Divestment means Fonterra can focus on its strengths
OPINION: Fonterra's board has certainly presented us, as shareholders, with a major issue to consider.
However, the co-operative's plan to divest businesses in Sri Lanka, Australia and New Zealand means its position as the sixth ranked dairy processor in the world may be short lived.
Fonterra sits behind Lactalis, Nestlé, Dairy Farmers of America, Danone and Yili on the list.
Lactalis, with revenues of US$30 billion retains the top spot. European co-ops Arla Foods and FrieslandCampina sit seventh and eighth respectively.
The report says Fonterra's revenue jumped, lifting the cooperative's ranking three places over last year. While acknowledging performance was strong, the report notes that Fonterra's financial year-end was July 31, 2023, meaning higher revenues likely reflect elevated commodity prices throughout the second half of 2022, which may have skewed the comparison to key global competitors with different financial year-end dates.
The report says Fonterra is unlikely to maintain sixth position in coming years given the cooperative's strategic shift to focus on its core business and the potential for this to reduce future revenues.
"Fonterra announced 'a step change in its strategic direction' to be achieved via a pivot back to its core B2B ingredients and foodservice business," the report says.
"If all the considered divestments come to fruition, this could represent 15% of the co-op's milksolids utilisation and 19% of the group's earnings, representing a sale valued at more than NZ$2 billion."
The report also notes a year of modest gains and strategic shifts within the dairy sector.
The report, which analyses the financial performance of the world's leading dairy companies, indicates a slight 0.3% increase in combined turnover in US dollar terms, a stark contrast to the previous year's 8.1% growth.
Fewer than half the companies listed maintained the same position as last year. Foreign exchange developments continue to impact the overall rankings, and limited mergers and acquisitions activity was again a key theme this year.
The report attributes the deceleration in revenue growth to lower milk prices in 2023 compared to the robust values seen in 2022. This trend particularly affected European cooperatives, and seven companies worldwide reported lower revenues in their local currencies. Despite this, many companies have managed to report stronger profits and margins than in the previous year.
France's Lactalis became the first company ever to exceed US$30bn in annual dairy-related revenue, an accomplishment that follows several years of significant revenue expansion through organic growth and acquisitions.
