Fonterra’s Brand Sale Continues to Drag New Zealand Down

Written By: - Date published: 10:16 am, May 19th, 2024 - 26 comments
Categories: Economy, farming, Free Trade, trade - Tags:

Fonterra is a complete construct of the New Zealand state, but it is pulling our entire country down. 

Fonterra dominates our dairy industry, which accounts for  around 3.1% of our entire GDP.

It is owned by approximately 10,000 New Zealand farmers, has 20,000 employees, and dominates whole regions including Northland, Canterbury, Waikato, Taranaki, and increasingly Southland and Otago, and most of the towns within them. Fonterra is the largest single turning mechanism in the hyper-concentrated capitalist machine of New Zealand.

The initial legislation that merged the entities together established a New Zealand dairy cooperative with the scale to compete in the global market. 

As of this week, however, it is not only preparing to sell out all its core consumer brands like Anchor and Mainland, it is also preparing to exit out of all its remaining factories outside of New Zealand. 

It’s like the standinding joke from the 1980s on how to get a Kiwi to make a medium sized company: give them a big company and stand back. 

We do not, for 25 years of state intervention into Fonterra, have a Kerry’s like Ireland, a Danone like Italy, or anything like a Nestle of Switzerland. We have a rapidly shrinking business. It is now going to focus entirely on ingredients straight to food manufacturers. 

A decade ago it failed to see the competitive edge of A2 milk and could have bought it out. 

In 2005 it was outplayed by San Miguel Ltd for National Foods. 

Through the early 2010s it made a series of disastrous foreign investments particularly in China. 

In 2019 it sold Tip Top. In 2020 it sold all its Chinese farms. In 2022 it sold its big Chilean business. In 2023 it sold its Brazilian joint venture with Nestle. 

With that cash, rather than do something useful with it for the future, it just returned most of it back to shareholders. 

This was the scale of the failure described back in 2018:

Fonterra has, from a long-run financial perspective, fallen well short of expectations. The company’s share price is well below where the price should be if Fonterra had delivered the merger benefits that were forecast at the time the company was formed by special legislation. Moreover, the much anticipated “move up the value chain” has not been achieved, with revenue growth falling well short of the targets that were set. It is encouraging that the company has announced an “everything on the table” review and the government is at the same time reviewing the legislation. In our view, a fundamental rethink is required if the company is to add value to its suppliers, its shareholders and the New Zealand economy.’

It has had successes. It has for many years been pushing beyond infant milk preparations –  absolutely boomed during the COVID years through to 2022. Anchor’s Proten+ and Milk&Grain+ are on tens of thousands of shelves across Malaysia, Philippines and Thailand already, and they are the result of Fonterra being our most important iinvestor in Research and Development. But selling off Anchor is like selling off the All Blacks: it’s one of just four things we are actually respected for in the entire world. The other two being scenery and Lord of the Rings.

Yet two years after the previous review the NZ Productivity Commission just put it out there:

As a national champion, Fonterra has fallen well short of expectations. Industry leaders projected that Fonterra’s revenue was to grow at 15% p.a. to $30 billion by 2010 as the company diversified into high-value consumer products. In reality, revenue has grown by less than 2.5% and the company has had to write down millions of dollars from unsuccessful overseas investments.”

With the sale of the branded business there will be far less motivation to invest in R&D, and with that goes for example its Massey R&D plant and much of the Massey University association. 

Fonterra is but one example of the drag on our economy and our society that super-concentrated and lazy oligopoly-monopsonies have on us. But it is likely our largest and deepest downward drag. 

There is no political will to improve this drag on New Zealand. In the shape of Nicola Willis, Fonterra now has one of its previous senior executives operating as the governments’ Minister of Finance. The Minister of Agriculture Todd McClay continues the fine tradition of enabling MFAT to be a subsidiary of Fonterra. Our Associate Minister of Agriculture Andrew Hoggard was head of the national agricultural peak group Federated Farmers which actively destroyed efforts to regulate water quality produced by dairy farmers. 

Whenever it has been asked, the government has changed the laws Fonterra needed changing. When Fonterra needs Kiwirail to invest its way, Kiwirail obliges. Fonterra have successfully resisted every single attempt to regulate the environmental standards for suppliers, and instead invent their own.  Not only do ordinary New Zealanders have no power over Fonterra, Fonterra have actively used their power over our state. 

