To Sell Cheese and Butter in China, This Dairy Company Is Training Chefs. Is That Going to Work?

A multinational's push to take the Chinese market — though the results are hard to measure. For Fonterra, the bigger market ahead and the bigger challenge are both in people's shopping carts.

At the entrance to a cluster of high-rise apartment blocks in Shanghai's Jing'an district, an unremarkable three-story building sits tucked behind a dumpling restaurant and a hot-pot place on the main road. Eleven chefs in kitchen whites have been inside all morning; the cheesecake bases they made are still chilling in the fridge, waiting to be finished. In the lull they sit around two square tables, comparing notes against slides on a screen and arguing over how much whipping cream to whip for a cheese-foam tea, and what temperature the gelatin sheets that set a mousse cake should be kept at. A man playing the part of "head chef" talks them through the finished products on the spot, and the chefs around him scribble the key points on paper recipe sheets as he speaks.

This training session, which looks much like the home-baking classes now popular everywhere, carries a bigger mission: Fonterra, the New Zealand dairy giant, wants to sell more of several key products in its lineup to Chinese consumers.

The company is known for its dairy exports, which account for a third of the world's dairy export volume. It was formed by merging what were then New Zealand's two largest dairy companies with the New Zealand Dairy Board, and is now the country's largest company. It entered the Chinese market in the 1970s. Its dairy partners in China included the Sanlu Group, exposed in a 2008 food-safety scandal; after that, Fonterra's China business took a heavy hit, and the company began building farms to move into raw-milk production and stepped up its imports of milk powder for use as an ingredient.

In 2014, Fonterra took a stake in Beingmate and handed it distribution of Anmum, Fonterra's formula brand for pregnant women and infants, and with that re-entered China's finished dairy market. Today 80% of China's imported ingredient milk powder comes from New Zealand, and Fonterra holds 89% of New Zealand's milk-processing market.

Fonterra's traditional partnerships with Chinese dairy companies have always centered on milk powder. But whipping cream, cheese, and butter are the products that carry the real margin — and the categories that have grown fastest in China in recent years.

By one count, China's butter imports grew from 17,000 tons in 2009 to 63,000 tons in 2016, an annual growth rate of as much as 20%. Euromonitor International puts China's cheese sales at 3.5 billion yuan in 2015 and expects them to reach 8.6 billion yuan by 2020. But Mintel's figures show that China's cheese consumption is driven mainly by restaurants rather than retail outlets such as supermarkets: food service accounts for 77% of the total.

That is also why Anchor, the brand that once concentrated on the ambient (shelf-stable) milk market in China, is now "bundled" with Fonterra's food-service business. Anchor is Fonterra's core brand, and the best-known name the company has in China.

Teoh Joo Cheong, the man playing "head chef" at the session, is a chef Fonterra hired to serve as executive chef director in its food-service department. His assignment is to push Fonterra's products — Anchor whipping cream, cream cheese, mozzarella, butter and the rest — as far as they will go in every kind of dish, and to pass those techniques on to Chinese pastry chefs one by one.

The three-story building they work in is Fonterra's Product Application Center, built for training and exchanges with clients; besides Shanghai, there is one each in Beijing, Guangzhou and Chengdu. The ten "students" on hand came from Zhejiang, Jiangsu, Shandong, Anhui and Shanghai; the bakeries they work for range from nationwide chains like Holiland to regional pastry shops like Siji Bingwu. After hearing Teoh Joo Cheong's first critique of the finished products, they moved on to practice, preparing the mousse mixture for a cheesecake — dropping cream cheese into a food processor and, holding the mixture below 10 degrees Celsius, blending in lemon juice, rum, yogurt and softened gelatin sheets…

The fast growth of the baking market is one big reason pastry chefs are glad to attend training like Fonterra's. According to China's National Bureau of Statistics, the baking industry reached a market size of 242.667 billion yuan by the end of 2014, a compound annual growth rate of 25%; in 2003 the figure was just 20.935 billion yuan. Mintel expects that between 2016 and 2021 the pizza category, which uses enormous amounts of cheese, will grow 11%, to $5.7 billion.

Fonterra has been a beneficiary of this shift in what people eat. The company's interim report for fiscal 2017 shows that with dairy commodity prices depressed, Fonterra Group's after-tax net profit rose only 2% year on year. But adjusted EBIT for its consumer-brands and food-service businesses came to NZ$313 million (about US$227 million), up 30%. According to the company's president for Greater China, a quarter of Fonterra's food-service business now comes from China, and mozzarella has done especially well, with sales up 66% in 2016. This staple of Western-style bakeries had in fact been quietly working its way into the Chinese market for years: in 2015, close to 300 million pizzas sold in China were made with Fonterra mozzarella.

But that is not enough. Fonterra wants to make something new, and what it wants most is to develop a product that sets the market alight. Now it has run into cheese-foam tea, the internet-famous drink.

Richard Allan, vice president of Fonterra's food-service division in China, told QDaily that a drink shop in southern China first used Fonterra dairy products to make cheese-foam tea. That prompted the company to study how the drink was made and to work out the best ratio of cream to cheese. The original intention was simply to help a client improve its recipe so the product could spread to more markets; nobody expected it to sweep the drinks business.

Cheese-foam tea has now become just about the favorite recipe borrowed by the chefs who buy from the food-service department. Clients in the beverage channel still make up only 20% to 30% of the total, but drink-making is already the fastest-growing part of the business.

Richard Allan added that it is not only merchants in China applying the cheese-foam tea recipe widely; Fonterra's clients in Southeast Asian countries such as Malaysia and Singapore have said they want to bring this new style of tea drink home too.

