24 September 2008

Is $130m the only cost to Fonterra's brand?

New Zealand dairy cooperative Fonterra has been forced to write down $130 million this week as it's global brand reputation increasingly comes under attack.

The write down comes in the wake of the everwidening Chinese milk tampering scandal, which could result in one of the largest food recalls in the Asia-Pacific region.

One of the largest dairy companies in the world, Fonterra was widely regarded as a "clean and green" brand. Not only does the company own a 43 per cent stake in San Lu, the Chinese firm that sold the poisonous milk formula, but it seems on the face of it, the company's directors had prior to knowledge of the tampering but seemed unable to act on it.

A carefully stage managed press conference in Auckland New Zealand this week saw executives once again running for cover as they fended off press accusations that the company could have done more to avoid the scandal, which so far has claimed lives and hospitalised thousands of children in China.

Despite a presence on the San Lu board, who may have known about the introduction of the contaminant as far back February this year, Fonterra CEO Andrew Ferrier insisted their lack of knowledge of Mandarin hadn't have hampered their efforts to understand the extent of the tampering and in interviews said he "was appalled that this could go on."

Fonterra claims they first knew of the contamination in early August and took what it regarded as the best course of action, which was to work with the Chinese government on a product recall.

However, the depth of problem is demonstrated by the extent of the write down, as the company paid $100m for a 42% stake in San Lu, which is now valued at $62m and with some reports suggesting that San Lu's brand is now virtually worthless. It also seems likely to anticipate a much more substantial write down on Fonterra's brand value.

Fonterra appears to have stumbled at the farmgate - first denying knowledge of the scandal, failing to achieve a product recall and now having to admit it had knowledge of the tampering prior to it going public.

Fonterra would do well to have learnt a lesson from Perrier, once the leading brand of sparkling water in the US and the world.

In 1990 benzene contamination was found in bottles of its popular sparking water leading to a complete global recall of more than 160 million bottles which, like Fonterra, was also similarly poorly handled by its executives. The result was an overnight collapse in market share and a takeover by Nestlé in 1992. Perrier is yet to regain its pre-1990 marketshare.

As the scandal widens to Australia, HongKong and other Asian countries it seems that in this escalating attack on its brand reputation is likely to result in a significant drop in its share price, market share decline and community disquiet in its respective markets.

All of this could and should have been avoided if the company had some proper risk assessment and crisis planning in place. In short, this would involve training for its key executives so they can plan responses and ensure various constituencies are actively tracked. For a company of this size I would have expected this was mandatory. However, Fonterra appears to have already broken one of the cardinal rules for protecting brand reputation and ensuring trust - when in a crisis provide as much certainty as possible around how you are dealing with the problem. They haven't and now it's too late.

I wonder if this is going to be a long, slow debilitating drip.

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