Fonterra makes a fresh start in China, tapping health and wellness appetite, tickling taste buds

Single-shot probiotics, pitching New Zealand milk as increasingly rare and valuable, and working dairy into Chinese cuisine are among Fonterra’s new moves in the massive China market as it gets its business strategy back on the rails.

As part of an operational “reset” after heavy financial losses in 2018 and 2019, when its China dealings became synonymous with disaster, New Zealand’s biggest company has ditched farms and company investments in China for what it does best – dreaming up new premium products for food businesses and consumers via intellectual property.

Greater China chief executive Teh-han Chow, appointed when Fonterra last year reorganised itself into operating regions, said the new drive will ensure the ingredients and food-service businesses, respectively its largest and second-largest in China, and its consumer operation are all focused on product innovation.

The aim is to expand Fonterra’s product reach in China by moving innovations deeper into the country, beyond the major business-to-business and consumer markets to lower-tier areas and smaller business operators.

To this end, earlier this year an innovation centre was set up in Shanghai to extend the work of Fonterra’s research and development science centre in Palmerston North directly into the China market.

The innovation centre supports investment in what Fonterra calls application centres, four kitchens where chefs and market specialists find and test new ways for business customers such as manufacturers, tea shops, bakeries and restaurants to use Fonterra products in their offerings.

A fifth application centre will open next year, in central China, and a sixth is planned.

One big advantage of regionalising operations is that new products from the 200-strong science team at Palmerston North can be commercialised quickly in China, Chow said.

Several new products are being launched off the back of the Covid pandemic, which has seen a sharpened Chinese appetite for health and wellness products.

Ready for launch next month is a probiotic single-serve sachet – similar to a sugar sachet – that consumers can add to a beverage or water.

Infant formula makers are keen on Fonterra’s probiotic focus and the company is eyeing opportunities with yoghurt and beverage producers.

“We haven’t done it yet but we want to stretch into the food-service space, offering customers the ability to offer products with the addition of probiotics. We’ve started discussions with a large coffee chain …” said Chow.

“Again, they are interested because of the health and nutrition trends in China. Everyone wants a proposition against that. It’s a really good space for us.”

He’s not disclosing probiotic sales projections but said Fonterra is confident demand will be strong.

“Tickling taste buds” is another Fonterra aim in China, where consumer confidence and spending has recovered well after Covid, he said.

“There continues to be a premiumisation trend, people looking for high-quality products that resonate in terms of provenance or functional benefits.”

There was a “huge” uptake in cake consumption after China’s Covid lockdown and while the surge has settled down, Chinese appetite for cream and cake, and cream in tea is growing, Chow said.

Tea macchiato – freshly made iced tea, topped with a mixture of cream cheese, whipping cream, and sometimes milk – is “immensely popular” and Fonterra hasn’t wasted any time cashing in.

With besieged tea shop operators in mind, it has produced a cream cheese and cream mix to save time and back shop labour.

“They have lines out the door. Typically they have to combine the cream cheese and cream on their own in the store which in a small store scenario can be onerous time-wise.”

Another new Fonterra solution for retailers is ambient cream.

“In tier one and two Chinese cities, cold chain (refrigeration) is not an issue but further out it is more of a challenge, and cold chain comes at a cost. Ambient cream doesn’t need to be chilled. It’s easier for a small operator to take on without having to have dedicated refrigeration space,” said Chow.

“This will help our expansion into lower tier cities in China.”

Fonterra has food service businesses in 350 cities in China, 50 more than last year with another 30-40 planned that the application centres will have to support as Fonterra moves deeper into China.

Fonterra’s second new thrust in China is to better market the provenance of New Zealand milk.

“As part of the strategic reset we are looking at how we can, what I call, valourise New Zealand milk,” he said.

The pitch will be that its production is not increasing and that it’s becoming “rare and more valuable” to business customers and consumers.

“A lot of what we do is making sure customers understand where it comes from – that it is grass-fed and pasture-raised.

“We have customers looking to use [this claim] to promote the distinctiveness of their product. It resonates with Chinese consumers. For example, one of our paediatrics customers across their infant formula, which we produce out of Canpac (in New Zealand), is now marketing it as grass-fed.

“Not everyone is familiar with the concept of grass-fed so they had to do a lot of research and papers to explain to their customers.”

Chow said Fonterra’s aim is to become a much stronger fabric of China’s food industry.

“One of the ideas we are working on is how do we get Fonterra products into more local cuisine?How do we get cheese into local cuisine? We’ve done that with a hot pot (in restaurants). We want to make sure our products are designed for the Chinese consumer – that’s where we want to head for all our businesses here.”

Fonterra, a New Zealand farmer-owned cooperative, has around 1900 staff in China. These include staff on Fonterra’s loss-making dairy farms, recently sold to two Chinese companies and awaiting regulatory approval to go unconditional. The farm staff will be taken on by the purchasers.

Chow told the Herald Fonterra’s sell-down of its stake in China baby food company Beingmate was continuing with the shareholding at 6.36 per cent as at the end of last month.

It paid $755 million in 2015 for an 18 per cent stake in Beingmate in order to access consumers.By 2018 the value of the stake had been written down by $439m which contributed to Fonterra’s historic net loss that year of $196m.

The sell-off can only be in bites due to Chinese regulations.

Fonterra said it does not yet give a breakdown of ingredients business revenue and ebit for Greater China.

Revenue last year for the Greater China food service business was $1.9 billion. It reported a 49 per cent lift in normalised ebit to $169m.

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