6 November 2002
Comparison Of 2002 And 1999 Dairy Industry Strategies
On presenting the 2002 strategy two days ago, Fonterra’s chairman and CEO said that Fonterra started with a “blank sheet
of paper” which has lead “[f]or the first time in our history [to] a strategy which focuses all our efforts on building
on the strong foundations we have in Fonterra”.
In other words, Fonterra’s 2002 strategy is supposed to be fresh, new and historic.
Fonterra says it paid McKinseys $3-4m for this ‘new’ strategy.
Using publicly available sources, I have compared the 2002 strategy with the one developed by McKinseys for the industry
in 1999.
The 1999 strategy was adopted by a Joint Steering Committee of industry leaders and was presented as the raison d’etre
for the merger of Kiwi, NZDG and the Dairy Board.
The 1999 strategy is reported to have cost $5-10m.
What does the comparison show? In summary, the two strategies are almost identical. 2002 is remarkably similar to 1999
(see the table below). What value has the 2002 strategy added? It is hard to tell.
The differences seem to be negatives rather than positives. These include:
- ‘Softer’ language in 2002, with more references to “understanding our customers’ needs”, “co-operative principles” and
“co-operative cornerstones” – though the strategy does not define these at all. The boundaries of the core co-operative
business are still not clear.
- No discussion at all in 2002 of likely structural implications. The 1999 package had two parts: one on strategy, the
other on structure. The 2002 document is completely silent on how the strategic ‘themes’ are to be achieved. It is also
silent on the implications the ‘themes’ may have for Fonterra’s structure.
- 2002 has no explanation of how the strategic ‘themes’ are to be weighted. Where is the growth to come from: core
commodities or value-added? In what proportions?
- 2002 also fails to recognise inherent conflicts within the strategic ‘themes’. Fonterra’s existing core commodities
business requires a very different mix of skills, culture and capital to the proposed food-services, foreign milk, and
specialised ingredients businesses.
- The 2002 process probably managed stakeholders’ likely reaction more carefully. In particular, Fonterra has gained
from the Shareholders Council a sense of ownership for the strategy, even though its potential implications are probably
not clearly understood by many farmers and Council members.
In short, the 2002 strategy, as released to shareholders, is general and vague. It is like a political communiqué that
can mean different things to different readers.
It is certainly not new. Fonterra should restrain its long habit of over-hyping. It simply lacks credibility.
The dairy industry has been saying the same thing for many years without finding solutions. Since the mid-90s, industry
leaders have recognised the threats to and limitations of their business. Back in 1989, Sir Dryden Spring said the
industry’s core strategy for the 90s was to sell only value-added products, or “as close to 100% as we can get as soon
as possible”.
The following analysis should sound familiar:
“The consolidation of retail has resulted in fewer, bigger buyers, all requiring a different bundling of services. Our
opportunity is that we should be able to combine our size and brand name with the right services, such as category
management and packaging, to work with the customer in a new and unique way. Then we will be competing on the basis of
service, not just price.
The demand for consumer convenience is also having a major effect in our industry. Look at the growing amount of shelf
space now devoted to value added and ready-to-eat products. As technology improves, we will see a shift to products that
are more easily consumed.
The globalisation of the industry is also influencing the way we do business. We are global traders, exporting about [ ]
percent of what we produce. Our markets will continue to shift as new competition develops at home and abroad,
particularly in our Asian markets. We must be prepared to respond.
To compete in this fast changing marketplace, we must reform ourselves. We must reform to earn and to keep our market
share. We need to shift from being a supply-driven organisation to becoming a customer-driven organisation. By focusing
on the customer, we will find new ways to compete.
To position our business as a market-driven organisation, it is necessary to implement some internal reforms. We must
change how we do business as a cooperative and redesign our marketing organisation to better fit today's marketplace.”
Who said it? Yes, it could easily have been Sir Dryden Spring in the early 90s, or McKinseys advising Fonterra, but no –
it was in fact the CEO of Sunkist, a large producer co-operative in the USA, in 2001.
The key issues facing the NZ dairy industry are common to large exporting producer co-operatives around the world.
According to the US National Council of Farmer Cooperatives:
"The dramatic pace of change in the food, natural fibre and agriculture system is forcing a complete reassessment of the
strategies needed for farmer cooperatives to continue to serve the farmer member," says Terry Barr, chief economist for
the National Council of Farmer Cooperatives. "Every segment of the business — from input manufacturing to production
agriculture to food processing and marketing to food retailing — has undergone a transformation in the past decade. How
cooperatives finance their future growth amidst such change is but the first of many questions."
Today, the cooperative industry is entering a new "new generation." Co-op boards and management move forward without a
roadmap. Do they continue to work within the confines of a narrowly-defined cooperative structure that links local
control and local capitalization? Or must they turn to outside sources to finance future growth?
Co-ops will shrink in number, increase in size, and become better at adapting to the fast-changing business environment,
NCFC's Barr predicts. "Cooperatives can't just build a business on debt. They're going to have to get equity investment,
if not from grower-owners then through preferred securities or stocks. It remains to be seen how cooperative principles
will transfer onto a balance sheet of publicly-held subsidiaries that are wholly owned by farmer cooperatives."
