Consolidation concerns: Australian dairy sector highlights worries over Fonterra sale of local business

By Pearly Neo

- Last updated on GMT

The dairy sector in Australia has highlighted concerns of ‘yet another blow’ to the industry as a result of Fonterra’s recent strategy change. ©Getty Images
The dairy sector in Australia has highlighted concerns of ‘yet another blow’ to the industry as a result of Fonterra’s recent strategy change. ©Getty Images

Related tags Australia Fonterra Dairy

The dairy sector in Australia has highlighted concerns of ‘yet another blow’ to the industry as a result of Fonterra’s recent strategy change that includes plans to divest its consumer brands.

Fonterra recently announced that it would be making a major change to its business strategy​ by both divesting its well-known consumer brands such as Anlene, Anchor and Fernleaf on a global level to concentrate fully on its B2B and ingredients business despite having seen the consumer sector deliver a stellar financial performance​ in the past year.

The most recent data from Fonterra showed that in FY2023, the Fonterra consumer business generated NZ$781mn (US$481.9mn) in gross profits compared to NZ$749mn (US$462.2mn) from its foodservice business, though the decision was likely fuelled by the revenue numbers where Foodservice represented about 13% (NZ$3.9bn/US$2.4bn) vs Consumer’s 7% (NZ$3.3bn/US$2.04bn).

The ingredients business made up 80% (NZ$17.4bn/US$10.7bn) of revenue and NZ$2.6bn (US$1.6bn) in gross profits.

This was in addition to a complete divestment of its consumer and foodservice businesses in Sri Lanka, and these as well as its ingredients business in Australia – which would essentially equate a complete exit from the Australian market.

“Fonterra’s global Consumer business has grown over the years since Fonterra was formed and is performing well, including a portfolio of market leading brands such as Anchor, Mainland, Kāpiti, Anlene, Anmum, Fernleaf, Perfect Italiano and others [whereas] Fonterra Oceania is a fully integrated business, recently created through merging Fonterra Brands New Zealand and Fonterra Australia.,”​ Fonterra CEO Miles Hurrell said.

“While these are great businesses with recent strengthening in performance and potential for more, ownership of these businesses is not required to fulfil Fonterra’s core function of collecting, processing and selling milk.

“Due to our co-operative structure, we believe prioritising our Ingredients and Foodservice channels and releasing capital in our Consumer and associated businesses would generate more value. 

“A divestment of these assets would help create a simpler, higher performing Co-op with our focus on our core Ingredients and Foodservice business and doing what we do best. We have also received unsolicited interest in parts of these businesses, making now a good time to consider their ownership.”

Concerns of consolidation

While purchasing interest might make this divestment a commercially sensible one for Fonterra, the local dairy sector has voiced concerns over the sale as it indicates a shift towards a concentration of the market.

“The announcement by Fonterra that it intends to sell its Australian dairy processing assets is yet another blow to dairy farmers and a reminder about the precarious nature of our food security when staples like milk are passed around like commodities,”​ Australia’s Business Council of Co-operatives and Mutuals (BCCM) told FoodNavigator-Asia​ on behalf of local dairy producers.

“This move, if it results in greater concentration of ownership of Australian dairy assets, will impact not only farmers but also consumers at the supermarket checkout.

“As big business interests have come to dominate Australian dairy, we have lost most domestic control and influence over a staple product essential to Australian consumers.

“What we have seen instead is a concentration of milk processing, including into the hands of retailers after the regulatory green light was given to Coles’ purchase of processing plants from Saputo. 

Fonterra has not yet publicly revealed who the potential purchasers in Australia are, but given the scope of its business in the country it is highly likely that this will be an existing food and beverage or dairy industry player, whether a manufacturer, processor or retailer.

BCCM believes that if this happens, it could gradually lead to an imbalance in the market that brings it closer to the supermarket duopoly seen in New Zealand​ before authorities stepped in, just from a dairy point of view.

“The danger now is that we could see more and more dairy farmers potentially squeezed out of the market because of pressure on farm gate prices, driven by the need to satisfy shareholder returns,”​ she said.

“A better prospect to preserve this vital industry is for primary producers to be more involved in the value chain.

“Co-operatives are the only way, in a largely deregulated and export-oriented industry like Australia’s, that dairy farmers can achieve a measure of bargaining power.”

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