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Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Chile a model for Fonterra expansion

Soprole is a fully integrated business that fits Fonterra's 'grass to glass' model, says former general manager

Fonterra's Chilean subsidiary is an example of what the co-operative would like to achieve in the rest of the world, says former general manager Jose Miguel Porraz.

Porraz, who left Soprole last year to become managing director of Fonterra Brands Vietnam, says the company is a fully integrated business that fits Fonterra's "grass to glass" model.

Soprole is the only company in Chile that collects milk nationally and is the country's biggest milk buyer. It has three manufacturing sites and, unlike the other dairy producers in Chile, distributes its products directly to around 33,000 customers. "The other parties do not have the scale to do that," Porraz says.

The brands - developed over the past 60 years - are all Soprole's and despite its near complete ownership, the Fonterra name is virtually unknown in Chile.

Soprole is Fonterra's oldest overseas investment and one of its most important, representing more than 20 years of New Zealand involvement in the Chilean dairy industry.

The company is a market leader in Chile - rubbing shoulders with Coca-Cola in terms of brand recognition.

It began as a local co-operative but went on to become majority-owned by two families.

In 1986 - the tailend of the late General Augusto Pinochet's military regime - one family sold a controlling 51 per cent stake to Fonterra's predecessor, the NZ Dairy Board.

The remaining 49 per cent ended up with a charitable trust that was controlled by the Catholic church.

When Fonterra wanted to go to 100 per cent ownership in 2008, it received the blessing of the church in Chile but final approval had to be obtained from the Vatican.

The holding today stands at 99.4 per cent, which has allowed Fonterra to incorporate the company's ingredients business into its global network.

A group of farmers retain a tiny stake, which means under Chilean law the company still has to publicly disclose its financial returns.

Soprole is entirely self contained - it does not take product from New Zealand. It has no connection with the New Zealand milk price because it sources all its milk locally.

The company is a significant contributor to Fonterra's coffers, and its earnings form an important part of the dividend Fonterra pays to its farmers.

In the calendar year 2012 Soprole had net sales equating to about $865 million and earnings before interest, tax and depreciation of $135 million.

The company has enjoyed double digit earnings growth - in the high teens - for the last decade. The per person consumption of dairy product is Chile is high but not as high as Australia and New Zealand, Porraz says, suggesting there is still room for growth. However, it has not all been plain sailing for Soprole under Fonterra's ownership.

In 2003, Fonterra formed an alliance with Nestle to create Dairy Partners Americas which produces ingredients and consumer products, with strong brands in the liquid and chilled dairy market throughout Latin America. The sticking point for the joint venture has been Chile.

There have been three attempts to bring Soprole into the venture but each time the parties have failed to gain regulatory approval on competition grounds.

That means Soprole remains a completely standalone organisation, competing head-to-head with Nestle in Chile.

Soprole is the largest player in the market by far. In all categories it is either first or second. The second biggest player is a local co-op called COLUN, which has 750 farmer members. Nestle is ranked third.

The company's main focus has been on everyday nutrition - yoghurts, desserts and milk.

It does not sell the kinds of products that are big in Asia - infant formula, milk products for mothers, or specialised calcium-enriched products.

Soprole has 30 per cent market share in the overall dairy categories, against 15 to 16 per cent for Nestle.

"It is a clear case study of a successful integrated model that has strong links into the community," Porraz says.

"We collect it ourselves, process it, convert it in our manufacturing plants, and distribute to the consumers with our own brands," he says.

"So we have full ownership of the entire operation."

Porraz says most businesses in Chile are fragmented, "but there is strength when you have an integrated model that is very hard to compete against".

Soprole has a competitive "moat" that makes it difficult for anyone to come into the market to challenge its top spot.

Danone entered Chile seven years ago and was successful in capturing market share in yoghurt, overtaking Nestle as the number two player in that part of the market. Soprole remained unthreatened at number one. Many of Fonterra's larger farmer shareholders see Chile as having similar potential as New Zealand for dairy farming and have invested there accordingly.

One of Soprole's biggest milk suppliers in Chile is New Zealand-owned Manuka, which has investors including former Fonterra chairman Sir Henry van der Heyden.

Manuka owns 22,578ha in Chile and produced 103 million litres of milk in the June 2012 year.

Parts of Chile are similar to New Zealand in terms of climate and soil quality.

Like New Zealand, there is a trend of farm conversion to dairy and of farm consolidation.

Soprole sells 6 million servings of dairy product a day in Chile but Porraz says the company aims to make that 17 million servings - thereby matching the population.

"The only way to do that is to continue to invest in innovation, strengthening the brands, and by ensuring that we have the right team in place to execute on strategy," he says. "It's a model that we should aspire to have in as many parts of the world as possible."

Jose Miguel Porraz Lando - the international face of New Zealand's dairy giant

Jose Miguel Porraz Lando could be the international face of Fonterra.

Porraz Lando is the current general manager of Fonterra Brands in Vietnam, a role he was appointed to last September.

Before that, he was the chief financial officer for Soprole, Fonterra's Chilean subsidiary, from 2008 to 2012.

Born in Mexico and educated at Harvard, Porraz Lando is fluent in Spanish and English.
He has New Zealand citizenship, thanks to a stint he did with Fonterra from 2004 to 2007, and also has Italian citizenship, through his mother.

He worked for the Ministry of Finance in Mexico and in the office of the then President, Ernesto Zedillo, from 1998 to 2000.

While studying for an MBA at Harvard, Porraz Lando's professor asked him to research Fonterra. In the course of his studies, Porraz Lando visited New Zealand to interview the then chairman, John Roadley, and chief executive, Craig Norgate.

Porraz Lando was invited to join the company in 2003 and arrived in New Zealand just as Norgate was leaving the firm.

When Norgate's eventual replacement, Andrew Ferrier, was approached to take up the job, the Canadian's first reference point was Porraz Lando's case study - which is still in use at the Kennedy School of Government at Harvard.

While in New Zealand, Porraz Lando worked on the hostile and ultimately unsuccessful A$1.8 billion takeover bid for Australia's National Foods in 2003, and the asset swap with Graeme Hart's Rank Group in 2005. He also spent a year with Fonterra in Melbourne with the co-operative's ANZ operation, working on strategy and planning.

In his current role, Porraz Lando is accountable for the retail and food service business in Vietnam. Fonterra Vietnam directly employs about 100 people and about 800 indirectly.

Chile facts

Population
17.2 million.

Economy
Annual GDP growth of 4.1 per cent.

Geography
At 4270km, Chile is one of the world's longest countries

Neighbours
Peru and Bolivia to the north, and Argentina to the east.

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