Fonterra unveils end-to-end value growth strategy focusing on ingredients and foodservice businesses

The Fonterra Co-operative Group released its revised growth strategy today. It details the company’s goal to grow value for farmer shareholders and unit holders by focusing on its “high-performing” ingredients and foodservice businesses.

Fonterra chairman Peter McBride argues that this revised strategy will create “a pathway to greater value creation,” while allowing the Co-op to “announce enhanced financial targets and policy settings.”

“The Co-op exists to provide stability and manage risk on farmers’ behalf while maximizing the returns to farmers from their milk and the capital they have invested in Fonterra. Through the implementation of our strategy, we can grow returns to our owners while continuing to invest in the Co-op, maintaining the financial discipline and strong balance sheet we’ve worked hard to build over recent years,” says McBride.

CEO Miles Hurrell adds that Fonterra is in a strong position, as it is delivering results above its five-year average, which is why the company is considering the next steps in the evolution of its strategic delivery.

“The foundations of our strategy — our focus on New Zealand milk, sustainability, dairy innovation and science — remain unchanged. What’s changed is how we play to these strengths.”

Strategic choices

Fonterra highlights six key areas of interest in its new strategy approach including farmer offerings, ingredients, foodservice, operations, sustainability and innovation. 

Hurrell highlights: “Following our recent strategic review, we are clear on the parts of the business that create the most value today and where there is further headroom for growth. These are our innovative Ingredients and foodservice businesses, supported by efficient and flexible operations.” 

“By streamlining the Co-op to focus on these areas, we can grow greater value for farmer shareholders and unit holders, even if we divest our consumer businesses.”

The Co-op exists to provide stability and manage risk on farmers’ behalf while maximizing the returns to farmers from their milk.In terms of delivering on the strongest farmer offerings, Fonterra sets out to work alongside farmers to enable on-farm profitability and productivity to support the strongest payout.

The company also wants to deepen its position as a global dairy ingredients provider and grow its trading capability to improve Farmgate Milk Price and earnings.

Last month, Fonterra increased its payout forecast, allowing it to pay farmers earlier than expected.

It wants to expand its foodservice business by focusing on China and other key markets. It will also invest in so-called operations for the future, namely in efficient manufacturing and a supply chain network that allows for greater flexibility to allocate milk to the highest returning product and sales channel. 

The Co-op aims to improve its sustainability credentials, while also strengthening partnerships with customers in the process. 

In order to innovate and drive an advantage, Fonterra plans to use science and technology to address ongoing challenges and expand its competitive advantages. 

McBride comments: “We have increased our target average return on capital to 10–12%, up from 9–10%, and announced a new dividend policy of 60–80% of earnings, up from 40–60%. At all times, we remain committed to maintaining the maximum sustainable Farmgate Milk Price.”

Alongside the highest sustainable Farmgate Milk Price, Fonterra will track its progress against the performance measures on shareholder returns, balance sheet stability and Co-op endurance.