Dairy industry fights for its place on world stage

By Philippa Stevenson

The New Zealand dairy industry has merged, maximised and marketed its way to a virtual standstill.

As dairy company directors from the three major companies - Dairy Group, Kiwi and Northland - hold a crucial summit in Auckland this weekend, they will be trying to box their way out of more than just one corner.

The meeting has been called to break a deadlock between the three over terms for their key merger, which would allow progress on the proposed mega co-op.

More crucial, however, is the strategy driving the mega co-op proposal, which all three helped devise last year.

It spells out the urgent need for New Zealand dairying to break out of its historical business patterns.

The pressure builds from the land where farmers are finding it harder to extract profits from their already low-cost enterprises and are increasingly looking to their off-farm investment to deliver better results.

The value of milk at the farm gate is dropping at the rate of about 2 per cent a year. Further on-farm productivity gains are possible but will tend only to offset the declining milk value.

Traditionally, the manufacturing companies have concentrated on improving their productivity by merging and building bigger factories to capitalise on economies of scale.

In the last decade they have had an average productivity improvement of nearly 4 per cent across their base products - an impressive rate by world standards.

But now the huge plants are about as big as technology will allow and more improvements, say in packaging, will be much smaller and harder to win.

Meanwhile, the marketplace is globalising fast. Retailers are consolidating and increasing their buying power, forcing their suppliers to do the same to extract value from their brands.

The Dairy Board's group manager of business development, Paul Campbell, said the board's consumer business had established "very solid brands."

"But they are a beach-head, a beginning of a global business, and not yet up there with the Nestles and Parmalats."

He said the challenge was to grow quickly in the profitable markets of South-east Asia, Britain and the United States where other companies were already consolidating their positions by acquisitions, mergers and alliances.

"The likes of Kraft, Nestle, Parmalat are taking their positions now. We have a choice - to step up to the plate and take a position in those markets, or not. We can't be caught in mid-ground.

"We are actually at a point now where we have good positions but we have to continue to build on them if we are going to be competitive and extract value out of the market. We have to get to a certain scale to compete in advertising programmes, and with resources of staffing, distribution, and research and development."

The board has said to be a significant player - a viable second or third in the world - it needs to grow by 15 per cent a year, transforming its sales revenue in 10 years from $7 billion to $30 billion.

"In the consumer business we have grown through organic growth - mergers, acquisitions, joint ventures," Mr Campbell said.

"We are going to have to continue that but increase the speed because the number of options in the game is narrowing as bigger players take chunks of the business."

Mr Campbell said developments in information technology are also having huge impact.

"People have better information, therefore, trading, price discovery and information about stocks starts to get much more public. Your ability to extract value through your own information goes down and you have to use it better," he said.

In its favour, the exporting Dairy Board had probably one of the biggest information networks in the world in the 120-odd countries where it was represented.

"We can draw huge amounts of information from that network, and that tells us what is going on in the dairy market every day," said Mr Campbell.

It will be vital when, as forecast to happen in the next 10 to 15 years, a dairy risk or futures market emerges.

"When that does come, it will be important that we make an entry into that market when the time is right. If you do it too early or too late, you destroy value," he said.

Today, the network is principally used to market New Zealand products. The industry strategy showed that to get more from the asset it also needed to sell other producers' milk.

"We have the information, we have the customer, and it's just a case of, where it is profitable, building in product from other places," said Mr Campbell.

The board's group managing director of global operations, David Pilkington, said buying others' milk gave the board opportunities to use it in lower, more commodity-style products while New Zealand milk was put into added-value areas.

It meant the customer could be offered a full range of products without the danger of New Zealand leaving an opening for a competitor.

"As we try to move more of our milk out of the basic commodities and into value added products, it leaves a gap at the lower end of the market for other people to get in. The customer will then try and bring those people up to start competing to bring the price down. So using other people's milk not only uses our infrastructure, it also protects us at the bottom end," said Mr Pilkington.

The board had also distinguished profitable markets from disposal markets resulting, particularly, in rationalisation of its Middle East offices, he said.

"We try to be much more specific. Our ingredient business is all about taking milk from New Zealand and developing added-value opportunities.

"In our consumer business, more and more, we want to look like Nestle - buy product at world market prices and add value to it without being saddled by [calls of] 'hey, we've got more milk, you guys go and sell more'."