Fonterra faces big challenges ahead in China

By Guy Montague-Jones

- Last updated on GMT

Related tags: Milk, Fonterra

Fonterra faces big challenges ahead in China
Fonterra may face an uphill struggle in its bid to expand in China despite the promise of significant market growth, according to an Asian food industry analyst.

Last week Fonterra said it planned to increase the number of cities it serves in China from seven to 18. The New Zealand dairy added that it would be expanding both its farm and ingredients businesses in the country.

Attractive growth prospects

According to its forecasts, the Chinese dairy market is due to triple in value from around US $22bn in 2009 to $70bn by 2020.

That would suggest that Fonterra is on the right track with its expansion plans but Matthew Crabbe, managing director of Access Asia, warned that developing the Chinese dairy market is not a straightforward task.

Supply is likely to provide the biggest headaches for Fonterra. Crabbe told there are “systemic problems”​ with milk supply in China.

Poor raw milk quality

Much of the raw milk is brought in from Mongolia as the grass in China does not provide cows with the right nutrients. Crabbe said the poor quality of milk from Chinese farms played a key role in the melamine crisis in 2008 as dairies used the industrial chemical to make up for low protein levels.

The market researcher said Fonterra may have to go in “A to Z” and build up new farms to guarantee milk quality but with land at a premium around the big cities that could prove expensive.

An alternative would be to buy up milk from afar and transport it to market. But then, Crabbe said Fonterra would have to build up the infrastructure – including fleets of refrigerated trucks - to ensure that dairy products reach retail shelves safely.

Either way significant investment is necessary. And the rewards remain uncertain, especially as memories of the melamine scandal, which left 6 people dead and made hundreds of thousands ill, are still fresh and food safety scares continue to reemerge.

“Many dairy companies are struggling because the industry is plagued by bad press,”​ said Crabbe. He said many are not finding the growth rates they expected and even big and successful companies like Bright Dairy are diversifying into other areas.

For the moment Fonterra does not have a major share of the Chinese market. After its joint venture Sanlu became embroiled in the melamine scandal in 2008, the New Zealand dairy had to rebuild its business in China.

Nestle, Coca-Cola and Danone are currently the biggest foreign companies in the Chinese dairy market – which is dominated drinking yoghurts and flavoured milks.

Related topics: Markets, Fonterra, Emerging Markets

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