As a national champion, Fonterra has fallen well short of expectations. Industry leaders projected that Fonterra’s revenue was to grow at 15% p.a. to $30 billion by 2010 as the company diversified into high-value consumer products. In reality, revenue has grown by less than 2.5% p.a. and the company has had to write down millions of dollars from unsuccessful overseas investments.

It’s now scrapped its 2030 profit targets. We don’t know their intended future financial or investment direction.

Following its colossal scandals and investment mistakes since inception, it righted itself with a new management team and was recognised for that by gaining a Most Improved Performance award by Deloittes in 2022. But anything can look profitable when you’re just selling assets off year after year, as Fonterra continues to do.

Now, there is no talk of Fonterra’s global ambition. There is not a hint left of how Fonterra will open up for New Zealand a new era of anything. There is no admission of the codependent relationship New Zealand has with just one business. 

Like an oil major such as BP or CALTEX, Fonterra through Dairy NZ has successfully lobbied to ensure that they never have national regulations that motivate common national scrutiny of its environmental damage that would in turn push Fonterra to be more than a damaging milk extractor. 

To see how that looks for motivating investors: Kiwisaver funds have made 42% returns by investing in Nestle over the last five years, against a loss of 55% in the Fonterra Shareholders Fund. 

It simply shouldn’t be that way. 

Some may well argue that businesses should just stand or fall. The problem with that for New Zealand is that our economy particularly our export economy is now so concentrated that Fonterra if there were any business with the definition is Too Big To Fail. It’s wayyy bigger than the National Bank or the BNZ in its negative impact if it fell or declined fast.

Chief Executive Hurrell simply concluded:

We intend to provide a further update on our revised long-term strategy in due course. This will include further detail on our plans to grow the long-term value of Fonterra and the measures through which we will track our progress.”

So we may or may not get some sense of all this in future.

Fonterra dominates much of our export economy and hence the fate of its terms of trade. It is by a long way our largest business, dominates many of our regions, and is our largest direct and indirect employer. It has consistently destroyed wealth. It has now made its single largest strategic move, but the CEO won’t say how this will achieve greater value focus, nor whether it will make money, nor provide any measures about whether this colossal selldown was good or bad. 

Is Fonterra going to continue to drag New Zealand down?

26 comments on “Fonterra’s Brand Sale Continues to Drag New Zealand Down ”

  • Comments are now closed

  1. Kay 1
    19 May 2024 at 11:11 am

    Despite the ongoing anger many of us feel about Fonterra insisting that domestic consumers MUST pay international prices for home-grown dairy product (is it only 5% of their total sales, something like that?), thus relegating dairy to the status of a luxury item for many, there is the very real prospect a big multinational buyer, eg Nestle, will destroy the actual product in search of even more profit, a la Cadburys/Mondolez.
    Interesting interview with a professor of marketing.

    https://www.rnz.co.nz/national/programmes/checkpoint/audio/2018938692/fonterra-proposes-selling-all-consumer-brands

  2. Phillip ure 2
    19 May 2024 at 11:19 am

    I can't see the economic sense in Fonterra returning to just being an exporter of dried milk powder…of putting all of their eggs into that one basket ..

    But .on the other hand..coming from my stance of opposition to new Zealand being a hotspot of animal exploitation/institutionalised cruelty ..

    ..I see it as a major step towards the ending of that situation..

    All it will take will be a war blocking access to markets. .causing it to fall over .

    But in much more danger of other players in the dairy world doing to NZ what the Chinese auto industry is currently doing to the American and European auto building industries…

    ..namely ..delivering better quality at a better price …

    ..by going back to that one raw product Fonterra are leaving themselves seriously vulnerable to outside economic/political forces…

    And whatever happened to that 'value added' mantra we heard for all those decades ..?…

  3. Rodel 3
    19 May 2024 at 11:52 am

    Never imnd the milk powder. Just sell all the cows to China. Solves everything.

  4. Gareth Wilson 4
    19 May 2024 at 3:21 pm

    A decade ago it failed to see the competitive edge of A2 milk and could have bought it out.

    Here's a fun little game you can play in any supermarket: pick up a bottle of A2 milk and try to find anything on the bottle that explains why A2 milk is better than normal milk.

