'Full steam ahead' for Fonterra's own-brand China plan after recall

By Naomi Tajitsu

WELLINGTON (Reuters) - Fonterra (FSF.NZ), 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.

CEO Theo Spierings told Reuters on Wednesday he expected the company's Anmum brand of infant milk formula to be available in 70 cities in the world's second-largest economy in 2-3 years as part of a plan to enter the country's lucrative formula market.

"We reviewed our plans after the (botulism) crisis. We reviewed whether we should delay it, and we said 'No', so it's full steam ahead," Spierings said, adding he was stepping up Fonterra's China expansion, prioritising growth in its consumer brands and food services there over other regions.

"In China ... we're going faster. In other geographies, in India, we've put some plans on hold. In Africa, we are only stepping up things in a limited way," he said.

China is a magnet for foreign milk formula makers, with its $12.4 billion market expected to double by 2017. Foreign firms are under scrutiny, however, after reports alleged 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.

Fonterra recently launched Anmum infant formula in China's Guangzhou province on a pilot basis on the company's website, he said, adding it would be available in Hong Kong later this year.

But Spierings said the roll-out for Beijing and Shanghai would be delayed as Fonterra had yet to develop a retail presence in the capital, and still had to assess whether it could take on fierce competition in Shanghai.

In pushing its own brand in China, New Zealand's Fonterra Co-operative Group (FCGHA.NZ) will be up against rivals such as Danone (PAR:BN) - a major customer whose brands command 9.2 percent of the Chinese market - and Mead Johnson (NYS:MJN).

REGAINING TRUST

Spierings said more work had to be done to regain the trust of Chinese consumers in the wake of last month's 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 because whey protein concentrate made by Fonterra contained a less harmful bacteria.

Fonterra, which controls nearly a third of the world dairy trade and generates around 7 percent of New Zealand's GDP, said it earmarked a NZ$14 million provision for the recall.

"Consumers are still in angst mode, and sometimes they don't really know what happened," Spierings said. "But we can't solve that alone. We need positive voices also coming from the Chinese government and our customers. That's what we're doing right now."

Industry experts in China say the scare added to consumer uncertainty about the safety of foreign branded infant formula.

"The Fonterra issue has left many Chinese consumers quite confused as to where to put their trust," said Sandy Chen, senior food and agribusiness analyst at Rabobank in Shanghai.

GLOBAL PLAN

Owned by some 10,500 farmers, Fonterra 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 pizzas.

But, 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 Chinese 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 criticised for failing to blow the whistle sooner and more loudly.

Fonterra's China expansion strategy, which also includes selling more processed products into the food services industry and 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.

Its push further into China comes as Beijing seeks to consolidate its domestic dairy industry to improve food safety.

Fonterra was among the foreign dairy manufacturers fined last month for fixing the price of infant milk formula - which is highly prized among Chinese who don't trust locally made formula after a series of food safety scandals.

The 2008 scandal, in particular, shredded public confidence in Chinese dairy companies, opening the door to foreign formula firms, which have now grabbed about half of the total market and can sell for more than double the price of local formula.

Fonterra said net profit for the year to end-July rose 18 percent, despite a drought that trimmed its earnings, to NZ$736 million ($608 million). Normalised earnings before interest and tax (EBIT) eased very slightly to NZ$1 billion - in line with guidance the company gave in July.

($1 = 1.1946 New Zealand dollars)

(Additional reporting by Adam Jourdan in Shanghai; Graphic by Catherine Trevethan; Editing by Ian Geoghegan)