Fonterra

Question :
Select a Business Organization and a Product / Portfolio of Products. Discuss the prevailing competition in the industry / major trends and explain how the selected firm is pursuing Low cost / Differentiation / Hybrid Strategies at present with your recommendations

Selected Business Organization:
FONTERRA BRANDS LANKA (PVT) LTD.

Selected Industry:
DAIRY PRODUCTS

Selected Product :
MILK POWDER

INTRODUCTION

In the domestic consumption of Dairy products, Milk powder is considered one of the essential products. Milk powder is the end product of evaporated milk, which has a low moisture content and longer shelf life.
In Sri Lanka the annual consumption of Milk powder is estimated as 85,000 MT (Metric Tons). Among the suppliers of powdered milk, a market share of 60% is dominated by the New Zealand Milk powder Anchor & Ratthi which is a product of Fonterra.
Fonterra – “Spring from the land”
Fonterra is a leading New Zealand company having quality & skilled dairy farmers built up a reputation for the quality of milk produced and sent across the globe. They are one of the major dairy products suppliers in the world.
Fonterra’s expectation is to be the number one among the dairy products consumers and they are on continuous product improvements and development in order to be the globally relevant co-op.
Their strategy is built on their strengths and the three main components of the strategy are Volume, Value and Velocity which aims to grow both volumes and values in their ingredients and consumer business.
Volume - Grow milk production volumes to protect our place in a growing market

Value - Drive more value from every drop of milk by providing high value products and services to our consumers and customers

Velocity - Execute our strategy at speed

Apart from the main strategies Fonterra as a mass dairy production company, also focus on seven strategic paths such as;
Optimize New Zealand milk
Fonterra is focused on delivering an improved customer metrics and low cost to service while increasing the speed agility of their global supply chain in the growing market.
Build and grow beyond our current consumer positions
Leverage leadership positions in New Zealand, Chile, Sri Lanka and Malaysia and investing in the core strategic markets of China, Indonesia, Australia and Brazil
Deliver on food service potential
Accelerate growth through the chef-led model in key strategic markets and continued new product development (NPD) and innovation to support customer needs
Grow Anlene business
Strengthen Anlene leadership in ASEAN (Brunei, Cambodia, Indonesia, Lao PDR, Myanmar, Malaysia, Philippine, Thailand, Vietnam and Singapore) through portfolio expansion and increased penetration. Drive Anlene in regions of China which is identified as their number one market
Develop leading positions in pediatric and maternal nutrition
Focused innovation in core cognition value proposition, enhance position in infant formula in selected Asian Markets and strengthen the maternal category
Selectively invest in Milk products
Maintain strong milk supply position and Stage-gated investment in additional China farms while focusing on food security & safety, sustainability and productivity. Support global co-operative through selective non-NZ sourcing options
Align the business and organization to enable the strategy
Focus on efficient and effective support of operations and deliver consumer assurance in food safety and quality

FONTERRA POWDER PLANT – BIYAGAMA
Fonterra has its own state of the art milk powder blending and packing plant in Biyagama – Sri Lanka which was established in the year 1995 followed by a Rs. 1.2 Billion expansion in the year 2008 in order to increase output by 40%, where the monthly blending and packing counts to about 5270 metric tons of milk powder every month.
This plant is operated 24 hours, with nine (9) filling machines packing a range of different Fonterra products in to different packaging such as sachets, chain bags and bag-in-a-box.
This plant employs 269 people working on three eight hour shifts that make an output of 475,000 packets a day across all the brands namely Anchor, Ratthi, Pedia Pro and Anlene. This plant is also audited to ensure Fonterra’s stringent global quality standards are upheld at every step.

TRENDS
Industry trends in the Dairy industry are mainly imports of milk & milk products, milk production, formal milk collection and Micro economics of dairy farming. Imports of milk and milk products such as Milk powder.

PREVAILING COMPETITION – SRI LANKAN MARKET

Among the Milk Powder brands in the Sri Lankan Milk Powder market, Fonterra Brands which has a variety of products namely Anchor, Anlene, Anmum, Ratthi, Pedia-Pro holds 60% market share which is a significant number, making Fonterra the undisputed market leader.
Lakspray & Nespray which is also imported from New Zealand holds 12% and 8% share accordingly, while Maliban which is a Australian Brand imported from Murray Goulburn
Co-operative Company Ltd. Holds a 12% of the Milk Powder Market Share.
Meanwhile the state owned dairy firm Milco ( Pvt ) Ltd, holds a market share of 8% .

DIFFERENTIATION

Anchor has a strong presence in Sri Lanka. In the Sri Lankan powdered milk market Anchor stands out from the rest because of the differentiation strategies they use. Fonterra brands distribute a range of milk powder to the Sri Lankan market, namely Anchor, Anlene, Anmum and Pedia – Pro and Ratthi. Each of these products is diversified under the age groups, gender, requirement and various facts while the other milk powder brands Highland, Maliban, Diamond and Candy provide only full cream and non-fat.

