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a2 milk enjoys healthy growth overseas - The a2 Milk Company

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a2 milk enjoys healthy growth overseas

April 12, 2012

A Kiwi firm’s white gold could soon be lapped up by health-conscious Americans and Canadians. Trendy Europeans may sip it at sidewalk cafes. Chinese babies could greedily suck the formula from bottles.

Aussies already drink it like it’s going out of fashion and the British are about to taste it. And yet, many Kiwis have hardly heard of A2 Corporation, much less poured its milk over their morning cornflakes.

A2, a company listed on the NZX’s alternative market, sells milk that is supposedly easier to digest because it lacks a protein found in the more common A1 type.

When A2 entered the market 10 years ago, it trumpeted research suggesting A1 milk was linked with a range of conditions including diabetes, heart disease, autism and schizophrenia. Co-op dairy giant Fonterra didn’t (and still doesn’t, a spokesman says) accept the research. The rancorous relationship between the two and several ownership changes certainly didn’t help A2 in the early days.

“The brand was in serious trouble,” says Peter Nathan, who has been boss of the New Zealand and Australian arm of the company since 2007. The local business remains largely unknown to general consumers due mainly, Nathan says, to “legacy issues” – an existing licensing agreement with Northland company Fresha Valley, and a tiny market share. But A2 hasn’t wasted time crying over spilt milk. Just across the ditch, it faces a problem of a different kind – the stock is moving too quickly off the shelf.

“In a sense, it’s a great problem to have,” Nathan says.

After years of going nowhere fast, the success of the joint venture formed in Australia in 2007 has been the catalyst to now launch into other countries.

When Investment Research Group financial adviser Dan Stratful wrote about A2 in October, he noticed its gradual turnaround from IP licensing to fast-moving consumer goods had produced instant results. Since then, share prices have almost doubled, from 24c up to 43c at the time of writing. Stratful says share volumes have risen daily since the half-year profit announcement last month, which bodes well for the company.

“That’s usually a good sign – if volume picks up on an uptrend, that it’s genuine buyer support,” he says.

The half-year result must have turned a few heads. Including a $1.1 million settlement from a Korean licensing dispute, the company posted a net profit of $3.1m, a 247 per cent increase from the same previous period.

“It’s pretty unusual to see the graph that I keep putting up to shareholders, the one we like, the one going up to the heavens,” A2 managing director Geoff Babidge says.

It took 10 years to make the company profitable and it was largely the Babidge and Nathan double act, established five years ago, which turned things around.

Babidge: “Over 600 per cent growth in a four-year period, Peter?”

Nathan: “700 now, I think.”

Future growth will be driven by replicating the Australian sales success in other markets.

But just what did A2 do right in Australia, where many other Kiwi exporters have come to grief?

Taking an active role rather than merely licensing out IP certainly played a big part. A2’s shiny new Sydney factory which opened last month is in response to rapidly growing local demand. But its success really lies with the construction of a slick marketing machine.

In a delicate sidestep of the strict Aussie regulations on health products, A2 uses consumer testimonials in ad campaigns, and runs a carefully non-committal “Feel the difference!” tagline.

The consistent message is that the milk does have health benefits, but it’s not overt enough to get it in hot water.

Babidge is confident anyway that conclusive science – one way or another – isn’t going to make or break the company. “We see no risk with the continuing work being done in science – we only see further upside.”

Distribution is a key component of the new-look A2 operation. Stroll into any Australian Coles or Woolworths supermarket, and the milk sits in every chiller –a marked difference from here.

It’s emerged an unlikely victor from a 15-month price war raging between the Aussie supermarket giants, who sell home-brand milk for A$1 (NZ$1.26) a litre.

A2 costs more than twice as much – just under A$5 for two litres – yet sales rose by 30 per cent in that period, and market share is about to hit 5 per cent.

The A2 sales rep monitoring the supermarket shelves in Sydney reckons he drinks a lot of A2 milk, and that’s without a staff discount. More surprisingly, he does so despite having no digestive issues with standard milk.

Although an estimated 23 per cent of Australian consumers have a perceived intolerance to dairy, the company has found most of its customers don’t fall into that bracket.

This is the most impressive result of A2’s marketing machine – punters could be drinking $1-a-litre home brand, but they’re happy to pay a huge premium for milk that may or may not be healthier.

The next big step is a joint venture in Britain with Robert Wiseman Dairies. The deal announced in November will open up a market three times the size of Australia, and sales will begin later this year. Although Babidge is cagey on the details, he confirms discussions are also under way with prospective partners in the United States, Canada and Europe. He’s hoping to cement another joint venture by year’s end.

In the next six months, A2 plans to start producing milk powders and infant formulas, and Babidge is on the hunt to find a partner to export into the initial target, China.

Babidge says that, while elements of the marketing and branding setup in Australia will be replicated in other countries, the Sydney factory opened last month was a one-off solution to local production issues.

“Our business is very much focused on building sales, marketing, branding, utilising IP – it’s not investing in stainless steel.”

He prefers partnerships, such as the one with Robert Wiseman, that don’t require much capital as it allows the company to move faster.

International expansion always comes with a price tag, but Australia is self-funding now, and the British deal required only $2m upfront. That let the company raise a modest $5m in capital last month, with the view of staying flexible while minimising debt. Shareholders have also approved a move that, if it goes ahead, may attract more institutional investors, who typically stay clear of the illiquid NZAX.

But is it all too much, too fast?

“We don’t have a very good track record of Kiwi companies doing well overseas, so they need to be careful,” Stratful says. Think Pumpkin Patch setting up retail stores in the United States, or The Warehouse’s ill-fated Aussie escapade.

Babidge is keeping it simple, with so far only four product lines to worry about – 1-litre and 2-litre bottles of low fat and regular milk.

“What I do is try and not spread us too thin,” he says. It jars with the speed of the international expansion, but Babidge comes across as a cautious and measured man.

Nathan is just as careful not to get carried away when talking about sprucing up the Kiwi business: “We’ve got a good habit of delivering on our promises, and we want to keep it that way.”

 

Disclosure: Richard Meadows flew to Sydney courtesy of A2 Corporation.

– © Fairfax NZ News

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