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Faltering partner poses fresh China challenge for Fonterra

This article is powered by Dairy Markets

Fonterra's pioneering efforts in the Chinese dairy market appear to have again hit the buffers with news that its investment partner, Beingmate, has made a large loss.

Infant formula maker Beingmate has forecast a first-half loss of NZD70 million and is to sell-off its dairy farm assets. The company had earlier forecast a profit. But it has since been suspended from trading amid claims of insider trading.

Fonterra paid NZD700 mln for an 18.8% stake in Beingmate in 2015 as an entrée into the Chinese infant formula market.

To some extent the strategy has worked. The partnership had given Fonterra access to an extensive IMF distribution and sales network, as spokesman told New Zealand's Taranaki Daily News. "As a result, our Anmum range is now in more than 170 cities in China, compared to around 60 in 2015,” he added.

Long-term strategy

The co-op also acknowledged the "challenging conditions" of the Chinese IMF market, but said it was still confident in its long-term strategy. Some analysts believe this may be misplaced.

Consumer research expert Andrew Zhu told the paper: "There's a big mismatch between Fonterra and Beingmate. The key thing is the Chinese consumer doesn't have confidence in this brand.”

Another, Rabobank dairy analyst Sandy Chen, has also questioned the investment. Last month he said that upbeat projections about the growth of the Chinese IMF market had proved too optimistic.

Also, he revealed that no actual product had been produced by Beingmate as a result of the Fonterra investment.

Back in 2008, Fonterra found itself enmeshed in the melamine scandal as a result of its partnership with the then formula-maker Sanlu.

Sanlu was found to have links with crooked suppliers. The chief executive was jailed and two suppliers were executed, but not after thousands of children were poisoned and at least six died.

The crisis had a profound effect on the Chinese dairy market, one that lingers to this day.

Fonterra was wholly innocent of any involvement in the scandal, but its links with Sanlu created a PR disaster, one that it has emerged from, thanks to its largely unblemished safety record.

There are connections between the current difficulties and the Sanlu crisis, an insider told IEG Vu. He said: "It’s Sanlu mark two. Once again it has a minority investment in Chinese processing company, where Fonterra itself has little authority."

Locally-based producers such as Beingmate have a hard time breaking through into the 'quality' end of the market occupied by foreign firms.

The market is currently beset with challenges: one being a tougher approvals process, the other a change in government policy which is giving more weight to encouraging breast-feeding.

Strong results

However, import levels remain strong, as the latest results from Ausnutria demonstrate. The group, with production facilities in Netherlands and Australia as well as China, yesterday (Aug 2) forecast a 50% increase in first-half profits in the range of CNY152 -158 mln.

It said its expected growth in the first half year of 2017 was mainly driven by:

  • the restructuring of the strategical and business plan of the core business, the own-branded infant formula, of the Group which was preliminary proved to be effective;
  • improvements of the overall organisational structure and sales network;
  • clear brand positioning and the implementation of innovative business strategies which helped the group effectively meet and satisfy different demands in the Chinese market.

Chairman Yan Weibin said there was steady growth in Chinese IMF demand. "This presents encouraging market potential for the group, having already gained valuable market and consumer recognition of our high-quality infant formula there," he said.

“We firmly believe that our excellent brand positioning plus the on-going expanded sales of our own-branded infant formula will allow us to achieve further growth results. We will strive hard to create greater value for our consumers and shareholders."

China IMF imports


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