"Our businesses are continuing to grow in China. There is an ongoing need for imports here to fill the gap not being supplied locally. Our Foodservices business is a key factor in generating that demand and is growing very quickly from a small base."
Diversifying Fonterra's business in China is a key play for the co-operative. The rising price of whole-milk powder in previous years spurred fast-paced growth, but if Fonterra is to continue to find success in a rapidly evolving market, breaking a reliance on commodities is essential.
Whole-milk powder prices worldwide skyrocketed as demand in developing countries surged, but the long-term viability of these trends may be tenuous, particularly as the Chinese market becomes more self-sufficient in the face of wholesale domestic regulatory changes.
Diversifying away from a reliance on whole-milk powder comes with its challenges however, as dairy ingredients remain unfamiliar to Chinese consumers. Foodservices looks to fill this void by promoting a wider range of products to create new markets.
"Primarily what we are trying to do in China is drive demand, build our brand name and build our customer base domestically," says Kefei Bu, general manager of marketing and business development for Foodservices China.
"We have a real opportunity here in China to get new businesses using dairy in their product line. Dairy is not a part of traditional Chinese food habits. As the market grows and as household income continues to quickly grow, we see a lot of Chinese families starting to learn the value of and how to use dairy products".
Based in a central city office in Shanghai, Foodservices now has three subsidiary offices throughout China, with more in the works. Strategically based in Beijing, Guangzhou and Chengdu, the units assist a growing network of staff on the ground in China who are currently operating out of 21 cities with a plan in place to increase that to 70 cities in the near future. Says Bu, "The key trend we are seeing in China is that dairy adoption in food services is still in the very early stages. Currently we serve primarily bakeries in China, but also food service restaurants and we are working with some of the local Chinese restaurants."
The baked goods sector presents a substantial opportunity for the introduction of dairy products and heads the agenda for Fonterra at present. Bakeries in China differ significantly from those in the Western world. The goods tend to be much softer and sweeter and come in a plethora of colours. The majority are made from non-dairy products - generally derivatives of palm oil, and though they look spectacular, the taste and texture are pretty unfamiliar by Western standards. With new cream cheese facilities coming onboard in Te Rapa, the team is looking to drive demand for this product in a market completely unfamiliar with it. "In China, cheese is very new to the average consumer. More and more Chinese people are getting used to it and it's popularity is growing," explains Bu. "We have conducted consumer research - talking to them about what flavours and products are palatable to locals."
From the research the chefs at Fonterra's innovation kitchen developed 60 recipes incorporating dairy products. Customers were then invited in to give their input as the recipes were narrowed down to fewer than 10.
"We then brought our recipes to a broader consumer base who tested the products and advised on their favourite flavours, textures and product," recalls Bu. "Eventually we ended up with two standard recipes: one is a slightly baked cheesecake, the other is a caramel flavoured cream cheese pudding. We packaged these two recipes, gave them a Chinese name and branding, then packaged them and produced marketing materials".
The two recipes were launched in six cities as a pilot, with 200 outlets selling the product to verify the consumer research on a larger scale and prove that they can be easily produced at a technical level.
"The national pilot quickly expanded to more than 1800 outlets across the country and provided us with very encouraging and positive results. We are targeting to have these recipes in 5000 outlets by the end of July in China, which will bring an increase in demand of 1000 tonnes of cream cheese. We are aiming to increase that demand by 1500 tonnes by the end of the year, which would account for 30 per cent growth".
• Kelvin Wickham will take up the newly created position of Fonterra's Managing Director Global Ingredients on August 1. He will be replaced by Johan Priem, who is currently a member of the Office of the CEO.
Dairy demand to soar
Demand for all types of dairy nutrition across China is expected to reach 70 billion litres every year by 2020 - about twice as much as is being consumed today. At present, the demand from the local market is increasing faster than supply with imported products required to try and bridge the gap.
Fonterra looks to meet the demand shortfall in two ways: importing New Zealand milk into China and building a supply of domestic milk produced in China to New Zealand standards.
"Most of the consumption locally in the future is going to be from the domestic milk sources, therefore if you want to have a good consumer proposition, you need to be a part of the local milk supply," says Kelvin Wickham, Fonterra's President for Greater China.
"There is good quality milk here, but clearly there are areas which are continuing to improve. You find that as you do you increase your cost structure in order to produce high quality milk. To have all of the controls in place, it's not cheap. At the moment we can produce milk cheaper in New Zealand than you can in China or Europe."
Long-term however, the goal in China is to become an established part of the local milk supply, with an integrated milk business that processes milk from local farms into dairy products for Chinese consumers. Fonterra first explored the possibility of local farms with a pilot farm in Hangu which opened in 2007 following 18 months of construction.
• Alexander Speirs was supported by the AsiaNZ Foundation for his research trip to China with a journalism travel grant and received assistance from Air New Zealand and NZ Inc Ltd.
