It’s a critical week for the country’s largest company, Fonterra, which has to find a new direction after shipping out its chief executive, Theo Spierings, writing off more than $1.5bn from its balance sheet, and posting its first loss in its 17-year history.
Meanwhile, back on the farm, Fonterra’s suppliers are absorbing payout downgrades as well as a slump in dairy farm prices. At the same time they are seeing the valuations of other companies in the dairy industry—notably A2 Milk and Synlait— soaring on the NZ sharemarket.
So they’ll be looking to Fonterra’s leaders for some fresh ideas on how to turnaround the fortunes of the big co-op.
Fonterra’s critics — and there are lots of them — contend the co-op model has failed. Underlying profit has fallen two years in a row. Over half of a $750m investment in Beingmate, a Chinese infant nutrition company, has been written off (though some reports the company may now be on the point of recovery). Then there was the $183m compensation payment to French food group Danone over the 2013 botulism scare.
Problem is there is no way the farmers who own it will abandon the co-op model.
So how does Fonterra pull out of the downward spiral? That’s what farmer-shareholders will be wanting to hear this week.
But whatever plan is being formulated, it will take time—and capital.
Some think Fonterra should split off its consumer business into a separate operation, still controlled by the co-op but introducing outside capital.
The first step of a new management team may be to focus on debt reduction and sell off what may be regarded as surplus assets.
Others see a restructuring of a top heavy executive, particularly at head office, as vital to trim inflated overhead costs. Stronger disciplines around costs and assets would certainly make a difference.
Many question how A2 Milk can achieve margins far greater than Fonterra does on the products it sells.
These critics point to the Irish co-op, Kerry, which on listing in 1986 had a valuation on its 51% stake of the listed entity worth 40m euros. Today its holding – while reduced to around 14% – is reported to be worth 2300m euros. The enterprise is now a diversified multinational food business – just what Fonterra should be, but isn’t.
There’s a big gap between Fonterra’s strategy and its actual performance.
Let’s see if the first steps in closing that gap can be executed this week.
After all, we still want Fonterra to be the national champion it set out to be when it was launched.