Fonterra’s succession of ultimatums to its suppliers smack of ham-fisted bullying and incompetence, writes commentator Allan Barber. The company’s first ultimatum was to push payment terms out to 90 days for a ‘small percentage’ of its New Zealand suppliers in line with its global practice, followed by an invitation to attend Dragon’s Den type negotiating sessions in which it has served notice it will demand 20 percent price reductions.
There is nothing wrong or sinister about a customer trying to negotiate better terms of trade as a means of increasing efficiency, but in Fonterra’s case the company appears to have completely ignored the value of proper communication and relationships with its suppliers. Many of these will be contractors that have devoted resources and valuable service over a number of years; these contractors will be an integral cog in the life and prosperity of the rural communities they serve and live in.
These communities will in many cases earn much of their living from employment at the Fonterra plant, dairy farming and supplying the plant and service contracts to maintain the plant. The trickle down effects of the campaign to screw suppliers in an attempt to bolster profitability may end up having unintended consequences for Fonterra.
There is already a growing sense New Zealand’s largest company, only two years ago seemingly a benchmark for excellence and the rock upon which our rock star economy was founded, has lost a significant amount of the respect it commanded.
Its inept performance in 2014/15 when it failed to justify adequately its poor profit performance at a time of low milk prices saw some of the lustre disappear; the lower dairy payout suggested dairy was just another commodity. But the recent payment terms debacle, when first the chief financial officer and now the chief executive have tried to pretend these are normal business practice and only apply to 15 percent of suppliers, has reinforced the impression Fonterra is a bully. This has now been confirmed by the blackmail invitation to suppliers to come to the party or else be fired.
These tactics also suggest incompetence. Theo Spierings’ statement at the announcement of the half year’s result indicated a cash flow of $50-70 million already achieved from deferring payments. Without knowing the details, it is difficult to assess how accurate this figure is. But if one takes into account the deferred terms and the enforced contract renegotiations, it gives a very strong impression of an out of control contract management system. Why on earth didn’t Fonterra make sure its contracts represented value for money before suddenly holding the contractors to ransom?
Spierings stated Fonterra suffered a competitive disadvantage of $150 per tonne on its route to market costs, as well as having to wait six months to be paid. Presumably the freight disadvantage doesn’t apply to the company’s competitiveness out of New Zealand or Australia, but its position relative to its European competitors which will be closer to some, but not all, markets. For example freight to China is likely to be no more expensive out of New Zealand than Europe and possibly cheaper.
It can also be argued management incompetence is responsible for six monthly payment by its customers. While it is some years since I was involved in exports from New Zealand, I have no recollection of large groups of customers holding back payments for six months.
So an unavoidable conclusion is Fonterra is trying to put up a smokescreen which will distract attention from the low milk payout, its less than stellar performance and its bullyboy tactics towards its suppliers. The almost certain outcome will be the loss of respect from the public as a whole and quite possibly an increased rate of milk supplier defection. I hope Fonterra will take a serious look at itself, but I won’t be holding my breath.