COM­PE­TI­TION HEATS UP FOR CON­TRO­VER­SIAL A2 MILK COM­PANY

The Gulf Today - Business - - SPECIAL REPORT -

SYD­NEY: Stay-at-home mother Anna Wei wanted the best milk for­mula to feed her first­born, so she chose the most ex­pen­sive brand her money could buy: Plat­inum by a2 Milk Com­pany Ltd.

“I al­ways felt that the higher the price, the bet­ter the qual­ity,” said 28-year-old Wei, who lives in Shang­hai.

Buy­ers like Wei have fanned a phe­nom­e­nal suc­cess for New Zealand-based a2 Milk and its con­tro­ver­sial milk pow­der that is mar­keted as eas­ier to digest than con­ven­tional milk be­cause it lacks the A1 caesin pro­tein.

As other dairy mak­ers held back from sell­ing sim­i­lar milk, scep­ti­cal about its ben­e­fits and wary of un­der­min­ing their reg­u­lar milk sales, a2’s rev­enue more than tripled in the three years to June 2017 as Chi­nese par­ents em­braced it. The com­pany’s share price rock­eted nearly 2,000 per cent.

Reg­u­lar milk con­tains both A1 and A2 pro­teins but some cows nat­u­rally pro­duce milk with­out the A1 pro­tein. Pro­po­nents of A2-only milk say the A1 pro­tein causes in­di­ges­tion for many peo­ple, while crit­ics say more re­search is needed to sub­stan­ti­ate the claim.

Now, sev­eral other com­pa­nies, in­clud­ing the world’s big­gest in­fant for­mula maker Nes­tle SA, have de­cided to sell their own brand of A2-only milk pow­der in China and other coun­tries, which Mark Brown, chief in­vest­ment of­fi­cer at share­holder Devon Funds Man­age­ment, said raises a ques­tion about the sus­tain­abil­ity of a2’s suc­cess and its strat­egy.

“The prob­lem you have is that a2 goes from this unique sell­ing propo­si­tion to a ‘me too’ brand,” said Brown. “I’m... con­cerned about a con­tin­u­ance of the same rapid growth we’ve had and clearly, then, what you pay for that be­cause the stock is enor­mously ex­pen­sive.” Re­flect­ing high ex­pec­ta­tions built into the stock price, a2’s shares dropped 20 per cent to a three-month low on Wed­nes­day as in­vestors were dis­ap­pointed by a com­pany fore­cast that sales would rise this year by 63 per cent.

A large part of the com­pany’s suc­cess has come from us­ing un­of­fi­cial and un­paid sales agents, or daigou in Chi­nese, rather than an es­tab­lished distri­bu­tion net­work, or Chi­nese part­ner.

There are no of­fi­cial fig­ures, but Brown es­ti­mates daigou gen­er­ate as much as 80-90 per cent of Australia and New Zealand sales, which would be around 60 per cent of a2’s to­tal in­fant for­mula sales.

Sev­eral Aus­tralian ex­porters of in­fant for­mula, in­clud­ing Bel­lamy’s Australia and Black­mores Ltd, turned away from us­ing daigou in 2016, fear­ing a crack­down in China on grey-mar­ket im­ports, and shifted to sell­ing di­rectly or via Chi­nese part­ners to dis­trib­ute their prod­ucts.

But a2 stuck with daigou and it paid off. While a2’s rev­enues rose, those of Bel­lamy’s and Black­more’s tanked.

The daigou buy items in Australia or other coun­tries on be­half of Chi­nese buy­ers be­cause prices for the same item in China can be much higher. When it comes to milk pow­der, many cus­tomers dis­trust brands pro­duced in China fol­low­ing a tainted milk scan­dal in 2008.

Wei, for ex­am­ple, or­ders a tin of a2’s Plat­inum brand for $45 from a daigou to avoid an on­line price in China of about $70. The daigou buys the tin in Australia for about $22 and ships it to China.

