Dairy Greg McNamara
Just like Robert I'm going to take a little bit of latitude for those of you that have never come
across Norco and know very little about us. I thought I would actually tell you a little bit about us
before we actually start. So Norco was established in 1995 and has about 290 shareholders and
175 to 180 supplying farms. So that's actually changing as we speak due to the negotiations.
We're actually bringing on new farmer to service the Coles contact in June.
We fundamentally manufacture dairy product for the fresh milk market, the ice cream market,
yoghurts, and we also have a rural retailing business that actually represents about a third of our
business. So we've been a business that's maintained its diversity. So in the '80s and '90s many
organisations actually chose to move into one business strain. We've actually managed to
actually keep that process in place and have used that as a proposition to talk to our customers
which I'm going to talk about.
So just to give you a sense of some of our products just to make sure that if you ever need some
you need some. So obviously, I won't go through those. And on the ice cream side, so the fresh
milk business is our branded business. And then in the ice cream manufacture, we actually take-We have a philosophy in our business which actually works about that we take every litre of
your milk from our farmers. And we get the best value you possibly can. Unlike some other
organisations that have chosen to take a different path.
So and the manufacture of ice cream is fundamentally different to manufacture our branded
product. It is completed contract manufactured. So that we actually met it. We've had a
longstanding relationship with a number of retailers over many years.
And the catalyst for us to have a deeper relationship with Coles more recently was the fact that
we were, have been manufacturing a number their generic style lines or even upper-end brands
for many years. So we've had a multi-stream business in that respect.
But my subject today is really talking about cooperatives working with the retailers. And what's
actually allowed us do it because Norco's history, you'd think a business that's been around as
long as we have, we'd be much larger than we have. Historically, Norco was confined by the, this
might sound odd for a chairman of a cooperative to actually say this but, historically Norco was
bound by the regulation system. We operated in northern New South Wales. And we had distinct
boundaries that we could operate within.
So when regulation was taken away in 2000, we'd already taken into a number of arrangements
with and joint ventures in fresh milk. And that was predominantly to actually undertake a
programme with the retailers. We needed to have an east coast distribution channel. And when I
say that, we needed to supply Melbourne, Sydney, Brisbane, and Cairns and to some degree
Adelaide. If you didn't do that if you couldn't do that, you didn't get an option to tender for
product. And that continued for around 15 years.
So that programme had a significant impact upon the retailers. And it was all driven about unit
price. So when the opportunity came for us to actually talk to business, the major retailers and
start to engage with them about our diversity of business and our real interest about-- Our real
interest is our farmers. We operate a cooperative. And we not ashamed to actually say, just like
Murray Goulburn, out interest is making sure the best milk price we can possibly put in their
pocket with a reasonable dividend.
That's a complete different model to many other corporate organisations. Theirs is about
shareholder returns. Ours is about milk price. And we don't lose that thought. So from a retail
perspective, we need to be able to convince retailers that we can manage all the issues.
We're not actually an organisation that has poor corporate governance. We don't fight. There are
no public brawls. There are no factions within our boards and with a memberships. We actually
need to make sure that from a governance perspective, that we're a stable organisation that are
applying ourselves to best practise in governance.
Then, we also need to make sure that we invest in our capital. What the retailers major concern
is, cooperatives historically have been very poor at investing in capital. They put all the money
into milk price and then actually forget about investing in facilities. And we've actually had a
good history and a good track record which we could actually demonstrate.
So ultimately, our success in putting a deal not only with Coles but any retailer is about, in fact,
actually making sure that we over-deliver on their expectation. It's nothing less than that. To give
you a sense of what the-- just make sure-- to give you a sense of what the opportunity for an
organisation to fill their factories and how that can actually affect a profitability of an
organisation.
If you look at these charts, the one on your left is actually telling you about the opportunity we'll
move to 57% of our business in generic. And we've come from 41%. Now that actually basically
fills our two factories, one based at Labrador and one based at Raleigh in Coffs Harbour.
Running those factories at a higher level with our own branded products still going through them
allows us to share the increased incremental return that we actually receive on those products
back with the farm sector.
