Fonterra tightens the reins

By KEVIN TAYLOR

Down on the farm, the Fonterra shareholders are delighted.

But many people in Wellington are in shock that the last symbol of the capital's control of agriculture is being dismantled.

Not so long ago the dairy industry was effectively run from the Dairy Board offices in Pastoral House, next to the Beehive, in Wellington.

Even when Fonterra was formed and set up its headquarters at Auckland International Airport, its subsidiary NZMP - the world's largest dairy ingredients company - was still based at Pastoral House.

Wellington continued to exercise significant influence through NZMP's managing director, Chris Moller, a former key Dairy Board official, who became the No 2 man in Fonterra after narrowly missing out on the top job.

But all that changed this week.

Moller resigned after being told his job was being abolished - although he was offered a position as NZMP's chief operating officer in Auckland - and several other key staff followed him.

Then it emerged that Fonterra was considering moving the whole of NZMP to Hamilton or Auckland and widespread redundancies were rumoured.

Wellington business and civic leaders were upset at their city losing yet another corporate office.

But Hamilton's Mayor quickly sought a meeting about the possibility of more jobs in the Waikato.

All the fuss has come since Fonterra chief executive Craig Norgate announced that NZMP would be brought back within Fonterra's fold.

For a year since the creation of the dairy giant, NZMP has operated as a standalone business, run by Moller. On Tuesday, he cleared his desk and left.

He declined requests from the Business Herald for an interview, but is clearly unhappy to be going.



NZMP has about 400 staff at Pastoral House and New Zealand Milk another 100. The building is the former headquarters of the Dairy Board, which melded with NZ Dairy Group and Kiwi to create Fonterra last October in New Zealand's biggest merger.

Norgate said this week that the NZMP reorganisation would result in fewer than 30 job losses.

But other reports say about 250 jobs will go and the remaining 150 NZMP staff will be shifted to Hamilton and Auckland.

Norgate says the report is untrue and a decision on moving NZMP has not yet been made.

But it is clearly on the cards.

After the report of mass layoffs, Norgate sent a memo to NZMP staff saying that over the long term a decision needed to be made about whether NZMP stayed in Wellington or was consolidated in Auckland and Hamilton.

That would have been Moller's job, but he turned down Norgate's offer of the Auckland-based chief operating officer position.

Because of the report about mass job losses, Norgate says he will now decide on the future of the NZMP operation in Wellington by the end of November.



"Previously we weren't going to consider the issue this side of Christmas."

Even if it was decided to shift, the move would be gradual.

Announcing the restructuring, Norgate said that in Fonterra's first year, it operated as a small corporate centre with two strong business units - NZMP and New Zealand Milk - and a collection of other activities under Fonterra Enterprises.

But the structure meant duplication.

"It's now time to deal with that duplication so we can reduce costs and, more importantly, become a single integrated team behind a common Fonterra vision."

Industry observers have interpreted the restructuring in various ways.

One was that Norgate was establishing control over NZMP, although he says he had that anyway.

Another variation comes from dairy industry merger critic Tony Baldwin.

He says it represents the dismemberment of the Wellington power base of the dairy industry.

"I think it's the two co-ops saying we are now in charge.

"For 50 years the Dairy Board has ... been the apex of the decision-making process, whereas now they are saying 'we, the co-ops, are running this'."



He thinks Fonterra's corporate structure has been cumbersome and fragmented, and the issue should have been addressed when the organisation was formed.



He sees two positives in the restructuring - the savings in overheads, which he understands will be about $15 million, and streamlined decision-making.

Negatives are the loss of good people and institutional memory, and the danger that management will become fixated on NZMP at the expense of opportunities elsewhere.

But another industry insider says there was no victory over the Dairy Board because there was no war.

"People are still thinking in the past. There isn't a Dairy Board any more, there aren't dairy companies. It's one company."



John Roadley, Fonterra chairman until August, also blasts the conspiracy theories held by many about the industry.

He does not see the restructuring as a final victory over anyone.

"It's a post-merger rearrangement.

"It has frustrated me right from day one that people continue to hatch conspiracy-type theories.

"Fonterra's about getting on and delivering the business case for shareholders and the savings required.

"There's nothing sinister going on here."

Charlie Pedersen, vice-president of Federated Farmers and a member of Fonterra's Shareholders Council, know some people, particularly in Wellington, will be unhappy at the changes.

But he says the industry has changed and there are always people who struggle with that.

Pedersen says the shift of NZMP is geographic.

"It used to be based in Wellington because it was a highly politicised industry that Government thought was very important to keep tabs on.

"The new regulations mean that almost day-to-day relationship is no longer necessary or appropriate."

Tony Baldwin says Fonterra's changes do not show an organisation in crisis.

But he does not believe it is all about saving money.

"I think they are doing something they should have done 12 months ago," he says.

When Fonterra was formed, the existing corporate structures were retained and the co-operative's head office was established as essentially a satellite in Auckland.

As well, Baldwin says, the two men who have run the main businesses - Moller and David Pilkington at New Zealand Milk - were appointed before Norgate took up his position.

"That would ordinarily be something the chief executive did. Craig's sort of inherited them and all the existing structures."

Dairy Farmers of New Zealand chairman Kevin Wooding says the reorganisation is a positive step towards addressing duplication and overspending.





"Farmers are not interested in the politics of where Fonterra's head office will be."

The dairy industry will be out of Pastoral House soon, regardless of what else happens.

Norgate says Fonterra is planning to shift New Zealand Milk staff to a nearby Wellington building before Christmas.

Fonterra groups

Dairy co-operative Fonterra, whose headquarters are in Auckland, has three operating divisions.

NZMP: the largest dairy ingredients company in the world, it handles milk collection from Fonterra's 13,000 suppliers, the manufacture and packaging of more than 1000 product specifications and the operation of a supply chain linking production plants in New Zealand and overseas. NZMP markets products in more than 100 countries.

New Zealand Milk: consumer goods business that provides products for customers worldwide. Main operations are in sales, marketing and distribution.

Fonterra Enterprises: consists of various ventures in support of Fonterra's core business. These include the biotechnology firm ViaLactia Biosciences, technology development business FonterraTech, rural retailer RD1 and agricultural website Fencepost.com.

Source: Fonterra website