Fonterra’s Arthur Kung with fresh milk from the dairy giant’s China farms. The milk is mostly sold online.
In China “you can’t stand still” says Fonterra’s business development manager for China, Arthur Kung.
New products are brought to market at a dizzying speed, partly driven by the competition between e-commerce companies who demand constant innovation and special deals.
China is Fonterra’s biggest market, consuming a quarter of the milk it produces, and generating $3.4 billion in revenue last year.
Motorbike couriers wait outside a Shanghai shopping centre for orders to deliver to homes.
Motorbike couriers wait outside a Shanghai shopping centre for orders to deliver to homes.
Almost $300 million of its profit in 2017 came from all its China business.
And yet the Chinese are still low level dairy consumers. Analyst Mintel’s latest data shows annual per capita milk consumption in China is 14.3 litres, compared with 36.8 litres in Japan and 51.7 litres in the US.
In yoghurt, China consumes 3.43 kilograms compared with 4.92kg in the US and 9.66kg in Japan.; and for cheese the Chinese eat just 0.02kg, compared with the Japanese (1.46kg) and the US’ whopping 6.89kg.
While traditional bricks and mortar stores still sell a significant share of its products, more than half of Fonterra’s consumer business is now through e-commerce.
In China, e-commerce is larger than in the United States, United Kingdom, Japan, Germany, Korea and France combined.
“E-commerce has grown rapidly. Food is small in penetration online so for New Zealand as a primary producing company it’s great news,” Kung said.
Most online consumer spending to date has been in areas such as electronics and clothing, with fresh food making up only 2 per cent of sales.
E-commerce is dominated by two players: Alibaba and Tencent. Fonterra had taken a punt on multiple horses, King said, and partnered with both Alibaba and Tencent.
It was also remaining focused on supermarkets and small convenience stores, the former accounting for 60 per cent of sales of all products, while small shops sell 40 per cent.
In 2015 Fonterra teamed up with Beingmate to try and get penetration into stores for its infant formula products. That strategy is now under question after it recently wrote down its investment by $405 million.
“Some people work with just one channel, but they can be forced to become loss leaders for that channel. It’s important for us to have a multi-partnership and channel strategy so we exist both online and offline,” Kung said.
The latest take on retailing is what is referred to as the “convergence” model. This is where an e-commerce player creates a physical store which acts as a shop window, but most products are delivered to people’s homes by motorbike couriers.
Take the example of the fresh milk sold through Alibaba’s new Hema stores, which source the milk from Fonterra’s China farms.
It took just three months from the time of concept to the bottles being placed on the shelf.
In a departure from the usual practice, the milk is stamped with a day’s date – say May 10 – and all the milk will be sold on that day. The next day is stamped May 11, and so on through the month.
There is a “use by” date on the back of the bottle of about a week. And what happens to the milk that does not get sold that day?
A Hema spokeswoman said the chain keeps a close watch on how much people are buying and orders accordingly, so little milk is left unsold.
Kung said the Hema stores were a pilot but could point one way to the future of retailing.
“You place the order on your app and if you live within 3 kilometres of a store it will be delivered in 30 minutes.
“If I place the order on the way home in the subway, I don’t have to go to the supermarket, it’s there when I get home.”
So why bother to have a store? Why not just have a warehouse?
“Consumers don’t trust online for food and beverage, so part of the experience is you can go into a store, choose a fish and they’ll cook it right here for you.
“It’s an experience that builds trust, and then I have confidence knowing what’s being picked is what I would have picked myself.
“It’s not something from the back of the store or a warehouse. Reputable businesses here are trying to build a brand, this is a biz model built on trust,” Kung said.
In a Hema store, people armed with a digital reader rush around picking up goods, which are delivered immediately to couriers for distribution to customers.
Fonterra facts
Fonterra has three business streams in China.
One is consumer business, selling products such as Anchor-branded UHT milk, whipping cream, and butter in stores or online.
The second is the ingredients business, where it works with bakeries, cafes and fast food chains and sells them mozzarella for pizzas, or cream cheese for drinks.
The third is its farms. It has seven near Beijing with 34,900 milking cows.
