About Fonterra

We are a cooperative owned by nearly 10,000 farming families. Our farmer owners have long realized the strength of coming together as a co-op and how it can enable them to take their milk to the world. From humble but pioneering beginnings, we're now the largest exporter of dairy products in the world. Through our global grass-to-glass supply chain, we collect, process, store, ship, and distribute more than 4 billion MT of nutritious dairy products to 140 markets. Our 22,600 employees across the globe believe dairy is well placed to play an important role in helping feed the world's growing population, which by 2030 will have another 1 billion mouths to feed.

Dairy is an integral part of our food – as an end product like milk or yogurt, or as input for products like cheese in pizza. It is essential in both food service and packaged food categories. Given its intrinsic presence, dairy is a microcosm of the food industry, with dairy consumers’ preferences influenced mainly by the same trends affecting the food sector.

We work with our farmer owners on a cooperative approach. Each day we pick up and process their milk, and we have an extensive network of support people who can assist farmers with everything from farm productivity, profitability, and environmental improvements to milk quality, safety, health, and animal welfare.

In recent years, the dairy industry has been at the center of the carbon emissions debate. In New Zealand, we pioneered low-carbon dairying, with the on-farm carbon footprint being one-third of the global average, due to our extensive and highly efficient pasture-based farming system. But we know we need to do more and that's why almost half of our cooperative's farmers now have tailored Farm Environment Plans and we are targeting 100% by 2025. It's also why we've made farm-specific emissions profiles available to all farmer owners, which will give them a baseline to work from and help them identify opportunities for further improvement.

Cows are part of our family. Our cows spend more time on pastures than anywhere in the world, and we place a high emphasis on their health and welfare. This means that they live longer, more productive lives and produce some of the highest-quality milk on the planet. None of our cows are given hormones for producing extra milk, and this activity is banned across New Zealand.

The global dairy market reached a value of USD 718.9 billion in 2019. The rising demand for milk and milk-based ingredients was evident around the world. This can be attributed to population growth, rising incomes, health consciousness, and the thriving food and beverage industry. Another growing trend has been a rise in the demand for natural products free from additives, artificial preservatives, or chemicals.

First Signs

New Zealand announced its first case of COVID-19 on February 28, 2020. By mid-March, it was becoming clear that COVID-19 would significantly affect our business and the economy at large. In the third week of March, we announced our interim financial results. While the results were well received, there was a lot of uncertainty around what impact COVID-19 would have on our business. While it was not practical to answer all the questions farmers and employees had, we did commit to keeping everyone updated, and we communicated regularly.

On March 19, 2020, borders were closed to nonresidents. In the next two days, New Zealand introduced an alert system to inform citizens about the severity of the situation in the country. On March 25, the alert level was moved to its highest tier, and the country entered lockdown.

The effects of COVID-19 were felt in every part of our business – from rural New Zealand to global markets. Our global COVID-19 response was managed through our Comprehensive Incident Management Framework. Globally, across all business units, our teams focused their incident response teams to ensure we had a coordinated approach from the CEO down through all business levels.

Throughout the pandemic, the safety of our employees was our number one priority. As an essential business, we were in a privileged position to continue to operate within strict guidelines designed to keep our employees safe. We quickly transitioned approximately 8,000 office-based staff globally to working from home by introducing new technology for connection, upskilling, and adopting more flexible and adaptable working practices. Our teams started maintenance programs to get our New Zealand manufacturing sites ready for the next season with reduced staff (vulnerable workers were not allowed on-site) and applied additional safety protocols.

Also, in the early days, it became clear that our business's most significant impact would center around the food service industry. With hotels, restaurants, bakeries, and catering sectors being forced to shut down, we could face a sharp dip in demand. This could also potentially be one of the last industries to recover.

Getting products to our customers on time is an essential part of our supply chain operations. The vast majority of our products (about 1.4 million metric tons) leave through the Port of Tauranga toward the north of New Zealand. Our partnership with New Zealand's logistics leader Kotahi and Maersk, the global shipping company, proved hugely valuable in managing this disruption, and we continued to move products to our customers. During these times, the value of our strong strategic partnerships came to the fore as they provided us with the service options and container and vessel capacity to ensure our dairy products were moved around the world.