And that's exactly what the retail market's actually looking for. Moving away from the current
process of. It's not just price. It's about making sure that they actually are seem to be looking
after the farm sector.
So what's different about Norco. It's about our milk price and our members. We're extremely
commercial. And I know that my sound odd to sound. But there have been a lot of properties in
the past 100 year that have actually failed purely because they don't actually act in a commercial
way. And I know my board sometimes will actually give me a hard time, shareholders give me
hard time sometimes because we do take a commercial line. It's finding that balance between
commerciality and actually doing the right thing by your members.
We operate across the whole supply chain. And one of the things that we found really interesting
is-- and I say it's not only about domestic but our export market-- is being able to tell a consumer
and being able to sit in a room and have a conversation about the supply of your ingredients
through your rural retail network, and into the farm sector, and manufacturing the product, and
putting it into the retail channel, is a significant proposition that not many people can actually
follow on.
And I just needed to let you know that our rural retail business is only 10-- Our farmers, dairy
farmers are only 10% of that business. But the fact is, we can actually engage with our retail
customers on a global scale about all the things we do along the chain.
So internally, and second, and finally on this one is it's really important that we have some
internal programmes to foster the relationships with our farmers. So we'll swear we're
commercial. We have many things that are going on internally in our business that we are very,
very proud of. And I won't go through them.
But the issue-- One of the-- And I haven't checked this word out whether, what's the [? rule. ?] Is
it providence? Is it provenance? How do you actually explain it. But there's this growing trend
across Australia and across the globe about where your food comes from. How far it travels.
What programmes it's gone through. What-- How the animals have been looked after. Can be
traced the product back to the final farm if we need to.
It's those things that they're, not only a Australian retailers are looking for, it's the things that
actually the global retailers are actually looking for. And we have absolute confidence that we
can actually do that. The systems that-- And I say this about Australia, but I say this more about
New South Wales and Queensland. Ironically, the system that New South Wales and Queensland
put into place back in the, started in the late '80s and in the early '90s about quality assurance,
about trying to keep the milk from Victoria out of New South Wales. And I say that somewhat
flippantly. But that was the reality.
We put quality assurance programmes in place that are second to none across the globe. So what
we do is engage. And we are very, very pleased to actually take our retailers through it. And only
recently I actually sat down with a major retailer and actually showed them how it works and
how the internal order process and how the external order process is undertaken. To make sure
that our farmers are doing the right things so that we can actually stand behind what we actually
say.
And that's the number one piece as a smaller business what we need to find that proposition in
the marketplace that people need to work for. We don't need to supply every customer, what we
need, every customer across the globe. We need to pick the ones that we want to work with that
actually respect us. And I think the piece that I found really interesting-- Because me and my
wife have a little bit of a chuckle about this and occasionally I do to go shopping from time to
time.
But I think the thing that is really interesting is the retailers have got really sophisticated about
how they track what we actually do as customers. And the fact that is, the moment you hand of
your card to actually pay for your goods and use whatever that card is my wife uses which I
refuse to have, tells them exactly my shopping habits for a history of time.
And people just don't understand that you give that information away. It's a Flybuys card. It
actually gives them information. But they are tracking it. And they are using that information.
And that information has clearly told them that what we're actually looking, what we are actually
proposing is exactly what they're actually looking for.
So to give you a couple of photos. I was very cautious about what I picked here. Sorry, have I
gone on too far? I haven't gone far enough. Sorry. [INAUDIBLE] watching the slide. So, sorry
about that.
So on the right here, on the left here, you have Curtis Stone. Curtis is with the farmers. And I
expect at some point in time, it'll be the Murray Goulburn or Norco. Someone is going to have a
photo and there will be a real squabble, I'm sure, about who it's going to be. But it doesn't really
matter. The end of the day, it's the consumers. And if you listen to those ads and there's a whole
range of them.
There's even one with Curtis Stone actually leaning on a gate and talking about the farmers set in
an shop. And it actually looks like they're on a farm. The interest from the retailers about how
they can prove to the consumers they actually have a direct relationship with the farmers has
completely changed.
In the '80s and the '90s and 2000, it was about price, price, price. Just tell us your best price.
