More dairy in Chinese cuisine helps boost Fonterra's growth

The increasing use of dairy products at Chinese restaurants as well as teahouses and coffeehouses has contributed to the growth of the food sector business for world-leading dairy exporter Fonterra Co-operative Group Limited in the country.

According to Fonterra's 2020 interim results on Wednesday, its food service sector in China has achieved double-digit growth in the first six months of its fiscal year, thanks to the penetration to the Chinese catering sector in integrating dairy products with Chinese cuisine.

Working with leading Chinese restaurants including the top hotpot chain store Haidilao as well as the Xibei restaurant chain, the company has covered 350 cities in the country during the period compared with 285 in the first half of 2019.

Fonterra's results show that foodservice sales volume went up 15 percent due to growth in China and Asia, primarily due to recovery in butter sales and city expansion.

Gross margins grew from 12.7 percent to 17.2 percent, due to improved butter margins in China and Asia and growth in higher-margin products in all regions.

Its innovations to localize the dairy flavors have met the demands of younger consumers for fusion food and nutrition, according to Fonterra.

The CEO said its foodservice business stood out as the company has grown sales to bakeries, coffeehouses and teahouses across China and Asia.

In the first half of the year, Fonterra group has seen its overall financial performance improve, with earnings reaching NZ$584 million ($329 million), up from NZ$312 million year-on-year, with net profit up NZ$221 million to NZ$293 million.

Last year Fonterra experienced major adjustment in its business strategy. In China, it appointed Teh-han Chow as its interim CEO in China on December 2019, after Christina Zhu, former president for Fonterra China, resigned after three years in the position. Under Zhu's leadership, the company has shifted its focus from ingredients to consumer products and catering services.

In 2019, the company put its Chinese farms under strategic review and on Wednesday, Hurrell said the review is completed and the sales processes are underway.

He said the company has revised down the valuation of China Farms and DPA Brazil by a total of NZ$134 million.

Fonterra CEO Miles Hurrell said Fonterra has continued to reset its business, introducing a new strategy, reorganizing and resizing its teams so there is greater focus on customers, and at the same time, significantly lifting its financial performance. ?

"We are now a very different co-op compared to this time last year – we're prioritizing New Zealand milk and staying focused on what we know we're good at and what makes a difference to our farmer owners, unit holders, employees and communities."

The CEO said the company is now operating in a very different global context as a result of COVID-19. Fonterra's key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share, achieve a gross margin in excess of NZ$3 billion, reduce debt so it is no more than 3.75 times its earnings and ensure capital expenditure is no more than NZ$500 million, said the CEO.