Fonterra did not invent cheese-foam tea. But once the new demand was uncovered, it became an enormous beneficiary.

Main dishes loaded with dairy are another focus for the food-service department's R&D. Not long ago Teoh and his colleagues tried adjusting the ingredient ratios for a vegetable dumpling made with cream cheese, and baked an egg tart with caramel added. Once they had settled the proportion of cream cheese on top and the oven temperature, the product — called the "molten cheese tart" — was fixed. Teoh plans to teach the new recipe to chef clients next, and before long different shops will probably be selling their own variations on the tart: maybe a toffee-and-sea-salt filling with something extra in it, maybe a longer bake on the cream cheese. It depends on what each merchant does with the original.

East-meets-West dishes like baked cheese rice and cream pineapple buns, meanwhile, long ago won dairy a place on Hong Kong dinner tables; dairy makes up about 5% of the ingredients used by Hong Kong's food-service industry. If mainland China reached the same proportion, it would be a market worth $7.5 billion a year.

Fonterra runs its whole food-service department off these four Product Application Centers, reaching into bakeries, restaurants and drink shops. Before the centers were formally set up, the chef team flew from city to city making house calls, or struggled to find third-party venues for training. In 2014, after some false starts, the Shanghai center moved from K11 into this larger building in Jing'an. Restaurant companies and bakery clients finally had a fixed place to compare notes and learn technique together.

Fonterra actually opened its food-service business in China in the late 1990s, but has only put real effort into it in the past two years. Richard Allan told QDaily that the huge potential of China's restaurant market has already drawn more than ten million yuan of company investment into the food-service department over the past five years. The department now has more than 100 employees, and more than 1,000 clients have been through Fonterra's chef training.

The 18 R&D chefs recruited across the four centers supply chef clients in different food-service channels with new recipes every week — all of them, naturally, using Fonterra cheese, butter and whipping cream. Space and resources are limited, so only 20% to 30% of clients currently get to work directly with the centers' chefs; but the 30 to 50 distributor chefs who partner with Fonterra carry the techniques out to the rest of the country.

Fonterra's competitors are working the market the same way. FrieslandCampina, the Dutch dairy company, opened its first chef-training kitchen in Shanghai this January; French dairy companies such as Elle & Vire and President have similar chef R&D and training teams, and Nestlé Professional runs a client exchange center of its own. All of them promise creative solutions and market insight.

Fonterra's edge may simply be that it started this business in China earlier, plus the reputation Anchor had already built.

Nicolas Sim, founder of the casual-dining chain Secret Recipe, told QDaily that what he values more is the market insight Fonterra brings him from other countries. That is a real help to a chain that runs company-owned stores in four countries and, in China alone, has to launch new mains and cakes every two or three months. Cross-market analysis lets Secret Recipe exploit the gap created when information travels at different speeds in different countries, and gives it a better chance of leading consumer trends.

Secret Recipe started in Malaysia; Nicolas Sim opened its first China branch in Shanghai's Gubei in 1997, and the chain now has 100 stores nationwide, more than half of them in the Jiangsu-Zhejiang-Shanghai region. The eight dessert and main-course R&D chefs at his stores are all regulars at Fonterra's Product Application Center. Their latest joint products include a set of cupcakes in four flavors — sweet, sour, bitter and spicy — and a chicken-sausage pasta in a whipping-cream sauce.

When those products sell, they translate directly into sizable ingredient sales for Fonterra. Nicolas Sim says 90% of the dairy in Secret Recipe's restaurant ingredients now comes from Fonterra, and more than 80% of that is Anchor whipping cream — its China stores get through 6,000 liters a year. The rest is cream cheese, butter and the like, generally used in main courses such as pasta, macaroni and cream soups.

Yizhiduo, another Fonterra client, launched a dessert co-developed with Fonterra for Father's Day this year — a cheesecake with fruit purée and white wine added to bring the fat content down — and sold more than 4,000 of them in the Shanghai area in three days.

Liao Jingjing, who heads Yizhiduo's cake R&D team, told QDaily that consumers are increasingly sensitive to how much fat they take in from food. Beyond packaging desserts in the smallest portions possible, the real difficulty in development is combining dairy with other ingredients without hurting the flavor.

Fonterra dairy now goes into 40% of Yizhiduo's shipments, above all the cakes that use a lot of cream cheese and the wife cakes whose main ingredient is anhydrous butter. In May this year, the low season for sales, Yizhiduo used 4,500 kilograms of Fonterra dairy products company-wide every week; in the usual peak season after August, that figure doubles.

What Teoh Joo Cheong wants is to teach people to love the thick, milky taste of cheese and butter. It is hard to say how much the chef training has actually done for Fonterra, but by the numbers Anchor is still the cheese brand imported into China in the largest volume.

In retail, though, Anchor ranks only third, with a 7.8% share — far behind the market leader Baijifu, a brand of France's Bongrain Group, which holds 20.7%. Baijifu's children's cheese line goes straight after parents who want to feed their kids nutrition from premium dairy. Even in the food-service and baking channel, the Sino-French joint venture Milkground is taking share, and ranks high in e-commerce sales.

For Fonterra, the bigger market ahead is in the supermarket — the thing people drop into a shopping cart without thinking, though that is now more likely to happen online. Either way, turning a population with no tradition of eating these foods into its customers remains something of a challenge.

Images in this article are from Unsplash, Shutterstock and others.

Cover image from Fonterra, Unsplash.