New Zealand’s dairy processing industry has emerged from six years of extraordinary volatility, spanning COVID-19, global logistics disruptions, and large commodity price swings, with sharply divergent outcomes across the largest processors.

Our new TDB Advisory report, the New Zealand Dairy Processors Review 2025, examines the financial performance of five major processors (Fonterra, Synlait, Westland, Oceania, and Tatua), representing 88% of collected milk, from FY2019 to FY2024. The report addresses two fundamental questions: who performed well and why? And did the long-held industry wisdom to “move up the value chain” actually deliver superior returns?

A sector failing to create value

The report’s first major finding is that, in aggregate, the sector fell short of creating sustained economic value. While the five processors’ pooled return on capital employed (ROCE) of 6.1% modestly exceeded the 5.1% regulatory WACC benchmark, it fell well short of the estimated risk-adjusted capital costs of 9% to 11% required by the market.

Behind this aggregate figure, performance diverged dramatically:

• Tatua delivered an “exceptional” 21.5% average ROCE, driven by successful specialisation in technically differentiated goods and capital discipline;
• Fonterra staged a significant turnaround, recovering from negative returns in 2019 to 9.9% by 2024 after refocusing on its core NZ ingredients and foodservice business and cutting debt;
• Synlait experienced severe volatility, swinging from 13.5% ROCE in 2019 to negative 19% in 2024, as debt-funded expansions collided with a collapse in demand from its key partner, A2 Milk;
• Westland averaged a negative 6.8% ROCE over the period, though it has recovered substantially since its 2019 acquisition, successfully pivoting to consumer butter and bioactives; and
• Oceania recorded persistent losses, constrained by its dependence on parent-company Yili.

The analysis reveals that the most durable returns were achieved at the strategic extremes: either specialised, high-margin niche products (Tatua) or scaled commodity and foodservice operations (Fonterra). Processors in the “middle” experienced higher volatility and weaker performance. The report also found that key risks, namely customer concentration, excessive debt-financing for expansions and poor market timing were the primary drivers of failure.

Does “value-added” actually pay?

A central question for the industry has always been whether moving up the value chain is worth the investment.

Our report provides new econometric evidence on this question. A panel regression analysis of the 2019–2024 period finds that, after controlling for firm-specific and year-specific factors, a positive relationship existed:

• Each +$1 per input kgMS in a firm’s revenue premium was associated with a +3.6 percentage-point increase in ROCE.

This encouraging finding suggests that within-firm movements up the value chain aligned with systematically improved profitability in the recent period.

However, the report provides critical caveats. The analysis identifies an association rather than proving causation, and when extending analysis to 2013–2024, the relationship weakened substantially (1.3pp) and lost statistical significance when excluding Tatua.

Most importantly, value-added strategies introduce materially greater business risk. These risks include 2-3x higher capital intensity, slower pass-through of input cost changes (increasing margin volatility), and greater operational complexity.

These risks are not theoretical. The report shows how they crystallised into major losses for Synlait after 2019 and for the pre-acquisition Westland co-operative, whose earlier underperforming value-added investments contributed to its 2019 sale.

The real lessons: productivity, focus and discipline

Ultimately, the report concludes that the sector’s central challenge is productivity growth: producing more value from existing assets and milk.

The most durable successes came not from simply pursuing “value-add” as an inherent good, but from strategic clarity, operational discipline, and a capital structure that matched the chosen strategy. The experiences of Fonterra and Tatua demonstrate that innovation can manifest as validly through ingredients-side process optimisation as it can through differentiated product development.

Success depends on matching strategic choices to organisational capabilities rather than pursuing value-added as an inherent good.