Fonterra Co-Operative Group, the sixth largest dairy company in the world, announced a major change in strategy in which it will try to sell some or all of its consumer business and its operations in Australia and Sri Lanka.

Fonterra called the move a “significant” one for the co-op “which will set it up to grow long-term value for farmer shareholders”.

The consumer business which has been put on the market including the world-famous dairy brand Anchor. The consumer product range includes fresh milk, cheese, yoghurt and butter. Those products accounted for 7% of Fonterra’s New Zealand milk solids sold in 2023.

According to an information pack released by Fonterra the businesses selected for divestment accounted for NZ$5.4bn (€3bn) of the co-op’s NZ$27.3bn (€15.4bn) revenue for the year ended July 2023.

CEO Miles Hurrell said: “A divestment of these assets would help create a simpler, higher performing co-op with our focus on our core ingredients and food service business and doing what we do best.”

He added that Fonterra believes a new owner with the right expertise and resources could unlock the full potential of the consumer-facing businesses. The use of proceeds from any sale would be governed by Fonterra’s resource allocation framework which decides on the use of funds for either debt repayment, investment in remaining business or distribution to shareholders and farmers.

Next steps

Fonterra will now appoint advisers to assist with assessing divestment options. The co-op said that choices made when considering options will be driven by both the potential proceeds of a sale and the ability for it to generate consistent returns over the long-term.

Considering the size of the potential sale, the co-op said that it will seek shareholder support for the divestment. While it said the process is expected to take between 12 and 18 months, Fonterra said it has already received unsolicited interest in parts of the businesses marked for disposal.

Fonterra also said that due to the impact the sale would have on the path of future earnings, it is withdrawing its financial targets out to 2030 which it had set in 2021 as part of what was its long-term strategy then.

The co-op also announced it is suspending its NZ$50m (€28m) share buyback scheme which was scheduled to continue until August.

Judith Swales, Global Markets CEO at Fonterra announced she is leaving the co-op, with Hurrell saying the change in strategic direction presented a “natural juncture” for Swales’ decision.

Initial reaction from shareholders has been very positive, with shares climbing by 30% since the announcement was made (see Figure 1).

Bigger not always better

The change in strategy at Fonterra will leave the co-op as a smaller operation, a path that the company was already on following the sale of its operations in South America last year to Lactalis. It will also change the focus of the co-op to its core dairy operations where it sells powders and protein solutions through its ingredients business and cheeses and UHT cream through its food service division.

Global ratings agency Fitch noted that the change in focus means that Fonterra would become a dairy commodity processor, rather than a packaged food producer. Fitch said that the co-op would lose the benefits of having diversified income streams should it successfully sell its consumer businesses, while adding that Fonterra would still be able to pass global dairy price and exchange rate movements to farmers.

While they might be happening on the other side of the world, the planned changes at Fonterra should be closely watched by dairy farmers here.

As we have written on these pages recently, the era of rapid growth in dairy operations has come to an end, with management at processors here looking to do more with what they have. The mantra of “expansion” has been replaced by one of “adding value”.

In Fonterra’s case, this means doubling-down on its core operations where it feels it is best placed to maximise earnings. Hurrell makes the point that the consumer business is profitable, but the co-op does not have all the expertise to get the best out of it.

For Irish processors, there is probably a lesson there. In trying to maximise value, there is always a trade off between competence and ambition. If they see an opportunity in a market for their products, they will need to ensure that not only can they supply the product, but that they also have the knowledge and experience to maximise returns on the product.

However, there are benefits in seeking new outlets for production as this can lead to a more diversified source of earnings which should mean less volatility in profits over the medium term. As Fitch notes, the Fonterra decision will reduce its earnings diversification, increasing the risks of more volatile earnings.

For Irish processors, this is probably a timely reminder that whatever decisions they make about their futures will involve trade-offs and risks.

However, doing nothing new also involves risks, as they may find themselves missing out on key market trends which could help secure their future profitability.