Dairy boss picks industry evolution

John Penno says he is comfortable with regulatory change. Photo / Richard Robinson

Dairy boss sees new era coming as French giant steps in to scoop up NZ companies.

The acquisition by French food giant Danone of two New Zealand dairy companies last month signals a new phase in the evolution of the local dairy industry - one in which manufacturers will get closer to their brands, says Synlait Milk managing director John Penno.

Danone last month said it had entered an agreement to buy processing firms Sutton Group and Gardians.

The announcement came as the dairy industry negotiated its way through new Chinese infant formula regulations.

Auckland company Sutton is best known for contract manufacturing of infant formula; Gardians has a milk powder spray drying plant in Otago.

The two firms are among the infant formula companies that gained registration to export to China.

Penno said the Danone purchase was "significant in the big picture".

"It's the second time that we have seen a real multi-national invest."

The first big purchase by a multinational in the local dairy industry was Holland's FrieslandCampina's 10 per cent stake in Synlait last year.

But Penno said this time was different, as a multinational was buying companies outright.

"Danone is a very large and well-respected company, and it has clearly made a decision that with some products, it is going to step in and make them itself inside this market," Penno said. "So I think it is a sign."

China's two biggest dairy companies, Yili and Mengniu, have a presence in New Zealand and Shanghai's Bright Dairy - through Shanghai Bright Dairy and Food - has 39 per cent of of Synlait.

Penno said that as China moved to tighten regulations on the manufacture of infant formula, closer integration between manufacturers and their brands could be expected.

Penno, who is a member of the New Zealand China Council, said "hiccups" on the regulatory front were symptomatic of a country that had gone from importing 100,000 tonnes of dairy product in 2008 to more than one million tonnes today.

Danone - whose subsidiary Nutricia makes the Karicare brand of infant formula - is suing New Zealand dairy co-operative Fonterra over lost sales and other costs it claims resulted from last year's botulism scare.

Synlait has also been caught up in the regulatory wrangle. It missed out on registration because its blending and canning line was not ready in time for the May 1 deadline.

Penno said he expected the line to be ready next month and for registration to occur in July.

"What is happening with infant formula has to be viewed in the context of a country whose markets and products are developing very quickly and moving from being largely self-reliant in those products to importing a lot of product - both as ingredients for its domestic dairy business and also as finished product for its consumers," he said.

"We are quite comfortable with the regulatory change that's going on."

Formula, in its finished product form, makes up about 5 per cent of Synlait's volume. The rest is in nutritionals - products that can be added to infant formula or to adult nutritional products.

Synlait, which is in its sixth year of operation, is 8.5 per cent owned by Japan's Mitsui.

Bright Dairy started with 51 per cent in 2010 with a $82 million investment and now holds 39 per cent - worth $207.74 million.

Synlait Milk listed on the NZX last July. The shares, which were issued at $2.20, closed down 9c yesterday at $3.51.