Fonterra looking to the future in Saudi Arabia

Fonterra Brands managing director for Middle East, Africa and CIS, Amr Farghal (left), and Mark...
Fonterra Brands managing director for Middle East, Africa and CIS, Amr Farghal (left), and Mark Wilson, Fonterra's regional managing director for Asia, the Middle East and Africa.
Misunderstood by many in the West, the Middle East is proving a lucrative and growing dairy market for Fonterra. Agribusiness editor Neal Wallace reports that brands such as Anchor, Anlene and Anmum are leading that growth.

It is the size of the market and the growing wealth of the region that excites Mark Wilson.

The statistics of the catchment roll off the tongue of Fonterra's director for Asia, Middle East and Africa: 40 countries of which 15 are significant in size; total population of 615 million with an average age of 25; market size $NZ17 billion - and those figures exclude India and China.

While much attention has been focused on the potential of Asia, Mr Wilson said Middle East and east African countries which Fonterra regularly sells to, encompass a population of 41.5 million, and a potential dairy market of $1.7 billion.

They are wealthy, many are flush with petroleum exports and like to drink milk.

The region is also an example of how Fonterra has a horses-for-courses market strategy - tailoring its business to particular markets.

In the highly competitive United States dairy market, Fonterra abandoned initial plans of selling branded products, avoiding taking head-on the food giants of Kraft and Nestle, in favour of selling commodities and supplying food ingredients.

In Asia and the Middle East (AME) it's policy is to manufacture locally recognised products, sell commodities and branded products, and Mr Wilson said Fonterra has successfully built brand equity around its core products of Anchor milk powder, Anlene, a calcium rich product that enhances bone health, and the specialist maternal product Anmum.

Mr Wilson said Anchor was the number two selling product in its range in AME, Anlene and Anmum number one, and Fonterra food services products rated first in dealing with bakeries, and number two in casual restaurants.

Sales of branded products to AME grew at a compound annual rate of 7.3% from 2007-09, and in the last financial year, sales of Anlene were $320 million, Anmum $70 million, Anchor products $620 million and food service $350 million.

In 2005, total net sales to the region were just over $1 billion but by 2009 had grown to $1.665 billion, accounting for one-third of Fonterra's branded product sales revenue.

Australia and New Zealand accounted for half, and the balance came from Latin America.

Mr Wilson said there was huge potential to grow sales further in Iran, Azerbaijan, Indonesia, Sri Lanka and Vietnam as wealth grew and people were able to spend more on dairy products.

The criteria for expansion was ease of entry, synergies with existing business, able to find partners and overcome bureaucratic hurdles.

While Iranians were large butter consumers, other issues delayed Fonterra tackling that market and instead it was looking further north at oil-rich, butter-loving Azerbaijan.

Tackline Africa and the Middle East has been aided by Fonterra buying out its partner and majority shareholder in the SNZMP processing factory in Dammam, Saudi Arabia, allowing it to compete with local brands and also to start making new local products such as jar cheese.

Fonterra was not alone in this strategy, with at least two other dairy companies recently opening processing plants in the Middle East.

Amr Farghal, Fonterra's managing director of brands for the Middle East, Asia and the Commonwealth of Independent States (CIS, the former Soviet States other than Russia), said sales in Iraq of Fonterra jar cheese, cheese with the consistency of honey, had grown from zero three years ago, to be the market leader today.

Jar cheese sales to Gulf Co-operation Council (GCC) countries, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates, have increased 10-fold.

Fonterra brands buys milk powder from its parent company, which is shipped to SNZMP and reconstituted into various dairy products.

Mr Farghal said the focus on brands and value-added products has seen revenue growth exceed volume sales, as Fonterra was able to improve margins and dominate some categories.

"The last few years have been all about laying down a strong foundation for Fonterra brands."

Its food service business was also growing throughout the GCC, which included the development of a white feta which only melted at extreme temperature.

The business arm was helped by the establishment of a commercial kitchen in Dubai and the appointment of an experienced chef to test products, work with local restaurants and chefs and promote Fonterra dairy products.

Doing business in the Middle East and Asian Muslim countries provided some challenges.

Fonterra has promoted its bone-enhancing Anlene products by offering free bone scans in shopping malls, a tactic which has proved successful, but for Muslim women, exposing skin was viewed as offensive in traditional Islamic countries such as Saudi Arabia.

Fonterra has developed a testing station that allowed women to retain their privacy while having a bone scan.

There is also potential for sales of infant formula in the Middle East and Africa, a venture made more likely given Fonterra has its own factory in Saudi Arabia so it can control the quality, but also for milk products targeting children and adults.

Fonterra's marketing director for Middle East and Africa, Ahmad Yahya, said Saudi Arabia was a conservative culture, but in recent years the role of women was changing due to exposure to media and the internet, economic pressures, career and business opportunities, increased education and technology.

Within Saudi norms, he said women were increasingly pushing traditional boundaries, becoming well informed while blending education, technology and moderate self expression typical of the West, with eastern family and social values.

In 10 years, the number of Saudi women working has gone from zero to 10%, while the largest investors on the Saudi Stock Exchange were women using the internet.

Mr Yahya said Saudis considered milk a vital health product and an integral part of daily life and, combined with societal changes, provided Fonterra with opportunities to promoted its branded products.

The biggest dairy farms in the world were in Saudi Arabia, with three farms milking 80,000 cows and the largest 40,000.

The cows were housed in air-conditioned sheds and supplementary feed grown under irrigation was trucked to them.

But the Saudi Government was now starting to question the amount of water used, putting the farms' futures at risk.

Saudi Arabia was potentially a large market, with 70% of the 28 million population ranked as middle to upper-middle class.

But osteoporosis was a problem for about 60% of adult Saudi women, providing Fonterra with an opportunity for its Anlene product.

While the GCC countries as a whole had enormous commercial potential, Mr Yahya said African markets were small and bought basic products, but Saudi Arabia would be the backbone of business growth in the region.

"Saudi is the core of the core. We need to win in Saudi Arabia to take the strategy forward," he said.

• Agribusiness editor Neal Wallace travelled to the Middle East with Fonterra.


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