Fonterra chief executive Theo Spierings’ challenge ‘build windmills not walls’ is galvanising the dairy co-operative, writes Fran O’Sullivan.

Theo Spierings' leadership has been tested as he re-engineers New Zealand's biggest business during the tough times of a lengthy global commodity slump.

The story of how NZ dairy farmer incomes have plummeted, the company's staff numbers have been slashed and hard calls made with its suppliers is well-traversed.

But behind the scenes there has been a fundamental refocusing of the company's strategic operations which Spierings expects will result in a "strong picture" when he unveils Fonterra's financial results late next month.

Fonterra is moving swiftly to occupy high-value market segments and has challenged its staff to find the next big game-changing idea or product through its new innovation programme: Disrupt.


This is part of a new focus across the company, which plays into its fundamental belief that the worldwide dairy business is demand-driven; not supply-driven.

Fonterra's leadership team arrived at that position by posing questions: "Is this a demand-driven industry?"; "Does the globally traded arena grow at pace and do we want to keep market share?" and "Can we shift the growth of the New Zealand milk pools straight away into the highest value add year-on-year?"

Says Spierings: "We answered those questions, all three, with 'Yes' so we believe we're in a good position."

Getting to grips with Fonterra's strategic focus is best explained through simplified charts.

The CEO is particularly keen on a chart used to illustrate the fundamentals of the global dairy market.

"The big bubble - if that grows by 2-3 per cent - that is 8-12 billion more litres of milk every year, year-on-year," says Spierings.

The chart indicates the upshot of increased demand-driven growth right around the world will be an increase in the size of the globally traded market.

"You will see more growth there, and that's why also, over the long-term, we are positive about the dairy commodity price levels and therefore our milk price," says Spierings.


He reckons a 2-3 per cent growth rate would sustain an additional 400-500 million litres of milk production each year in NZ.

"That's about the amount we can shift to consumer food service, the highest value-added stuff we have."

The strategy is focused on shifting volume growth in the NZ milk pool directly into the highest-returning products that Fonterra makes under its own valuable brands. It will then use its other milk pools around the world to serve in-market customers for ingredients.

The projections are compelling. For instance, while milk powders and other products traded through the Global Dairy Trade platform are expected to decline minus 2.4 per cent (FY2014-FY2018), ingredient sales are projected to increase by 4.9 per cent, food service sales by 16.3 per cent and consumer sales by 8 per cent over the same period.

I've never been different in my messaging that we need to do things at scale and in the most efficient way before we start connecting the dots in China. And that's what we're doing right now.

Operationally this means optimising New Zealand milk; growing consumer positions; delivering on the potential of the food service and Anlene businesses; developing leading positions in paediatric and maternal nutrition, selectively investing in milk pools and aligning Fonterra's business and organisation.

Fonterra operates in a range of markets worldwide, as can be seen on a chart on this page which also illustrates China's central importance.


Says Spierings: "When you look at this chart of strategic choices there's not a lot of risk ... if you do it as well and you invest in the right things and the right partners in these markets, then you can minimise risk and maximise value because these markets have high potential."

The rate of change in China - where Fonterra has invested in dairy farms, brands and a food services business - is "phenomenal".

"The market has changed drastically from retail-driven Tier 1 and Tier 2 to an e-commerce-driven Tier 3, and Tier 4 market," he adds pointing to how the e-commerce giant Alibaba and its more recent competitor JD Com are disrupting the domestic market. "If you're not fast to adapt, then you find yourself on the back foot."

Spierings is confident Fonterra is in the right space when it comes to market and brand positioning and its integrated end-to-end strategy.

"The farms are extremely well-managed, so that's an upfront investment we can leverage in China," he adds.

Fonterra is on track to produce one billion litres of milk each year from its Chinese farms.


"We can connect our branded propositions with the upstream milk we produce and then capture the margin in the entire chain," explains Spierings. "Which was always the plan. But we didn't farm at scale, and we didn't have brands at scale.

