Fonterra's new ally sees falling sales

Fonterra CEO Theo Spierings says the tie-up combines "strength with strength".Photo / Dean Purcell

Chinese firm reportedly grappling with distribution challenges

Fonterra is pinning its hopes on a tie-up with Chinese infant formula giant Beingmate as it pushes into China's lucrative baby milk market, but the dairy co-operative's new partner is facing falling sales and profits and is reportedly grappling with major distribution challenges.

Hangzhou-based Beingmate has the largest share of the Chinese formula trade of any domestic producer - about 10 per cent - and the partnership is expected to provide the New Zealand company's Anmum infant nutrition brand with access to around 80,000 retail outlets across the world's second-biggest economy.

In an interview with Bloomberg TV yesterday, Fonterra chief executive Theo Spierings said the tie-up was all about "combining strength with strength".

But the Chinese firm's recent financial performance has not featured in the public relations push. Revenue slumped 25 per cent during the first six months of this year to 2.4 billion yuan ($466 million), while profit plunged by more than 70 per cent, according to a report by China's Sina online news outlet, which was translated for the Business Herald.

Another Sina report said Shenzhen-listed Beingmate's "traditional distribution model" was being disrupted by a rapidly changing infant formula trade in China.

Hong Kong-listed Biostime, another major Chinese infant formula manufacturer, reported a 34 per cent rise in revenue to 4.5 billion yuan in 2013, while core profit - which excluded a one-off fine - rose 32.4 per cent to 983.6 million yuan.

Financial results for 2014 were not available on Biostime's website.

One local industry source questioned how Beingmate could assist with Anmum, given the Chinese firm faced its own challenges.

"I wonder how such a company could help Anmum's growth in China?" the source said.

Fonterra will spend about $615 million purchasing a 20 per cent stake in Beingmate, whose share price has slumped almost 20 per cent since April.

A Fonterra spokesman said the company was fully aware of Beingmate's recent financial performance and was "totally satisfied" with its new partner.

"We have absolute confidence in Beingmate's distribution network and it delivering their market share today," the spokesman said. "Fonterra undertook full and robust due diligence as part of this process."

Federated Farmers dairy chairman Andrew Hoggard said it "would obviously be a concern" if Beingmate was facing falling sales and distribution difficulties.

"I think when we have our next round of [Fonterra] director meeting roadshows there will undoubtedly be a lot of farmers asking the directors questions and wanting to satisfy themselves that it is a solid investment," Hoggard said.

Fonterra has been a late arrival to China's booming branded baby formula market, where annual retail sales are projected to rise from the current $18 billion to $33 billion by 2017.

Anmum infant milk was launched there only last year.

Fonterra plans to build a third farm hub in China through a joint venture with New York-listed baby formula maker Abbott Laboratories.

Beingmate and Fonterra will set up a joint venture that will purchase Fonterra's Darnum manufacturing plant in Australia.