China gets creative with dairy

Kelvin Wickham. Photo / Dean Purcell

Fonterra chief operating officer NZMP Kelvin Wickham says when it comes to finding new ways to consume dairy products, the Chinese are incredibly creative.

He looks after operations for Fonterra's NZMP business — the division that sells dairy ingredients to food makers. Though dairy ingredients are used in obvious places they are also now turning up in products that are uniquely Chinese.

There are the well-known international staples such as slices of cheese on hamburgers and melted mozzarella on pizza. Wickham says these are now popular in China.

Fonterra's butter and cream can be frequently found in cakes, biscuits and other cooking.

No surprises there. Yet Fonterra's cheese now makes its way into lollipops, as well as into a brand of fish and cheese-flavoured sausage. Chinese consumers also enjoy having cream cheese in glasses of "tea macchiato", a popular drink.

Wickham says: "This creativity mixes Chinese tastes with Westernisation. Consumers in China love fast food, which can use a lot of dairy, but with food like fish and cheese sausages they are making it their own."

He says another popular fad is the so-called muddy bun. It's a form of chocolate cake where the whole point, and part of the fun, is to leave smears on your face, which can be licked off. NZMP dairy ingredients are an essential part of the experience.

There is more serious innovation. Like everywhere else in the world, the Chinese are interested in their health and wellbeing. Another trend helping NZMP is that consumers want to see a transparent supply chain. In some cases this can mean tracing the milk they drink right back to a farm. More regularly it is about knowing their milk comes from grass fed cows.

Fonterra is seeing a growing demand for paediatric dairy products in China. In effect this is an extension of the infant formula business where parents want their children to go on drinking milk as they grow.

Chinese consumers are also looking for medical dairy products. Wickham says Fonterra has recently introduced a fast-acting milk concentrate product. This helps with muscle recovery and works within two hours. It can be used after workouts, but is also given to people experiencing trauma or recovering from disease. It also helps the elderly.

Wickham says the gold standard for this kind of product has always been whey protein, but that's not popular because it has an unpleasant taste. Using milk gives it a better flavour and makes it easier to digest. It can be made into a drink or included in foods such as a protein bar.

This creativity is helping ensure Fonterra's China business continues to grow at a clip. Its food service business in China grew 48 per cent last year and has doubled in the past four years. Chinese dairy imports are expected to double again by 2020.

"The business is strong, it is growing and it will continue to grow and expand into new areas." says Wickham.

Fonterra is riding a trend which means it has the right product in the right place at the right time. He says: "The growing affluence and urbanisation in China helps. As people and nation move up the GDP curve, they put more protein in their diet and one of the first proteins they choose is dairy."

He says the numbers are huge: today Chinese consumers drink 1000 glasses of our milk every second.

This has led to a point where one out of every four Fonterra tankers on the road is collecting milk that will go to China. The country is Fonterra's number one market and accounts for about a quarter of its value.

Wickham says there is plenty of room left for growth. Though dairy is established on China's eastern seaboard, there is scope for it to reach people living in inland or secondary cities.

"At the moment the average Chinese person eats about 100 grams of dairy a year. In Western markets that number is around 2.6 kilograms", he says.

Fresh milk is another area where Fonterra can see considerable expansion. In January it launched a new fresh milk product in China. The company worked in partnership with Hema Fresh, an Alibaba offshoot that mixes traditional and online shopping.

Wickham says until now most milk sold in China has been the long life variety. Its name, Daily Fresh, reflects the difference. It is sold from refrigerated cabinets.

For now Fonterra and Hema Fresh sell their refrigerated milk in 14 stores in Shanghai and Suzhou. Freshness is a huge part of the product's appeal. The milk comes in 750ml bottles marked with the day of the week to emphasis their freshness. Each store is restocked overnight. The milk comes from Fonterra-owned farms in China.

Though volumes are modest for now — sales are around three tonnes a day — the plan is to scale up as Hema Fresh rolls out more stores across China. Fonterra says the business is part of a move upmarket as Chinese consumers become more sophisticated.

Wickham says the Daily Fresh project shows how Fonterra intends to progress with partnerships in China and elsewhere in the world.

He says business partnerships are often tested, sometimes to breaking point, and China is no different. Yet he continues to see huge value in the partnership model for Fonterra.

It means companies can bring different strengths to the relationship.

"NZMP is not a spot trader. We're looking for long-term partnerships. Some may involve equity, others are joint ventures. We may partner with companies in some areas and compete with them in others," he says.

Last year Fonterra's revenue from China was around $3.4 billion; it's earnings were $209 million — that's up 60 per cent on a year earlier.

During the year Fonterra's foodservice business, Anchor Food Professionals, passed the $2b annual revenue milestone. The target is for this to reach $5 billion by 2023.

Wickham says the business is important for Fonterra, as it means a move to high-value products and gives the business a more positive long-term outlook.