Kelvin Wickham (centre) proudly promoting health and safety at a Fonterra farm in Hebei.
Fonterra's China boss Kelvin Wickham talks to Alexander Speirs about how New Zealand's largest company plans to navigate the changes to the Chinese dairy market.
'Like all players here, we're going to have to adapt to the new market," says Kelvin Wickham, who is Fonterra's Managing Director for China and India.
"My view has always been that you have to retain relevancy. You must be relevant to your consumers and customers, to the Government and to other stakeholders here so that you're able to make a valuable contribution and be a key cog in the industry."
The dairy consolidation hasn't come as a huge surprise to experienced industry players like Fonterra. The Netherlands and France have recently been down this track. It's not an uncommon trend in immature dairy markets.
"When we did our strategic review and produced our China plan through to 2020, one of the key components was that we expected consolidation to occur and we expected that some players may be more favoured than others," says Wickham. "That's just part of the landscape here in China.
"It's a really good thing that the Government is supportive of the dairy industry here. Some people raise concerns that there seems to be a visible influence from the Government who are definitely keen to see consolidation take place.
"They're keen to see better regulatory controls and standards, but we see that as a positive thing. They're looking to attain a degree of self sufficiency in China - there's still going to be a place for imports but they want to make sure that what's produced domestically is going to be sufficient and of the quality the Chinese consumers deserve."
The post-consolidation landscape will see fewer, higher quality players - including foreign dairy companies - competing for market share.
Says Wickham: "Already multinationals of all persuasions here are finding it harder to compete, because the competition doesn't go backwards, cost structures are getting higher and overall it's becoming a more difficult market to remain competitive in."
In this environment it is vital that Fonterra makes the right steps to remain competitive.
Despite the botulism scare, 2013 represented a strong financial year for Fonterra, which generated six-month revenues of $3.15 billion (July 2013-January 2014) up from $1.28 billion in the same period a year earlier.
Growth of $1.87 billion from China period contributed the vast majority of growth in Fonterra group as a whole, which saw total cumulative revenue growth of $1.96 billion year-on-year over that six-month period.
With China contributing almost 28 per cent of the co-operative's total earnings, consolidating its own market position is essential to grasp the opportunity as new demand arises.
"First and foremost for us we need to strengthen our current position," says Wickham. "How do we push harder on our domestic brands, how do we continue our rollout of food services and how do we continue to make sure our core ingredients business is the preferred choice for customers here?"
The ingredients business continues to be at the core of Fonterra's business operations in China.
In 2013, Fonterra exported 110,000 metric tonnes of milk powder to China, representing year-on-year growth of 10 per cent, which Wickham expects to continue. "That number is off a huge base already and will keep growing at that sort of rate which becomes a positive underlying base for the rest of the business to grow from. The ingredients business more and more will be entering into bilateral agreements with big customers in China."
Fonterra is now looking to form long-term partnerships in China. The deals will include technical support, product development and branding assistance as the company moves beyond arms-length commodity trading and enters more comprehensive arrangements.
"I think if you look past 2020, it's going to be absolutely necessary to have strong partnerships here. They can be anything from small partnerships all the way through to equity shares, there's a huge range - but I think you will have to have that to be a strong player in the future Chinese market. It will be difficult to stand alone and succeed.
"Over time it makes sense to have partners in China, to be part of one of the winning amalgamations that will inevitably emerge here.
"The time frame on that is not so clear, but be very clear that the big dairy companies here are in the top 20 today already and it's only a matter of time until they're in the top 10."
Wickham says Fonterra's interest is aligned with a number of big players in China. "We want to see a bigger pool of high quality milk that can be used for downstream applications to sell to consumers.
"They're very credible players they have high quality products, they have state-of-the-art production facilities and they have scale.
"You can't just turn up here, bring in a foreign brand and expect it to be the winning product off the shelf. This is a very competitive market and consolidation is only going to increase that."
