Background
Fonterra is a New Zealand food producer that accounts for 30% of the world’s dairy exports; the leading consumer of Fonterra dairy products is Australia. The most exported products are whey and skimmed milk powder, their export has increased several times in recent years. The export of other dairy products is also constantly growing: the supply of butter, cheese products, ice cream, drinking milk, and cream and cheeses is increasing. The potential for market expansion is enormous, but its development depends on two factors: the cost of raw milk and the devaluation of the New Zealand dollar. This has to be taken in consideration when developing Fonterra’s competitive strategy on the world market.
The growth of dairy exports is associated with expanding the raw material base: recently, the volume of raw milk produced by Fonterra has increased. An additional factor stimulating sales to foreign markets is the high world prices for skimmed milk powder. The sale of products such as milk powder, butter, and cheeses are increasing due to the fact that manufacturers use milk fat instead of vegetable fat. While maintaining the existing economic conditions, export growth will continue; one of the main factors affecting the production of goods and their cost is the cost of raw milk. Due to the challenging climatic conditions in Australia – arid weather – there were difficulties with livestock feed production. Since the weather in New Zealand was favorable to meet the demands of market exports, it was decided to expand production on its territory.
Strategic Plan: Expansion
Due to the increasing export of dairy products, Fonterra faced the need to expand its production scale. It was impossible to do this on the territory of Australia, where the central part of the company’s factories is located, due to dry weather conditions. The low grass dried in the sun cannot give cattle the necessary amount of vitamins and trace elements. Due to the lack of moisture in the soil, with significant temperature increases, the quality of green grass can decrease to threshold limits; as a result, milk yields suffer. A dry diet, including dehydrated pasture and field feed, reduces the milk yield of cows by almost half in a few days. Therefore, the expansion of dairy production in Australia has proved problematic.
The specifics of the production of dairy products and the limited shelf life of goods force the company to follow specific rules when opening factories. First of all, it is necessary to consider the climatic conditions that turned out to be suitable in New Zealand. Fertile pastures should be located next to the enterprise; in New Zealand, they occupy more than half of the natural territory. At the same time, workshops should be removed from large enterprises and roads that pollute the environment. Since the country’s economy is based on agriculture, New Zealand has a pretty good environmental situation. Thus, New Zealand is an ideal place to expand the production of Fonterra dairy products.
Possible Options
Buying Property
A clear advantage of buying property in New Zealand is the possibility of full-fledged construction of factories that meet all the requirements and standards of Fonterra. Only with the purchase of a building will it be possible to reorganize production, lines, and ripening warehouses. The most modern technological solutions can be used on a non-rented farm, for example, a milking parlor of the “Carousel” type with 1000 seats. It will be possible to install expensive maintenance elements: scraper installations for automatic manure removal, heated drinkers, and ventilation curtains with electric drive to control the microclimate. It will also be advantageous to invest in an automated manure flushing system, manure pumps, and manure separation systems.
Fonterra will be capable of forming its own haulage trenches, which will create a fodder base for future livestock facilities. It will also be permissible to fully equip the milk processing workshop and a cheese factory since there will be no need to dismantle and remove the equipment later. The company will have the possibility to install its cup and filling lines, expand the fermentation area, modernize the cottage cheese area and the refrigeration unit at its discretion. It will be able to customize the cheese production complex, focusing on the most demanded positions in Fonterra: these are cream cheeses, feta, and mozzarella. The purchase of buildings will make it possible to completely reproduce the entire production cycle approved by Fonterra.
The central negative aspect of buying property in New Zealand is the inconvenient location of factories. Since Australia is the leading buyer of products, installing plants on its territory after the end of the drought period would be more appropriate. In addition, deliveries to other countries from New Zealand would also be problematic. It would be laborious to find new suppliers to transport dairy products to all importing countries on time and without loss of product quality (Jankoff, 2021). Transportation of milk and dairy products is a delivery of perishable batches that require compliance with the temperature regime. It would be a laborious procedure to develop a short route, train accompanying personnel, prepare the necessary documents for a long time.
Buying property will mean that manufacturing in New Zealand is not a temporary measure. Therefore, there will be a need for more detailed development of the delivery scheme. It is essential to consider the order of location of recipients and the stated deadlines under the contract. Next, it would be necessary to consider the transportation schedule in the long term when transporting milk and dairy products in large batches to remote locations. In addition, more finance would be needed when preparing the necessary accompanying papers. There would be a need to purchase a car equipped with climate technology. Perhaps it would be insulated vans or refrigerators equipped with thickened walls. A large-scale purchase of equipment for the transportation and storage of milk would be mandatory. It would require the reissue of special sanitary passports according to the New Zealand standard.
Renting Property
The main advantage of renting a property in New Zealand will be changing it if it is revealed during the work that it is not convenient by any criteria. There will be no need to purchase technical equipment since the property will already be equipped. The company will not be tied to one place and will have unlimited opportunities to choose a building. It will be possible to determine the location at which the cost of delivery of raw materials and the cost of sending finished products will be the most profitable. The company also can rent premises outside the city if they have convenient access roads and warehouses. Then the cost of production will be lower than renting space in the town, where logistics will be complicated due to traffic jams. The availability of qualified labor will also depend on the location, which directly affects the quality of the manufactured goods. The lessor will bear the costs of maintaining and operating the premises.
At the first stages of product development in New Zealand, buying premises is not advisable. Thus, the company can test the viability of the business by minimizing the start-up costs. It will be possible to pick up a room already equipped for dairy products and their variants ready for operation. In this regard, Fonterra will have the ability to start work immediately after registering contractual documents on the lease of premises. Moreover, as the production facilities were not empty but rented out, construction, fire, sanitary and hygienic standards have already been observed.
Disadvantages of renting premises for dairy production in New Zealand are related to its payment. There is a high level of dependence on the landlord associated with the risk of rent increase, termination of the lease agreement unilaterally. Rental rates can and will fluctuate over time; the company has no control over this, and it may have to move if rental peaks exceed its spending limit.
If suddenly the owner decides to terminate the lease for any reason, the company will have to look for a new premise, and move to a new location. For example, the lessor may change his mind about renting out the plant and start selling it. In this case, it will be necessary to move out within the agreed time frame. This can hurt Fonterra’s affairs and will entail additional waste of time and money. Therefore, the risk of being left without a building in case of various problems is quite a severe rental problem. In addition, it is impossible to convert the space to Fonterra standards and requirements. The amount of rent will increase the cost of services and goods.
Recommendations
The recommendations given to Fonterra in this situation are to rent a premise with a further prospect of buying it. The apparent advantage of such a solution will be the possibility of long-term business planning. Each contract extension can turn into protracted negotiations, where the owner is trying to get favorable conditions for themselves. Therefore, the lease agreement will be a temporary solution, as this approach will give the company several advantages, manifested in relative freedom in making decisions on space disposal.
As a potential owner, the company will be able to make repairs or add-ons and equip the plant at his discretion. It will be possible to install existing technological lines for the production of milk, sour cream, cottage cheese, fermented milk products of the full Fonterra cycle. At the same time, the company will not need to coordinate the import and export of its inventory with the lessor every time. The costs of transporting equipment, spending on finishing work in this way will be suitable. At the same time, the landlord will pay for real estate insurance, property tax calculated from its cadastral value, land tax. They will bear the costs of paying for PSC services and installing an alarm system, as well as caring for the surrounding area. At the same time, it will be possible to terminate the contract if the product turns out to be unprofitable, and moving it to Australia will be more advantageous.
Reference List
Doc: Jankoff, C. (2021). Accounting systems. Web.