August 20, 2008

Fonterra Forges Bravely Ahead in Asia

By JANES, Andrew

Rocketing prices are stalling dairy consumption across Asia. But Fonterra continues to gain market share, its new head in the area, Mark Wilson, tells ANDREW JANES


'Ultimately demography drives economics" is a phrase Mark Wilson likes. He repeats it several times during our interview and says he uses it as a guiding light.

As a business mantra, it's an apt one for a man in charge of Fonterra's operations for a region accounting for about 60 per cent of the world's people whose impressive GDP growth rates are helping to drive the current international dairy boom.

Raised and educated in the United Kingdom, Wilson joined Fonterra in February after more than 30 years in the food and beverage industry - most of the past two decades of which have been spent in Asia. He looks after all of Fonterra's operations in China - including its 43% shareholding in Chinese dairy company SanLu, ingredients and food services businesses - as well as its consumer brands and food services (but not ingredients) businesses in the rest of Asia and the Middle East. Based in Hong Kong, Wilson spends a lot of time travelling between Fonterra's Chinese headquarters in Shanghai and its Asian hub in Singapore.

In the 2006-07 financial year, his patch generated just under $1.5 billion of revenue for Fonterra - $1.18b from Fonterra Brands Asia-Middle East and about $300 million from China. Both divisions have grown revenue in 2007-08 - Asia- Middle East by 13% to $1.34b and China by 31% to $401 million.

Wilson describes it as a pretty good year.

"The big story of last year was the dramatic commodity price increases," he says.

"The reason we're pleased is that the price increases we had to put through in our markets were, to say the least, substantial."

In local currencies, Fonterra put prices up by an average of 68% in Sri Lanka, about 40% in the Middle East and between 25% and 35% in most of the other major Asian markets.

"I see the press clippings come through from New Zealand about dairy price rises, but compared to some of the markets I've been handling, the increases in New Zealand have been modest."

Many of the Asian markets are also dealing with high rates of inflation - 30% in Sri Lanka, 25% to 30% in Vietnam, 14% in the United Arab Emirates, 10% in Saudi Arabia and 7% to 8% in Singapore.

The upshot of rising prices and inflation is that some consumers are dropping out of the dairy market, while others opt for cheaper alternatives and smaller sizes.

In Malaysia and the Philippines, Fonterra is seeing some consumers switch from its full-cream milk powder to a cheaper type of powder with vegetable oil in it.

"We're seeing that product proving to be relatively resilient because it's a lower price point."

In the food service market - hotels, restaurants, bakeries and caterers - some customers are moving to butter substitutes, and there is quite a lot of resistance to the prices Fonterra is trying to get for cheese, according to Wilson.

The rising prices are slowing down the growth of the various dairy categories.

"But the good news is that our major brands - Anchor, Anlene and Anmum - have, generally speaking, across all markets improved their share."

Wilson puts this down to a strong pipeline of product development and not scrimping on advertising and marketing. "When I go back to my experience of the Asian financial crisis in 1997-98, when the currencies were diving, those brands that continued to innovate and invest did well. And I think that's what we're seeing with Fonterra at the moment."

Wilson points to a recent launch of a new version of its high- calcium milk powder, Anlene, as an example of product innovation driving market share.

"The brand team came up with an Anlene concentrate which we launched in Thailand last year. It's basically a little tetra brick - with four times the amount of calcium you would get in regular milk - sold in a pack of four with a nice outer sleeve.

"We get a well-known Thai star to advertise the product and we've gone from being a rather soggy No. 2 in the market to being the clear No. 1 as a result of that."

Over the next 18 months, the same product will be launched in five other Asian markets with Malaysian actress Michelle Yeoh - one of the stars of Crouching Tiger Hidden Dragon - just signed to advertise it.

Currently most of Asia and the Middle East are still predominantly powder markets. The Middle East and Sri Lanka are heavily skewed towards the Anchor brand and full-cream milk powders, while Anlene and Anmum - a range of powdered milks aimed at pregnant women, young mothers and babies - are the strongest products in South-east Asia.

Indonesia, the Philippines and Malaysia are the three most important markets for Fonterra in South-east Asia.

China is a different beast, with both liquid milk and domestic Chinese dairy companies playing a far larger role in the market. The ingredients business - powders manufactured in New Zealand - still accounts for the bulk of revenue.

"The ingredients business is really the exciting part of the piece. The demand is growing so fast. But, equally, the local (Chinese) production is continuing to develop. For us, the question is how much we balance our local supply from China with the imported supply from New Zealand. Increasingly, what we are looking to do is use the production capabilities of SanLu to give us more volume. Where we need to sell locally sourced powder at lower cost, we source that from them."

Because of difficulties in accessing a supply of high- quality milk, Fonterra set up its own 3000-cow dairy farm in China last year - the first time it has done this anywhere in the world.

"I wouldn't say it's been a smooth ride in terms of setting up the farm, as you might expect with almost anything in China, but we're certainly over the hump now and are producing more milk than we had budgeted at this time in the plan," Wilson said.

The farm (85% owned by Fonterra and 15% owned by SanLu) was intended as a pilot. However, Wilson said the thinking had changed a bit, with Fonterra now looking for outside investors to foot most of the bill of setting up new farms.

"We're looking to see if we can find financial partners, where Fonterra provides the expertise and the outlets for the milk, but other people provide, hopefully, the majority of the capital.

"With the rise in commodity prices, it's heightened the interest of the private-equity players and investment banks. The combination of rising prices and the growth story of China make it quite an attractive area for these guys."

One major Asian market where Fonterra is conspicuous by its absence is India. Wilson's demography-drives-economics philosophy would seem to demand a presence in the world's second-most- populated country and biggest milk producer, but he said the co- op's current strategy was to just keep a watching brief.

Fonterra had a joint venture in India with Britannia Industries, but pulled out last year. Wilson said the main barrier to setting up in India was the informal subsistence farming model, which made it difficult to get access to milk.

Of the major international dairy companies, only Nestle had a significant presence in India, he said.

"We have a lot on our plate in terms of geographic spread already. One of the key things is to maintain our focus and make sure we do a good job where we already are - in South America and China - before we take another brave step."


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