Fonterra to focus on B2B services in sweeping strategic change
Fonterra Co-operative Group Ltd is exploring how to divest from some of its global consumer and integrated businesses in order to focus on its ‘high-performing’ ingredients and foodservice channels.
The announcement follows a strategic review which confirmed the co-op’s B2B services should be prioritized ahead of the Group’s consumer and associated portfolios.
Fonterra’s consumer offering includes well-known brands Anchor, Fernleaf and Western Star, but the co-op’s management thinks that focusing entirely on its ingredients and foodservice provision would offer the highest value in the long term.
CEO Miles Hurrell said a divestment - which is expected to take 12 to 18 months and require shareholder backing - would create ‘a simpler, higher performing co-op with our focus on our core business and doing what we do best’.
“We are exploring divestment options for our global Consumer business as well as our integrated businesses Fonterra Oceania and Fonterra Sri Lanka,” he 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.
“At the same time, we believe Fonterra is not the highest-value owner of the Consumer and associated businesses in the longer term and a divestment could allow a new owner with the right expertise and resources to unlock their full potential.
“This presents a great opportunity for these brands and businesses. While I recognise there’s a strong connection to brands such as Anchor, a new owner could help these businesses to flourish.”
Hurrell added that the co-op has already been approached by prospective buyers, which suggests it’s the right time to divest.
Fonterra’s top performers
In recent years, Fonterra has been consolidating its business operations, offloading its Chilean business to Peru’s Gloria Foods, selling Dairy Partners America Brazil - a joint venture with Nestlé - and divesting from its loss-making Chinese farms.
The co-op has benefitted from strong margins in dairy ingredients, particularly in the last two years when global dairy commodity prices have been volatile. Meanwhile, Fonterra’s foodservice offering also delivered improved performance in FY23, mainly due to increased product pricing and higher out of home demand post-pandemic.
The dairy firm’s consumer division however has been affected by milk price volatility more than other divisions and only returned NZ$3.3bn in revenue in FY23, with impairments amounting to NZ$222m in total.
In comparison, Fonterra’s ingredients channel – which utilized most of the co-op’s milk output (80%) – generated almost five times more in revenue, returning NZ$17.4bn in FY23. Foodservice returned $3.9bn by utilizing around 13% of milk.
Fonterra goes to market via NZMP, its ingredients brand, and Anchor Food Professionals, its foodservice brand.
2030 financial targets scrapped
Fonterra has also announced that it is withdrawing its 2030 financial targets since these included projections based on the performance of the businesses it's planning to divest from. According to figures released by the co-op during the announcement, the businesses in scope for divestment generated NZ$5.4bn in revenue and have NZ$3.4bn of capital employed.
The co-op is also scrapping its on-market share buyback programme, which was expected to run until 13 August 2024. The FY24 forecast earnings, sustainability targets and associated investment plans are not being impacted, however.
"We intend to provide a further update on our revised long-term strategy in due course. This will include further detail on our plans to grow the long-term value of Fonterra and the measures through which we will track our progress,” Hurrell concluded.
