The New Zealand co-operative’s new head of global consumer and foodservice division, Lukas Paravicini, acknowledged changing regulations and the fake baby formula scandal made progress difficult in China, but said the country was an important long-term play for the dairy giant.
In February, Beingmate, which operates four plants and 80,000 retail outlets across China, blew out to a full year 2016 net loss of 798.0 million yuan ($150 million) from a net profit of 103.6 million the prior year, following revelations of underground factories and a counterfeit formula ring.
Fonterra booked its own losses from the scandal related to a distribution deal it did with Beingmate in 2015 for its Annum formula brand and a manufacturing joint venture at its plant in Darnum, Victoria.
The former Nestle executive said Fonterra remained committed to China, where the co-op exports over 5 billion litres of milk, making it a key player with about an 11 per cent market share.
“There are some uncertainties because of the new regulations,” Mr Paravicini said.
“But this is about what we can deliver to the market long term. Our partners are solid, especially on the food safety and quality. We are very committed to Beingmate … every growth strategy has challenges and risks and that is why we are here to make sure we get to the right destination.”
Fonterra’s new traceability system will allow customers to easily see where the nutritional product components have come from and know more about the retailer selling the product.
“The QR code will tell you immediately whether the product is from Beingmate and whether the shop you bought it from is an authorised dealer,” he said.
China is the largest market for infant formula worldwide, valued at $50 billion, and poised to double in the next five to seven years. But several players have faltered including Fonterra customer, Bellamy’s Australia.
Infant formula is only one product in a suite of brands that Mr Paravicini, Fonterra’s former chief financial officer, will manage in his new role. His division has two segments: branded consumer dairy products like Mainland cheese and the 90-year-old Western Star butter and food service, which targets commercial kitchens including Asian bakery chains with more than 1000 outlets, hotels, and quick-service restaurants with products like cream cheese and mozzarella.
“Today if you look at pizza consumption, over half of the pizzas in China will have have our [Perfect Italiano] cheese on it … it’s a huge opportunity,” Mr Paravicini said.
In March, Fonterra revealed a modest 2 per cent rise in first-half net profit to $NZ418 million ($384 million), while revenue rose 5 per cent to $NZ9.2 billion. The food services unit earnings was up 30 per cent supported by greater China, even after $NZ32 million of associated earnings losses. While the consumer and food service unit is growing, the global ingredients division is the engine of the business contributing two-thirds of group earnings before interest and tax, which reached $NZ1.4 billion in 2015-16.
Mr Paravicini admits doing business in China is challenging, but remains a big opportunity market.
“You need to have years of experience, good local presence and partners to help you,” said the Swiss native.
Fonterra has bet big on China dairy, having invested nearly $NZ600 million over the past two years, with a further $NZ130 million earmarked this year on its farming operations. The China farms, which have 18,000 milking cows, have been a drag on the business, but are tipped to break even this year.
Credit Suisse analyst Arie Dekker was wary saying, “while volumes are continuing to grow with all farms operational the level of EBIT loss has not meaningfully reduced yet”.
Mr Paravicini said the Chinese consumer is evolving, and is interested in fresh product, and also wants to embark on new trends like lactose free and high protein products.
“They want to be reassured by brands they recognise,” he said.
While greater Asia, Australia and NZ are key markets, Fonterra is well positioned in Latin America, Middle East and Africa, where it recently entered Ethiopia with Anchor UHT milk brand.
“We will look to leverage brands out of Australia, because for us this is a very important source where we can enrich our portfolio like butter into Egypt or products of cheese to Pacific Islands,” he said.