The political environment (Refer Section 1 in Appendix 01) does not favour Fonterra’s operating environment with heavy control over milk powder pricing. Political figureheads at times lead the public to perceive that multinational dairies are working towards destroying the local dairy industry. With the ending of a 26-year old war within the country there is stability in the political environment which in normal cases encourages foreign investment.
However the government’s policies and tight regulations towards foreign investment and trade, creates an unfavourable environment for operating multinationals like Fonterra. Noted. In the economic front (Refer section 2 in Appendix01), with base commodity prices being reliant on global trends and heavy fluctuations on exchange rates, budgeting for the purchase of full cream and skim milk from New Zealand proves difficult with currency fluctuations most often surpassing budgeted variances. Subsidies by the government to selected local dairy companies also give unfavourable advantage to them over Fonterra.
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Socially, similar to world trends, the aging population in the country has opened up new opportunity for Fonterra to move in with its Anlene product, coincidentally at a time when mature markets like full cream milk come under heavy smear campaigns with global issues such as the melamine scare in China. Such incidents create negative perception on all powdered milk products that not only impact short term sales figures but also tarnish the brand loyalty Fonterra has established throughout the years (refer section 3 of Appendix01).
When we analyse technological trends and their implications on Fonterra (Refer section 4 in Appendix01), many technological improvements ranging from foraging, nutrition, and flavouring to packaging, has influenced Fonterra to create its own biotechnology subsidiary called ViaLactia Biosciences, working on identifying, discovering and commercialising genes that affect pasture grasses, milk production and milk composition.
One such discovery was the response to bone decay known as Osteoporosis that most ging populations of the world are facing. By combining bone strengthening nutrients like Calcium, Zinc, Protein and Magnesium, Fonterra was able to create the brand Anlene. Environmental influences on Fonterra’s strategy are discussed in detail in section 5 of Appendix01. Government sponsored environmental schemes both globally and locally such as deployment of Emission Trading Schemes (ETS) and application of Afforestation Grants Scheme (AGS) increases Fonterra operational costs by having to monitor their greenhouse emissions.
Fonterra has to include many green initiatives in to their strategy ranging from simple measures such as waste water treatment to more far-reaching methods like emission trading schemes to forestry provisioning. In addition the trend to move towards more renewable energy globally would drive the energy costs higher for Fonterra. On legislative front (Refer section 6 in Appendix01), Fonterra plans and operates under strict legislative framework governed by many authorities both globally and locally as content claims on dairy product are heavily scrutinised.
Furthermore, products such as Anchor 1+ that cater to infant nutrition require additional measures due to their sensitive nature throughout their lifecycle from production to transportation. Any mishap on the part of a multinational such as Fonterra can lead to a product recall. Therefore additional operational costs have to be borne in maintaining hygiene in areas such as production, packaging, storage and transportation. Refer Appendix01 for a detailed analysis on current industry trends and implications to Fonterra. An extremely good analysis.