Undeterred by recall, Fonterra seen pushing on with own-brand China plan

Tue Sep 24, 2013 2:23pm EDT
 
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By Naomi Tajitsu

WELLINGTON (Reuters) - Fonterra (FSF.NZ: Quote), the world's largest dairy processor, is moving ahead with plans to launch its own branded milk formula in China, undeterred by a recent botulism scare and Beijing's crackdown on foreign firms over alleged corrupt sales practices.

China is a magnet for foreign milk formula makers, with its $12.4 billion market expected to double by 2017. But foreign firms are under scrutiny after reports alleged that companies bribed medical staff to recommend their products to new mothers. Authorities have also fined a group of mostly foreign milk formula producers $110 million for price fixing.

New Zealand's Fonterra Co-operative Group (FCGHA.NZ: Quote), owned by some 10,500 farmers, supplies 90 percent of China's milk powder imports by selling its raw material to other companies to make products ranging from infant formula to cheese on frozen pizza.

While China is its biggest export market, Fonterra has stayed away from selling its own branded baby formula there since a poisoning incident in 2008, when six infants died and thousands fell ill after local dairy firm Sanlu was found to have added melamine to bulk up its infant products. Sanlu collapsed as a result of the scandal, while Fonterra, which held a stake in the Chinese firm, was criticized for failing to blow the whistle sooner and more loudly.

Investors expect to hear more from Fonterra on its China expansion plans when the company announces full-year results later on Wednesday. The company may also give an update into ongoing investigations into the recent contamination scare, when Fonterra said it found a potentially fatal bacteria in one of its products, triggering recalls of infant milk formula and sports drinks in nine countries including China.

New Zealand's Ministry for Primary Industries later said tests showed the botulism scare had been a false alarm as whey protein concentrate made by Fonterra contained a less harmful bacteria.

Fonterra's China expansion strategy, which also includes building a UHT milk processing plant by 2016, is part of the company's global plan to generate more earnings from value-added products, as opposed to lower-margin bulk milk powder.

DISTRACTION   Continued...

 
The Fonterra Te Rapa plant is seen behind a sign board for cyclists near Hamilton, August 6, 2013. REUTERS/Nigel Marple