A2 Milk’s sales prospects are looking good as the company builds its markets in China and US

Fonterra’s farmer shareholders   might have been stung  by pangs of envy  as  they  looked  into  the next    paddock,  and  discovered  how  another  company  in the  same industry is  racking up  huge revenue gains  from  the  same  markets  in  which their  co-op is  competing.

But A2  Milk,  a  company founded  in 2000 by  Dr  Corrie McLaughlan  and  Howard Paterson,   is  not  just  another  outfit  selling  milk  products.  The   company’s  founders had  the  aim of  doing good for  health  globally.

That  gives  it  the vital  point  of  difference   which  has ensured  its  market capitalisation is  close to  being the highest on the  NZX.

As  its  CEO  Jane Hrdlicka  told  the annual  meeting in  Auckland this week, the  company has  changed a lot  over the last two decades and is engaged now on the next phase of its evolution.

In FY19, we kicked off a journey to step up the role we play as a unique,premium and modern dairy nutritional company. This has led us to clarity on how much potential we have remaining in our core business in the two largest consumer markets in the world – Greater China and the US”.

A2 Milk is forecasting first-half revenue of up to $800m, compared with $1.3bn for the whole of last year.  Hrdlicka said that strong first-half sales and improved marketing investment in China and the US would help lift full-year margins to between 29% and 30% against the previous guidance of margins around the 28.2% experienced in the six months to June 30.

The company told the AGM that first-half sales should grow on a near doubling of China label infant nutrition sales, and an even better growth rate for its US sales forecast.

Fonterra’s  farmer-shareholders,  who had to absorb the news  of  a  record loss  by their  co-op  in  its latest year, along with the  evaporation of  a  dividend,  might be  crying into  their milk  when they read that.

A2  Milk,  though,  has a   market advantage  in the  Chinese  market.

Independent  research  provides strong evidence from a clinical trial with pre-school children in China that A1 beta-casein relative to A2 beta-casein has negative effects on both digestion and cognitive performance.

The  research results  were published in  the Journal of Pediatric Gastroenterology and Nutrition (JPGN), the official journal of the European and North American Societies of Pediatric Gastroenterology, Hepatology and Nutrition.  The researchers  were  from Shanghai Jiao Tong and Peking Universities in China, together with an Australian collaborator.  Peking University is ranked by Times Higher Education as the number one university in China and Jiao Tong as number 7.

The trial with 80 pre-school-age children compared ordinary milk containing a mix of A1 and A2 beta casein  with a milk product where all of the beta-casein was A2.  Most of the children were showing early signs of intolerance to conventional milk before  the study.

A2 milk comes from A2 cows, with these cows naturally producing milk free of A1 beta-casein. There is no A1 beta-casein in human milk— or  milk from goats  or sheep.  Cows are the only species that produce A1 beta-casein, and it is found in a high proportion of cows of European origin.

Hrdlicka  told A2 Milk’s  annual  meeting  its China  strategy entailed  building a  broad-reaching business to serve consumers across  all  consumer  channels.

Fonterra,  meanwhile,  is trying to  extract  itself  from  its unfortunate  (and  costly)    investment in  China’s  Beingmate.

Hrdlicka,   in spelling out  A2’s strategy, says the priorities translate into four team objectives underpinning financial targets. The first is to build capability in China, Australia and  New Zealand to support the delivery of  the  company’s ambitions; the second is to accelerate growth in the US; the third is to build sustainable brand leadership across core markets; and the fourth is to ensure organisation has the right people, tools and partners to enable  growth.

Delivering on the  priorities requires investment in people, brand and infrastructure, which includes technology.

We have enhanced our people plan by adding new skills and capability across the total organisation in key areas such as consumer insights, marketing, strategy, sales and commercial growth, technical and human resources and we are pleased with how our new team members are settling into, and contributing to, the organisation.

“This includes good progress in building our local China team and empowering them to grow a strong and capable organisation that will enable us to stay ahead in this dynamic market. Expanding our team thoughtfully, quickly and in line with our purpose and values, is critical to realising our growth strategy”.

Hrdlicka  says   the brand investments are building both broader awareness in  target market segments and driving trial and consumer engagement.

We continue to see encouraging results from several inmarket tests in China which will be scaled up during the second half alongside an exciting new advertising campaign that launches in December in the lead up to Chinese New Year.  In the US we have launched a new advertising campaign and impactful new packaging which is all contributing to increases in brand awareness and sales velocities in our key accounts.

We also have a unique opportunity to step-change our information systems, data usage and technology-based tools more broadly.  Without the burden of significant legacy systems, we have a great opportunity to put in place state-of-the-art digital data and technology tools to enable our business growth strategy. These projects will be phased over the course of the next three years”.

Hrdlicka  reckons China and the United States would be top performers this year.

Infant nutrition sales for China are forecast to be about $135m, a growth rate of 84%, while US sales should climb to about $27m, a growth rate of 110%.

And   she had a   message  for  those  who  contend  the  dairy  industry   has   no  future  because    global   warming is  said by some to  threaten  extinction of  life on  earth.

“We feel a strong sense of responsibility to improve the quality of people’s lives. This was at the foundations of our company in NZ in 2000 and is still at the heart of everything we do today.”

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