Fonterra's pizza strategy pays dividends in China

WELLINGTON: New Zealand dairy processor Fonterra posted record consumer product sales in China on Thursday as it saw reward for its efforts to reduce reliance on milk powder and boost its branded milk, cheese and cream in Chinese pizzerias and bakeries.

The world's largest dairy exporter posted net profit after tax of NZ$506 million (US$318.07 million) in the year to July 31, a 173% rise from a year earlier. Consumer products operating profit in China leapt more than five-fold to a record NZ$45 million, with sales volumes up 33%.

The cooperative added four kitchens in China to teach chefs from bakeries, cafes and pizzerias how to incorporate dairy into their recipes, aiming to boost their use of Fonterra branded products such as Anchor cheese.

"I think that strategy in particular is very good. Approaching the bakeries, the pizza houses and the key people in regards to utilising cheese and dairy products will be and is quite effective," Forsyth Barr analyst James Bascand said.

Fonterra already supplies mozzarella cheese for most of the 300 million pizzas sold each year in China, and is seeking to reduce its reliance on milk powder which has volatile prices. It also hopes to tap into growing Chinese demand for lower lactose dairy products such as cheese.

Fonterra forecast sales to Asian bakeries would more than double to NZ$1 billion by 2020.

Plummeting dairy prices lowered Fonterra's costs and underpinned much of the gains in annual profit, but also weighed heavily on the company's farmer-shareholders whose incomes have been slashed in the past year.

Slowing economic growth in China and a global oversupply of milk products have battered dairy prices, which are down more than 50% from their record highs in 2013 despite a rally in the past two months.

Fonterra lifted its price forecast to NZ$4.60 per kg of milk solids from NZ$3.85, although analysts warn prices are likely to remain volatile.

The New Zealand dollar rallied half a cent to $0.6288 after Fonterra, New Zealand's biggest exporter, released its results. The local dollar hit a one-month low of $0.6235 on Wednesday.

Shares in Fonterra's fund, which provides investor exposure to the company, climbed 4.3% to US$5.48. - Reuters