Contract blow for Fonterra

Fonterra is to lose a significant chunk of the domestic fresh milk market after supermarket chain Progressive Enterprises opted to axe a major contract with the co-op for the supply of house brand milk in the North Island.

Australian-owned Progressive would not name the new supplier but Gisborne Milk general manager Dan Gaddun said yesterday it was to be Auckland-based Independent Dairy Producers.

Independent was unavailable to confirm this.

Fonterra strategy and growth director Graham Stuart said the contract involved supplying between 20 million and 30 million litres of fresh milk a year, out of a total market of about 240 million litres a year. That indicates the contract involved between 8 per cent and 12 per cent of the market.

Stuart would not put a dollar value on the contract but said "in our business in New Zealand it's a significant one" and "we would have liked to have kept it".

The milk going to Progressive from a new supplier may still, in part or whole, be produced by Fonterra farmers as the co-op can be obliged to supply independent companies.

Progressive - which would also not discuss the contract's value - has this week been advertising its new "home brand" milk for $2.47 for two litres.

Marketing general manager Richard Manaton said the new supply arrangement was aimed at getting a better deal for Progressive and better prices for customers.

"At the end of the day, we're always looking for opportunities where we can pass on savings to the customer," said Manaton.

He would not comment whether the move indicated a hard-nosed attitude towards reducing wholesale prices since Progressive was bought by Woolworths Australia.

But said Manaton, "Milk supply is very much regulated ... and it's important that we have competition in the domestic market" - this was a reference to Fonterra's obligation to supply independent companies.

Gaddun believed the new arrangement would hurt his firm in the local Gisborne market. "We're going to be lining up with our milk which is retailing at about $3.25 versus $2.47."

Meanwhile, Sanlu, a company part-owned by Fonterra in China, has become the third-biggest player in the dairy market there. An internet-based news service reported Fonterra's rise follows Shanghai-based Bright Dairy losing market share as a result of flagging sales and a quality incident that damaged its reputation.