Fonterra targets doubling of China revenue within five years

See also: Fonterra focuses on opportunities in tough times

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, has set a target of becoming the No 1 dairy player in China and doubling its business in the country to $10 billion within the next five years.

Speaking at the cooperative's annual meeting in Waitoa today, chief executive Theo Spierings said the new plan meant China could contribute 25-30% of total revenue.

When asked whether that would expose the cooperative to too much risk in one country, Mr Spierings said China's provinces could almost be regarded as countries in their own right.

"Local governments are getting much stronger," he said. But the company was also driving growth throughout southeast Asia and into Latin America.

China and Russia are the two biggest dairy markets in the world and had both reduced demand for different reasons in the past 12 months but chairman John Wilson said Fonterra had shown it had the strength to sell into other global markets as well. In the past three months demand in China has been returning as inventory levels drop.

Mr Spierings said the next business plan would consider the right timing to resume production in China, which would be considered by the management team in March/April and the plan put before the board in June.

He said Fonterra didn't want to build "assets for assets' sake" and there had been considerable interest from potential partners, many of whom were customers, in working with the cooperative on its manufacturing needs in China. Even without that partner, it could still make sense to go ahead once fresh milk produced by its own farms reach sufficient levels of about 400 million litres of milk annually.

Fonterra's managing director of international farming, Alan van der Nagel, said last week that it would take another two years to become profitable after it posted a loss of $44 million in the 2015 financial year. The company is proceeding with a $US300 million, 51/49 joint venture with Abbott Laboratories to build a third farming hub, which Mr van der Nagel said would mean the group had the capacity to produce 600 million litres a year of milk from its three China hubs.

Under Fonterra's new strategy its China business would be comprised of 60% ingredients, 20% consumer and 20% foodservice, developing leading brands, access to more high quality milk, selling more online, and multi hub assets connected to China to meet demand, it said.

Christina Zhu, managing director Greater China, told the meeting Fonterra had set some challenging targets for the 2016 financial year but the business was off to a strong start.

E-commerce was "changing the game" in China, where huge growth was expected for sales online, for food in particular, she said.

The Beingmate Baby & Child Food Co partnership, where Fonterra has invested $750 million to take an 18.8% stake in the company, was a key factor in Fonterra's success in China, she said. "This is something we need."

The joint venture agreement to run Fonterra's loss-making Darnum plant in Queensland has been approved by the Beingmate board and shareholders.

Zhu said Beingmate had struggled last year along with a lot of other Chinese companies and had made efforts to turn things around. Beingmate's changes were already taking effect with better results in the third quarter and that was expected to increase in the following quarter, she said.

(BusinessDesk)