A Different Take on Innovation from Adjacency 128.0

Tiny Tatua dives deep into milk to regularly deliver large payouts

Tatua Cooperative Dairy Co Ltd of New Zealand shows another approach to adjacency.

Instead of moving to an adjacent application (like BYD), Tatua dives deep into milk fractions and derives a more valuable mix of products to consistently return better payouts to its cooperative members.

Below, I tell how Tatua does it.

The Cooperative. Tatua’s dairy cooperative is located in Tatuanui on the dairy rich Waikato in the North Island of New Zealand. It has only 112 dairy farmer members with farms located just within 12 kilometers around their milk processing facility.

In comparison, the world-renowned Fonterra has more than 11,000 members, more than 95% of all Kiwi dairy farmers.

Tatua exports 90% of its products; Fonterra accounts for 90% or $9.7 billion out of $10.7 billion of New Zalands dairy exports.

Tatua processed just 10.9 million kilograms of milk solids (kgMS) versus Fonterra’s 1,192 million kgMS in the latest financial period.

Still, Tatua had a total payout of $8.61 per kgMS compared to the $7.90 that Fonterra yielded to its members in the same period. The difference was more stark in earlier years like in 2001-2002 when I lived in New Zealand.

Tatua’s Adjacency Strategy. Tatua uses its “small tightly-knit supply base allows for careful control over milk quality and the ability to ensure a consistently fresh milk source,” to quote its company brochure.

More importantly, Tatua produces and sells more specialized dairy products with higher value. This has allowed it to survive and flourish despite its small size. They do not sell commodity milk powders

Product Portfolio. The Tatua product range includes:

• Branded consumer products like whipped cream, savory sauces and convenient cheese snack;
• Value-added foodservice products to hotels, airlines and restaurant chains;
• Bionutrients like purified proteins and peptides for uses like diagnostic and culture media;
• Specialty nutritional products like protein hydrolysates, lactoferrin, for sport and enteral nutrition, infant formula, meal replacement and mineral supplementation;
• Natural dairy flavors; and
• Premium high-quality specialized dairy ingredients for use in global food manufacture like caseinates, whey protein concentrates (WPC) and anhydrous milk fat (AMF).

The theme in the Tatua product portfolio is avoidance of high-volume, low margin commodities and either moving as close to the consumer with branded products or niche, high-value items for manufacturers.

Production Technologies. The product portfolio is supported by the appropriate range of unit processes (as listed in Tatua’s brochure).

• Chromatography for fractionation and purification of target proteins or peptides;
• Enzymatic protein hydrolysis for release of target peptides and amino acids;
• Micro filtration for clarification of products;
• Ultra filtration for the concentration and purification of protein solutions;
• Reverse osmosis for concentration of protein by removal of water without heat;
• Spray-drying;
• Aerosol cream manufacturing plant;
• UHT and aseptic bag in box packaging format;
• Tetra Pak liquid beverage packaging format; and,
• Enzyme modification of dairy ingredients to product concentrated dairy flavors.

These production technologies, themselves, are not proprietary but off-the-shelf unit processes linked together in close-system production lines. Tatua’s strength is commercial, i.e. in product selection to maximize total returns out of raw milk.

Still, I do believe there is a hidden asset coming from learning by doing, using and interacting with customers (DUI) from this close-knit company.

Milk and its Fractions. Milk (from cows), like crude oil, has a generally stable composition.

Milk is about 87 – 88% water and the balance of 12 – 13% is milk solids.

In turn, milk solids is roughly 29% milk fat (which is the main component of butter). This proportion is equivalent to 3.7% at the whole milk level, i.e counting water at the divisor, though standardized down to 3.25% in the UHT milk that you drink .

The rest of the non-fat milk solids is composed of proteins, lactose (a sugar) and minerals.

The proteins are generally of two types: casein (which is the main component of cheese) and whey protein.

Obviously, there are other and deeper cuts like the next fractionization for protein: whey protein can be further fractioned into lactalglobulin, lactalbumin, immunoglobulin and proteose peptones.

Tatua reaches deep and purifies these fractions into valuable products.

Back to Strategy. My quick analysis of milk fractions above also implies that the choice of first level products like cheese or butter determines the downstream by-products that are, in fact, the leftover of such choice.

Tatua does not make commodity cheese (it does have branded cheese snacks) and instead bypasses cheese to extract and derive the more valuable proteins: caseins and specialized WPC. Better still, they process through and break down WPC to its more valuable fractions.

In a way, Fonterra cannot really follow Tatua into this strategy because of its large size and high supply volume. The individual markets for these specialized products are too small; Fonterra must produce mass consumption products like UHT milk and butter to use up the large volume of milk that Fonterra’s 11,000 members produce everyday.

So Tatua’s small supply capacity determined its range of strategic choices. What is beautiful to see is how they turned what many would take as a disadvantage on its head. Indeed, employing more technology to gain value is harder. Still, this small band of self-reliant Kiwis ran with the hand they were dealt.

The hard choices they made and the ensuing execution are beautiful to behold!

Please click here for the Tatua Dairy website that has a link to its annual report and company brochure.