Asians want 'kids to look like yours'

Which is good news for NZ dairy industry

BY RICHARD WOODD

EMERGING countries - China, Indonesia, the Philippines - where populations are growing (rather than ageing) and which have barely noticed the global recession, are huge emerging markets for dairy products.

This was the message of London-based Professor of Food Marketing Dr David Hughes to 200 people at a recent Fonterra Shareholders' Council seminar in New Plymouth.

"The parents want their children to grow, be healthy, fit, have good teeth and dairy products are perceived as being a very important part of that. They want their kids to look like yours.

"Often I hear in China people say they want their kids to look like the backpackers from Australia and New Zealand. They associate that with dairying; it's a wonderful platform for dairying, an opportunity that you will exploit ruthlessly.

"There's nothing wrong with the Asian diet, but as their income rises, they are tending to eat more meat and dairy. They may seem fit and healthy but a lot are under-nourished. Why would they over-consume like we do? They are saying: Just give us the chance, mate," said the entertaining Dr Hughes, 61, who enjoyed putting the audience through hoops with impromptu quizzes.

He is an emeritus professor at Imperial College of London ("emeritus means I work when I feel like it and they don't pay me"), a father of two boys, an online Tesco shopper and a director of a large UK farmer- owned berry fruit business. He is an adviser to companies on three continents and is a much sought- after speaker at conferences on food industry trends and consumer trends. He knows a lot about the global food industry and loves talking about it.

Here's his global food snapshot: Every day one billion people go to bed hungry; conversely, one billion people are severely overweight or obese; 25 per cent of all food fails to reach final consumers in emerging countries because of inadequate post-harvest infrastructure; whereas in developed countries 25 per cent of all food is wasted – either thrown away or left on the plate.

Since Dr Hughes began his professional career aged 24, two billion people had been added to the world population. "The expectation is that we will have 2-3 billion more over the next 30-40 years. Can our resources cope with that?"

Supermarkets: The big money is made by supermarket chains, mostly names unknown to Kiwis - the top nine being Walmart, LIDL, Aldi, Kaufland, Carrefour, Metro, Costco, Tesco, REWF. Walmart's total annual sales are US$400 billion, but on a 3.5 per cent profit margin.

The top global grocery companies ranked by profit margin percentage were also mostly names unknown to the audience: Altria Group 45, Philip Morris International 40, British American Tobacco 34, Diageo 30, GlaxoSmithKline 30, Johnson & Johnson 27, Reynolds American 26, Coca Cola 24, AB InBev 23, Reckitt Benckiser 23, SAB Miller 22, Nestle 22.

Tobacco and alcohol manufacturers figured heavily in the list; dairy products company Nestle was ranked last.

"Why? It helps if the products are addictive," said Dr Hughes.

Non-food was intrinsically more profitable and easier to globalise because: No waste, longer shelf life, non-perishable, harder to copy and easier to niche market.

Unlike Fonterra products.

Unemployment as a percentage of the recognised workforce: Spain 21 (for under 35s it's 37 per cent), Ireland 16, Europe and UK 10, NZ 7.3.

"This may not improve over the next two years. If that's so, what will it do to price pressure in retail grocery and food industry?

"Big box retailers are very sensitive to losses in sales volume. If you lose 2 per cent your net profit is cut by a third. What can they do? Lay off checkout staff and make the shopping experience even more miserable than it already is. Most in Europe are operating on a 2 per cent margin.

"How do they get people back in the door? Cut prices. That's what we will see in the next two years. In Japan 2009 supermarket sales were 4.3 per cent lower than 2008. Walmart Japan has not made a profit in nine years due to price cutting."

Dairy opportunities

"We've seen volatility in dairy prices and we'll see lots more of that in next few years.

"It might all seem very threatening, but there are also more opportunities in terms of promoting how green you are.

"Genetic engineering will have a much bigger influence in the future.

