Market analysts and dairy industry players say Fonterra needs to improve its performance and while job cuts are unfortunate, big changes are required.
Chief executive Theo Spierings revealed yesterday that hundreds of its 1500 head office and support function roles would be axed and sales and marketing positions increased in a bid to lift returns.
Fonterra has been under pressure after a 16 per cent drop in half-year profit and falling dairy prices, which are putting increasing financial pressure on its farmer shareholders.
There have been anecdotal reports that many of its 10,500 suppliers are seeking to leave and supply independents.
Spierings would not confirm the number of layoffs until a final review is completed and approved by the board, due on August 1.
The review includes external input from consultancy McKinsey & Co, which will provide global benchmarking on how Fonterra is performing against its peers.
Morningstar analyst Nachi Moghe said Fonterra could get "more bang for its buck" through boosting its sales and marketing capabilities.
"The marketing spend needs to go up so that's where the focus will be going forward," Moghe said. "I guess that will be positive in the long term if they implement it." Fonterra employs 11,500 staff in New Zealand and 18,000 worldwide.
One farmer at the National Agricultural Fieldays yesterday, who declined to be identified, said Fonterra chairman John Wilson had been undertaking "cow shed meetings" with farmers in a bid to retain his position. Wilson and two other Fonterra directors are up for re-election at this year's annual meeting.
"Farmers are pretty pissed off, they are grumpy, and they [the directors] do not want a protest vote," the farmer said. "They have got to be seen to be doing something, otherwise someone else will fill the vacuum." Low milk prices in theory should represent a lower input cost for Fonterra, resulting in a higher dividend, but farmers have been disappointed the dividend has not been increased to at least allow a partial offset for low farmgate prices.
Rickey Ward, New Zealand equity manager at investment firm JBWere, said there was a view in the market that Fonterra was top-heavy in terms of head office staff.
"It's a large international business run out of New Zealand, so we can't be dismissive of that, but there certainly have been questions since the listing [of the Fonterra Shareholders' Fund] of how efficient the company is," Ward said. "In periods of high payout you can be forgiven for a few sins, but we're in a tough environment now and that forces management's hand to become more productive and efficient."
Units in the Fonterra fund, which have shed 19 per cent in the past year, closed down 1c at $4.69 last night.
Federated Farmers Waikato dairy chairman Chris Lewis said farmers had made it clear they were unhappy with Fonterra's performance, with some viewing it as "a bloated cow", and it needed to trim costs.
"Like everything in life, not all of us can drive a Rolls-Royce and most of us have to drive a Hilux because your costs have to suit the current business cycle," Lewis said.
Harbour Asset Management analyst Oyvinn Rimer said the changes suggested by Spierings yesterday made sense. "The organisation seems to be carrying a bit more cost than it should be."
- additional reporting BusinessDesk