Fonterra pushes plans for own-brand milk in China

New Zealand dairy firm targets US$12.4 billion mainland market despite recent health scare and crackdown over corrupt sales practices

PUBLISHED : Wednesday, 25 September, 2013, 10:35am
UPDATED : Thursday, 26 September, 2013, 2:58am

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 US$12.4 billion market expected to double by 2017. Foreign firms are under scrutiny, however, after reports alleged some had bribed medical staff to recommend their products to new mothers.

The authorities have fined a group of mostly foreign milk formula producers US$110 million for price fixing.

New Zealand's Fonterra Co-operative, owned by 10,500 farmers, supplies 90 per cent 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 pizzas.

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 company, was criticised for failing to blow the whistle sooner and more loudly.

Fonterra yesterday reported an 18 per cent rise in its full-year profit, despite a drought trimming earnings. Net profit for the year to July was NZ$736 million (HK$4.73 billion).

Fonterra is investigating the recent contamination scare, when it said it found 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 harmful type of bacteria.

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 its reputation has been knocked by the product recalls last month, 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, a strategist at Deutsche Bank. "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 about 7 per cent of New Zealand's gross domestic product, cut its forecast in July after a drought this year sapped milk production.

Its push further into China comes as Beijing seeks to consolidate its dairy industry to improve food safety.

Fonterra was among the foreign dairy manufacturers fined last month for fixing the price of infant milk formula.