Fonterra Co Operative Group Ltd. Business Information, Profile, and History

Company Perspectives:

Fonterra aims for global dairy industry leadership. The Group strives to be the lowest cost supplier of commodity dairy products, the leading price and inventory manager in the global commodity market, an effective developer of dairy ingredients partnerships in selected markets, a leading specialty milk components innovator and solutions provider, a leading consumer nutritional milks marketer, and to be a leading dairy marketer to foodservice in key markets.

History of Fonterra Co Operative Group Ltd.

The Fonterra Co-Operative Group Ltd. was created from the October 2001 merger of the New Zealand Dairy Group (NZDG), Kiwi Cooperative Dairies, and the New Zealand Dairy Board (NZDB). Responsible for 20 percent of New Zealand's total exports and 7 percent of its gross domestic product, Fonterra operates as the world's largest exporter of dairy products, controlling over a third of international dairy trade. The Group is co-operatively owned by over 13,000 dairy farmers whose products--sold under such brands as Anchor, Anlene, Mainland, Anmum, and Chesdale--make their way to customers in approximately 140 countries by way of the Group's marketing arm, New Zealand Milk Products (NZMP). Over three million Fonterra cows produce over 13 billion liters of milk each year. The United States is Fonterra's largest single market by revenue while Asia is the Group's largest export region. Fonterra operates 29 manufacturing sites in New Zealand and has 35 additional locations throughout the world.

Early History: 1800s-1900s

New Zealand's dairy industry got its start in the early 1800s when Samuel Marsden, a Christian missionary born in England, traveled to New Zealand to bring Christianity to its aborigines, the Maoris. Little did he know that his gift of a bull and two heifers in 1814 would mark the start of an industry that would eventually support much of New Zealand's economy.

The growth of the dairy industry coincided with a period of civil unrest in New Zealand. In 1840, Britain took control of the islands and began to form settlements, forcing the native Maoris to change their ways. Land wars were fought from 1843 until 1872, when the British declared victory over the aborigines. During the conflict, dairy farming grew to be popular among New Zealanders. By 1846, the country's first export, a consignment of cheese, was shipped to Australia. Other key events before the turn of the century included the creation of New Zealand's first cheese co-operative in 1871. In 1882, the first refrigerated shipment of meat and butter sailed to London from Port Chalmers. The following year, the separation of skim milk from cream was made possible with the advent of the cream separator. In 1886, Henry Reynolds established a butter factory at Pukekura in the Waikato region. The Anchor brand was launched the same year and became a leading brand across the globe. In fact, Anchor was one of Fonterra's leading brands in the new millennium.

By the start of the 1900s, most of New Zealand's dairy factories were co-operatives, a trend that continued through the next 100 years. The government eyed this industry as a key component to its economic development and therefore began taking a strong role in its performance. In 1923, the Dairy Export Control Board was established to oversee all of New Zealand's exports. The Labour Government came into power in 1935 on the heels of strong support from farmers enticed by the party's commitment to a guaranteed price for butterfat. The government took control of all export marketing that year.

Changes continued into the 1940s as dairy farmers began to demand more control over their products. In 1947, the Dairy Products Marketing Commission was launched, empowering both industry leaders and government to make decisions related to export marketing. While changes were being made in the governance of the industry, new technological advances were making their way into New Zealand. In 1948, an artificial breeding center was established that promised to make the breeding of cows a more lucrative process. Collection of whole milk by tanker also became the norm, saving farmers both time and money.

Focus on Diversification and Expansion: 1960s-90s

During the 1960s, the New Zealand dairy industry began to diversify its product line and seek out international expansion. New Zealand butter and cheese had made its way to the United Kingdom in the late 1920s through Amalgamated Dairies. Nonetheless, dairy farmers wished to expand their reach much further. In 1961, the Dairy Board and the Dairy Products Marketing Commission were combined to form the Dairy Production and Marketing Board. The new group branched out into Asia, launching its first overseas milk recombining plant in Singapore. The industry continued growing at a rapid clip in the following years. By 1964, New Zealand's dairy farmers had over two million cows at their disposal.

Overall expansion continued to remain at the forefront of dairy farmer's strategy during this time period. To bolster the country's international trade exposure, New Zealand took special interest in the happenings of the General Agreement on Tariffs and Trade (GATT). In 1978, the organization began to address agricultural trade--after years of negotiations and meetings, agriculture was officially added to GATT's agenda at the GATT Uruguay Round meetings in 1994.

In order to compete in an international marketplace, the New Zealand dairy industry took measures to strategically position itself among the leading dairy exporters in the world. Significant changes occurred in the 1980s and 1990s that led to the formation of Fonterra. The Dairy Board Act was passed in 1987, giving the Board financial independence from the New Zealand government. In 1992, the domestic milk and dairy products market in New Zealand was deregulated. By 1995, the Dairy Board was 80 subsidiaries strong, making it the largest marketing network across the globe. The dairy industry continued to operate in a co-operative fashion--local dairy farmers owned portions of their processing plants and those plants owned part of the Dairy Board.

