Find out why Fonterra’s sale of its Australian dairy business is raising worries about market consolidation. What will this mean for local farmers and consumers? Read more.
Fonterra’s decision to sell its consumer brands is a significant event that is reshaping the global dairy industry, including the Australian sector. This strategic shift, which prioritizes B2B and ingredients despite the consumer division’s financial success, has raised concerns among local stakeholders about market concentration and its potential impact on Australian dairy producers and consumer choices.
As the Business Council of Cooperatives and Mutuals (BCCM) stated:
“The announcement by Fonterra that it intends to sell its Australian dairy processing assets is yet another blow to dairy farmers and a reminder about the precarious nature of our food security when staples like milk are passed around like commodities.”
Key concerns include:
- Market consolidation reduces competition and local control.
- Pressure on farm gate prices, possibly forcing farmers out of the market.
- The risk of a supermarket duopoly, limiting consumer choices and raising prices.
The issues at hand underscore the pressing need to promptly reassess market dynamics. This is crucial to secure the long-term sustainability of Australia’s dairy industry, a vital part of our nation’s economy and food security.
Fonterra’s Strategic Pivot: Divesting Consumer Brands to Strengthen B2B and Ingredients Focus
One of the major players in world dairy, Fonterra, is changing its approach to concentrate on its B2B and ingredients division. Selling well-known consumer brands, including Anlene, Anchor, and Fernleaf—despite their gross earnings in FY2023 of NZ$781 million (US$481.9 million—this move entails selling these companies notwithstanding Revenue sources indicates another tale, though the consumer sector accounted barely 7% (NZ$3.3 billion / US$2.4 billion). The food service industry brought 13% of total income (NZ$3.9 billion / US$2.4 billion). Comprising 80% of revenue and producing NZ$2.6 billion (US$1.6 billion) in gross profits, the ingredients industry dominated. Aiming to simplify processes, emphasize core competencies, and react to consumer and food service asset interests, this strategy change is meant to streamline operations.
Financial Data Illuminates Fonterra’s Strategic Shift
Fonterra’s latest financial results support their strategy change. From a modest 7% of sales, the consumer division brought in NZ$781mn (US$481.9mn) in gross profits in FY2023. With nearly 13% of sales (NZ$3.9 billion/US$2.4 billion), the food service industry produced NZ$749mn (US$462.2mn) in gross profits. With 80% of total sales (NZ$17.4bn/US$10.7bn), the ingredients business led with gross earnings of NZ$2.6 billion (US$1.6 billion).
Substantial consumer and food service revenues nonetheless indicate Fonterra’s main strength—that of ingredients. Fonterra wants to improve long-term value by concentrating on its best-performing channels—ingredients and food service—involving Unwanted interest in areas of its company also drives the choice; this is a perfect moment for disposal to reallocate funds and improve its principal activities.
Fonterra’s Comprehensive Global Strategy: Streamlining Operations with a Focus on B2B and Ingredients
With its intentions to leave the Australian market and divestiture of consumer brands in Sri Lanka, Fonterra’s new approach centers on its B2B and ingredients business and CEO Miles Hurrell pointed out shedding companies including Anlene, Anchor, and Fernleaf, “While these are great businesses with recent strengthening in performance and potential for more, ownership of these businesses is not required to fulfill Fonterra’s core function of collecting, processing and selling milk.”
Hurrell clarified the strategy turnaround: “More value would come from focusing our Ingredients and food service channels and freeing money in our Consumer and related companies. Disposing these businesses would enable a more straightforward, better-performing Co-op with an eye on our core Ingredients and food service sector. We have also had an unwanted interest in several of these companies; hence, this is a good moment to review their ownership.
Aiming to strengthen its presence in the worldwide market, where B2B and ingredient categories offer more profitable prospects, the divestments in Sri Lanka and Australia are part of a bigger plan to maximize operational efficiency and capital allocation.
Concerns Over Consolidation: Potential Ripple Effects on the Australian Dairy Market
The local dairy industry is alert about how Fonterra’s divestiture may affect the Australian market. Rising market consolidation especially worries the Business Council of Cooperatives and Mutuals (BCCM). They contend this would concentrate dairy asset ownership within a small number of powerful companies, therefore lowering competition.
BCCM cautions that this consolidation might harm dairy producers by lowering their bargaining strength at the farm gate. When market power centers on one entity, farmers may be pressured to accept reduced milk prices to meet shareholder profits. This might threaten smaller, independent farms, compromising the industry’s variety and resilience.
Customers might also experience this. Price increases at retail establishments run the danger given that fewer businesses manage processing and distribution. BCCM observes that this could result in fewer options and more expensive essential dairy products.
The possible loss of local authority over dairy assets raises even another issue. Emphasizing more profitability than community and farmer wellbeing, BCCM notes that foreign and corporate ownership may eclipse local interests.