Don't tell us about anything else. We just want the price. It has changed. And your shopping
habits actually have changed that. On the right, we've one of our farmers. And we've got a local.
And I won't play it today, but we've got a local farmer called Ken Wadsworth who actually farms
at Coorabell. Outside it's one of the best places in Australia. Coorabell overlooks Byron Bay.
And actually the lighthouse actually swings past his farm. Just an amazing piece. His farm is one
of the original farms that started supplying Norco in 1895.
So what's the benefit of actually supplying a major retailer? And there are really significant
benefits. In Australia, it's about access to channel the market. You can't ignore the three big,
Audi, Woolworths, and Coles. You just can't ignore them. To do that, you're doing that at your
peril. But what we do is that we've actually made the proposition that we're more than happy to
actually share the margin and the benefits. That we actually take and actually demonstrate that
transparently back to the retailers.
We value-- We've had conversations with the retailers about value adding. So when we've
actually got surplus milk from time to time, we've actually gone back to them and said, look,
we've actually got some opportunities. We actually are very keen to actually share them with
you. And then actually share those rewards with our members. And we've actually done that.
And in fact and more recently, we actually released a price increase across our members for a six
month period of 1 cent a liter due to that fact that the retailers had actually help us do that.
We don't have our own brands in our manufacture of products. So that actually helps us to some
degree. Means that we don't necessarily have that, and especially in the manufacture of ice cream
and yoghurts, we don't have that affiliation that we have to support our brands. We can actually
do things that others won't.
And just to give you an example, the way it works in the ice cream business. We do the whole
gamut of it. We can actually-- We have an R and D team. We have the manufacture. And we
have logistics. We deliver. We basically-- You come with a proposition we'll actually make it for
you. And we'll find it. And we'll actually test it in the market for you. Which you need to pay for.
But we can do that whole lot. And that's actually working really well for us.
But one of the things I think really important that-- And I say this about supplies and it's about
our farmers. I could have actually said our farmers. But our farmers need to be educated about
what the expectations of the retailers. And just the reverse of that, the previous point, it's about
we need to educate the retailers on us. The farmers and what's actually occurring at farm. So it's
a two way street. And we found that to be incredibly rewarding, sitting around a room and
actually having that conversation is very, very interesting.
But again, it's about the fact that we need to find those balances between milk price,
reinvestment, and reward for your capital in the business. And ultimately just as Murray
Goulburn, your profits that we create through manufacturing and distribution of product in
Australia actually stay in Australia.
And it's not to say, and I say that very cautiously because it's not to say that a foreign company
that's invested in Australia is wrong, it's not. It is-- That's great. We actually need investment in
Australia. But our proposition is we shouldn't be embarrassed. Our proposition is support us
please.
Now one of the things that I think, I want to take a little bit of latitude with you. One of things I
think about when I was given this topic on presentation was, people actually just assume that we
operate in the domestic market. In these next two slides, and I was very pleased to actually see
that there was, and I can actually update my slides, is the next two slides actually talk about
what's going in the global scale.
And this first one's about, as we saw this morning about income growth, and this is an older a
slide but it's being repeated. This was created by Rabobank back in about 2004, 2005. And it just
tells you that as income grows, so does the change in your food and what you're actually
spending it on. Meat and dairy are the ones that are actually going to bear the benefits from this
perspective.
But the next ones about-- I find this really, really interesting. Next one's about, everyone talks
about we've got all this huge global opportunity for dairy and agriculture. But unless we get
productivity gains from the existing land, we're in real trouble in my view.
There's a real, as just as we're saying, the retailers change their buying habits. At some point in
the near future, I would suggest there is going to be real changes in how we actually get
productivity gains or who's going to miss out. Because as the population grows, there's not
enough food. And it's coming. It's just a matter of when it's going to happen. And we might keep
it off for awhile. But it's coming. And more importantly, I'm going to talk about this as we go.
These next couple of slides are going to miss some. But I'm going to go down to the second to
the last point. It's about volatility. Volatility in not only milk in your commodity prices, but
volatility in how we actually manage droughts, floods, and things like that.
