Published in Newsroom, 10 June 2024

Fonterra has announced in the last week that it has decided to reduce its involvement in branded consumer products and concentrate on ingredients for the business-to-business value chain.

This is a big blow for early hopes that the formation of New Zealand’s largest corporate in 2001 would see it as a global champion for added value in the dairy sector. But it has been far from successful. If we compare it with another dairy cooperative – Ireland’s Kerry Group – Fonterra and Kerry’s had comparable sharemarket value at the start of this century: $7.5 billion (Fonterra) versus $5.6 billion (Kerry’s). Nearly 20 years later Fonterra had a lower sharemarket value but Kerry’s was worth $33.1 billion.

This a setback for Fonterra, but also for New Zealand more broadly if we are to face up to the key challenges facing us, in three areas:

• Demography. An ageing population means greater demand on health and superannuation, yet the taxation base in the working population is due to decline.
• Environment. New Zealand is operating outside sustainable planetary and environmental boundaries, yet it must draw on these resources for its primary sector economy.
• Economy. While different metrics could be used, a key one is that we have the lowest export intensity of 24 small OECD countries:  27% of GDP – compared to the 60% average.

In a recently completed study by The Helen Clark Foundation (of which I am chair) and the New Zealand Institute of Economic Research (NZIER) on added value in the primary sector we spoke to industry leaders, and drew on several case-studies to distil possible lessons of export success and value capture:

• Kiwifruit (Zespri). Cross-sector co-ordination, international linkages, constant innovation.
• Honey (Comvita). Exploiting a unique local product and developing a distinctive market.
• Timber (Red Stag). Drawing on policy and incentives to diverge from predominant raw exports.
• Wool (Icebreaker). Exploiting and branding a unique mixture of local product and lifestyle.
• Beef and Lamb (Taste Pure Nature). Consumer focus, investment, government backing.
• Fish. We took Iceland as a comparator: they halved fish take, but doubled value by cross-sector cost-sharing and complete use of the catch.
• Milk (A2 Company). Research and innovation breakthrough, long-term commercial development.

In working across these case studies and interviewing industry leaders, several themes emerged. In many of these cases, research and innovation were key, either in an initial breakthrough – such as A2 milk and Manuka honey – or through constant product development (as with Zespri). However, in almost all cases a sophisticated focus on the consumer and on marketing dynamics was required, particularly where a distinctive New Zealand story could be told (for example, Taste Pure Nature and Icebreaker). In many instances cross-sector collaboration and government involvement were required, such as for Red Stag and for the Iceland fishery.

The decision of Fonterra to pull out of consumer products is a real misfortune for this stream of development since dairy is such a large part of New Zealand’s primary sector and Fonterra is dominant in that field. The adverse demonstration effect could be substantial.

Can anything for the “value add” movement be rescued from this development? Fonterra is in an almost unchallengeable position of dominance for accessing milk supply across the sector. It has now decided to funnel that milk supply not into a diversity of consumer products but into ingredients in the business-to-business value chain. This is a legitimate business decision, and may meet with success – for Fonterra. But should it commit almost the entire New Zealand milk supply on account of its markedly dominant position?

An earlier government was faced with something like this when it had a public monopoly telecommunications company – Telecom – but limited evidence of innovation, competitiveness, and consumer value. Between 2008 and 2014 Telecom was split into a  utility – the lines company, Chorus – and open, competitive, consumer-facing opportunity which has since been populated principally by Spark, 2 Degrees, and OneNZ (previously Vodafone).

In the dairy sector, a single utility could still pick up the milk and pay farmers the standard price according to the dairy auction platform, but then that milk would be available not just for a newly-commercial Fonterra, but also other potential competitors in the field of consumer products. Keith Woodford has suggested a two-company model.

If Fonterra divests its brands now to foreign ownership, that is a further reversal for New Zealand’s stretched balance of payments. If we continue to be over-reliant on mass volume, low-value commodity exports, together with an export intensity that is the lowest among OECD countries of comparable size, then our way of life and social infrastructure may well fray and decline as we become increasingly reliant on the import of foreign capital to make up for our deficits in savings, innovation, collaboration, and export value capture.Peter Davis, Emeritus Professor of Population Health and Social Science, University of Auckland, and Chair of The Helen Clark Foundation, and independent public policy think-tank.

If you want to subscribe to my posts, go to https://peterdavisnz.com/ and follow the instructions. You will be joining quite a few others!