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Why Fonterra chose to exit from dairy joint venture

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Continuous losses, contract manufacturing weigh down prospects.

“Only in cheese is the brand holding on with a 20 per cent-odd market share, compared with its main rival, Amul’s 65 per cent.”

Harish Damodaran

New Delhi, April 28 The world’s No. 1 dairy products exporter Fonterra’s decision to pull out from Britannia New Zealand Foods Pvt Ltd (BNZF), its equal joint venture with Britannia Industries Ltd (BIL), is being attributed mainly to three factors.

The first of these has to do with the joint venture losing money. For the year ended March 31 2008, BNZF incurred a net loss of Rs 5.1 crore on a turnover of Rs 142.40 crore, with the corresponding figures for the preceding fiscal being Rs 11.2 crore net loss and Rs 118.60 crore, respectively.

“It was heading nowhere. The company was forced to exit the liquid milk business about four years back, while Britannia Milkman ghee and dairy whitener are not doing particularly well. Only in cheese is the brand holding on with a 20 per cent-odd market share, as compared to its main rival, Amul’s 65 per cent,” according to industry sources.

The losses, in turn, reflect the limitations of a marketing strategy revolving around contract manufacturing. “Unlike an Amul, Hatsun Agro or even Nestle India, BNZF does not have any independent milk procurement and processing network. The company’s cheese is produced by Schreiber Dynamix Dairies at Baramati, just as it was earlier dependent on Modern Dairies, Karnal and other local players for sourcing and packing liquid milk,” sources noted.

Milk marketing

Moreover, the Indian market for ‘western’ dairy products such as cheese and butter is neither very large nor growing substantially. “The table butter market is about Rs 800 crore, while being hardly Rs 250 crore for cheese. In the segment that has seen real growth — liquid milk — Amul, Mother Dairy and others who procure directly from farmers have a definite advantage. All these considerably restrict the scope for a dairy company headquartered in New Zealand,” they added.

And that brings a second plausible reason for Fonterra’s exit. The NZ $19.5 billion Auckland-based dairy major is a cooperative owned by some 11,000 dairy farmers of New Zealand.

“A dairy business cannot succeed here unless it develops its own milk procurement network. But that does not fit in with Fonterra’s main purpose, which is to market the milk of its 11,000 farmer-shareholders rather than that of Indian farmers,” the sources said.

Outsider problems

For Fonterra, BNZF was an avenue that would eventually help market dairy products manufactured in New Zealand under its own brands, such as ‘Anchor’ in India. This objective was certainly not being met under the present arrangement, compounded by high import duties and limited domestic market for products such as cheese.

“Investing in India’s consumer dairy market is not a core priority for Fonterra at this time,” Mr Mark Wilson, Managing Director (Asia/Middle East) said in a statement posted on the company’s Web site on Tuesday.

The third reason could be the fallout of the ‘melamine scandal’ last September involving San Lu, a Chinese joint venture in which Fonterra held 43 per cent. The venture was forced to recall infant milk formula produced under Fonterra’s brands after some batches were found to have been contaminated by melamine, a toxic industrial chemical.

“Fonterra then blamed the problem on the raw milk sourced from third parties in China, while claiming that the products produced using 100 per cent fully-imported dairy ingredients from New Zealand did not suffer any contamination. Probably, they do not want to risk any such occurrence again,” the sources pointed out.

In fact, this was hinted at by Mr Wilson. “The local milk supply (in India) is highly fragmented and requires significant development and investment in order to deliver an efficient supply chain for high quality fresh milk,” he said.

BNZF was set up in 2002, consequent to BIL transferring its entire dairy business to the joint venture. Prior to the hiving off, dairy was contributing over Rs 130 crore or almost 10 per cent of BIL’s topline. The turnover has remained more or less the same since then.

(This article was published in the Business Line print edition dated April 29, 2009)

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