Fonterra fallout contaminates New Zealand brand as well

The Fonterra scare had potential for toxic and explosive reputation damage when news of it broke last week, given that the brand effectively has a monopoly on the New Zealand domestic and global export dairy industry.

Even though the contaminant in question, a bacterium called Clostridium botulinum, is non-fatal, the company was "smart enough to realise instantly that its initial public response could make or break the brand" both at home and in its biggest export market, China, said Leo Wood, a senior director in FTI Consulting’s strategic communications team.

China accounts for around 20 per cent of Fonterra's milk-related turnover, according to Fonterra chief executive Theo Spierings.

Spierings showed "sound judgement" by quickly jumping on a plane [to Beijing during the weekend] and publicly apologising, at a time when Chinese authorities are "in the mood to beat up foreign companies", Wood told Campaign Asia-Pacific.

The brand's overall response had been "immediate, transparent and contrite", Wood said.

"Fonterra took responsibility for the problems and has shown genuine concern for the health of their consumers," agreed Sarah Chin, vice president and general manager, GolinHarris Shanghai. "They are doing what is necessary.”

Behind the scenes, the company also mobilised the New Zealand government, which swung into action with a well-positioned defence of its dairy industry that still retained objectivity over Fonterra, Wood said.

Both company and country have been addressing the issue head-on, assuring Chinese consumers that this was, hopefully, an isolated incident.

No wonder, because Fonterra’s crisis is also New Zealand’s crisis. One needs to look no further than the country’s ‘100% New Zealand’ tourism campaign, carefully cultivated for years, to see that its national branding, showing untainted rural pastures, is inextricably linked to notions of purity and healthy living—all characteristics embodied by Fonterra.

Almost a quarter of New Zealand's dairy exports are to China. "It is vital for the nation's economy that the government comes out to bat on behalf of Fonterra and its peers," Wood said.

With safety essential to its country status, New Zealand's products have enjoyed a dominant and premium market position in China until now.

Chinese state-run media wasted no time in broadcasting stories criticising the quality of New Zealand's dairy products this week. The politically driven message is clear: Chinese manufacturers are just as safe and a lot cheaper.

"Chinese consumers should drop the blind trust to foreign dairy brands," noted an editorial published by the People's Daily newspaper, the mouthpiece of the Communist Party.

To minimise the impact of this crisis on Fonterra's bottom line and on New Zealand’s image, Fonterra has to prove to consumers that the scare was a blip in its procedures.

"If they cannot do this quickly, China's domestic producers, aided by a nationalistic media, will steal market share," Wood said.

The window of opportunity for dairy brands from elsewhere, from Japan to Europe, has already been created. An opportunistic infant formula brand by PBM Nutritionals from the US has bought advertisements touting how the US is the worldwide leader in the technological development and usage of whey protein; and that it contains the highest amount of immunity-increasing whey protein (10.9 grams per 100 grams of milk powder) among others.

Competing brands should "speed to market with communications that position themselves as a smart alternative to lead to more sustained market-share growth over time", said Eric Lin, general manager of Siegel+Gale Shanghai.

Spierings repeated in media briefings to reporters yesterday and today that Fonterra will be conducting an internal investigation to fully understand the "human errors" that happened before and after the affected whey protein concentrate was manufactured.

There is criticism that Fonterra first discovered the contamination as early as March but delayed disclosure. Also, it confirmed that laboratory results showed the bacteria linked to botulism was in a concentrated whey product on 31 July, but did not inform New Zealand's Ministry for Primary Industries (MPI) until the afternoon of 2 August.

Spierings defended the timeliness of Fonterra's reaction. "I think in these specific circumstances, with the complexity of the bacteria group we're talking about, that is pretty fast," he told the media.

Describing its characteristics, Spierings said it needs to remain in an anaerobic environment to survive. “When exposed to oxygen, Clostridium botulinum does not survive and, for this reason, it is not commonly tested for in dairy manufacturing".

Ironically, Fonterra had to soothe its stakeholders over a separate drama yesterday, when it was fined about US$716,000 for its part in a price-fixing investigation by the China National Development and Reform Commission (NDRC).

Fonterra was fined along with Mead Johnson (US), Danone (France), Biostime (Hong Kong), Abbott (US) and FrieslandCampina (The Netherlands).

Nestle (Switzerland), Meiji (Japan) and Zhejiang Beingmate Scientific Technology Industry and Trade (China) were "not punished because they co-operated with the investigation, provided important evidence and carried out active self-rectification”, according to the NDRC. Fonterra emphasised that its fine was in the lowest range.

38 metric tonnes of three batches of whey protein concentrate manufactured within New Zealand was subsequently used in infant formula, juice and dairy beverages, yoghurt, body building powder, and animal stock food in its supply chain.

Due to an improperly cleaned pipe at a plant, the case affected brands such as Dumex, Similac, Wahaha and Coca-Cola in China that use Fonterra ingredients. Precautionary recalls have been carried out, but there is no guarantee that the gray market is cleared of all tainted products.

Despite market anxiety, Fonterra is forging ahead with plans to expand its present Anmum maternal formula to infants and toddlers in the second half of the year.

"The project team for launching infant nutrition in China is on track and has the same mandate," Spierings said, though he added he "wants to first ensure the [whey protein] situation is under control".

Between 2014 and 2016, Fonterra is also planning to set up a plant in the country which would process ultra-high temperature milk.

DDB and OMD, the brand's creative and media agency in China respectively, deflected inquiries from Campaign Asia-Pacific about the impact on future campaigns directly to Fonterra.

Lin senses that this is a short-term setback for both Fonterra and New Zealand. "They have done such an effective job at positioning themselves, and fulfilling their promises, around quality and purity, that one incident alone won't suddenly lead to their demise," he said. "It will still likely be the desired place of origin for dairy products".

"My hunch is that Fonterra's textbook crisis response will mean they will succeed," Wood agreed.