  5. aj 5
    19 May 2024 at 3:28 pm

    Good post. I want Luxon to be asked if this move by Fonterra is the sort move he supports when he speaks of his of ambitions for New Zealand.

  6. SPC 6
    19 May 2024 at 4:14 pm

    Why is Silver Fern Farms owned 50% by Bright?

    Why did Synlait get money from Bright to get going – after failing to raise money on the local market?

    Because we make money speculating on property without a CGT.

    Synlait has a valuable asset – its right to supply the Chinese market with A2 milk. A2 milk and Bright own about 50% of the company (because of this).

    The A2 milk company is an international one – shares traded on the Oz X, none of its executives are based here.

    Synlait foolishly diversified – has $500M in debt and is so now only valued at $100M. It is trying to sell its Dairyworks brand – it will be so much harder to do so with other brands on the market.

    Fonterra has a deal to supply its A2 milk to the A2 milk company – no one is quite sure when its term expires.

    At the moment more and more of our herd is A2A2. Within 10 years it could be all A2A2. Before then, Fonterra might have areas where all supply to a factory is all A2A2 – if it were to buy up stock of the A1A2 supply type to ensure this.

    This will undermine the A2A2 premium held by the A2 milk company in the local market.

    A2 Infant milk formula is popular in Asia because of a difficulty Asians have with A1 milk protein.

    Fonterra is fundraising – has over $3B of brand assets and over $4b in debt – one reason is reduce risk of a falling dairy price. Another is get competition for its milk supply from external brand companies (if the dairy herd was to fall in size – say to A2A2 milk supply only and then to meet global warming regulation).

    Hopefully the NZSF and or Kiwi Funds can see as role as partner in keeping these brands on the local stockmarket, because it seems the rest of us would rather speculate on rising property values – given our lack of CGT on housing.

  7. SPC 7
    19 May 2024 at 4:33 pm

    It is not Fonterra's job to invest in food science industry research.

    Our lack of venture capital (and industry R and D to develop brand value) for such is not the fault of a farmers co-op.

    Their purpose is to identify markets for dairy supply and relate supply to that market.

    It makes sense to move on from Goodman-Fielder (to Oz only?) and such as choose international market partners (Asian, European, ME, American etc) for brand supply – 50/50 and then later sell their 50% to NZF or Kiwi Saver Funds – if they want money for a separate A2A2 herd supply play. Such partners are allies in maintaining market access and understanding their local markets.

  8. SPC 8
    19 May 2024 at 4:51 pm

    I am not sure exactly how a dairy co-operative compares to any of these.

    https://en.wikipedia.org/wiki/Nestl%C3%A9 (centuries old)

    https://en.wikipedia.org/wiki/Danone (founded in Spain, based in Paris today over a 100 years old)

    https://en.wikipedia.org/wiki/Kerry_Group

  9. Mike the Lefty 9
    19 May 2024 at 5:38 pm

    It all brings back to me how much NZ business and marketing groups used to say that NZ suffered because it didn't create enough quality processed products for export, just relied upon bulk export of raw material for others to make the goods.

    So now Fonterra wants to divest themselves of the (few) processed products that they still manufacture and stick with exporting the bulk unprocessed stuff.

    For an industry that likes to think they are forward looking it seems remarkably backward looking to me.

    The farmer shareholders should put their voices up against this, but probably won't. Their National Party-supporting leaders will no doubt nod their heads sagely and swallow it all.

  10. Shane Keyward 10
    19 May 2024 at 6:10 pm

    A decade ago it failed to see the competitive edge of A2 milk and could have bought it out.

    Hows that business doing?

    It must be doing really well considering the amount of press on it.

    Never mind fonterra was involved in A2s beginings but didnt believe the story, but that didnt stop the folks who started it.

    Likely there is substantial investment coming up for the consumer business, and like tip top, they dont want to throw more at stainless. The low return of capital is bad enough now, let alone throwing a few hundred million at it.

  11. adam 11
    19 May 2024 at 11:13 pm

    Precision fermentation, then we will see the wheels fall off.

    https://www.newshub.co.nz/home/new-zealand/2024/05/scientists-find-new-way-to-make-cow-s-milk-substitute-could-have-radical-effect-on-new-zealand-s-dairy-industry.html

    Goodbye fonterra, and thanks for killing all the fish.

