Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The Fonterra Shareholders Council annual report notes that co-op has performed poorly against targets set by the board.
The co-op failed to meet six out of seven key performance indicator (KPI) targets on its strategy: only meeting the milk collection target of 80.8% of total NZ production.
It fell short of its consumer and foodservice sales volume: achieving only 4.9b liquid milk equivalent (LME) against a target of 5.7b LMEs.
Farmgate milk for 2018-19 was $6.35/kgMS, 65c less that the $7 target. Return on capital was 5.8%, against target of 7.6%.
Fonterra’s gearing ratio last year was 48.2%, well outside the preferred range of 40 to 45%.
The council says the KPIs need refreshing to reflect the new strategy and the measures of success that have been announced.
“Council is also of the view that, given it reflects the aspirations for the co-op for the financial year ahead, the statement of intentions should be transparent to all stakeholders throughout the financial year that it relates to, as opposed to reflection following the end of that financial year.
“We will continue to push for these outcomes in dialogue with the board.”
Council outgoing chairman Duncan Coull says shareholders lament another year of disappointing financial performance from the co-op.
“We should be in a positive space right now with a solid spring in most places, a milk price that is looking very favourable and interest rates at historic lows.
“There is good cause for optimism, yet the sentiment in the farmer base is more pessimistic.”
The co-op has some real challenges ahead, he says.
This includes a changing regulatory environment and tightening of banking covenants.
“We also have challenges within our cooperative as it looks to fundamentally reset its behaviours and strategic direction, to align with its new purpose to ensure it delivers on the promise of an enduring co-op for us all.
“Our mindset will determine our approach - we can choose to see challenges or opportunities.
“It is my personal view that, as a dairy industry, we’re at risk of being caught up in our own negativity, to the extent that we risk missing out on the opportunities that are in front of us as innovators and producers of the most sustainable dairy nutrition in the world.
“The decisions made over the course of this year have been defining in terms of establishing the groundwork for a new way forward for our co-op.
“Unfortunately, the full fruits of that groundwork are yet to materialise into satisfactory financial results, but I firmly believe we have started to lay solid foundations to continue building on.”
