Dairy company Tatua is showing no signs of easing up in its quest for innovation, writes Brierley Penn.

Not only is New Zealand's oldest independent dairy company, Tatua, celebrating its 100-year anniversary in 2014, it is embarking on a series of projects designed to lift the co-operative to new and greater heights.

Tatua's chief executive Paul McGilvary says the strategy comprises four key themes; growing the premium over the NZ milk price, investing in sustainability, creating a common vision and developing a talented pool of staff.

As a smaller-scale operation, Tatua focuses on a higher-value product mix than commodity-based dairy companies. In total, Tatua brings in 140 million litres of milk from its own suppliers, alongside contract milk from Open Country Dairy. This is then processed for use as ingredients, bionutrients, food service and consumer branded products, and as flavour ingredients. Tatua's smaller size allows for more refined operations in market niches.

"But for a company of our size, some of those niches are quite big," McGilvary says. "So hydrolysates is probably too small for big dairy companies, the big processing companies in the US and Europe, and even New Zealand; for them protein hydrolysates is just not interesting because it's not big enough for them. But for Tatua, it's huge. And that's what we're into, and that's what we'll chase."

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And chase they are. Tatua is investing in their biggest project to date, a $65.5 million drier that will allow the company to expand their hydrolysates production.

Protein hydrolysates are a specialty nutritional ingredient, used in a range of products designed for babies, geriatrics, and athletes. The key advantage of the product is its more rapid absorption into the digestive system. As it stands, the hydrolysate industry's three largest producers are based in Europe. McGilvary hopes to change that, using what he cites as the most advanced infant formula standard drier in the world. The drier will process reconstituted milk product, expanding Tatua's current processing ability by some 6,000 to 7,000 tonnes per year. The plan is to have the drier in operation by April next year, with a period of commissioning to convert products from old driers to the new.

"We expect on the basis of having this drier that we will become the number one hydrolysate producer in the world. We're currently about number four."

The company currently maintains 300 employees and 109 shareholders, with that number set to grow further when the new drier comes into force. McGilvary anticipates a staff of up to 500 within 10 years. The expected boost to surrounding communities will be significant, given that the vast majority of jobs are locally sourced.

Tatua's innovation shows little sign of easing. McGilvary estimates Tatua could grow its value-added business up to 10 times using only its current milk supply, as many of these value-add products actually use very little in the way of milk - McGilvary reminds us that products such as whipped cream are comprised largely of gas and cans. This sets Tatua apart from other milk companies, who are reliant on increasing milk production to grow output and premiums. Investing in key plant such as the drier will allow Tatua to expand its product offering, while working to raise their premiums above commodity prices. "Our milk supply is relatively fixed, and our whole discipline is about growing the value of it. We keep shifting the milk from bulk ingredients into products that have higher margins."

And the 100-year milestones are already starting to stack up. This year has already marked a record milk supply from Tatua's own suppliers, generating 13.22 million kilograms of milk for the company. A record low bulk somatic cell count has also been recorded, indicating the highest milk quality on record. "We'd love to do the three things, and have the highest payout as well - we're trying! No guarantees."

But domestic capacity expansion is not enough for what has been described as the "dairy mouse that roars". Tatua is growing in China, with plans under way to open an office there. This will sit alongside its current office in Japan, and is reflective of the growing importance of the country to Tatua's export revenues.

"To service customers with these value-added products, they require a lot of support. It's not just like buying a commodity that everyone makes, we make them specifically for the customer, and they need a lot of support to make sure they function."

Exports make up 94 per cent of Tatua's products with the most significant markets including Japan (20 per cent), the United States (15 per cent) and Australia (10 per cent).

The most notable growth has occurred in exports to China. Five years ago, the market accounted for only 1-2 per cent of total exports. Today, that has reached 17 per cent with continued growth anticipated.

Tatua has remained reasonably insulated from some of the changing dynamics in the Chinese market. McGilvary considers the increase in domestic supply of Chinese milk products could be good news for their value-added product base. "Their domestic supply is there, but it's mainly basic products and commodities. They don't have a big industry yet that produces a lot of these value-added products. A lot of our customers are dairy companies; we provide ingredients to use in what they do, so I think the opportunity is far greater than the threat right now.

"I'm sure at some point in time there will emerge a Chinese value-added company like Tatua, but it's not just a question of technically being able to do the products, you've got to have the culture right, you've got to have the customer orientation, you've got to have years and years of understanding how the markets work and build trust with customers. There's a lot more to it than just sticking a plant up."

This is a consistent theme from McGilvary, who believes Tatua has survived for the past 100 years on the back of a strong culture among shareholders and employees. Investing in people is a priority for the company, and Tatua is taking its 100-year anniversary as a well-earned opportunity to celebrate the co-operative's many successes. A book launch, trip to Japan, "birthday party" and gala dinner are all on the cards.

The botulism scare didn't slow down Tatua, although McGilvary believes the long-term cost impact may be more significant. "We've had to register, we've had tougher import requirements, but we're a bit lucky like that because we meet those requirements in Japan anyway, so we sort of felt quite geared up to do that.

"In the long term what I think it's done is put pressure on NZ's quality assurance systems."

As the New Zealand dairy industry opens up further, with newer companies such as Synlait, OCD and Miraka gaining a bigger toehold in the market, possibilities are growing for Tatua to resume trading more with other milk companies. This became more difficult after Fonterra's consolidation of the market.

McGilvary says Tatua's future is looking bright, reinforced by confidence from staff and shareholders. "They see we're developing, they can see growth, they can see our revenue will move towards $400 million over the next 10 years."