Fonterra to slash Australian brands to restore profitability as rivalry intensifies

Wednesday 27th March 2013

Fonterra Cooperative Group plans to slash its consumer brands in Australia to restore profitability as competition intensifies for both milk supply and retail sales.

The company's ANZ division, which produces consumer products and ingredients in Australia and New Zealand and runs the RD1 rural supplies chain, posted a 32 percent decline in normalised earnings before interest and tax in the first half to $98 million. Of that, EBIT from Australian consumer brands fell 31 percent while New Zealand consumer brand earnings were "slightly up."

"There's a new reality in Australia," chief executive Theo Spierings told reporters on a conference call.

Fonterra is facing "aggressive competition" in milk supply and the effects of a retail price war across the Tasman and has to ensure its supply chain in the middle is cost effective.

"That's why we have to rationalise brands, rationalise our organisation," he said. Fonterra currently has 21 brands in Australia, which has room for a maximum four or five, he said.

It was too soon to say what plants or jobs losses may result, though Spierings noted the company has a wide variety of yoghurt brands and also faces pressure in the liquid milk market. Fonterra has seven main plants in Australia.

The ANZ division's normalised EBIT margin shrank to 4.9 percent in the first half from 6.4 percent a year earlier while revenue fell 10 percent to about $2.01 billion.

Fonterra is likely to trim back its 65 brands around the world, starting with Australia. "Given our footprint, that's too much," Spierings said.

In October, Fonterra announced the close of its Cororooke factory in southwest Australia that made soft cheeses and cream products. In November, Norco Cooperative announced it would buy back the milk marketing, sales and distribution business it sold to Fonterra in 2007, ending Fonterra's rights to its brands.

Fonterra's group net profit rose 32 percent to $449 million in the first half and the company lifted its forecast payout to farmers to $5.80 per kilogram of milk solids from an earlier forecast of $5.50.

Drought in New Zealand meant annual milk volumes in the current season would about match last year's, down from an earlier forecast of a 1 percent increase.

BusinessDesk.co.nz

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