Fonterra pins hopes on new global strategy

12.00pm - by KENT ATKINSON

The company that earns about 20 per cent of the nation's export revenues, Fonterra Co-operative Group, says it is putting its money on a new corporate strategy.

It today unveiled seven strategic "themes", even though the company's board has not yet approved them.

Fonterra chief executive Craig Norgate told the company's annual meeting at Hamilton that the first two themes promoted and protected the business' foundation and the advantage that the New Zealand dairy industry had to produce and market commodity dairy products, at the lowest possible cost.

Another four themes would provide earnings growth by pushing harder the activities at which Fonterra excelled, and the final theme recognised the dynamics of four large, emerging geographies that would be "very important" to the overall business.

Mr Norgate made the announcement to 13,000 farmers, some of whom have been critical about poor performance by the company and its executives in its first year of operation.

Before Mr Norgate spoke today, the annual meeting -- relayed in a teleconference to six other venues around the country -- was expected to be seen by farmers as a chance to vent frustration over its performance.

Farmer confidence in Fonterra has been rocked in recent months with revelations of a $50 million loss, missed milk collections and plummeting payouts -- down from $5.33/kg milksolids this year to predictions of $3.70 next year.

Farmers were also disturbed when the annual report last month revealed nine Fonterra employees were on a $1 million-plus salary at a time when they were being told to tighten their belts.

Fonterra faced its latest round of criticism recently when its watchdog, the shareholders' council, released a report saying this year's payout was thousands of dollars lower than it should have been. The council also said Fonterra's corporate overheads were too high.

But Fonterra's retiring chairman, John Roadley, told farmers today the company was trying to identify how best it could position itself to capture the value of milk and develop a global strategy.

"Your board sees the prospects which have been identified as pivotal to setting the course ahead in describing what type of co-op Fonterra will be, deciding how to use our global position for growth and exercise our responsibility worldwide," Mr Roadley said in notes for his speech.

The strategy was worked out as part of what the board called its "Project Galileo", led by an international consultant, McKinsey and Co. The consultant was hired to help Fonterra come up with a coherent business strategy in the course of corporate wobbles which culminated in the shock resignation in January of veteran commercial director Mike Smith.

Mr Smith resigned from Fonterra after just four months because he feared the company would fail to reach its potential without boardroom changes.

"Unless Fonterra addresses the issues it won't become the company that all farmers and indeed all New Zealanders want it to be," Mr Smith said at the time. He did not feel enough of the directors wanted a change in the company climate, or had any sense of urgency about it.

Since then the company has accelerated its transition to an extra commercial director, making four in all, and will use only nine farmer directors because it will not replace Mr Roadley as a director when he quits the board.

Mr Norgate said in his speech notes for today's meeting that Fonterra had created a platform to adapt quickly and effectively to a changing trade environment.

"It is production from the lower cost parts of the world, such as Australasia, rather than European production, that will drive tomorrow's market," he said.

Globalisation and industry consolidation was leading to the emergence of a handful of key dairy players that would increasingly shape the global arena, and it would be increasingly important to be part of that influential group.

Fonterra needed to manage its relationship with each multinational in the knowledge that they were potentially customers, competitors and business partners -- all at the same time.

"We need a long-term strategy which anticipates these trends and changes and positions us to turn them to our advantage," he said.

"And we have one".

An intensive, broad-based study was being completed "as we speak" to provide a 10-year strategic framework which was exciting, credible and profitable.

"The Fonterra strategy recognises that as a co-operative owned by its dairy farmer suppliers, Fonterra's objective must be to make milk as valuable as possible," he said.

"Our vision is to be the most successful and innovative dairy company, delivered by a powerful combination of industry, strategic and performance leadership," Mr Norgate said.

The seven strategic themes were based around a focus on building from Fonterra's existing strong foundations.

Fonterra had to retain its ability to produce dairy products at the lowest cost possible.

"This is the most important strength of our industry and we need to protect it and promote it very aggressively," Mr Norgate said.

"This effort will not only involve Fonterra's business -- it must also touch on every one of your farms."

Fonterra also needed to be the smartest player in globally traded dairy markets, which meant exploiting its increasing presence in the market and a rigorous approach, to deciding what products to produce, and at what price and time of the year to sell them.

The company also needed to recognise that its large customers were increasingly demanding partnerships with their dairy ingredient suppliers, and should be building broader and deeper relationships with them. Fonterra should be providing them with tailored products and services rather than simple commodities.

It should also be using its knowledge of milk to develop innovative speciality dairy products to address the needs of the most sophisticated ingredients customers -- similar to the work of Fonterra's tiny but very profitable Waikato rival, Tatua.

And in response to the changing demands of consumers, Fonterra must better exploit the health and nutritional benefits of milk.

"We should be leading the market in the development of milk offerings that meet these consumer demands," Mr Norgate said. Fonterra's successful consumer business in Asia was already pursuing these opportunities.

Fonterra also needed to push further, and harder, into the rapidly growing global food service sector.

"There is an ever-increasing demand from restaurants, hotels and caterers, for processed dairy ingredients," Mr Norgate said.

"We have what it takes to lead in this area, given our excellent product and service reputation, and our global presence."

The final element was to recognise that the major emerging markets -- China, Mercosur, Eastern Europe and India -- will be increasingly important to New Zealand dairying.

"Our strategy will not be complete without a clear understanding on how we will play in those regions," Mr Norgate said.

Each "theme" built on what the company was already good at -- making milk as valuable as possible.

"We will deliberately focus our management effort and people in these seven themes as areas where we can become a clear leader," he told the farmers.

"The reward for doing this right is exciting, as it will represent sustainable higher returns for you."

More details of the strategy would be disclosed to farmers by the end of the year and Mr Norgate said he was sure they would agree it was pivotal to defining how Fonterra could "capture opportunities on the global stage".

- NZPA