Editorial: Fonterra's focus must be global

Obstacles to competition are always a cause for concern when big deals involving everyday consumer items are announced. The agreement between dairy giant Fonterra and Graeme Hart's New Zealand Dairy Foods is clearly a case in point.

Just four years ago, Fonterra, as a condition of its formation, was required by the Government to sell the section of its domestic operation encased in Dairy Foods. Now, a prime part of that business, the Anchor milk brand, is returning to its stable.

The Government's ambition was to ensure that internal competition would not fall victim while Fonterra was off footing it with the Nestles and Danones of the world. The outcome could be described as patchy, given much-stated criticism of, in particular, the price of milk. Only in the past couple of years has Dairy Foods developed, as envisaged, into a significant domestic competitor for Fonterra.

This agreement, however, has been tailored so as to minimise competition concerns. The swapping involved will, most importantly, see Fonterra's Meadow Fresh milk products division end up with Dairy Foods. Meadow Fresh's share of the milk market, especially in the South Island, is the foil to Fonterra's gaining the rights to much of New Zealand's Anchor-branded products. Fonterra will also get the Fresh'n'Fruity yoghurt business, which is larger than its existing yoghurt operation and has export potential. Only the branded butter business that Fonterra will buy looms as an obvious case for Commerce Commission scrutiny.

Fonterra is making much of its once again owning the Anchor brand, both abroad and at home. "Anchor is one of our international Power Brands and this is a once-only opportunity to regain the brand in our home market," the chief executive, Andrew Ferrier, said.

It is all part of a new emphasis on branding. Those Fonterra brands that are not working will be ditched. Those that work provide, in the breathless words of one of its executives, "not just a functional experience but a complete emotional experience for the consumers".

Large-scale business deals - the assets being acquired by Fonterra are valued at $754 million - should, of course, be driven by more than the emotion of regaining a brand. Or of aligning a domestic brand with one that defines Fonterra internationally.

The domestic market is a relatively small player in the company's scheme of things. It pales beside an international strategy that must stress innovation, and involve levering as much as possible off the local dairy industry's low production costs. Yoghurt aside, there seems little here to advance that strategy.

Fonterra's aspirations have taken a knock or two lately. This year it lost out to San Miguel in a $2 billion bidding war for Australian dairy company National Foods. Victory there would have made it the biggest player in the transtasman consumer dairy industry.

San Miguel's success, however, meant that, because of Commerce Commission hurdles, it could not take its interest in all of Dairy Foods any further. Indeed, such is the state of the industry in terms of competition issues that Mr Hart had eventually to settle for the present agreement with Fonterra.

On a minor level, the return of the Anchor brand to Fonterra's New Zealand product range is welcome. But this shuffling, however well crafted to avoid competition issues, is essentially a sideshow for the dairy giant. New Zealand will be best served when it pursues the ambition that underpinned its formation.