Friday, October 17, 2014

Friday management note - Coles, Fonterra and the behavioural impact of cooperative structures

There was extensive coverage in this morning's Australian media of the action by the Australian Competition and Consumer Commission against Coles alleging that the retail giant engaged in unconscionable conduct against five suppliers, including cleaning products company Oates, Benny’s Confectionery and Bayview Seafoods.

The alleged events surrounding a "perfect profit day" took place several years ago, but fit within a pattern of complaints asserting that Coles and Woolworths have used their overwhelming buyer power to squeeze suppliers in a situation of two primary buyers, multiple suppliers. 

Fonterra  (and here) is New Zealand's largest company.responsible for around 30% of the global trade in dairy products, It is also a cooperative owned by over 10,000 New Zealand dairy farmers. There are other shareholders now, but they have no voting rights, only an economic interest.

 The relationship between Fonterra and its dairy farmer shareholders is a complex one. Like Coles and Woolworths, Fonterra is effectively a single purchaser for a large number of smaller suppliers. It has to make a profit and has an incentive to lower farm gate prices to maximise returns on sales. It also operates in a global marketplace where milk prices fluctuate. Milk prices have dropped quite sharply and Fonterra needs to adjust. However, it also needs to maintain stable supply, recognising too that it is the main income source for its growers who are also its primary owners. 

  This complex relationship leads to quite different behavioural characteristics as compared to Coles and Woolworths. Here my attention was caught, among other things, by the new Farm Source program.The company describes it in this way:
Fonterra has signalled a significant step-up in its relationship with farmers, rolling out Farm Source which will support farmers and their farming businesses and bolster the Co-operative’s connection with rural communities in New Zealand. 
Farm Source combines service, support, rewards, digital technology and financial options for farmers together with local Farm Source hubs to support the major dairying regions throughout the country.
 Speaking at today’s launch in Methven, Fonterra Chairman John Wilson said Farm Source’s seed was discussions with farmers and the “together as one” principle behind co-operatives.
If this were a Government policy announcement, my reaction would be ho-hum, here we go again. I have lost count of the number of Government hub announcements I have seen. However, Fonterra is a highly commercial operation.

In the discussion that surrounded Farm Source, I caught an interesting side reference to the financial options discussion. Family farmers in New Zealand and in Australia have long experienced some difficulty in attracting capital, as well as servicing that capital during down turns. If I interpret the discussion correctly, Fonterra appears to be considering the creation of some form of vehicle that will attract longer term funds for farm investment for its members. 

This is just a note at this point  Fonterra has attracted my curiosity given its size, commercial success and different ownership structure.     


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