One of the reasons that we had a really good conversation with some retailers back in 2009 flood
in Brisbane was, in that year in that flood in January 2009, I think it was 2009, you could go to
McDonald's. You could get a burger, and you get a piece of meat. You couldn't get the tomato.
You couldn't get the lettuce. And you couldn't get the sauce. Because of the way we've created a
system. Now that was the first time to my knowledge the McDonald's actually suffered that
consequence.
And it was a really interesting one. And all the retail-- Everyone knew about it. But the fact was
for a short period of time, it wasn't very long, but you could not get what you were used to. And,
boy, does that create a problem. It was the same with milk. You couldn't actually get milk either
at a point.
So what we need to start talking about and what we need to start thinking about is how as
businesses are we going to actually manage those critical periods of volatility. Because today we
can actually see that things aren't too bad. But a point in time, there will be the volatility. And
we've got enough to actually manage. But how are we going to actually manage those issues of
who gets a product and who does not get the product.
And that gets me to the point about relationships. It's how you're actually honest about them. So
one of the things that we've done across the, not only our domestic business but our export
business, is we've actually built relationships not just with an individual but with organisations.
It's really important for us to actually do that.
And we've had some historical periods is where someone leaves in the business and the
relationship's with an individual. We've made sure that the businesses are actually and
relationships are actually structured two or three levels in the business. We've moved to a point
of actually, as you would know the retails, we've heard Murray Goulburn signed a 10-year deal
with Coles. We signed a five-year deal.
It's interesting to know a number of years ago, you would have lucky to get a 12 months a six
months a 12 month contract with retailers. And we're talking three, five, and 10 years. That gives
you the message that there is an issue of supply. And they're looking to actually short that
product.
So what we do is we lead by example. Just because someone actually treats us poorly doesn't
mean to say that we actually have a, it's fine to be strong on your views, but we have to respect
those. But most importantly, it's also good as the retailers and this globalisation pieces continues
to involve, and grew up in school when everyone started talking about globalisation. And we
didn't really know about it.
Paul Keating was talking about equal playing field. Globalisation happening. But the equal
playing field has never happened. It's never going to happen in my view. And I understand why.
But the fact is that we need to foster not only foster a long-term relationships, we need to find
new relationships and continuing to build on them. And that's where the Asian Opportunity
actually comes in. And that's what we need to actually put our energy into.
But most importantly the day that, and we had a recent experience where we felt so, I feel so
passionate about a particular issue that we went back to a retailer and said what you're doing is
absolutely wrong. And the fact that they actually listened to us, against my management's advice
but anyway.
But sometimes you need to be brutally honest with them and actually be upfront about where the
position is in a respectful way. And I think there that's the change that I'm seeing in the global, in
the domestic market. And I actually expect it was actually coming into the global market.
But without being on all day about cooperatives and their opportunities, I think that the
challenges for us to actually sustain our momentum, we had international year of cooperative last
year. People actually started to get it, that cooperatives can actually be run as viable businesses.
They are reasonable structures to actually have.
We need to be commercially focused. There's no ifs, buts, or anything else on it. We need to be
commercially focused. And to survive, we have to be. But on that side of it, we need to adheed to
our purpose. Our purpose is our milk price, paying a reasonable dividend, and making sure
there's a future in dairy. No farmer wants the price today and a lousy price tomorrow. They're
looking for that nice trend in upward pricing.
And I think that the piece that we've put a lot of energies into is trying to find, as our retailers are
becoming more concentrated in Australia, and the fact that we're finding ourselves generally [?
on alliance ?] you'll find yourself with more business with one than the other. That we need to
find alternative markets to actually make sure that we're not controlled by a retailer in any
particular way. So we've got a real emphasis on that.
And I can actually successfully say that we've actually now are putting fresh milk product into
the Philippines as of last week. And we're also now putting, trialling, product into China. So
there are significant opportunities. And we're actually doing those because people see our
proposition as something could really, really adds value.
And ultimately, we have to take our members forward with us and our stakeholders. Just as
Robert Poole actually said earlier, how we find that additional milk to supply the opportunity we
have into Asia for the benefit of Australians I think is a real challenge. Thank you very much.