During the Great Lockdown

We had recently unveiled our new purpose and strategy, and just before the pandemic, we had launched “Good Together,” the umbrella that brings together our purpose, strategy, and values. “Good Together” gave us the clarity to know what we needed to do to keep our people safe and support their well-being and keep our operations running as we focused on areas where we could make a difference for the environment and the New Zealand economy while continuing to provide quality nutrition to the world. We also developed a psychosocial recovery model and created “Good Chat” dial-in sessions to support mental well-being for our people, and we have had over 5,000 people globally connect around the world and get support via these sessions.

Several changes were made to our global operations. In China, our food service teams moved from customer visits to virtual training sessions and livestreams to demonstrate how to use our butter and cheese. In New Zealand, our farmers continued to keep their farms operating, and our teams ramped up production to provide dairy to supermarkets for the influx of panic buying and home bakers. To help small businesses in New Zealand, we committed to paying our vendors within 10 days from receipt of their invoices.

With hand sanitizer in short supply in New Zealand, we redirected two million liters of our high-grade ethanol for use in sanitizer production. When one of our medical nutrition customers put in an urgent request for more hydrolysate (a fast-absorbing whey protein used to provide nutrition) to feed hospital patients, including those suffering from COVID-19, our teams quickly responded and extended production by one month, and partnered with Air New Zealand to get the life-saving cargo to the customer.

When schools closed, we let school principals know that they could send home milk from our “milk for schools” program to families that needed it. We also redirected nearly one million servings of milk to community groups, including the Salvation Army, Kiwi Harvest, Eat My Lunch, and Whānau Ora. We lent a homogenizer to COVID-19 Vaccine Corporation (CVC) to help speed up their effort in producing a vaccine in New Zealand. In many of our markets, including China, Thailand, Sri Lanka, the US, and Vietnam, we donated products to healthcare professionals and community groups.

Navigating the Great Lockdown

The impact of COVID-19 was felt in every region we operate in. However, our farmers and employees came together as one team and kept our business running. This was helped in large part by New Zealand having very few (in some places zero) community cases of COVID-19. Our food service business in China was hardest hit – when restaurants, cafes, and the like closed down. Having an on-the-ground team helped us immensely to understand the situation firsthand and direct our strategy.

Projects were prioritized, and those that couldn't be put on hold were given exemptions to continue under strict internal COVID-19 protocols. With international experts not able to travel to New Zealand to be part of project work, we employed technology known as HoloLens from Microsoft – enabling them to take a virtual tour of the project in real time from anywhere in the world and keep updated with developments.

Our sales team had to adapt to a whole new way of selling. In China, our teams conducted home cooking demonstrations, attracting more than a million online viewers. Our team took to television shopping channels in South Korea to sell more than USD 1 million of functional nutrition in just one hour. The changes we made enabled us to continue to operate.

At a time when many businesses have not been so fortunate, we've been able to stay open, keep employing people, and give back to communities. As an “essential business,” we have been in a privileged position to continue to operate during all COVID-19 alert levels. This is not something we've taken lightly. When New Zealand moved down to Alert Level 3, we continued to work with the precautions we had in place for the highest alert, Level 4. To this day, many of these precautions remain in place.

Clearly, it's not a singular action that Fonterra took that delivered success; instead, several actions came together to help New Zealand communities and our global family of customers and employees. Our farmer owners, tanker operators, and manufacturing teams kept the milk processing going and also produced additional ethanol and hydrolysates. Our supply chain teams kept the products moving. We dynamically adapted our product mix as global markets have shut and reopened – redirecting products around the globe to meet changing demands. We increased our emphasis on “well-being” and “connection,” which will continue as a core part of our business practices. Our ability to keep operating and the support we have provided our communities have improved how our staff, farmer owners, and New Zealanders feel about Fonterra and the dairy sector as a whole.

During COVID-19, we achieved our highest ever reputational scores. We also saw an increase in our Net Promoter Score with our farmers as pride in their role in New Zealand was reignited, and we experienced an overall positive media sentiment. We couldn't have done this without the support of our entire global value chain, and we have worked extremely closely with customers, suppliers, and communities.

Future Outlook

While there have been challenges for us at Fonterra, it has certainly not been all doom and gloom. Despite the food service industry being so severely impacted, we see some positive trends resulting from COVID-19.

Some key trends that have accelerated due to COVID-19 are about how food is prepared in-store, how customers engage with their suppliers, and how consumers are now purchasing their food.

