The business on the block includes the consumer activities of Fonterra Oceania, which is a recent merger of the Australian and New Zealand businesses, and Fonterra Sri Lanka.
The global consumer business sells fresh milk, cheese and butter, with brands most prominent in New Zealand, Australia, Sri Lanka, China and Southeast Asia.
Brands include Anchor, Mainland, Kāpiti, Anlene, Anmum, Fernleaf, Western Star and Perfect Italiano.
The proposal to divest the business will be subject to a shareholder vote.
Fonterra this week said it had started a sale process, pursuing both a trade sale and IPO as options.
McBride said Fonterra, as a farmer-owned co-operative and given the associated cost of capital that comes with that model, was not the natural owner of a consumer business.
“Having reached that conclusion, our focus from here is on running a process that maximises value in a way that is in the best long-term interests of farmer shareholders.
“The evolved Fonterra that remains will be a simplified business focused on our comparative advantages. It will be lower risk, be less capital intensive, and achieve an increased return on capital overall.”
Chief executive Miles Hurrell touched only briefly on the intended consumer business sale.
The new business strategy was grounded in an intention to create “goodness for generations”, he said.
“This means taking a clear-eyed view of where we create the most valu today and where there’s further headroom for growth...the co-op exists to provide stability and manage risk on your behalf, while maximising the returns to you from your milk and capital.
“Our innovative ingredients and food service businesses, supported by efficient and flexible operations, are the parts of the business that do this the best.”
There were few questions about the intended sale from the floor. At least two shareholders expressed concern about the “risks” of a divestment via an IPO, but did not elaborate.
McBride told the well-attended, good-humoured meeting a risk for the co-operative was how it managed capital risk on behalf of its farmer-owners.
“We are and always will be a New Zealand farmer-owned co-op, but we are also a global export business.
“When considering our strategy, we need to challenge ourselves to look beyond the back fence, and past the here and now.
“The world is changing. We are moving out of an era of trade liberalisation and co-operation and into a world that is more expensive, competitive and volatile. Expectations are evolving and New Zealand milk is becoming scarce.
“Customers are increasingly calling on us to partner with them to improve their sustainability and innovation capabilities. And there’s even more focus on sustainability from banks, regulators, and from a market access perspective.”
McBride said in new global context, Fonterra also faced increasing competition for both milk and capital here at home.
“That all sounds inherently negative, and it’s certainly not without risk, but the opportunity for us still absolutely exists.
“Demand for dairy continues to grow and, in a rapidly changing world, we are uniquely positioned to capitalise on any shifts.
“We have high quality New Zealand milk which is becoming more scarce. And most critically, we have scale. That gives us great confidence in the future of our co-op.
”Fonterra is an extension of your farming businesses. It exists to provide certainty and manage risk on your behalf, while also maximising returns via a competitive and sustainable milk price, and a respectable return on the capital you invest in the co-op.
“We govern Fonterra through a set of financial settings and a risk appetite that is now more appropriately aligned to that of our farmer owners. As you’ve seen from our recent financial performance, this approach has served us well in recent years and has set a strong platform for this next phase in Fonterra’s evolution.
“Fonterra adds value for all dairy farmers by creating stability for the industry and de-risking the on-farm investment. You and your bank manager know that your milk will be collected and you’ll be paid on time each month – not every industry can say that. We add value through the milk price - delivering a return on the $50 billion invested in on-farm capital,” McBride said.
“This last piece is central to the conversation on our strategy and the divestment of our consumer business.
“Right now, we estimate the weighted average cost of capital for a dairy farmer is somewhere around 10%. Consumer businesses are inherently more capital intensive and riskier businesses to operate - you’ve seen that play out over time in our own operation.
“Overlay that with the potentially higher geographic risk in the markets where our consumer businesses operate, and a respectable return on capital for the consumer business should be something north of 15%.
“Our Consumer business had one of its better years in 2024, but despite that, its return on capital was just 6.8%, up from 3.9% in 2023 and 0.2% in 2022.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
