Europe's threat to NZ dairy

Fonterra's Chief Executive Officer, Theo Spierings.

Theo Spierings flourishes a page from a Fonterra internal briefing document, minus the confidential figures which spell out the full extent of the competitive threat it faces due to major changes looming in the global dairy industry.

The pending deregulation of Europe's dairy industry in 2015 is increasing the pressure on Fonterra to maintain the New Zealand dairy industry's positioning as a low-cost producer.

A huge European wall of milk (see adjacent table) graphically illustrates the threat to New Zealand's dairy farmers if average on-farm costs per litre of milk produced here are not tightly managed.

Under the current protectionist regime, European farmers have no impetus to be cost-efficient and have much higher average costs than their New Zealand counterparts.

But Spierings says Europe is gearing up for the market environment and expanding spray-drying capacity on a massive scale to make more milk powder to sell at an internationally competitive price.

"In order for them to compete in market by scale and efficiency they will have to push their costs down otherwise they can't survive," says Spierings.

Fonterra also needs to grow its milk pool to ensure it maintains its share of the global market and does not lose relevance fast. "If we increase cost because of sustainability issues and start feeding cows and go out of pasture-based farming we could potentially end up closing the gap," he adds.

Keeping costs down is a major challenge for Spierings, who is adamant that it is imperative New Zealand retains its competitive edge in the global dairy market.

Ironically the overall global dairy demand story is robust, creating plenty of opportunity for efficient exporters. Fonterra has produced some compelling graphs for chairman John Wilson to use in the United States and to explain why dairy farmers elsewhere should not be afraid of trade liberalisation.

But back home New Zealand needs to stay ahead of the cost curve.

Three hundred staff will lose their jobs as Spierings slims down corporate HQ in Auckland ("there are 300 people under execution at the moment... it is permanent"). The company's shared services footprint in New Zealand, which is "very big" with more than 1000 employees including engineers, is also being reviewed as the "true business responsibilities" are moved to Fonterra's businesses around the world.

"A lot of checking and control stuff that was happening here is moving out. Just disappearing... the autonomy of the regions will increase. Here it's just a headquarters that sets standards and policies and safeguards to ensure we are doing proper things in the world," says Spierings.

"I'm still not very pleased with the speed we develop and the complexity we create. But also if you benchmark us for cost, I think on cost-consciousness and cost-focus in this building, in general we are not very strong.

" If the heat is on next year - and the heat is on next year in the business because milk prices are high and the costs are high - and if we want to keep on growing market share and executing our value strategy in more markets, there is margin pressure. And you can only get out of margin pressure if you sell more and you spend less."

The Fonterra management team has developed a strategy to add more value to the New Zealand milk pool. It will focus on growing its high-margin consumer positions, food service and paediatrics platforms.

Executives likes Alex Turnbull who runs Fonterra's successful Latin American portfolio are being urged to intensify their businesses to create more value for the New Zealand parent. Spierings instances the Soprole brand in Chile which is a billion-dollar business.

There will also be a focus on streamlining Fonterra's brand portfolio: Global power brands like Anchor, Fernleaf and Soprole carry enormous brand equity. Then there is Perfect Italiano which Fonterra says is an emerging global power brand, local jewels like Mainland Cheese with its crafted taste and everyday affordable brands like Dairy Dale, and Bega.

About 38 out of Fonterra's 69 strong brand portfolio will go.

But Spierings also wants to create a visual identity (rather like Nestle uses) to sit over its global power brands. "Three are key brands and that is where we want to talk to the Government about Brand New Zealand and could it be a Golden Fern?"