Fonterra Co-operative Group Ltd, the world's largest dairy exporter, is banking on rising dairy consumption in China, fueled by product innovation, expanding access in lower-tier cities and surging demand from the country's fast-evolving foodservice sector, according to a top executive.

Teh-han Chow, Fonterra's president for global foodservice and China CEO, said the country's dairy market still has significant room to grow, as consumers gradually adopt milk and related products as part of a daily diet.

Government calls to boost dairy intake are reinforcing that trajectory. Han Jun, minister of agriculture and rural affairs, said last month that dairy intake in China remains insufficient. Specifically, per capita dairy consumption is only one-third of the global average.

Chow said: "If we want to build a healthier society and a healthier lifestyle, that is the level of dairy consumption we should aim for. The question is how we lift consumption — especially for industry."

While dairy is not yet a staple for many Chinese consumers, its use is increasingly embedded in popular foods and beverages. Products such as pizza, milk tea and baked goods have introduced dairy as a key ingredient, often without consumers explicitly seeking it out.

"In a lot of product applications, we see increasing use of dairy," Chow said. "Consumers don't necessarily say 'I want to buy dairy' — they want to buy something that tastes good."

That shift is also driving what the company calls a "dairy upgrade", as food manufacturers and catering companies replace vegetable fats with butter and cream to improve flavor and perceived quality.

The trend is particularly pronounced in lower-tier cities, where consumption levels have historically lagged but are now catching up.

Fonterra is accelerating efforts to tap those markets, expanding beyond major hubs into smaller cities where growth is outpacing first-tier cities. Through Anchor Food Professionals, its foodservice brand, the company now reaches about 500 Chinese cities and is increasing its presence further inland.

"We see consumption expansion now being driven more by lower-tier cities," Chow said. "In those markets, access to innovation is harder, and that's where we can put more effort into supporting our customers."

A cornerstone of Fonterra's local strategy is innovation, particularly through its network of six application centers, where chefs collaborate with clients to develop new products tailored to local tastes. The results are creations of hundreds of new applications each year in the country, said the company.

Foodservice has emerged as a major growth engine, with rising demand for butter, cream and other dairy ingredients across restaurant chains, beverage brands and bakery operators. Chow said the growing demand in China is prompting a fresh investment of NZ$75 million ($42.9 million) to expand butter production capacity in New Zealand.

Beyond China, Fonterra is also exporting its playbook to other markets, particularly in Asia, where local companies are looking to replicate the country's rapid pace of innovation. The expansion of Chinese tea beverage chains overseas is creating additional demand for consistent dairy solutions across regions.

"The experience we've built in China becomes an important reference for other markets," Chow said.