Fonterra's 'bigger than this'

GERALD PIDDOCK, STACEY KIRK AND LAURA WALTERS
Last updated 08:18 10/01/2014

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Fonterra scare could have been prevented Fonterra to "vigorously defend" damages claim

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Court proceedings brought by French food giant Danone were unlikely to cause long-term reputational damage to Fonterra or affect dairy commodity prices, experts say.

Danone has cancelled its supply contract with Fonterra and is launching legal action against the New Zealand dairy co-operative in a bid to win compensation for $492 million of losses incurred last year and reputational damage.

The moves follow a scare in August when Fonterra issued a milk powder contamination warning that later tests found was a false alert. University of Auckland head of marketing, Rod Brodie, said whether Fonterra suffered any long-term reputational damage as a result of the court action would depend on the way the company handled the proceedings. 

"While it will be expensive for Fonterra perhaps in court with litigation, in terms of its end markets I think Fonterra's bigger than this."

The reputational damage to the New Zealand dairy industry since the scare had led to a market reconfiguration, Brodie said. But the market consolidation meant Fonterra would probably be able to better manage its relationships. 

When asked what compensation was being sought, Danone spokeswoman Eliza Newton said the company had identified an initial €300m (NZ$492.9m) in anticipated business losses for the 2013 financial year. 

The losses were incurred when Danone had to recall baby-formula product in eight of its markets after Fonterra's botulism alarm in August. 

Danone would also be seeking compensation for brand and reputational damages. 

The final figure would be quantified at the trial, she said. 

Danone experienced a "significant drop-off" in public trust for its brand directly following the botulism contamination scare last year. 

It was this reputational damage that had led to the decision to launch proceedings against Fonterra at the High Court at Auckland, she said.

Newton said the company was working on rebuilding trust in its products but it was a slow journey. 

"Beyond compensation, Danone is seeking the guarantee that this situation will never occur again, and a guarantee from Fonterra as a leading supplier, that they consistently meet the highest quality and food safety standards for every customer and stakeholder." 

Danone was also starting arbitration proceedings in Singapore "to bring all facts to light and to obtain compensation for the harm it has suffered". 

Newton would not disclose the value of the terminated supply contract and Danone was talking to other potential suppliers. The termination of the contract with Fonterra would not cause supply issues because Danone had a network of suppliers, she said. ANZ rural economist Con Williams said the contract termination and legal proceedings were unlikely to affect dairy commodity prices. There had been some commercial impacts for Fonterra because of reputational damage after the contamination scare, he said. Fonterra had put in place more food safety initiatives to reassure customers and Danone would be aware of that, Williams said. There would also be commercial impacts if Fonterra were to lose the court proceedings.

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However, Williams said he did not believe those factors would have an overall effect on dairy prices. Fonterra said it would "vigorously defend" the legal proceedings. 

The company said it was "disappointed" that ongoing commercial discussions with Danone had resulted in legal action. It would now work through the detail of Danone's claims. Primary Industries Minister Nathan Guy said news of the court action was unfortunate.

"Obviously I'm disappointed in what I've read and seen today, that this particular issue couldn't be sorted out. 

"But it looks like it's heading to court so it would be unwise for me as minister for the Government to comment on what basically is a commercial issue between Fonterra and Danone." 

Guy said he had not seen anything to suggest Danone had not been "squeaky clean" in its dealings with Fonterra - "that's something Fonterra needs to work through with Danone". 

He said the ministerial inquiry had confirmed New Zealand was leading in its food safety systems but needed to continue looking at processes to maintain that reputation.

In October, Danone estimated that overall damage to its 2013 baby-food sales from the botulism alarm was $564m.

Fonterra, in its 2013 financial statements, said it had made provision for $14m in contingent liabilities on the contamination issue. Whether it has insurance to cover a successful claim by Danone could not be established.

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Court action launched by French food giant Danone against Fonterra has worried and disappointed the dairy co-operative's farmer shareholders.

Federated Farmers Waikato provincial president James Houghton, who is a Fonterra supplier, said the news was "disappointing and frustrating".

"No doubt Fonterra would defend it vigorously."

He said it was difficult to comment on the pending case without being privy to the contractual obligations and policies between the two parties. But he also saw the issue from Danone's perspective.

"If I was a shareholder of that company, I would be asking questions why some of those losses were not effectively recovered."

While he doubted it would impact on Fonterra's milk price, Mr Houghton believed it could impact on the dividend Fonterra pays to its farmer shareholders as the amount claimed was so large.

"It will have an effect on the earning potential that comes directly out of Fonterra."

Fonterra Shareholders Council chairman Ian Brown, a Waikato farmer, said Danone had flagged this course of action prior to Christmas.

"It's the realities of business and the transactions that go on between businesses. We sell products and people use that to manufacture and sell products of their own. Sometimes these things happen.

"You always wish this never happened, but things go wrong and you just have to work through it as it unfolds and that's where we are at."

Federated Farmers dairy section chairman Willy Leferink remained hopeful that the two parties would reach a settlement before it reached court.

If it did end up going to court, there would be no winners in what would be a lengthy court battle where the outcome would be decided by the judge.

"The people that get rich from this are the lawyers.

"Of course as shareholders we're worried about this, and we're certainly worried about what effect this will have on the payout, but in the end we are the owners of Fonterra and are directly involved in this whole debate."

- © Fairfax NZ News

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