Having completed the billion-dollar divestment of Mainland Group to Lactalis, Fonterra is swiftly moving toward a simplified organisational model in which ingredients and foodservice are the star players.
The New Zealand dairy co-operative has also made changes at the top – appointing Richard Allen as the successor of outgoing CEO Miles Hurrell, effective May 1.
While Fonterra is in a strong financial position on the back of the completed sale and demand for ingredients and foodservice, the real work begins now – and Allen will be responsible for how the co-op’s long-term strategy is realised.
What are Fonterra’s top strategic objectives?
In the past decade, Fonterra has focused on consolidating its geographic footprint and streamlining its product and services to maximise value for farmers and shareholders. This has meant a gradual reduction in overseas assets and letting go of iconic consumer brands.
Instead of stretching across markets and distinct business models, the co-op chose to bet on its foundational strengths – grass-fed New Zealand milk, value-added ingredients, and foodservice industry growth.
Here are the main areas of focus for Fonterra’s new CEO.
Ingredients growth
In ingredients, the co-op’s plan focuses on optimising product mix, smarter pricing strategies to counter volatility, and building relationships with global customers. The co-op is adapting to suit what customers want – from a flexible digital ordering platform to working closely with manufacturers on formulations in high-growth segments such as sports and medical nutrition.
The co-op is trialling a digital sales system that provides real-time visibility into stock and pricing levels for ingredients including WPC, lactose, caseins and milk protein concentrate. It serves as Fonterra’s own digital marketplace: complete with auctions, fixed-price listings, weekly tenders, and bid and counter-offer negotiations.
As part of its strategy, Fonterra is also allocating more milk solids to high-value ingredients and foodservice channels as a reaction to growing demand for functional proteins.
The global opportunity for New Zealand dairy ingredients is significant: newly-signed FTAs with the UK and Europe mean strong potential for future expansion, while demand from the US, Japan and China remains crucial long-term.
To that end, Fonterra is investing in production and storage infrastructure. To unlock capacity in the high-protein market, which is set to swell to nearly US$10bn over the next four years at a CAGR of 7%, the co-op is expanding production at its Studholme site for advanced proteins for the specialised dairy and medical and sports nutrition arenas.
Cheese storage is also being increased, with the co-op’s Whareroa storage facility being upgraded to house 5,000MT more cheese, to a total of 26,000MT.
Having helmed the ingredients division until his appointment as CEO, Richard Allen is well-placed to build on Fonterra’s service provision here – including rolling out the co-op’s digital sales system more widely to simplify purchasing and maintain pricing agility.
Foodservice expansion
In foodservice, Greater China has historically been the co-op’s engine in this channel – but scaling this model to other major markets, from Latin America to Southeast Asia, remains a key growth priority and something the new CEO would likely place a sharper focus on in the years to come.
Being the biggest market for the co-op’s foodservice division; however, there’s no escaping the fact that much of the investment is still going to flow into Greater China. From local application centres to a UHT cream plant construction to cater for growing demand for UHT products, the co-op is strengthening in a market that offers increasing opportunities, driven by urbanisation and growing awareness of dairy’s nutritional value.
Meanwhile, Southeast Asia is emerging as a key region, with Vietnam cream sales doubling in value between 2022 and 2024 and bakery, beverages and desserts among the fastest-growing categories in the region. There, Fonterra is betting on its butter sheets, cream and cream cheese products to advance its offering.
With Mainland Group fully divested, the New Zealand dairy major should now have bandwidth to focus on growth in both emerging and established markets.
Improving operational efficiency
Unlocking capacity and improving market penetration through investment and innovation is one part of the story. Stability achieved through operational efficiency and discipline forms an equally essential part of what Fonterra’s board would expect Allen to deliver.
In FY25, Fonterra’s manufacturing costs per kgMS increased by 9 cents due to inflation and other costs as its portfolio shifted to high-margin ingredients and foodservice products. Quality-related costs also increased last year, though higher milk volumes and prices helped offset this.
But in the long run, optimising production to deliver both quality and pricing stability will be among the top priorities for the new leadership.
Innovation and AI-driven R&D
Fonterra sees innovation as not merely formulating new products but improving operation across its entire business. This goes to operational efficiency, as mentioned above, but also on-farm solutions that support sustainability and enhancing responsiveness across the supply chain.
The co-op is using AI to cut down packaging-related downtime by scanning production lines for packaging faults – a move that’s already reduced downtime by more than 90% at one of its butter packaging sites.
The co-op is also leveraging the technology to sift through 98 years of in-house research – or more than 19,000 documents – which would accelerate R&D by saving thousands of hours of research per year.
Ultimately, the question for Allen is whether Fonterra can turn this sharper strategic focus into sustained execution: keeping complexity in check while delivering growth, efficiency and innovation at scale.
