* Fonterra's branded push into China seen on track, despite
* China dairy crackdown, brand competition pose risks
* Full-year EBIT dips to NZ$1 bln, in line with forecasts
By Naomi Tajitsu
WELLINGTON, Sept 25 Fonterra, the
world's largest dairy processor, is moving ahead with plans to
launch its own branded milk formula in China, undeterred by a
recent botulism scare and Beijing's crackdown on foreign firms
over alleged corrupt sales practices.
China is a magnet for foreign milk formula makers, with its
$12.4 billion market expected to double by 2017. Foreign firms
are under scrutiny, however, after reports alleged companies had
bribed medical staff to recommend their products to new mothers.
Authorities have also fined a group of mostly foreign milk
formula producers $110 million for price fixing.
New Zealand's Fonterra Co-operative Group, owned
by some 10,500 farmers, supplies 90 percent of China's milk
powder imports by selling its raw material to other companies to
make products ranging from infant formula to cheese on frozen
While China is its biggest export market, Fonterra has
stayed away from selling its own branded baby formula there
since a poisoning incident in 2008, when six infants died and
thousands fell ill after Chinese dairy firm Sanlu was found to
have added melamine to bulk up its infant products.
Sanlu collapsed as a result of the scandal, while Fonterra,
which held a stake in the Chinese firm, was criticised for
failing to blow the whistle sooner and more loudly.
On Wednesday, Fonterra reported an 18 percent lift in its
full year profit, despite a drought trimming earnings. Net
profit after tax for the year to July 31 was NZ$736 million
($608 million), compared with NZ$624 million last year.
Normalised earnings before interest and taxes (EBIT) fell to
NZ$1 billion from $1.03 billion a year ago, in line with
guidance given in July.
Fonterra is investigating the recent contamination scare,
when it said it found a potentially fatal bacteria in one of its
products, triggering recalls of infant milk formula and sports
drinks in nine countries including China.
New Zealand's Ministry for Primary Industries later said
tests showed the botulism scare had been a false alarm because
whey protein concentrate made by Fonterra contained a less
Fonterra's China expansion strategy, which also includes
building a UHT milk processing plant by 2016, is part of the
company's global plan to generate more earnings from value-added
products, as opposed to lower-margin bulk milk powder.
While Fonterra's reputation has been knocked by the August
product recalls, analysts say this should have only a limited
impact on its growth plans.
"At the margin, it will have been a bit of a distraction and
there's potential for some delay in terms of some initiatives,"
said Arie Dekker, strategist at Deutsche Bank in Auckland. "But
initiatives like the UHT plant and expanding food services in
China, they're not going to be pushed back significantly because
of the botulism issue."
Fonterra, which controls nearly a third of the world dairy
trade and generates around 7 percent of New Zealand's GDP, cut
its forecast in July after a drought this year sapped milk
As global dairy prices hover near record highs, Fonterra has
warned that high input costs may dent margins in the current
Its push further into China comes as Beijing seeks to
consolidate its domestic dairy industry to improve food safety.
Fonterra was among the foreign dairy manufacturers fined
last month for fixing the price of infant milk formula - which
is highly prized among Chinese who don't trust locally made
formula after a series of food safety scandals.
The 2008 scandal, in particular, shredded public confidence
in Chinese dairy companies, opening the door to foreign formula
firms, which have now grabbed about half of the total market and
can sell for more than double the price of local formula.
In pushing its own brand in China, Fonterra will be up
against rivals such as Danone - a major customer whose
brands command 9.2 percent of the Chinese market - and Mead
"A lot more is going to depend on whether Fonterra can craft
an effective brand and compete head to head with Danone, Mead
Johnson and local players like Beingmate," said James Roy,
senior analyst at China Market Research Group in Shanghai.
"That's really the bigger challenge, building the brand up,
because that's not something they have established here yet."