Global branded consumer products are a margin hedge against a decline in commodity prices, writes Duncan Shand.
Duncan Shand is the managing director and founder of YoungShand, an independent marketing agency focused on helping challenger brands in the ever-changing media landscape.
OPINION
The announcement last week about Fonterra selling off its remaining consumer brands makes no sense to me. This is a mistake not only for Fonterra, but for New Zealand.
I can understand that Fonterra is a large, complex business. And the temptation to simplify it will be real. Perhaps the challenge to invest and grow consumer brands is at odds with its core business model of collecting and processing dairy products. I’ve worked in large engineering/operational businesses before, and often these businesses find it hard to invest in building brands.
When you look at the numbers, there also seems to be value there – this business generates 19 per cent of profits from 15 per cent of revenue. Global branded consumer products are a margin hedge against a decline in commodity prices, but Fonterra has decided this is “not core” and is exiting to focus on trading commodities. This makes no sense.
Strong brands will make more margin and more money. I’d be focusing on growing the brand business to accelerate profit growth.
It’s telling that one of the first things Fonterra did when it was formed in 2001 was enter a joint venture with Arla, effectively selling the Anchor brand to them. It exited this JV selling its remaining 25 per cent in 2009, and by 2012 there was no New Zealand milk in the Anchor brand that is sold in the UK.
And in 2019, Fonterra sold Tip Top to Froneri. It appears there is a lack of appetite, expertise or investment to create long-term global brands.
Contrast this with Coke. One of the biggest brands in the world. A flavoured water created in America and sold globally. In every country there is a Coke plant that manufactures and distributes the brand created with local ingredients and its centrally produced secret formulation, Merchandise 7X. Can you imagine Coke selling off its brand and focusing on selling flavours to anyone who wanted them?
As a country, we need more strong, international brands. We need more world-class innovation. We know this only comes with clusters of competition where firms are dynamic and developing new products to meet customer needs.
Products and services need to be world class. This comes from strong domestic competition as well as competing internationally.
Building brands isn’t easy. It’s not about a new campaign, refreshing the packaging or tweaking the logo. It takes time, understanding, consistency, investment and sheer determination over a long period.
Building brands is about understanding consumers, positioning, defining your difference, building distinctiveness, and building awareness through campaigns that emotionally connect with your audience.
Again this isn’t easy, you need to get every step here right, but the brands that do will be stronger for it. Applying this consistently time and time again is key. Staying true to your brand story and remaining relevant as times and tastes change is essential.
The research shows strong brands command a price premium and grow faster than their competition. Why, then, would Fonterra even consider doing this?
Perhaps we need to go right back to the beginning and question whether approval should even have been given to allow the creation of this monopoly. The co-op has grown at only about 3 per cent per annum on average since its inception, hardly a glowing endorsement of value creation.
What I really fear is the brand business being sold off to an overseas multinational that will use its own ingredients (where it can) and then develop these brands and sell them back to us at higher margins.
This would create a significant increase in brand value for the new international owner at our expense, effectively recreating the same scenario with our banks when we sold them off and they now charge us higher margins here and send super-profits back to Australia.
If this is the result then perhaps we need to consider that the experiment of creating a monopoly to compete globally has failed. Is this really the best we can do? We have to be more ambitious and committed to building strong brands here.