[“Co-operatives at the Cross Roads: Expanding the Search for Capital”, May 2002, Robert Heuer]
Producer co-operatives seem to work reasonably well while the products they make are very similar or closely reated to
the goods farmers supply. However, when the manufactured products become highly differentiated, the co-operative
structure struggles.
Put simply, the mechanisms a business needs to be highly responsive to changing consumer demands do not sit comfortably
with traditional co-operative principles.
As new Fonterra chairman, Henry van der Heyden’s hardest and more important challenge is to help dairy farmers
understand this reality.
Conclusion
While it is positive that Fonterra has finally adopted a strategy of some sort, the strategy is vague and general. It
also fails to address the underlying problem of how a traditional closed producer co-operative can operate successfully
in consumer-driven value-added markets.
2002 STRATEGY
1999 STRATEGY
DIFFERENCES
5-10 year vision
5-10 year vision
No change
Achieve at least 13-15% total shareholder returns
Achieve 15% return on total gross assets
2002 target is lower
It is about understanding our customers
Need for sharper customer insight
No change
Strong co-operative principles underpin the strategy.
Not as explicit
More emphasis in 2002
‘Theme 1":
Be the lowest cost supplier of commodity dairy products
‘Horizon 1’:
Be the lowest cost supplier of commodity dairy products
No change
Protect and promote the advantage we have to produce and market commodity dairy products at the lowest cost.
Defend and extend our position as the world’s lowest cost producer of basic dairy products. This is our top priority
No change
Our low-cost production is a core competitive advantage
Our most fundamental competitive advantage is in low-cost production and sale of basic dairy products
No change
There are real threats to our low cost position. We have to defend it aggressively
We risk losing that advantage.
No change
Details not provided
Unit cash costs in NZ rising at 2.3% pa.
USA unit cash costs falling at 1.8% pa.
Average international decrease in unit cash costs is 2.7% pa
No change in international trend
Achieve on-farm productivity gains of at least 3-4% pa
Pursue aggressively on-farm productivity enhancements, including on-farm biotech
Same, but 2002 adopts a specific 3-4% target
Look at each step of the value chain and look at where improvements can be achieved
Adopt 4% real productivity target across entire value chain
Similar, but 2002 drops the 1999 overall 4% target
Ensure that growth in NZ milk is profitable. Farmers will need the right economic signals
Encourage profitable milk growth by sending right price signals
No change
‘Theme 2’:
Be the leading price and inventory manager in global commodity markets
Be a top trading and distribution company
2002 language is new
Be smarter in handling inventory, working capital, pricing and product mix
Send direct price signals to shift our product mix.
2002 gives more emphasis to inventory management
Trade liberalisation gives us the greatest potential to improve farmer’s incomes. We must continue to put the case at
global and bilateral levels
Drive trade liberalisation. Capture the lion’s share of the new value creation from trade liberalisation
No change
‘Theme 3’:
Be a developer of dairy ingredient partnerships
‘Horizon 2’:
Leverage our ingredient network beyond NZ
2002 language is new
Need to understand our customers better and create value for them
Forge closer alignment between manufacturers, the market and customers
No change
Bring to customers our technical skills to the table, not just dairy products
Expand our business by building and selling technology skills, global trading network and risk management services
No change
‘Theme 4’:
Be a leading specialty milk components innovator and solutions provider
‘Horizon 2’:
Build global ‘slivers’ in specialised ingredients.
No change in substance
Specialty ingredients market - has the potential to deliver new value-added earnings. Create an ‘innovation engine’ and
a ‘pipeline of new products’
Dominate at least 10 specialised ingredient slivers
Same, but 2002 drops the 1999 specific target
Build protein business
Focus on proteins – 93% of the top 22 speciality products are proteins
No change
Key opportunities include top-end whey protein, milk protein, hydrolysate products, colostrum market and pharmaceutical
lactose
Most attractive products include alamin, protein hydrolysates, colostrum products, WGC and WPI and others
No real change
‘Theme 5’:
Be a leader in consumer nutritional milks
2002 language is new
Build on Asian market, wanting milk with health and nutritional benefits (eg ANLENE)
Focus and grow milks in consumer markets in SE Asia, including cultured drinks
Similar
Be on a par with the very best consumer companies in our speed to market
Benchmarked against top performing food companies
Similar
‘Theme 6’:
Be a leading dairy marketer to foodservices in key markets
2002 language is new
Growth is being driven by the consumer tend for convenience – read to serve, off the shelf solutions
More emphasis in 2002
‘Theme 7’:
Integrated strategies for China, South America, India and Eastern Europe
‘Horizon 2’:
Focus on Latin America and Asia – consolidate local markets in Latin America to grow milks position
Similar
Strategy also gives Fonterra the flexibility to pursue other options, eg sourcing non-shareholder milk to support
partnerships
Leverage our ingredients network beyond NZ dairy.
Source non-NZ milk to capture growth opportunities
Same, but 2002 links non-NZ milk to building partnerships
Process for developing strategy
Very robust, very thorough process
Very robust process
No change
Started with a blank sheet of paper
Builds on project work and analysis from July 1995
2002 claim seems unlikely