Unleashing the giant: Fonterra's future | KPMG | NZ

Unleashing the giant: Fonterra's future

Unleashing the giant: Fonterra's future

Ross Buckley, KPMG’s Executive Chairman, says KPMG is encouraging informed debate around the future of Fonterra and the dairy industry, given its vital importance to New Zealand’s prosperity.

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An analysis of the Fonterra signals

“Putting it bluntly, New Zealand needs Fonterra to succeed. Our economy emerged from the GFC in relatively good shape due to our dairy industry, and in particular Fonterra. It’s been a good news story - and we need to see it getting even better.”

The signals indicate that Fonterra is still on its trajectory to create a “game-changing future” for the New Zealand economy.

Ahead of Fonterra’s 2015 results being announced on the 24th September 2015, our analysts have released a report that looks at the direction of travel and its potential to be one of the world’s mega food & beverage brands.

KPMG Partner Matt Diprose says the signals indicate that the co-operative could be on a “flight path” to achieve its goal of becoming a $35 billion company by 2025 and making $3.5 billion in EBIT. “That’s where they need to get to. It’s consistent with their message and consistent with our analysis of the signals. That outcome would be game-changing for their suppliers and for New Zealand.”

Simon Hunter, who leads the Performance Consulting team in Auckland, says the Government’s target to double agribusiness exports by 2025 will only happen with a highly competitive and growing Fonterra underpinning it. New Zealand needs $33 billion in growth, and Fonterra is the single biggest player, accounting for approximately one-third of our agribusiness revenue.

“The company has emerged from three very tough years, and is now focused on a transformation so it can deliver on its strategy. It’s time to take stock and ask, are we seeing the rate of improvement we should be seeing from Fonterra? And how far could it go?”

Our analysis has concluded that Fonterra is on track to significantly improve its profitability.

Hunter says Fonterra’s key problem to date has been an inability to lift profitability beyond an EBIT/sales ratio of 5%. This compares with competitors like Nestlé, Abbott and Danone that deliver ratios of 10%-15%.

He says getting to 8% is “absolutely achievable” in the next two years, based on Fonterra’s current solid foundation and plans for growth. A key strategy will be to shift the focus to consumer goods, as the other big players do.

Fonterra has already sharpened its focus to a tight-knit stable of three major consumer brands (Anchor, Anlene and Anmum); complemented by their value-add ingredients business (NZMP), and commodity product.

“The world’s top 10 food and beverage companies each have multi-billion dollar brands to lead in selected categories,” says KPMG’s Global Agribusiness Leader Ian Proudfoot.

“With that mix, Fonterra has the potential to be among the mega food beverage brands in the world.”

Farm Enterprise Partner Roger Wilson encourages New Zealand farmers to look beyond current market pressures, given the inevitable rebalancing of dairy prices, and to realise “this is a long game.”

“The number one thing farmers should be focused on is EBIT, because that’s what gives you the power to invest in brands and new markets. And it’s the number that makes them as a supplier group far more resilient compared with farmers in other countries, because they’re part of an integrated supply chain.”

© 2017 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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