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A2 Strategic Review Outcomes - The a2 Milk Company

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A2 Strategic Review Outcomes

October 31, 2012

A2 Corporation Limited (“A2C” or “the Company”) announced in April 2012 it was undertaking a strategic review of the Company in order to assess its options to accelerate growth and maximise shareholder value. Additionally, the review considered the merit of approaches received from parties interested in partnering with A2C.

The strategic review is now complete and the Company wishes to update the market on the outcomes. The Board is pleased with the work undertaken by management and the advisors during the course of the review.

The outcomes of the strategic review are that A2C will dedicate additional resources to initiatives previously announced and prioritise investment in opportunities identified during the strategic review, including:

Further developing the strong suite of intellectual property and the uniqueness of a2™ brand dairy products

A2C has developed, and is continuing to develop, a comprehensive suite of global intellectual property, including patents, trademarks, proprietary processes and know-how with respect to a2™ brand dairy products. An independent legal review of the global intellectual property undertaken during the course of the review has confirmed that the intellectual property rights are strong and of extended duration with the opportunity to further enhance and extend.

Further growing the Australia and New Zealand fresh milk businesses by investing in additional processing capability in Australia and extending the Australian sales and marketing model into New Zealand

The Australian a2™ fresh milk business continues to perform strongly. Current trends and strategy suggest a milk value share of at least 10% of grocery is achievable in Australia in the medium term. In addition, the Company contemplates further growth through route trade distribution. To support the continued growth of the business, the strategic plan envisages an investment in additional processing capability to supplement A2C’s company owned and operated facility at Smeaton Grange, New South Wales.

The Company has also decided to enter the New Zealand fresh milk market directly through the establishment of a wholly owned operating subsidiary. Discussions are underway with the sole remaining non-exclusive licensee to ensure an optimal outcome for the expansion of the business across the North and South Islands.

Accelerating investment in the UK fresh milk market now that the Robert Wiseman joint venture is established

The 50/50 joint venture with Robert Wiseman Dairies, the largest dairy processor in the UK, has positioned A2C to enter the UK fresh milk market, where trends support the a2™ brand proposition. A launch through almost 700 supermarket outlets of three major supermarket chains is now under way. A fourth supermarket chain will offer a2™ brand fresh milk from January 2013 coinciding with the commencement of a television advertising campaign.

As in Australia, the pace of development of the UK business is dependent on building consumer awareness of the products and its potential benefits and further expanding distribution through retailers. The size of the opportunity in the UK market is significant, and A2C will continue to assess the merit of making additional investment beyond the initial capital contribution to accelerate growth in the medium term. A successful launch of a2™ brand fresh milk in the UK will provide the platform to expand the product portfolio in this market and new markets in Europe.

Accelerating investment in the large and rapidly growing China infant formula market now that the China State Farm distribution agreement is established

Last week, A2C announced the appointment of China State Farm Holding Shanghai Company (“CSF”) as the exclusive distributor of a2™ brand infant formula for China. CSF is a wholly owned subsidiary of China National Agriculture Development Group Corporation, the only Chinese State Owned Enterprise that operates in the production of agriculture, animal husbandry and fisheries. CSF has the strength of local relationships and financial capacity to establish a dedicated infrastructure, distribution network and marketing activity to support the A2C infant formula business plan. CSF and its parent have demonstrated strong commitment to the a2™ product proposition. A2C’s business model, which is based on limited capital expenditure, is focused on a rapid roll-out, initially targeting the five core Tier 1 cities, progressively expanding across China, Hong Kong and Macau. Based on current business plans, a funding commitment of around USD5 million is assumed during 2013/14. Additional opportunities to distribute a2TM brand milk throughout China and South East Asia are being reviewed.

Entering new international markets, with an immediate focus on North America and specific markets in Europe

The Company has identified a number of attractive international markets for a2™ brand milk beverages. North America and a number of markets in Europe, including Germany, France, Italy and Spain, have been prioritised as the Company’s next market entries. The entry model will differ by market and may involve a joint venture as has been done in the UK, the use of a local ontract manufacturer or an investment in regional processing assets, as in Australia.

Entering new categories, with UHT milk and Yoghurt the immediate focus

The high-growth UHT milk and Yoghurt categories have been identified by the Company as attractive opportunities for the a2™ brand. There is significant scope for A2C to enter these categories, particularly in Asia Pacific and Europe where the Company can leverage its existing infrastructure in Australia and the UK.

Corporate Structure and Resourcing

A new organisation structure for A2C will comprise three business units – Australia and New Zealand, A2 Milk (UK) and A2 Infant Nutrition – plus a corporate capability to manage administration and new international initiatives. The financial and human resources of the Company are considered appropriate to fully support the strategic agenda.

A2C is well placed to drive strong future growth independently, with an openness to engage with potential partners who may assist with its global ambitions.  By virtue of the capital light partnership model the Company is well positioned to progressively fund its development through its internally generated cash flows and strong balance sheet. The Board will continue to assess the Company’s optimal capital structure in light of the above mentioned opportunities, as well as new opportunities that may emerge.


For further information contact:

Geoffrey Babidge
Managing Director
A2 Corporation Limited
+61 2 96977008

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