Fonterra is building new factories to keep up with China's new appetite for dairy foods, as Bill Bennett reports

Tea macchiato is a modern Chinese drink topped with a mixture of cream and cream cheese, so popular that there are often queues to buy it.

Fonterra's food services business will soon pass $2 billion in annual revenue and reach $5 billion within the next six years.

"That's not a forecast, it's a commitment," says Fonterra's director of Global Foodservice, Grant Watson. "China will be a significant contributor to that growth."

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Foodservice sells dairy products to businesses that prepare food outside of the home - everything from restaurants to kiosks, including airline and prison meals.

Watson says the division is growing at three times the rate of the global foodservice industry.

Today the division operates in 75 Chinese cities, and the plan is to reach 160 cities. "China is very important to our business. We're going as hard as we can and we have great momentum," he says.

In the last financial year Fonterra grew its combined consumer and foodservice volumes in Greater China by 48 per cent, making the co-operative an industry leader.

Fonterra's strategy is to focus on key channels and what Watson calls the "hero products".

For now, Fonterra Foodservice's biggest market in China is bakeries. They buy ingredients needed to make cheesecakes, cream cakes and a range of other dairy-based products.

Watson says the fastest-growing segment is known as Italian Kitchen - that's pizza and pasta. Fonterra supplies mozzarella cheese for pizza and a specially-developed catering cream needed to add richness to certain pasta dishes.

Watson says another booming area is beverages. "We've seen a recent explosion in the Chinese beverage market. In New Zealand people might invite their friends for a beer after work or coffee during the day.

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"In China, they go to tea houses. They are fashionable, especially with young people and it's where people go for business meetings.

"People still drink bubble tea, but one of the most popular new drinks is a tea macchiato. It's good for us because it is dairy intensive. Tea macchiato is made from Chinese tea, but is drunk with a topping of whipped cream and cream cheese."

Tea macchiatos are often sold in popular tea house chains such as Heytea and Nesno. Watson says a tea house recently opened in Shanghai has an average queuing time of three hours. "Someone developed a phone app so people can book a space in the line and pay others to queue for them."

Chinese tea houses serve up as many as 200 million dairy drinks a year. It's not just tea. Starbucks coffee shops also sell a lot of dairy in China.

Watson says typically the cost of the milk used in these drinks is higher than the cost of the coffee. Starbucks sells drinks which are often as much as 400-450ml and up to 80 per cent of that is milk.

He says tea macchiato is an important opportunity for Fonterra because as much as 90 per cent of the existing cream market in China is non-dairy. As Chinese consumers become richer they look for quality and authenticity.

Watson says the mouth feel of real cream makes for a far better experience and people now know to look for it. They look for a fresher taste. To help meet this demand, Fonterra recently completed a new one-litre UHT line at its Waitoa plant. It has already started work on a second line.

When complete the two production lines will produce more than 120 million one-litre packs a year. The total cost of the expansion is $35m and means 26 new jobs at the plant.

Dairy is popular and fashionable in China now, but it does not have a long tradition there. Watson says the demand is being driven by urbanisation and modernisation - the Chinese see dairy as modern.

Fonterra faces competition selling dairy into China's prepared food and beverage sector, but most of its rivals target a single niche. Fonterra operates across the entire range, which gives it an advantage when it comes to cross-selling.

Watson says the company has a strong market share in each of the sectors where it operates.

The strength of the Anchor brand helps, as does its history. Anchor stands for quality in China.

"We benchmark against our competitors, looking at things like the taste of our mozzarella cheese and the way it stretches when pulled - that's an important part of the pizza experience." says Watson.

"We also measure up in areas such as the stability of our cream rosettes on cakes."

Fonterra has an end-to-end story to tell in its marketing - its Anchor products perform better than rival products because New Zealand cows are pasture-fed, which produces a noticeable difference in both the taste and texture of the products.

Watson says Fonterra continues to invest in the capacity to meet fast-growing demand from China and elsewhere.

A new $245m plant is being built at Clandeboye in the South Island to make mozzarella - Fonterra's third mozzarella factory.

Watson says by the time that plant is up and running there will be a need to plan the next one.