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Current as of 09/12/16 07:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

Fonterra strategy gaining traction - top exec

Fonterra's strategy of shifting more milk, quicker, into the value-added side of the business is gaining momentum after getting off to a slow start, according to one of the co-operative's top executives.

Jacqueline Chow, chief operating officer of Fonterra's global consumer and foodservice business, said that was the message given to farmers in a series of meetings held after last month's result, which showed the co-op's net profit jumped65 per cent higher to $834 million for the 2015/16 year.

Chairman John Wilson said last month that the 2015/16 season had been "incredibly difficult" for farmers but that the co-op's business strategy - moving more milk into higher-returning consumer and foodservice products - was working.

It's been a long-held criticism that Fonterra has not done enough to shift the business away from its traditional, commodities-based model towards a more value-added one, and Chow conceded that the so called "velocity" strategy - which has been in place for around five years - had been slow to get off the ground.

"During those early years, we were troubled with some crises that have been well documented, so I think that it was difficult and challenging," Chow said, in reference to the WPC-80 botulism scare.

Sharply higher quantities of milk going into value-added over the last two years had added credibility to the strategy, she said.

Over 2015/6 Fonterra put 380 million litres more into consumer and food service alone, and plan is add another 400m litres this year.

"We are obsessed about moving as much milk as we can into that business because it gives an over 40 per cent capital return to our farmers," Chow said.

"We are not flicking from nothing to something. We already have a lot of scale and we are building off that."

Value-added has been the catch cry for the dairy industry for years, but the sheer size of Fonterra, which turned over $17.2 billion and took in 1,566m kg of milksolids over 2015/16, meant the business overall can not turn on a dime.

"It can't happen overnight but I think that the scale and profile of the [consumer and foodservice] business is already quite significant," Chow said.

As it stands, 5 billion litres of milk goes into consumer and food service . The goal is to take that to 10b litres by 2023 - growing by between 400m and 500m litres a year.

By itself, Fonterra's consumer and food service business - which is present in 80 countries and which has a turnover of $6.5b - is substantial in its own right.

The dairy industry worldwide has been in turmoil thanks to an extraordinarily long and deep trough in milk prices.

Much of the trouble has been put down to a supply/demand imbalance, but Chow said it was more a matter of the world struggling with extra supply, rather than it being a problem with demand. In the key market of China, Fonterra struggles to keep up with demand, she said.

In the big picture, the dynamic of a growing middle class in the world's emerging economies, remained intact, she said.

"The number one substantiator of all that is that the middle class is going to double in size in all the emerging economies by 2050," she said.

With a wealthier middle class comes greater understanding and awareness of dairy as a form of nutrition.

Chow said dairy was gaining awareness in the emerging markets as a healthy, unadulterated source of nutrition.

Commenting on Fonterra's joint venture partner in China, Beingmate, Chow said Fonterra was pleased with the arrangement, even though Beingmate's profitability had suffered from some "hiccups" .

"We are very pleased, but I would have to say that they have had hiccups in their performance, which we are working very closely with them on, but it does not change the overall investment ," she said.

"It's still very good. We have now tripled the number of cities that we are in now with the anmum product which would not have happened without Beingmate."

Fonterra's joint venture with Beingmate to make infant formula at Darnum, in Victoria, is now up and running.

Fonterra's consumer and food service's normalised earnings before interest and tax came to $580m in 2015/6, up 42 per cent from a year earlier. The trick will be in ensuring that kind of growth is sustainable, Chow said.

- NZ Herald

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