Sir Paul Callaghan & Fonterra's Revenue Per Employee

Sir Paul Callaghan gave a presentation called New Zealand: A Place Where Talent Wants to Live. His main point was that many of New Zealand’s successful companies meet very small niche markets that are often very specialised. But these companies dominate this very small niche globally.

Part of the talk was to compare New Zealand companies by revenue per employee. The slide below shows that in order for New Zealand to stay at its current level in the OECD, we need companies that earn at least $120,000 per employee.

So if we invest in the wine and tourism sectors then we will get poorer as a nation.

Food Manufacturing achieves the required earning per employee of $120,000.

The manufacturing sector does well and earns around $240,000 per employee.

Fisher & Paykel Healthcare are doing well with $290,000 per employee.

Right at the top we have Fonterra with a very healthy (by NZ standards) earning of $350,000 per employee.

This got me thinking, how does a commodity producer have a higher revenue per employee than a high tech design company like F&P Health Care?

I would have thought that a company with a high revenue per employee, would have employees that were highly trained, working on high value design/research type jobs that generated high margins for the company. F&P Healthcare seem to fit this stereotype of mine, but Fonterra certainly doesn't.

What does Sir Paul mean by “Fonterra”? Is that just Fonterra employees or is that Fonterra’s supplier farmers as well.

Fonterra has about 9,500 employees and its 10,500 shareholder farmers employ approximately 32,000 people on their farms. That makes 41,500 employees in total. Fonterra’s revenue for the year ending July 2010 was 16,726,000,000. That equates to $403,000/employee which is higher than the $350,000 quoted in Paul’s graph. But it’s in the ball park as we don’t know what year’s figures Paul used. So I’m comfortable that “Fonterra” means Fonterra’s employees and their dairy farm employees as well.

To me, the figure of revenue per employee is an indication or measurement of how efficient each employee is, but it is also an indication on how much value each employee adds to the company. High tech research and design type jobs are well paid but they also generate high margins for the company.

Fonterra basically sells milk powder, which is a basic commodity ingredient to food companies around the world, who then process the powder into value added products like baby formula and chocolate. Fonterra sits toward the bottom of the value chain.

What this graph says to me (and tell me if you think I am wrong) is that a co-op filled with farmers who employ unqualified people to throw cups on cows add more value than the technically skilled, high tech manufacturers at Fisher & Paykel Heathcare.

We keep hearing how Agriculture won’t make NZ rich as it does not create high enough revenue or well-paid jobs, but this graph disputes that premise.

We need to be clear that revenue per employee is not an indication of the amount each employee is paid, but rather the value that the company earns per employee.

A high revenue per employee means one of two things; either milk commodity prices are very high resulting in a high revenue or dairy farmers are very efficient with their labour and have quite a low number of employees. As I've pointed out earlier on my blog the hours worked by dairy farmers and their staff is far higher than most "city" businesses.

So I'm leaning towards the theory that while Fonterra's revenue is significant, the revenue per employee measurement is higher than it really should be because most dairy farms are understaffed, in my opinion.

I'm also prepared to admit that I may be drawing a bit of a long bow with this reasoning, but it got me thinking. Hope it gets you thinking too.