- A big player enters A2 Milk’s main market with a directly competing product.
- China is a large market with lots of opportunities for growth.
- Is there room for more fish in this pond?
At the end of March international food group Nestle announced it will launch an “A2 beta casein” infant formula product in China. This caused a sharp decline in A2 Milk’s share price on NZX from $13.84 on 27th of March down to $11.60, eventually closing up $12.97 on 6th of April.
The China market is essential for A2 Milk. It is believed to be the key driver for the future sales growth of the infant formula supported by fresh milk and milk powder. A2 Platinum infant formula accounts to 78% of all A2 Milk revenue ($434,7m) for 1H18.
There are several main points why A2 Milk is likely to continue outperforming in China regardless of the increased competition:
A2 Milk Market share
By December 31, 2017, revenue received from China and other Asia doubled ($114.4m) with 250% growth in EBITDA ($48.3m). The company is focused on the infant formula market with estimated retail value of $27.8 billion and volume exceeding one million metric tonnes. For the last quarter ending December 31, 2017, A2 Milk has increased its consumption market share from 3.5% to 5.4% as measured by Kantar. It is determined to grow its share in the infant formula market and invest in its organisation in China across all key functions.
Marketing and patenting
A2 Milk has a multi-channel infant formula strategy in both China label (offline and online) and cross border English label (online). It heavily invests in in building credibility and awareness for the A1 protein-free proposition. For example, in November 2017, there was a publication of research findings from a major clinical trial in China on the benefits of A2 milk. The company participates in key online sales events – in the major ‘11/11 Singles Day’ event it was the top-selling infant formula on Kaola.com, second on JD.com and third on T-mall.
By December 31, 2017 in the offline (bricks and mortar) segment, distribution grew to 6,700 Mother & Baby Stores supported by an in-store communication programme with promotional staff. Further expansion is planned for this channel, backed by investment in mainstream media in targeted provinces and in social media. The China business also launched A2 Platinum infant formula in Hong Kong, with distribution through 350 high-end pharmacy outlets, supported by brand advertising in outdoor media.
A2 Milk also has intellectual property protection around the world registering the A2 brand and the science that lies beneath it. In 2017, it reached an out of court with Australia’s Lion – Dairy & Drinks over a labelling dispute. The parties mutually agreed not to proceed with their cases against each other. This may be a warning sign to other competitors as A2 Milk would not have settled without Lion agreeing to remove the term “contains A2 protein” from its labels. The protection around “A2” provides a significantly greater defensibility to A2 Milk’s main product.
A2 Milk’s partnership with Fonterra
In February 2018, a comprehensive strategic relationship with Fonterra was announced, encompassing a range of supply, distribution, sales and marketing arrangements in targeted markets. With Fonterra, A2 Milk can diversify its milk sourcing, processing and manufacturing to meet growing demand for its products in China, Southeast Asia and the Middle East.
Competitors and regulation
There are several competitors for A2 Milk in China. Earlier in March, Australia’s Freedom Foods launched an a2 protein milk. The Chinese dairy giant Mengniu already sells A1-free children’s UHT milk. Danone has been in the market for a long time with Aptamil brand. However, A2 Milk has a strong premium branding and positions itself as the only company engaged in the sourcing, processing and marketing of solely A1 protein free dairy and nutritional products in global markets. Nestle entry will be a check for the company’s long-term efforts to distance itself from competitors.
With more than 17 million new-borns in China every year the child nutrition market seems deep enough and rising competition should assist in building credibility and awareness for the A1 protein-free proposition, and hence build the overall category more quickly. It is likely that A2 Milk will enlarge its share in the premium milk market, having substantial amount of intellectual property and patents. If not in China, for example, due to regulatory risks, it may switch attention to the US rapidly growing market where the company has already established moderate presence.
For a full analysis and recommendation on A2 Milk click here.