Anchor is the newest Fonterra brand to launch in China, hitting the market in September 2013. It's the same Anchor brand used in New Zealand and 70 other countries around the world, where its 127-year heritage is vaunted as a measure of trust and experience.
"The brand has great positioning and backs up that integrity of supply chain from New Zealand," says Wickham. "We now just need the next plant to come on stream at Waitoa because we're effectively having capacity constraints.
"It's been a great starting launch, we're meeting our distribution targets and we're selling more than 20 per cent. We're in the big supermarkets, it's all about getting that supply now.
"We started in the Yangtze River Delta. We're going to just do geographic rollouts, key cities within chosen geographies and then targeting the local key accounts - the big supermarkets and modern trade. Then we follow up with an online campaign that works alongside that, as we aim for 20-25 per cent online sales.
"Once we get distribution up to 95 per cent on those key accounts, we go to the next geography. That's the plan but we can't do anything more until we get more supply."
Anlene is Fonterra's powdered milk brand in China - especially formulated for adult consumers to promote bone health. Anlene was relaunched in China four years ago. The brand was in China prior to the 2008 melamine crisis in the industry, which saw it withdrawn from the market.
"The rollout has been very structured, launching in 15 cities including Shanghai and Guangzhou.
"We've taken the model that has worked very well for us in Southeast Asia - Malaysia in particular being a very good example - and are adapting it to China. The environment is different so we're having to adapt, the price of television time in China in particular is incredibly expensive."
Instead of spending money on TV commercials and other conventional marketing approaches, Fonterra has focused on trade marketing activities to help educate consumers about the benefits of dairy for bone health and mobility.
"One of the challenges you have with mobility and bone health is that it's a creeping disease. To educate consumers about that we've invested in bone density scanning machines and we take them out to shopping malls and supermarkets," explains Wickham.
Anmum Materno produces milk powders for mothers and children alike, performing most strongly in Hong Kong and Guangzhou. The range of products expanded to include the Anmum child nutrition range, with a pilot phase launching at the end of 2013.
"We are looking for a different model because it's so highly competitive. The market is extremely fragmented and to go head to head with the big players is just not going to happen. We believe we have a very good product, which has a point of differentiation from the market. We are still piloting how to make that work in a couple of locations, but it's very early days.
"We can produce milk in New Zealand cheaper than in China or Europe, which has a similar cost structure to New Zealand. You've got the reasons why you would buy New Zealand milk over Chinese milk, and you have a branded proposition, which justifies that. You want to have good consumer branded positions in addition to ingredients from New Zealand and you need to be in local milk supply - either yourself or working with local partners."
"Primarily what we are trying to do in China is drive demand, build our brand name and build our customer base domestically," says Bu Kefei, General Manager of Marketing & Business Development for China Foodservices.
Foodservices is part of Fonterra's strategy to move up the value chain in China, working with customers to integrate dairy products into their foods.
"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."
Fonterra uses their executive chefs to work with customers to help with product development and learning to use dairy in cooking.
Those customers range from small restaurants through to mass-production recipes.
"The key is that we have to develop recipes which are standardised, welcoming to consumers and relatively simple to produce."
The baked goods sector present substantial opportunity for the introduction of dairy products. For the past 18 months the focus has been on cream cheese, as Food Services helps drive demand for the new Te Rapa factory.
"In China, cheese is very new to the average consumer," says Bu.
"More and more Chinese people are getting used to it and its popularity is growing."
After conducting consumer research, Fonterra launched two recipes in six cities as a pilot, with 200 outlets selling the product to verify the research on a larger scale and prove they can produced on a technical level. That quickly expanded to 1800 outlets, with Fonterra now aiming to have the recipes in 5000 outlets by July.
"That will increase demand for cream cheese by 1000 tonnes. We are aiming to increase that demand by 1500 tonnes by year's end, which would account for 30 per cent growth."
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