As com­pe­ti­tion heats up, the chal­lenge for a2 will be to keep daigou loyal. They are in­cred­i­bly in­flu­en­tial with Chi­nese con­sumers, mar­ket­ing prod­ucts via so­cial me­dia net­works.

a2 shares rock­eted from just NZ0.76 cents in late 2015 to NZ$14.62 ear­lier this year. Af­ter a2’s rev­enue pro­jec­tion on Wed­nes­day, the shares fell as low as NZ$10.25.

“Post the big rally, the name sim­ply be­came too large,” said Rod Gil­lam, chief in­vest­ment of­fi­cer at Anchorage-based Mckin­ley Cap­i­tal Man­age­ment, which has cut its stake in a2 to 0.6 per cent from 1.7 per cent over the past year.

Three out of the firm’s top four share­hold­ers - fund man­agers Colo­nial First State Global As­set Man­age­ment, Chal­lenger Man­aged In­vest­ments Ltd and Green­cape Cap­i­tal Pty Ltd have trimmed their po­si­tions, mostly since Au­gust.

Stock mar­ket fil­ings and Thom­son Reuters Eikon data show that Colo­nial had kept its stake steady or had in­creased it since De­cem­ber 2016, while Green­cape and Chal­lenger had been trim­ming their hold­ings since April.

Green­cape and Colo­nial de­clined to com­ment. Chal­lenger, which in­vests on be­half of sev­eral bou­tique funds, de­clined com­ment “be­cause it’s our bou­tiques who are trad­ing,” a spokes­woman said.

“Many of our large share­hold­ers have had to sell down to com­ply with their own self-im­posed rules,” about the size of in­di­vid­ual stock hold­ings as a per­cent­age of their port­fo­lios, a2 Milk’s Asia-pa­cific Chief Ex­ec­u­tive Pe­ter Nathan told Reuters. He made the com­ments be­fore Wed­nes­day’s rev­enue fore­cast was re­leased.

Nathan said the com­pany’s daigou net­work con­tin­ued to grow and the fact that other com­pa­nies, such as Nes­tle, are launch­ing their own A2 prod­ucts “val­i­dates the A2 propo­si­tion and the ex­tent to which fur­ther con­sumer aware­ness is cre­ated, it will strongly ad­van­tage the a2 Milk brand given out first move ad­van­tage.” a2’s sec­ond-largest share­holder agrees Nes­tle could have a pos­i­tive ef­fect.

“I suspect that they’re go­ing to as­sist con­sumer aware­ness and I cer­tainly think that a2 Milk is dis­pro­por­tion­ately well po­si­tioned to be able to ben­e­fit from that,” Oyvinn Rimer, direc­tor at Har­bour As­set Man­age­ment, said fol­low­ing a trip to China “to ver­ify that the the­sis is in­tact”.

EX­PEN­SIVE MILK

a2 Milk is also devel­op­ing a grow­ing distri­bu­tion net­work in about 6,700 mother-and-baby stores and on ma­jor e-com­merce plat­forms, Nathan said.

On its web­site, a2 says there is a “grow­ing body” of sci­en­tific ev­i­dence sup­port­ing the ar­gu­ment milk with the A1 pro­tein causes di­ges­tion prob­lems, but many sci­en­tists are scep­ti­cal.

“In things like in­fant for­mula and tod­dler milk, there are no stud­ies in in­fants and chil­dren,” said Jane Scott, pro­fes­sor of pub­lic health and nutri­tion re­search at Curtin Univer­sity in Perth, who has stud­ied a2’s claims. “It’s milk. It’s just ex­pen­sive milk.” a2’s Nathan said stud­ies in re­la­tion to chil­dren are at ad­vanced stages. So far, Wei said she is sat­is­fied. “I might only con­sider switch­ing brand if the nutri­tion value is the same and Nes­tle can of­fer a bet­ter price.”

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