Having just notched $1.5 billion revenue, accounting for 8% of Fonterra’s turnover in 2014-15, the division intended to have revenue of $5b by 2023, using 17% of the milk pool.
Along the way, food service revenue would pass through $2.5b in 2017-18, global food service director Grant Watson predicted.
Doubling milk volume should result in trebling of revenue because of the greater margins food service products generated.
“The gross margin from food service is two or three times what we can earn from ingredients,” he said.
That was the value-add dimension Fonterra had been criticised for ignoring when continuing to build milk powder plants, though Watson said specialty powders were counted as ingredients not commodities.
There might have been some truth in that accusation two or three years ago.
At the opening of the Waitoa UHT plant last year chief executive Theo Spierings said Fonterra’s capacity to make food service products had been lagging; something he identified when taking on the top job four years ago.
At that time Fonterra had lacked the big volume food service capacity to meet growing demand in Asia from hotels, restaurants and bakeries.
Following his recommendation to the board, $262 million was spent over two years at four food service plants – half at Waitoa plus smaller amounts on Te Rapa cream cheese, Eltham sliced cheese and Clandeboye mozzarella.
Spierings said adding value was a staged process, going from commodities to ingredients, to food service lines and consumer-ready products.
“If you want to shift milk from ingredients to brands you cannot go to infant formula straight away.
“You need to add value in stages by going through food service products like UHT cream and cream cheese,” he said at the time.
Watson said the products and the target markets for the five major product streams that made up his division – slice-on-slice cheese, mozzarella cheese, UHT creams, cream cheese and butter.
Just under half of revenue came from China and greater Asian and Middle Eastern markets, he said.
More specifically, two-thirds of all food service revenue came from three groups of users – western-style quick service restaurants, Italian-style kitchens and Asian bakeries.
The definition of food service was all “out-of-home” consumption in hotels, restaurants, aeroplanes, entertainment venues, educational establishments and institutions.
Food service spend per capita was $2000 in developed markets like the United States, United Kingdom, Canada and Australia but in emerging Asian markets like Thailand, Vietnam, Indonesia and China was $100-$400.
The growth opportunity lay in the Chinese trends towards urbanisation, affluence and preference for western diets, Watson said.
Growth in food service in countries like the US, Australia and Brazil would come through Italian eat-out channels such as pizzas and pastas.
Cream-based pastas were the fastest-growing category, where Fonterra sold its range of UHT creams.
Pizza was the world’s most popular food and mozzarella made up 40% of a pizza’s cost, being the “hero” ingredient that bound the top to the base.
Clandeboye had the capacity to produce enough mozzarella for 300m pizzas a year, Fonterra’s global operations managing director Robert Spurway, said.
At Eltham in Taranaki the new secondary processing plant had produced its first slice-on-slice cheese shipments to Asia, the Middle East and Oceania, to be used by McDonald’s, Burger King and Subway stores, for example.
“It is a story of innovation built on 40 years of cheese-making experience, done at much greater scale in order to serve these large and growing markets,” he said.
The food service plants would run year-round, shutting down only for essential annual maintenance.
Spurway said the most-recent four food service plant investments would not provide sufficient capacity to fulfil the $5b revenue target for 2023 so Fonterra would need to make further demand-led investments in food service capacity.
In the 2015 financial year consumer and food service plants, essentially Fonterra Brands plants in NZ and Australia and the four food service plants, had earnings of $408m – a 25.5% return on capital.
The ingredients division, with revenue two-and-a-half times bigger, earned $973m but its return on capital was 9.3%.
