Fonterra Is A Price Taker

Following on from my post about how New Zealand agriculture can learn from Apple, I thought I'd look at some New Zealand companies that are doing well overseas. 

Geoff Ross is a former advertising executive who rose to prominence when he founded 42 Below, the Vodka company. He and his partners have gone on to invest and run other companies which they take public. The companies Geoff and co have invested in are Ecoya which makes candles and Moa Beer.
I think he is an interesting business person to study because he hasn't invented anything new or created a unique product. He has simply taken products which are already common place, but he creates brands that enable him to sell these products at a premium price.

42 Below is a brand of Vodka, which is hardly a new product but he promoted the brand in such a way that it appealed to their target market. He promoted it as a high value brand from New Zealand and took it global. He and his investors then sold it to Bacardi for over $100 MIllion.

So when I heard that The National Business Review were doing a question and answer session with Geoff Ross, I thought what a great opportunity to ask him about Fonterra.

I asked:

Geoff is saying you can be an ingredient business which is at the lower end of the value chain and be successful. But you should have a strong brand which creates loyalty. This branding allows you to have control over the price you receive for your product.

The Intel inside example and Gore-Tex are great examples of businesses that supply components to manufactures who create the final product.

Intel make the processors that go into most computers. Your PC laptop will likely have an Intel sticker on it. Prior to the 1990s Intel was just another component supplier, although a very good and innovative one. Anybody outside of the computer industry would not have heard of Intel. 

This quote is from the Intel Wikipedia page.

Intel embarked on a 10-year period of unprecedented growth as the primary (and most profitable) hardware supplier to the PC industry. By launching its Intel Inside marketing campaign in 1991, Intel was able to associate brand loyalty with consumer selection, so that by the end of the 1990s, its line of Pentium processors had become a household name.

Now consumers became aware of the processor in their PC and when they were buying their new computer, they would have the option to choose the brand of processor.

I remember buying my first computer in 1999. I actually researched which processor I should choose, AMD vs Intel.

Wouldn't it be great if consumers around the world actually knew and cared about where the milk came from to make the end product.  

Gore-Tex is another good example of ingredient branding. When you buy a new jacket you can get a Kathmandu Gore-Tex jacket or a Macpac Gore-Tex jacket. The Gore-Tex brand is quoted along side the jacket manufacturers brand. The Gore-Tex jackets are always much more expensive than the competing materials.

When I think about Fonterra, they have the powerful brand name, they also have a range of consumer brands. If we look at Anchor as an example. Anchor milk is a premium brand, it retails at the top end of the milk market. That's what it should be doing. But a vast majority of Fonterra's milk is sold as a commodity and the board of Fonterra seem to be quite happy with that fact.

Fonterra set up the Global Trade Event Auction, on which they sell their product to buyers. An auction is great when there is good demand for your product but it is not a strategy to maximise your products premium status or achieve a consistency in pricing. An auction is handing over control of your pricing to your buyers and it certainly does not go towards promoting your brand as a premium brand.

How many of the buyers (ie food companies) of Fonterra's milk, care about how it was produced? Do they care it was pasture based? Do they care that it has a very low carbon foot print?
I doubt it very much. The buyers are the food companies of the world and they will get milk where ever it is cheapest and whoever has a consistency of supply. That's why whenever the USA and Europe production increases the price New Zealand farmers receive drops. Simple supply and demand. 

The goal should be to have global consumers looking for the Nestle chocolate bars or the infant formula with the "NZ Inside" or "Fonterra Inside" or "Pasture Harmonies" label on the side of the packaging. 

Fonterra and New Zealand have such a unique branding opportunity and truly differentiated farming systems, that are not being promoted. The contrast between a New Zealand pastured based dairy farm compared to a housed factory farm in California is huge. The fact that New Zealand dairy products can be produced, processed and shipped 17,500km to the UK and still have half the carbon foot print of a UK produced product, is not being promoted. Our animal welfare standards are high. The average pet loving European house wife could be persuaded to pay more by simply showing her contrasting pictures of grazing cows, beneath snow capped mountains, and that of housed cows. But again that is not being promoted either.

If you look at the adverts at the top of this post and you applied that sort of design and creativity to New Zealand's low carbon, pasture based, animal friendly farming systems. You can see how the end consumer can be drawn to care about where the milk in their products comes from.

But we are just selling a basic product to the highest bidder via an auction. New Zealand milk is not considered any different to US milk or EU milk. Its just an ingredient and luckily for us there is demand for milk. Fonterra is successful simply because global demand is increasing, not because of some wonderful Fonterra strategy.

The future demand for milk is strong, so simple supply and demand will keep NZ farmers in the money. But there is a problem with this strategy.

Brazil can grow 30,000kgdm/ha/yr where New Zealand farmers can only grow 17,000kgdm/ha/yr. What happens in 20 years time when South America has adopted modern farming practices. 

Fonterra has the resources, the scale, the expertise and the people to execute a branding strategy to differentiate Fonterra's milk, just like Intel did in the 1990's. But they don't have the desire to. For 11 years they have been talking about "value add" but it's not really their goal. It's the sort of thing you're supposed to say in your annual report and you splash the phrase around in business plans and outlines of next years strategy.

When you look at companies that are based on being a premium product, the culture right from the top promotes the premium values. Apple had Steve Jobs and 42 Below had Geoff Ross. They promote the culture that permeates through the entire organisation.

The culture of the New Zealand dairy industry is "production" and that's what Fonterra's strategy is really about. That's why they are setting up mega industrial factory farms in China, to increase production. In the context of increased production, the global trade auction platform makes sense. But from a value perspective the auction system is an abomination.

Fonterra is going to be successful but they could be really successful. Fonterra's strategy is just lacking in aspiration and they will continue to perform below their potential. 

People will be able to counter the points I've made, but all I'll say is if Geoff Ross took control of Fonterra for 10 years. Who's strategy will provide the highest payout to farmers? Geoff Ross or the current management team? 

So I'm calling for Geoff Ross to be the next chairman of Fonterra.