“Fonterra has in a stroke gone from being an “also ran” in China in something like 50th place to being a market leader in fourth place,” Morris said.
Morris is director of Coriolis Research, the firm tasked with reporting on New Zealand’s progress in fulfilling the goals of the government’s Food and Beverage Project, to double the country’s 2009 export value by 2025, to $65 billion a year, excluding inflation.
Five years into the project NZ is tracking relatively well, recording 7% a year growth.
Coriolis’s latest report “What does Asia want for dinner?” highlights dairy and beverages as standout performers over the past decade, with dairy recording 9% value and 4% volume gains a year, and beverages 12% value, 4% volume gains.
For the gains to continue, Morris was adamant NZ needed to approach the next decade differently, looking at branding and value-added products to run alongside the core of bulk milk powders, logs, and sheepmeat.
“We have been creeping up the value chain, and the move with Beingmate is a smart one that will only help that further. It makes far more sense to partner up with a company that already claims 9% of the Chinese infant formula market, than to try and start from zero per cent and work from there.”
Fonterra has long stated its intention to have a “Fonterra” branded formula in the Chinese market. However as of last year it was also a market undergoing a shake out for “rats and mice” brands. Following the botulism scare last year the Chinese government made it clear it wanted to see greater consolidation in the market.
The Ministry of Industry, Information and Technology stated in August last year it wanted to reduce the number of Chinese infant formula manufacturers to no more than five, with revenues that exceed NZ$10 billion, by 2018.
Morris suspected Fonterra had recognised a new brand launch would result in it showing up late to the infant formula game, and the brand rationalisation to follow would have made a new brand difficult to launch on its own.
“This is really not that surprising. Consolidation is something we have seen in other markets, including Hong Kong. The retailer only really wants to deal with two or three brands on the shelf in a category, not twenty or two hundred.”
Morris said typically two or three key brands would be the focus of the shelf, with maybe a couple of niche players around them.
“That could be something like the Dairy Goat Co-operative powder and perhaps an organic brand.”
In terms of market share, Fonterra’s new partner Beingmate is snapping on the heels of industry giant Danone, which holds a 10% share against Beingmate’s 9%. Mead Johnson claims 10%, and Nestle at 12% holds the largest single company share. However at present 20% of the market is claimed by multiple “other” brands. The only NZ infant formula brand present in the top 25 in China is Healtheries, barely registering at between 0% and 1% share in 2013.
Morris described the market as something of a wild West for players, and could appreciate the need to tighten up on standards and players.
He said there was no clear answer about whether Fonterra would jeopardise its relationship with companies it supplied powder to for infant formula products by producing a formula itself.
“From the perspective of those companies milk powder is just a commodity, and they realise they have to buy from somewhere.”
The area of contract packing could be more at risk by Fonterra entering the market as a branded player, however.
‘You could argue if they did not have the one-child policy they would have had larger families and not been able to afford quality infant formula.’
But he saw the real returns back to NZ from the Beingmate deal, coming through processing and exporting from here.
“The more we can do here, the better in terms of the value it delivers to NZ.”
He hoped that would happen, based on moves by other Chinese-owned companies to process here. He pointed to Bright’s investment in Synlait and formula production, while both Yili and Mengiu were building infant formula plants.
“This says to me the maths has been done, and it makes sense to build the plant here.”
While some analysts have made much about China’s one-child policy putting the brakes on the sector’s growth potential, Morris was more sanguine.
“You could argue if they did not have the one-child policy they would have had larger families and not been able to afford quality infant formula.”
If demographics reduced Chinese demand growth, he was confident potential existed elsewhere, in Africa in particular, where some countries were experiencing strong economic growth driven by investment in mining, oil, and gas.