"Obesity trends in the US for women (i.e. 30lbs overweight) are horrific and the message from that is: Eat less dairy and meat.

"But the good news is that looking at sub-trends, consumers are showing more interest in digestive health and natural health, where dairy products score high.

"Dairy based protein snacks that fill you up without adding weight (e.g. Activia) are very popular in US and Europe. A low risk product for women. Try it for three weeks and if it doesn't work get your money back.

Food safety: "Food safety is a big thing. In the US in 2009 half of all media stories about food were about food safety.

"New Zealand is at the top of this tree. Protect what you've got to the hilt because you are perceived around the world at being good at this; supply chain integrity is gold dust.

"You've been close to the edge with the tragedy of Sanlu but you seem to have come out of it rather well. Having ownership [in China] at arm's length? Probably not because you cannot afford to put that integrity at risk."

Green issues

"The perception is that New Zealand is the ultimate in green- ness. Don't wait to defend, but set the stage and use good science. If you're No 1 in milk, people expect you to lead.

"You must not say: Whose going to pay for it? Because it generally pays for itself.

Reducing carbon generally means reducing cost. "The main reason why you have to go down the green route is because the major retailers of the world have. They have been pushed there by their governments and they recognise it's the only sustainable way for them as businesses. If they are going to be carbon neutral, that means their suppliers had better be also.

"The green train has left the station, you'd better get on board."

Market power: "As far as I am concerned, New Zealand is certainly No 1 in milk production and supply management. New Zealand is not famous for many things, except dairying. But you are not No 1 in branded dairy products and you are not going to be.

"Fonterra is not a Nestle and it's not going to be.

"World demand for milk products will grow faster than you can grow milk supplies.

"If you do nothing, and just soldier on, then your global dairy market share will likely decline."

Dr Hughes described the UK based berry business of which he is a director, as comprising 65 farmer suppliers.

"We're not a Fonterra but we turn over about half a billion NZ$ in strawberries and raspberries. We have a 40 per cent market share in UK and we can say no to Tescos. We don't want to, but if they bully us to an extent that we find unacceptable, we say no.

"Good global market share gives you strength in the marketplace. But you want it to be profitable market share.

"Profits on strong brands are excellent, but also on ingredients with intellectual property protection. You've been brilliant at dairy quality trading and you will continue to be but over time your competitive advantage will be eroded because you won't be the lowest cost producer. "I have no doubt it is part of Fonterra's strategy to be into smart dairy ingredients that you can protect and defend with patents."

Overseas investment

"To expand your position in milk production, supply chain management, value added ingredients and branded products, requires substantial investment.

"I don't know the answers but some very difficult and thoughtful decisions have to be made ahead.

"If you are to expand and produce milk outside your borders, that is not something Fonterra ought to do because big companies are not farmers. It should be done by entrepreneurial farmers who see opportunities.

"It may well be that Fonterra has bona fide reasons to support and help you; we have berry farmers supplying us from South Africa and we help them in any way we can, but the company is not a farmer.

"Where will you get the money from? Have you the appetite and the margin to invest? You need good joint venture partners or you can go to the market.

"My understanding is that at the moment you don't want equity partners, you want to own the business yourselves, and that's your prerogative. Or you can borrow it.

"If you are into these high value added ingredients it does require investment. Seed and pharmaceutical companies spend way more than you have allocated in Fonterra. You are going to have to up the ante there and that will require planning for it.

"I'm not telling you how to get the money, you'll work that out for yourselves. But sometimes it's very difficult to do this quickly and that can be frustrating."

Consumer power: "Consumers are the people you don't often see and you probably don't want to see.

"They want dairy products that are priced well, tasty, good for them, to benefit their well being and body, make them feel and look good, safe for their kids; esoteric stuff that is better for the world, better for the countryside, better for family, better for Bambi, Flipper, Little Nemo, Babe and Bo Peep.

"That's their prerogative and if they don't keep putting their hands in their pockets we are all buggered."

- © Fairfax NZ News