"Now we have both. So we need to have a factory in between - that's the easiest thing to do. Building brands and farming is difficult.

"And we could do that alone or we could opt for partners."

There has been considerable scepticism about Fonterra's investment in Beingmate - which is China's biggest infant formula manufacturer. Spierings says the partnership is crucial.

"We are of course interested in dividends from the 20 per cent shareholding we have from the listed company in China. But the main reason why we do this as well is that we have a global supply agreement with Beingmate for all the different milk pools around the world.

"What we're working on is this R&D-aligned agenda between the two of us where we use our milk from our farms and then a farming joint venture together."


It's also necessary because of China's changing regulatory platforms.

Much of Fonterra's developing China strategy is still under wraps.

But Spierings hints at a big disruptive opportunity in the market where a strong value proposition built around New Zealand provenance is ready to be discussed with the e-commerce players.

Already, Tip Top hokey pokey icecream is being delivered by e-commerce orders and arriving in Chinese homes - rock solid.

"Yes, people are right that we have been building these businesses a little bit in isolation," he concedes. "But we have given people the mandate to do farming, to drive the ingredients business hard, and to build consumer food service; but now we're at a massive scale, we are saying that we are going to connect the farms with the ingredients business and our consumer food services in the next 12 months and make sure that we capture downstream value.

We can connect our branded propositions with the upstream milk we produce and then capture the margin in the entire chain.

"I've never been different in my messaging that we need to do things at scale and in the most efficient way before we start connecting the dots in China. And that's what we're doing right now."


The Australian business is now back in the black after a tough three-year transformation.

Again, Spierings wants to see a significant shift to the higher-value propositions, "we're on the right track but I think we can go harder".

"We have a great top team. We've slimmed down to be agile but there's still opportunity out there because I don't think that the competition is in the same shape as where we are at the moment.

"We took quite a bit of pain."

Fonterra has strengthened relations with its farmer shareholders using the innovative "4.31am campaign" as a "reset" designed to assure them their co-op has their back.

Spierings acknowledges the growing need to focus on environmental issues. "Look, at a very low milk price where we were not much was possible. Too many of our farmers were underwater to invest in sustainability and environmental solutions.


"But in a normal "market" - let's say on a weighted average price of $6 per kg milk solids which it was over the past 10 years - 2-3 per cent growth is possible and with it comes new solutions."

Since Spierings came into the business four years ago it has put on 5 billion litres more milk - or 25 per cent. "You cannot shift 5 billion litres more milk overnight - that's the issue. We added Ireland over four years to the milk pool, right? It's massive.

"But we're also going for a value-added strategy and we're not going to sell these products if we don't maintain our unique New Zealand brand, too.

"And as we get more millennials who are our consumers, they're tougher on us on those things."

The Government is currently considering whether to amend the Dira (essentially, competition rules which require Fonterra to take milk from new suppliers and sell milk to competitors).

The company is waiting to see whether and by how much the goal-posts are shifted.


"It's been a difficult year around the world, and we have delivered on our promises," says Spierings. "But next to that we have launched initiatives like Disrupt, a new, highly innovative platform that is appreciated in the company. We got quite a number of compliments from our competitors when we did our Europe trip that they were deeply impressed with how fit we actually are."

He puts that down to Fonterra's agility. "Like the milk price increase we are the first in the world to move up. But we were also the first to move down. So, we are the first to take the pain."

Spierings is cautious when it comes to predicting whether the milk price will continue to appreciate following last week's announcement it had raised its farmgate milk price forecast for 2016/17 to $4.75 per kg of milksolids, up from a previous forecast of $4.25/kg.

He says the strong kiwi dollar will continue to present headwinds.

"That is one more reason for caution and it's very early in the season. It's pretty cold out there and wet, and all sorts of things can happen.

"I can't say more to you right now because we're in the blackout. But I can assure you we will come to the market and show how we have created value.


"And that's going to be quite a strong picture and strong message."