    • Graeme 11.1
      20 May 2024 at 8:38 am

      It's probably wishful thinking to expect industrial precision fermentation to kill less fish than industrial pastoral dairy farming. Still industrial discharge into the commons.

      And in divesting it's retail brands, Fonterra could be positioning itself for a transition into precision fermentation. The co-op already has the marketing, branding and distribution, and a lot of production plant and expertise in the field. It wouldn't be a hard sell to a shareholder who spends a lot of his working day with their head in close proximity to a cows arse, and spends some / most of that time thinking about their Fonterra share price and eating the aforesaid cow. They’ll find another use for the land, and with the economics of that use underpinned by returns on their shares we could be in a much better lace environmentally. Fonterra will probably use the environmental line as a selling point in the transition.

      • Phillip ure 11.1.1
        20 May 2024 at 9:25 am

        @graham…

        Yeah..nah ..eh .?

      • Ad 11.1.2
        20 May 2024 at 10:30 am

        A great use for all those stainless steel tanks.

        But not sure the farmer shareholders would agree, since it is in no way in their interests.

        • Shane Keyward 11.1.2.1
          20 May 2024 at 7:50 pm

          The investment to replace the volume of milk in NZ will be tens of billions, just for the fermentation tanks. Never mind they still have to have capital invested in driers.

        • Graeme 11.1.2.2
          20 May 2024 at 9:29 pm

          Fonterra's job is to maximise returns to its shareholders, and not all of them are paid /kg milk solids. Most farmer shareholders also hold general shares as well as production.

          It's not Fonterra's job to preserve farmer's tit pulling lifestyles, that's the Farmer's Union's (Fed Farmers) job.

          The farmer shareholders will vote where the money's best.

    • Phillip ure 11.2
      20 May 2024 at 9:24 am

      @ Adam ..

      Yep..!..then there's that…

    • Shane Keyward 11.3
      20 May 2024 at 7:49 pm

      Lol

      Precision fermentation has been forecasting the decline of dairy for more than a decade, and they have yet to make any real volumes.

      They have made a fortune in startup funding. Perfect Day will be going under shortly. Maybe drongos will keep throwing free cash at them. Lolz.

      Never mind Fonterra has put more money into it than anyone in NZ.

  12. tc 12
    20 May 2024 at 12:43 pm

    Excellent piece Ad.

    Current CEO gets an armchair ride as he flogs off businesses to create one off gains.

    Hell likely be off before chooks come home to roost with bonuses from those one offs.

  13. Christopher Randal 13
    20 May 2024 at 4:33 pm

    Let's repeal the Dairy Industry Restructuring Act 2001 and then see what happens

  14. Ian 14
    20 May 2024 at 9:11 pm

    If you want to change how Fonterra operates buy a dairy farm,get some skin in the game and become a shareholder.Or [deleted].

    • Ad 14.1
      21 May 2024 at 8:26 am

      How much more skin in the game does every New Zealander need?

      Fonterra and its suppliers consume and spoil the vast majority of our fresh water, are one of our largest greenhouse gas producers, are New Zealand's single largest economic risk and exporter, and are our single largest private employer.

      Fonterra is a collective sovereign risk to New Zealand, and a personal liability and opportunity to each of us. That defines the scale of the skin in the game we have.

    • KJT 14.2
      21 May 2024 at 8:37 am

      Considering the amount of support, for Fonterra and farmers, tax payers, and indeed our entire economy, have sacrificed for fonterra's commodity exports, we sure do have "skin in the game".

  15. KJT 15
    21 May 2024 at 8:33 am

    An accountant once told me how you get a multi-million dollar management position.

    1. Talk your way into managing a company.

    2. In two years. Cut staff training, cut wages, cut capital investment and sell off as many assets as you can. All this makes the balance sheet look good and the shareholders happy.

    3. Take the bonuses and award yourself a golden parachute.

    4. Leave for another higher paid position, before the inevitable reckoning from the lack of investment fucks the company. (If you are Boeing CEO. Ride it down collect 45 million).

    5. Rinse and repeat.

    Unfortunately for my friend, he was too moral to take his own advice, and only earns in single millions.

    What is being done to Fonterra is happening to our entire country. Managing for anything but short term gains for the Manager/s, is beyond the ken of our current rulers.

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