decline just as steeply in recent months.

Less than 3 per cent of the 11 million Chinese couples eligible for another child applied for permission by the end of May, jeopardising government efforts to bolster a population that the United Nations predicts will start shrinking by 2030, Bloomberg said.

Analysts blamed the high costs associated with raising children in China as the main reason for couples' reluctance to tow the party line.

Williams said the involvement with Beingmate would help Fonterra to speed up the market penetration of the Anmum infant formula brand in China.

However, he said Fonterra's prediction that the formula market in China would grow from $18 billion a year today to $33 billion by 2017 might prove to be overly optimistic.

"That is lofty growth," he said. "Certainly our work would suggest that we won't see that sort of growth for five to 10 years.

"But longer term, we look favourably on that sort of thing because infant formula [is a] high-margin product, which is basically adding more value to milk." Williams said the week's announcements were a step up in Fonterra's strategy.

"Theo Spierings and the new management are really stamping their mark on taking the company from a global milk powder company to a more more brands-oriented, sophisticated dairy product/nutritionals company," he said.

Meanwhile, Fonterra was at pains to stress that it carried out the appropriate due diligence tests on Beingmate after the 2008 contaminated formula incident involving San Lu, in which Fonterra had a 43 per cent stake, which ended up costing Fonterra $139 million.

"The thing is to ensure that the lessons around San Lu have been learned and that they have done the appropriate due diligence," Williams said.

"Beingmate is a much bigger investment, so they would want to get it right this time."

- APNZ

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