China Consumer

A market that’s hard to milk

Fonterra resets agenda in China after Beingmate fallout

Cows-w

New Zealand’s big udder market

The term ‘sour milk’ is pertinent to the attempts of many international dairy firms to enter the huge China market. Many have set up joint ventures or partnerships but then watched aghast as the tie-ups curdled.

A landmark case: last year Royal FrieslandCampina called it quits as a liquidity crunch at its local partner China Huishan saw their JV fail. In March France’s biggest dairy cooperative Sodiaal also took over most of the Brittany-based infant-formula plant operated with China’s Synutra when the latter struggled to deliver on promised Chinese sales.

So the divorce between Fonterra and Hangzhou infant formula maker Beingmate – finalised recently – was not the biggest of surprises. The two parties reached an agreement to part ways with Fonterra gaining full ownership of its production plant in Australia’s Darnum and taking back the marketing rights for its Anmum brand in China at no cost. The deal was followed by the resignation from Beingmate’s board of Christina Zhu, Fonterra’s head of Greater China operations.

Beingmate soon signed a deal to sell a 5.09% stake to a unit of the state-owned bad debt manager Great Wall and the sale has fanned speculation that Fonterra might soon divest its 18.8% interest in Beingmate as well.

After years of lossmaking, Beingmate triggered a NZ$405 million ($270 million) Fonterra writedown in the first half of last year (see WiC403), which angered the cooperative’s 10,500 farmer shareholders. Although Beingmate returned to profit in 2018 and escaped delisting from the Shenzhen bourse, the turnaround was largely fuelled by asset disposals, Yema Financial, a zimeiti blog, reports. That included offloading 12 properties and the Rmb166 million ($24.6 million) sale of an equity stake in its babyfood unit.

So how is the Kiwi dairy firm going to develop in the Middle Kingdom after its second botched alliance (the first being with Sanlu, which was at the centre of the melamine scandal in 2008; see WiC75)? Well, the company is not backing away from the Chinese market – not least as that would mean shaving 20% from its revenues, based on its annual results in 2018. Instead it is striking out on its own.

Two weeks ago Fonterra announced that it would start selling fresh milk in China under its flagship label Anchor. As opposed to its offerings under a partnership with Alibaba’s Hema Supermarket and Carrefour, Fonterra’s new dairy range will be marketed solely under the Anchor brand, marking the first time that a foreign brand has entered the country’s fresh milk market. More significantly, it will source raw milk from China. Fonterra now operates two farms in Shanxi and Hebei – from which it has supplied third parties such as Mengniu – and a third one, under construction in Shandong, will take production to 1 billion litres of milk a year by 2020.

Demand for pasteurised milk has been on the rise in China. Sales are expected to grow 18.5% annually on a compound basis and reach Rmb7 billion over the next three years, as more health-conscious consumers change their diets. Improved cold storage supply chains can now better cope with the growing market.

Research by state-owned Bright Dairy also concluded earlier this year that China’s pasteurised milk is an under-penetrated segment, representing just 14% of the liquid milk market, versus 98% or above in the US, Britain and Japan. The Shanghai-based company (where former Chinese leader Jiang Zemin worked for a brief stint in the 1950s) currently leads China’s fresh milk market with a 48.5% share.

Another area of growth that Fonterra is trying to tap into: local delicacies like cheese tea and cheese shrimps. In fact, over 500 million cups of cheese tea use Anchor’s whipping cream each year, notes Sina.com. “We don’t just supply ingredients, we also explore with our clients how to integrate cream, butter, and cheese into their products,” Fonterra’s Zhu told Jiemian (so far the New Zealand firm has concocted over 50 kinds of crossover ‘dairy’ foods for the Chinese palate).

She will be hoping to replicate Fonterra’s success in pizzas. Zhu also told the local news portal that roughly one in every two cheese pizzas sold in China features its Kiwi mozzarella.


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