'Expensive brand beats expensive land'

Share on twitter
Share on facebook
Share on linkedin
Share on whatsapp
Share on email

Dairy farmers need to demand that dairy giant Fonterra invests heavily in brand development if increasing costs are to be offset by high-priced milk products, says a food marketing expert.
 
Global food and drink industry international speaker Professor David Hughes said New Zealand’s dairy companies had to spend more on developing patented clever dairy brands as domestic milk growth could not continue at its same rate forever.
 
«If you want to see Fonterra and smaller companies have higher valued products, they have to spend more on branding and research and development, and to do that has to be through brave farmer leadership saying hold on to more [revenue] and invest it on our behalf for our longer term, and don’t send it back to the farm and there would lots of farmers who don’t agree with that,» said Hughes who spoke at the Zoetis Dairy Summit in Christchurch this week.
 
He said it would be unreasonable of farmers to expect Chinese demand for infant formula and other dairy products to carry on growing as it had.
 
Every so often there would be economic problems and the real worry would be when China stops or constrains its buying. Placing all the eggs in one basket was a risky strategy, he said.
 
Dairy prices previously halved when China realised the developed world was going into recession and sharply constrained its buying. The prices went on to recover, but this was cold comfort for dairy farmers who, at the time, had bought high-priced dairy land.
 
Hughes said milk growth could not be expected to go in a straight line and both supply and demand could be expected to become more volatile. That would make business planning difficult for farmers.
 
He said New Zealand farmers were the «best» at converting profits from exported milk products into higher land prices by investng in more farms, contributing to raising their cost base.
 
Historically they had been low-cost producers, but costs were increasing, reflecting environmental and regulation pressures and farmers buying more land. Plan B should be to produce products of higher value to compensate for higher costs, he said.
 
«When I talk to dairy farmers and tell the story our major company Fonterra doesn’t have branding in its DNA, and in history it has under-invested in research and development for ownership in patented high-value special dairy ingredients (they object to that). But I say you own the company and the reason why is that farmers have said ‘don’t do anything clever and send all the money back to the farm’ and management have responded to shareholders’ wishes.»
 
So farmers have bought more expensive land to produce higher-cost milk and there would be those with trousers around their ankles if demand dropped, he said.
 
«In general there is a very exciting future for dairying. But you will have hang on to your hats and make sure they are crash hats because every now and then seatbelts on, please, because it will be a rough-and-tumble ride.»
 
NZ-based milk would lose international market share over time and its pole position would be threatened with competition expected to come from South American nations such as Chile and the United States.
 
In Australia the big players were lining up to buy milk supply but Fonterra was constrained by capital availability.
 
Hughes said demand was surprisingly good for dairy at one level in developed markets with consumers interested in natural, healthy and functional foods and most of these aligned in favour of dairy products.
 
There was a big focus on protein, but not meat protein, for weight management and older people wanted protein to avoid muscle wastage and young people wanted to be sporty and sought protein boosters.
 
«The surprising emergence over the last 10 years of that has been whey, which used to be less than a byproduct. So the use of whey has come out of the closet just for bodybuilders and now appeals to a wide proportion of the market, particularly in developed countries.
 
«And actually we now have this sort of whey imbalance whereas it used to be ‘what can we do with this damn whey’ and now there is this buoyant, booming demand for whey products and it’s the butterfat which is much more problematic.»
 
In the biggest consumer market of the US some of the greatest «rip-roaring» successes have been other dairy-based products. Among the multibillion-dollar brands are Activia, owned by Danone, with its drinkable yoghurt and probiotic products to prevent women from feeling bloated. Sales of greek yoghurt by Chobani, owned by a Turkish entrepreneur, went from nothing to over $1b in five years.
 
The bigger players such as Danone have moved to these products and the company’s look-a-like greek yoghurt product for men had sales of $285 million in its 2012 launch.
 
Protein bars with whey powder in them have also been popular in other world markets.
 
«Suddenly in dairy the very, very big boys are taking interest and Coca-Cola, in a joint venture, and Pepsi Co, in a joint venture, separately have milk partners to have milk-drinking products,» said Hughes.
 
«It sounds pretty good [for farmers] for the moment. However, other things are happening and in most of these developed countries the classic dairy products struggle. Bulk cheddar, butter and drinking milk are declining in consumption in most mature markets, yet in New Zealand you consider them the rock-solid guts of the processed dairy markets and in history that’s what you exported. They are in decline in many markets.»
 
Bulk cheddar is «boring and fat» and in butter saturated fats have had bad press with obesity becoming a national tragedy as nutritional labelling penalises dairy products with any fat component. Milk has more competitors with mineral waters, smoothies or fruit juices and in many markets tea drinking has fallen and, with it, milk use has declined.
 
Milk processors are starting to see this «strange imbalance» and in most developed countries there is unlikely to be growth except for whey-based protein, yoghurt products or artisan cheeses.
 
Another trend is that people don’t have time for a bowl of cereal – and convenient milk-free breakfast biscuits are getting popular.
 
«Should we go out and slit our throats? Well no, because what we do know is our huge focus in NZ is developing markets.»
 
The seven billion population of the world is expected to grow another two billion in 40 years with one billion in Asia and the other billion in Africa. Increasing incomes are expected to drive up consumption in meat and dairy.
 
The positive is that Southeast Asia is a close trading neighbour and New Zealand has a mega dairy trading company in Fonterra and emerging small operators quick on their feet in supplying to markets.
 
The flip side is New Zealand’s reliance chiefly as a commodity ingredient provider for the global infant formula market to China. China and Hong Kong contributed to 60 per cent of world growth in the market from 2008 to last year.
 
«This tells me in this vitally important market we have this huge bet on continued growth out of the Chinese market. And what actually do we sell there? We don’t sell the really high value branded infant nutrition – we sell the raw materials which is purchased by the Nestles and Danones, Mead Johnson and Abbott Laboratories. They control more than half the total world’s branded infant formula. That is your raw material – powdered milk – pixie dust and a lot of marketing and that is where the real money is made.»
 
Hughes said Fonterra had a branded product in China called Anmum which was still at the pilot phase trying to edge into the infant formula market against big players with billion-dollar brands and the regional brand of Anlene was successful in Asia and seen as an expert brand in bone health.
 
«Actually, you just have too few of these. So in history you have not invested in brand development and under-invested in research and development to produce patented products with very high value. You have got the milk, the exports market is dominated by China and my worry is that is putting a big bet on China producing a strong rate of economic growth which we know won’t just keep on going, and we won’t catch the brand value because that’s not in our DNA.»
 
The good news for farmers is that emerging markets are taking up the slack as mature markets move away from butterfat.
 
Less endearing is Fonterra’s food integrity scares which had worried markets and New Zealand had to deliver on its «brand NZ» reputation which would be challenging, he said. Nor could it rest on its clean, green reputation, as other countries such as Chile and Ireland could also lay claim to it.
 
Hughes is away from his home country of Wales 300 days in a year on the speaker circuit or hired by food and drink companies to talk about emerging trends in consumer and market developments. Last week he was in Spain and Austria and the two weeks before in Cambodia, Singapore and Australia.
 
Source: Stuff

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

Te puede interesar

Notas
Relacionadas