Fonterra eyes 'wow' market

BY ANDEA FOX

With a population nudging one billion, an average age of 25 and GDP of more than US$1 trillion, Fonterra's latest dairy sales hunting ground has, as a marketer puts it, the "wow" factor.

The consumer brands team at the headquarters in Dubai, United Arab Emirates, of New Zealand's biggest company, and of the world's largest dairy exporter, has its sights on a market comprising the Commonwealth of Independent States (all the "stans"), North Africa, East Africa and the East Mediterranean.

The total gross domestic product of this 43-country market, which includes war-torn Iraq, is worth US$1.6 trillion (NZ$2.2t), says Fonterra Brands' general manager, developing markets, Tamer El Ashmawy.

The potential market's GDP per person is US$3763, he says.

Strategic priorities for his team in the next three years are: to lift "jar cheese" (runny cheese in a glass) sales to Iraq, where Fonterra is in the No1 sales spot just three years after launch; raise Anchor butter sales in Azerbaijan, where Fonterra is also No1; and sell more bone-health milk powder Anlene in the East Mediterranean and "growing up milks" for East African children. Anchor milk powder is already No1 in key East African markets.

Geographical expansion is planned into North Africa (cheese and butter), Lebanon (milk powders) and Ukraine (butter), Mr El Ashmawy says.

His team has an "extreme focus" on winning market position in the CIS, Egypt, East and West Africa, and Iran. Improving nutrition in these markets is not Mr El Ashmawy's only imperative. Developing food services – the name Fonterra gives to its business divisions around the world offering specialty products and service to professional cooks – is also a priority.

While Fonterra can show quantifiable sales progress to support robust growth projections, Mr El Ashmawy says the dairy co-operative must not rush its fences in these huge, undeveloped markets.

"There is a risk element in all this `wow' (scenario) ... and that is going too fast. If you don't win, you can be eliminated from the market very quickly. That is the biggest risk. The issue will be not that you have 20 (new) markets opened, but what are you doing in those 20 markets."

Anchor cheese sales volumes in Iraq show 115 per cent compound annual growth since 2006; Anchor butter, 20 per cent in Azerbaijan; and Anchor milk, 51 per cent in Somalia. Fonterra's compound annual sales volume growth in these developing markets between 2006 and last year was 34 per cent. The compound annual revenue growth rate was 43 per cent.

Expanding Fonterra's brands business in the six oil-rich states of the Gulf Co-operation Council is the core business of Fonterra Brands' Middle East operation, which was restructured and rejuvenated by chief executive Andrew Ferrier in 2006.

But Mr El Ashmawy says the opportunities in nearby countries are too good to miss.

Iraq is a good example of the company's drive into new territory – and of this region's world-beating love of cheese, in all its forms.

Jar cheeses are a big seller throughout the Middle East – Fonterra's plant at Dammam turns out 15 tonnes of them a day – and Iraq has lapped them up since Fonterra launched its Anchor brand offering in 2006. Glass has a marketing edge in that it is resistant to high temperatures, making a handy recycled vessel for locals who drink their hot beverages out of glasses.

But being No1 in Iraq is not enough, says Mr El Ashmawy.

"The challenge is to make sustainable profits to reinvest in our brands ... and the ability to consistently supply this market with a quality product at a consistent price despite the difficulties of war."

The US military in Iraq has not contributed to Fonterra's rise to the top of the jar cheese market. The company does not sell to the army because it is not a consistent, sustainable customer – the sort Fonterra has built its sales strategy on, he says.

As Fonterra Brands' Middle East managing director, Amr Farghal, says, the war will not last forever. And when it has passed, and dairy rationing by the Iraqi Government ends, Iraqi consumers will remember the company that was first in with a product, and consistently supplied them when the going was tough. In another first for the Iraq market, Fonterra has introduced tinned butter. Sourced from New Zealand, the product transports well into a country which Mr El Ashmawy says is a logistical transport nightmare. Because the can withstands warm temperatures, it solves the Iraqi household's problem of erratic or no electricity supply for refrigeration.

The ace in Fonterra's sales strategy is its Dammam factory, close to the port of the same name and within a 650km radius of all its major customers. The dairy co-operative recently bought out its Arab joint venture partner for NZ$42 million. With tinned butter and milks in the sales mix, Mr El Ashmawy sees double digit growth potential in Iraq. Business with Iraq is conducted on a cash-only basis, as it is with Jordan and Somalia, he says.

Another Dubai-based Fonterra executive with his eye on developing markets is Callam Weetman, based several kilometres away in another modest Fonterra office. He is in charge of selling commodities and ingredients into the Middle East and Africa.

New Zealand product that goes into the Dammam plant is sold to Fonterra Brands by Mr Weetman's division (just as Fonterra's consumer brands operation in New Zealand must buy its milk powder and raw dairy product from Fonterra at the going international dairy price).

Mr Weetman, who joined the New Zealand dairy industry 17 years ago from P&O Nedlloyd, runs a US$1 billion business which sells into nearly 50 countries.

He says the "engine rooms" for driving his side of the business are: Algeria, Saudi Arabia, Iran and Egypt – in that order. Algeria, for example, imports about 220,000 tonnes of milk powder a year – not all from Fonterra. Its army is a big buyer and its government runs a food programme for the poor.

Dairy consumption per capita per year in Africa is 38kg and growing, he says.

Fonterra's commodities and ingredients sales are growing at 15 per cent a year across his total region, boosted since 2006 by Australia's drought supply difficulties and European Union dairy market reforms.

His office earned 15 per cent of Fonterra's total NZ$10.5 billion revenue from commodities and ingredients sales last year.

It sold 320,000 tonnes of product into the Middle East and Africa region this year, slightly down on budget because of a 20 per cent recession shrinkage in demand and supply restrictions from drought in New Zealand and Australia.

Fonterra's share of the ingredients market in the region is just over 50 per cent, Mr Weetman says.

About 90 per cent of his customer businesses are family-owned. Fonterra, through its legacy companies and the former Dairy Board, has had a presence in the region for 32 years which has generated a lot of loyalty and goodwill towards New Zealand and its dairy products, Mr Weetman says.

"In these businesses, we're dealing with the sons and grandsons now."

Fonterra's biggest commodities and ingredients competion in the Middle East is from the Saudi-based processor Al Marai, which would give Fonterra's big Taranaki plant Whareroa "a run for its money", Mr Weetman says.

Al Marai started as a dairy company and has branched into waters and juices, and has just signed a joint venture with Mead Johnson to launch infant formula, he says.

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