Less is more in Fonterra's new business strategy as it aims be our promised national champion

New Zealand milk will be king as Fonterra brings the focus home. Photo / File

The best way to understand Fonterra's just-revealed new business direction is to forget everything you understood about New Zealand's biggest company – except for the dairy bit.

Gone is the aim – and claim – to be one of the world's biggest dairy exporters.

Gone is the goal of collecting more and more milk from other countries, previously known as "milk pools", which resulted in debt-funded growth.

Gone is the sloganised ambition of "making a difference to the lives of two billion people".

Gone is the Fonterra DNA trait of wanting to own everything in its orbit.

The "dairy giant" handle is dead.

But not apparently, the ambition we were promised 18 years ago – that Fonterra would be New Zealand's national champion.

Chief executive Miles Hurrell and his leadership team are confident Fonterra can yet be that.

The new business strategy follows an internal houseclean at the embattled dairy conglomerate and was unveiled by Hurrell, in the job 12 months, and his lieutenants chief financial officer Marc Rivers and head of strategy Chris Greenough.

Starting now, Fonterra is taking a "more targeted" approach to business, instead of being "all things to all people in all categories", they say. The hunt for milk volume that has proved so disastrous for the balance sheet, will change to a hunt for value.

Fonterra will "pick and choose" the categories it works and invests in, prioritising investment to areas that will deliver sustainable value. These have been identified as core dairy (powders and ingredients), food service, paediatrics, sports and active nutrition, medical and aging nutrition.

Fonterra CEO Miles Hurrell. Photo / File

It will run a "conservative" balance sheet that ensures, among things, it retains its currently endangered "A" credit rating.

It will "show respect for capital" – something sorely lacking for a while say Fonterra's farmer-owners, who have witnessed more than $4 billion of wealth destruction in the past two years.

New Zealand milk will be king.

Dumped is the over-riding business strategy of maintaining a 30 per cent claim to the world export market and chasing a collection target of 30 billion litres a year by 2025.

Prioritised from now on is New Zealand-grown milk and all the market attributes that go with that label. New Zealand milk production is flattening. As Greenough puts it: "Milk is an increasingly valuable and scarce resource."

Hurrell suggests the previous regime's pursuit of overseas milk sources could have "diluted the value of what New Zealand milk offers".

That said, it sounds unlikely the baby will be thrown out with the bathwater in all offshore activities, such as the underperforming Australian and Chile businesses.

Some consumer parts of those businesses are doing well, says Hurrell.

But the new, more targeted, approach to business may result in a decision, for example, not to make dairy desserts in Chile.

And the pursuit of the added-value consumer dollar isn't entirely abandoned. But this side of Fonterra's business will shrink.

When it can put a product in a retail wrapper to capture a premium price, it will still do so – for example a kilogram of milk powder in a retail bag makes a margin over a 25kg commodity bag. Where Fonterra can cash in on its ingredients scale – think an innovative "instant" cheese product, for example – it will chase the consumer margin.

Fonterra's new business strategy follows an internal houseclean. Photo / File

The now-sold Tip Top ice cream company wasn't "scalable". Nor, apparently, are yoghurts or cultured dairy desserts.

"Business to business" supply of ingredients and food services is reckoned to be Fonterra's strength and it plans to stick to it.

Fonterra no longer aspires to own all its business interests. Partnerships, especially in intellectual property and skills, and research and development, are now on the menu.

Offshore, it will focus more on being a component supplier to customers, rather than trying to sell them the whole bucket of milk. For example, it won't buy cows or farm in Europe order to supply a customer or business partner/associate there which just wants Fonterra's whey or lactose.

There will be "some change to the way we face the market", says Hurrell. He wouldn't elaborate other than to suggest New Zealand staff "should be in front of customers". Nor would he discuss the very likely redundancies that will arise from this change.

Fonterra promises to commercialise more of its innovations.

It may be throwing off the mantle of aspiring global dairy giant but Fonterra says it is undoubtedly the world leader in dairy protein innovation, with 400 science staff pursuing breakthroughs at its Palmerston North science facility.

"We have a great deal of innovation still sitting in the cupboard," says Greenough.

It is promising to rebuild trust with New Zealanders. Hurrell says surveys show relationships with customers are "very, very strong". With Kiwis, not so much.

"We have a lot to do in New Zealand. We are a big part of the economy."

Against the "opportunities" ahead for Fonterra – from such factors as rising incomes in developing world, good dairy supply/demand dynamics, New Zealand's "world class" farming – Hurrell and his team didn't shy from some harsh realities it faces.

Forget "dairy giant" and global domination, Fonterra is bringing the focus home. Photo / File

These included constrained capital, high debt, a large asset base, lack of trust and confidence, underperformance, environmental investment costs and increasing competition, including from non-bovine milk.

The progress of Fonterra's new strategy would be measured by what it called "The Triple Bottom Line – healthy people, healthy environment and healthy business".

While this terminology appeared for a horrible moment to be straying into the meaningless slogan territory the previous regime so loved – think "Turning the wheel" and "Velocity" – the explanations were simple enough.

Healthy people means strong relationships. With the community and customers, being a good corporate citizen and supporting communities.

Healthy environment means the responsibility to lower the company's footprint, pursue zero waste, and restore nature whenever possible.

Healthy business translated to "sustainable payout, return on capital and reliable dividends".

Fonterra is a farmer-owned cooperative and with cooperatives there's always the temptation to "over-pay" for milk, says Rivers. But Fonterra has strong mechanisms in place – the fortnightly Global Dairy Trade auction and the milk price manual – to make it hard to over-pay, he says.

Fonterra's financial straits are not because it has overpaid farmers as critics like to say, but because it made big investments with limited capital, he says.

The hunt for milk volume that has proved so disastrous for the balance sheet, will change to a hunt for value. Photo / 123RF

After all, the reason for a cooperative's being is to pay its farmers a healthy milk price.

"We are still a cooperative – we can't just focus on earnings," says Hurrell.

Progress on a "healthy business" will be measured by all the usual metrics such as gross margin percentage, ebit, net profit, capex and debt, but with free cash flow and return on capital considered crunch measurements.

There's to be greater emphasis on transparency with chief executive and senior leadership performance targets to be disclosed from now on through the metrics of return on capital and earnings per share.

Fonterra's new strategy may not sound very radical, says Hurrell, but it represents a huge change in thinking from where the company was just 18 months ago.

"We are a cooperative. It may not sound so radical but a simple change in how we think of ourselves takes us to a really different place today.

"We've been here for 150 years – we want to be here for 150 more."