1. We are now seeing significant simplification of the menu items that our food service customers are operating, mainly to keep staff farther apart and reduce the amount of labor in kitchens to preserve the health and safety of their employees as they prepare food. We've seen food service operators cut their menu items by 50% to focus on the core items – which means we need to ensure we stay relevant in these core menu items.
2. Another trend is reducing labor in restaurants – to ensure employees are protected from COVID-19 risks and ensure the restaurant's costs are being managed. Labor costs typically amount to approximately 30% of their total expenses. We expect restaurants to outsource more and more of their food preparation to large-scale industrial kitchens off-site to continue managing their costs in these challenging times.
3. Digital technology will change the way customers order from us, how we sell to our customers, and how everyone will order our food from restaurants forever. During the pandemic, delivery and takeout often have been the only way food service operators can sell to consumers. This is a big reminder that we need to make sure the great products we create from our New Zealand milk are fit for delivery and takeout. A great example is what we are doing with our mozzarella innovation to ensure products like pizza are still piping hot and the cheese is still stretchy when it arrives at homes.

In the wake of COVID-19, we are already seeing heightened awareness from people about their health and immunity. As a result, food-as-medicine is taking off again. The importance of science in consumer choice will likely increase, with significant implications for both products and production methods.

Although a lot of these trends were on their way before the pandemic, COVID-19 has accelerated them as businesses have had to pivot and, in many cases, change their business model. Some of these changes were initially brought in to help businesses manage through the short-term, but we expect to see many establishments continue them as a permanent part of the way they do business.

In times like these, the key to success will be mindset – embracing change and thinking differently while putting ourselves in our customers’ shoes. In addition to this – we must have a firm focus on our return on capital. We must ensure that capital investments deliver against their business cases – which is where our innovation agenda will play an important role.

We have the opportunity to leverage our sustainability value proposition and to really differentiate our precious New Zealand milk while also entering into new categories with new products where our sustainability, innovation, and efficiency give us a competitive advantage. A big part of this will be all about focusing on the things we can control. For example, we can't control when governments relax their various lockdown rules or put them back again, as we see in many countries. And we can't control when our food service customers can start operating again. However, despite these challenges, we can still look at ways to get closer to our customers and support them so that we are their preferred supplier when they are open for business.

Learning from the Great Lockdown

COVID-19 has made us rethink several aspects of how we do business and how we respond to rapidly evolving circumstances. Some of our key learnings include:

1. Importance of agility: The best-equipped companies will look to rapidly adjust their strategies to fit with the “new normal” dairy world post-COVID-19. Several already underlying trends are likely to be accelerated by COVID-19.
2. Sustainability: Sustainability already has been gaining traction for years. Assuming consumer spending power is not too badly hit, it is plausible to imagine a post-COVID-19 world where sustainability will have an even more significant impact on consumer purchasing. Increased supply chain scrutiny is likely to take place.
3. Plan for scenarios: Along with pharmacy and some high-tech industries, dairy has undoubtedly been more sheltered from the global downturn than most sectors. And unlike the long 2008 economic crash, a faster rebound in demand is expected, with China in particular helping. In fact, in New Zealand dairy sales have gained strength during the pandemic, and the industry has proven itself to be a durable part of the New Zealand economy.
4. Proactively adapt: It will be critical for dairy companies to capitalize on sales channel shifts, with customer-led operating models that allow companies to take advantage of these opportunities.
5. New categories: In the wake of COVID-19, we are already seeing health and food-as-medicine taking off again. The importance of science in consumer choice will likely increase, with significant implications for both products and production methods. This could also act to accelerate the advance of dairy alternatives.
6. New customer behaviors: We believe the secret to our success going forward is all about applying our solutions in a different way to provide the most support to our customers. We have already seen how well our China food service business has bounced back. They have shared their learnings with us, and we have already applied some of these to our new strategy. In particular, we are looking at all the new online behaviors we have been following and how we can best capitalize on these.

While economists are expecting the world economy to continue to recover from the lows of 2020, growth will not be evenly spread. We will need to continue to monitor the impact and flow of the effects of COVID-19 in our markets and keep adapting as necessary.

About the Contributor

Karen has been with Fonterra for 11 years and in that time she has had a number of senior management positions. While in the role of GM Preparedness and Response, which she moved from earlier this year, she led our crisis and incident management teams in response to a number of issues across the co-op.

Karen led Fonterra's COVID-19 crisis response, and while she says at times the task at hand was daunting, ultimately she was inspired by the way everyone at Fonterra joined together to successfully face the many challenges COVID-19 brought, which in turn saw the co-op come through the pandemic in good shape.