Anchor

Under the brand name Anchor, Fonterra has a variety of Milk powder products. They are namely Anchor full cream and Anchor Shape up (the non-fat milk powder), Anchor Instant and Anchor PediaPro 1-2, Anchor PediaPro 2-5, Anchor 1+, Anchor 3+, Anchor PediaPro Mama. Out of these products, Anchor PediaPro 1-2 to Anchor 3+ is specially made for kids using special formula.
Anchor pediaPro is a result of extensive research carried out by the Anchor Institute. It was found that the most important ingredient for child growth and mental development is Docosahexanoic acid (DHA) which is included in the growing up milk powder (GUMP) PediaPro along with Gangliosides (GA), Proteins, Calcium, Vitamin D, Nutri-Care.
Anchor 1+ and 3+ is also created for optimal growth and development of children. In the Sri Lankan market for GUMP products (Growing up milk powder) Anchor is leading with a higher demand, quality and supply.
Anchor Pedia-pro mama is another important product developed at the Anchor Institute made especially for pregnant and breast feeding mothers. This product consist of Docosahexanoic acid (DHA), Folic acid and Gangliosides (GA) in order to help strengthen the Childs health and immunity.
Anlene
In order to raise awareness to the increasing bone health issue across Asia, Fonterra Brands has invented Anlene. This is high calcium, low fat milk powder developed for an active life and a complete mobility.
Ratthi
Ratthi is another full cream milk powder packed at the Fonterra Biyagama powder plant which is also popular in the Sri Lankan milk powder market.

MILK POWDER PRICING

Category: Full cream
Milk Powder Brand
QTY
Local Supplier
Price LKR

Anchor
400g
Fonterra Brands Lanka (Pvt) Ltd.
386.00
Ratthi
400g
Fonterra Brands Lanka (Pvt) Ltd.
386.00
Maliban
400g
Maliban Milk Products (Pvt) Ltd.
360.00
Candy
400g
Sha Lanka Trading (Pvt) Ltd.
310.00
Lakspray
400g
Lanka Milk Foods (CWE) PLC
386.00
Nespray
400g
Nestle Lanka PLC
325.00
Higland
400g
Milco (Pvt) Ltd.
285.00

Category: Non – Fat
Milk Powder Brand
QTY
Local Supplier
Price LKR

Anchor Shape up
400g
Fonterra Brands Lanka (Pvt) Ltd.
465.00
Maliban
400g
Maliban Milk Products (Pvt) Ltd.
430.00
Bonlac
4004
Millers Limited.
450.00
Higland
400g
Milco (Pvt) Ltd.
375.00

Category: Growing up milk powder (GUMP)
Milk Powder Brand
QTY
Local Supplier
Price LKR

Anchor PediaPro 1-2
400g
Fonterra Brands Lanka (Pvt) Ltd.
599.00
Anchor PediaPro 2-5
400g
Fonterra Brands Lanka (Pvt) Ltd.
599.00
Anchor 1+
400g
Fonterra Brands Lanka (Pvt) Ltd.
445.00
Anchor 3+
400g
Fonterra Brands Lanka (Pvt) Ltd.
445.00
Nespray 1+
400g
Nestle Lanka PLC
435.00
Nespray 3+
400g
Nestle Lanka PLC
410.00
Lactogen 1
350g
Nestle Lanka PLC
390.00
Lactogen 2
350g
Nestle Lanka PLC
415.00
Lactogen 3
350g
Nestle Lanka PLC
450.00
Lactogen 2-5
350g
Nestle Lanka PLC
500.00

Compared with the milk powder pricing in the Sri Lankan milk powder market, Anchor and Ratthi full cream milk powder which is a product of Fonterra brands is the highest with a retail price of LKR. 386/- . This reflects that they do not follow a low price strategy. Taking in to consideration, in the Non-fat milk powder brands Anchor Shape up is the highest. It is significant that, among the leading full cream and non-fat milk powder brands Fonterra pricing is the highest. Even though Lakspray full cream is offered at the same price, the demand is for Anchor in the milk powder market.
Among the range of growing up milk powder, again Anchor PediaPro, Anchor 1+ and 3+ brands are marked the highest of the available brands. These products do not only mark a higher price but is proven with quality and nutrition.
Coming in to a conclusion on the pricing strategies, Fonterra is following a Focused Differentiation, where they seek to provide high perceived product benefits, justifying price premiums.
As it is reflected by the prices and the differentiation of their products, it is clear that they do not seek to distribute their products at a low price relative to competitors. Which they do not seemed to be adopting a hybrid strategy to their business.
Recommendations
Fonterra Brands Lanka as the dominating milk powder supplier in the Sri Lankan milk powder market has a number of differentiated milk powder products distributed among the daily milk powder consumers in the country, which is a great advantage for them. It is vital for them to adopt a Hybrid strategy where they achieve differentiation and low price simultaneously relative to the competitors so that they can be the price leader in the market.
As they have their state of the art milk powder plant in Biyagama, operating 24 hours, they can cut down on the fixed costs and achieve greater volumes of production in their differentiated products.
If Fonterra is introducing a new milk powder product to the existing milk powder market, they can experiment the hybrid strategy which I think they will benefit in large volume of sales as people can afford them if they were sold at a lower price competitive with others.
Not only with the price and differentiation and various strategies they follow to keep the organization running, it is crucial that they focus on the quality as well.

Ex:
Earlier in 2014 it was said that in the Milk powder imported from New Zealand contained a percentage of Dicyandiamide (DCD) which had been used to treat the grass that was given to cows in the dairy farms.
Fonterra as a major supplier had to face a critical issue because of the DCD and they lost a considerable amount of their consumers. Therefore, they must always focus on the quality and the consumers of the product which they release to the market.

CONCLUSION
Out of Sri Lanka’s milk powder consumption it is proven that Fonterra brands hold over 50% of the market for their products. They import milk powder from New Zealand and packs and distribute them around the country. Even though the products are marked a higher price than the other milk powder brands, people still buy the product for the trust they have built over Fonterra for decades.