BCCM supports increased primary producer participation in the value chain to offset these risks. They see cooperatives as essential for giving dairy farmers the negotiating strength they need to flourish in Australia’s mostly deregulated and export-oriented market. Supporting cooperatives helps the industry protect its stability and sustainability against the forces of market concentration.
Potential Consequences of Fonterra’s Australian Asset Divestment: Market Concentration and Its Ripple Effects
Fonterra’s choice to sell its Australian consumer businesses begs questions about further market concentration. Like the supermarket duopoly in New Zealand, this action may result in a few powerful companies controlling the market. Such consolidation may marginalize independent, small dairy farms and processors, lowering their market impact.
Two big supermarket chains’ dominance in New Zealand caused an imbalance in negotiating strength, which drove down farm gate pricing and compressed profits for local dairy producers. Should this happen in Australia, some farmers may be driven out of the sector by cost constraints and declining profitability. Therefore, Farmers and customers would be affected by this, influencing product diversity, price, and market rivalry.
The regulatory clearance for Coles’ purchase of Australian Saputo processing facilities points toward retail ownership over processing becoming the norm. Should this continue, milk manufacturing may merge even more into retail chains, emphasizing cost over innovation or quality, which would reduce market dynamism.
Encouraging the adoption of robust cooperative models is not just a solution but a beacon of hope in the face of these challenges. These models have the potential to empower Australian dairy producers, increasing their share in the value chain and enhancing their negotiating strength. By promoting a cooperative approach, we can help the sector maintain the diversity and resilience of the Australian dairy market and mitigate the potential negative consequences of market concentration.
Future Pathways: Strengthening Dairy’s Horizon Amid Consolidation Concerns
The choices Australia’s dairy sector must make now will determine its direction. Thanks to increased consolidation, larger companies might be able to dominate, perhaps pushing out smaller farms and lowering competition. However, consumer choices and farm gate pricing may suffer from this change.
Still, a different route highlights how cooperatives strengthen leading producers. The collective negotiating strength provided by cooperatives guarantees a fairer market, more balanced pricing, and equitable profit distribution. Participating in the whole value chain—from manufacturing to distribution—improves farmers’ economic resilience and negotiation power against more powerful companies.
Moreover, cooperatives may promote sustainable agricultural methods that match environmental and financial objectives. Establishing a robust cooperative movement within the Australian dairy industry guarantees food security, variety, and quality for customers, as well as stability and protection of livelihoods.
Using co-ops and including primary producers in the value chain will determine the industry’s destiny. These tactics may let the dairy industry negotiate consolidation difficulties and emerge stronger and fairer globally.
The Bottom Line
Fonterra’s calculated choice to sell their consumer brands and concentrate on B2B and ingredients represents a significant change. This action seeks to simplify basic procedures even if consumer sector financial performance is excellent. However, the Australian dairy sector has expressed worries about market concentration. Essential concerns include:
- Possible consumer price increases.
- Effects on nearby dairy farms.
- The possibility of a retail duopoly pressuring farm gate pricing.
Examining this divestiture process closely is vital if we safeguard industry stability and advance cooperative models that empower farmers in the value chain. Maintaining the interests of every Australian dairy industry stakeholder depends on a balanced, competitive market.
Key Takeaways:
The recent strategic pivot by Fonterra, which involves divesting its consumer brands to concentrate on its B2B and ingredients business, has raised significant concerns within the Australian dairy sector. The decision, influenced by various financial metrics, is seen as both a commercially sound move for Fonterra and a potential risk for market consolidation in Australia.
- Fonterra plans to divest its consumer brands such as Anlene, Anchor, and Fernleaf globally.
- The decision follows a strategy shift to focus on B2B and ingredients business despite strong performance in the consumer sector.
- FY2023 data reveals that the consumer business generated NZ$781mn in gross profits, surpassing the foodservice business.
- The ingredients business remains the largest revenue contributor, making up 80% of total revenue.
- Fonterra’s exit from the Australian market includes divestment of its consumer, foodservice, and ingredients businesses.
- Concerns have emerged within the local dairy sector regarding market concentration and its impact on dairy farmers and consumers.
- Australia’s Business Council of Co-operatives and Mutuals (BCCM) highlights the potential for increased market dominance by large business interests and its implications on farm gate prices.
- There is a growing sentiment that co-operatives may be a key solution to maintaining bargaining power for dairy farmers.
Summary:
Fonterra is reshaping the global dairy industry, including the Australian sector, by focusing on its B2B and ingredients division. This strategic shift has raised concerns about market concentration, potential impact on Australian dairy producers, and consumer choices. The Business Council of Cooperatives and Mutuals (BCCM) criticized the announcement, stating that market consolidation reduces competition, local control, pressures farm gate prices, and risks a supermarket duopoly. Fonterra’s financial results show that the consumer division generated only 7% of total income in FY2023. The ingredients industry dominated, accounting for 80% of revenue and $2.6 billion in gross profits. The Australian dairy industry is concerned about Fonterra’s divestiture, which could lead to market consolidation and lower competition. BCCM supports increased primary producer participation in the value chain.