The Birth of Fonterra in the New Century

Success in the dairy industry was crucial to the overall health of the New Zealand economy. Dairy farmers remained heavily dependent on export trade, leaving them vulnerable to fluctuations in international economies, especially those in the United States and Asia. During the late 1990s, industry leaders began to formulate a plan that, upon fruition, would secure New Zealand's place among the leading dairy exporters across the globe.

The plan called for the combination of the country's two largest dairy co-operatives, New Zealand Dairy Group (NZDG) and Kiwi Co-operative Dairies, and the New Zealand Dairy Board. The merger would create New Zealand's largest company and one of the top ten dairy concerns in the world with assets of $5.8 billion. In order for the deal to go through, the New Zealand government needed to pass laws that allowed competition in its domestic market in order to quell anti-trust fears. The Commerce Commission would also have to approve the merger, 75 percent of the co-operative farmers would have to vote in favor of the deal, and NZDG and Kiwi would have to formulate an acceptable merger agreement.

The proposed deal, which was expected to increase industry earnings by NZ $300 million per year, was applauded by farmers whose incomes were tumbling due to falling prices for commodity dairy products. While the benefits of the arrangement appeared to be cut and dry, the deal nearly collapsed several times due to the inability of NZDG and Kiwi to settle on the terms of the merger agreement. The ensuing negotiations proved to be hostile at times, and several leading executives, including Doug Leeder, the chairman of NZDG, resigned during the talks.

An agreement was finally reached between the companies, and shareholders voted on the deal on June 18, 2001. The three heads of the merging companies--John Roadley, Henry van der Heyden, and Greg Gent--argued in favor of the transaction in a letter to shareholders, asserting that passage of the merger was crucial to the advancement of the industry. They claimed the fusion of the three businesses would provide many benefits that included increasing global competitiveness; keeping the assets of the NZDB in one piece so that New Zealand companies would not have to compete against each other in international markets; maintaining a profitable co-operative structure; and integrating both manufacturing and marketing businesses in a cost effective fashion. In particular, management believed that the merger would point the New Zealand dairy industry in the right direction for future growth.

Shareholders agreed and voted in favor of the union. The new business group officially began operation in October 2001. Named Fonterra Co-operative Group Ltd., the co-operative rose to the upper echelon of dairy concerns, becoming the largest exporter of dairy products in the world and selling nearly 95 percent of supplier shareholder production. The Group's top exports included whole milk powder, cheese, skim milk powder, butter, casein, anhydrous milk fat, liquid milk and cream, buttermilk powder, prepared edible fat, and lactalbumin.

Fonterra spent its first year working towards integration. The company also made key partnerships to strengthen its foothold in the international marketplace. During 2002, the company teamed up with Nestlé S.A. to create Dairy Partners America, a venture designed to export dairy products to South America, the United States, and Canada. The firm also eyed China, India, South America, and Eastern Europe as growth markets. During 2002, sales increased by nearly 59 percent. Fonterra's shareholders were not as fortunate as the company reported a loss due to falling prices and oversupply. In order to calm disgruntled farmers concerned about their payout, Andrew Ferrier--Fonterra's elected CEO--promised to focus on improving the company's return to its shareholders.

Ferrier referred to Fonterra as being in its childhood in a 2003 New Zealand Press Association report. The CEO felt confident that he and his management team could lead Fonterra successfully into its adolescent years. "The question for New Zealanders," stated the aforementioned report, "is whether that adolescence is going to be a smooth transition into adulthood, or a swamp of juvenile delinquency." While many of the companies comprising the group had been in business for years, the birth of the Fonterra group was indeed a milestone for the country's dairy industry. Its future, however, was dependent on the health of global economies and its ability to transform itself from a commodities business into a multi-faceted value-added concern with a broad range of branded consumer products.

Principal Operating Units: New Zealand Milk Products; New Zealand Milk; Fonterra Enterprises; Fonterra Shareholder Services; Fonterra Marketing & Innovation; Fencepost.com; RD1; ViaLactia.

Principal Competitors: Groupe Danone; Nestlé S.A.; Parmalat Finanziaria S.p.A.

Chronology

• Key Dates:
• 1814: Samuel Marsden brings a bull and two heifers to New Zealand.
• 1846: The country's first export--a consignment of cheese--is shipped to Australia.
• 1886: The Anchor brand is launched.
• 1923: New Zealand establishes its first Dairy Board.
• 1935: The government takes control over export marketing.
• 1961: The Dairy Production and Marketing Board is created.
• 1987: The Dairy Board Act is passed.
• 2001: The Fonterra Co-Operative Group Ltd. is created from the merger of the New Zealand Dairy Group, Kiwi Cooperative Dairies, and the New Zealand Dairy Board.