http://www.weeklytimesnow.com.au/ag...y/news-story/5adcbcc4302d626ffefc2f6e58383bb7
Milk and toast: a2 Milk Company chief executive Peter Nathan raises a glass to his company’s success. Picture: Zoe Phillips
DecisionAg
The a2 Milk Company’s intriguing journey
ALEX SAMPSON, The Weekly Times
August 15, 2016 12:00am
MILK doesn’t generally equate with riches. Certainly not of late. In fact, when it comes to Australian agriculture, dairy has perhaps had the toughest time of farmgate prices, seasonal conditions and retail value in the past year or so.
But for The a2 Milk Company, milk is white gold.
“Consumers believe in our product,” a2 Milk chief executive Peter Nathan says. “It’s fair to say that we have always been very confident about the potential of the business and its growth.”
The a2 Milk Company has cornered 10 per cent of Australia’s fresh milk market since it first hit shelves in 2003 and charges a retail premium of 30-40 per cent ($2.80 a litre) compared with other private-label milk.
The company produces full-cream, light and no-fat milk, as well as long-life milk, milk powder, cream, yoghurt, ice cream and infant formula in New Zealand, Australia, the UK and US, setting itself apart by boasting of digestive benefits on the premise the A2 protein found in milk is easier to stomach than the A1 protein.
Thousands of years ago cows only produced the A2 protein. But a mutation in the dairy herd, thought to be caused by selective breeding, saw some cows also produce a new casein protein – A1. Now, most cows produce A1 and A2 proteins. The theory is some humans have trouble digesting milk due to the presence of the A1 protein. It’s a story that has resonated with consumers. In Australia, it is estimated up to 5 per cent of caucasian and up to 75 per cent of non-caucasian residents are dairy intolerant.
Gene pool: While most cows produce the A1 protein, some still produce milk with just the A2 protein.
Nutritionist Michele Chevalley Hedge says many people who believe they have lactose intolerance or irritable bowel syndrome are actually having a reaction to the A1 protein.
“It’s not so much that the A2 protein is beneficial, it’s that we’ve found the A1 protein is creating some kind of inflammation in the body and causing issues with digestion, allergies, sensitivities and skin,” Ms Chevalley Hedge says. “What we’ve seen is that when people switch to A2 there is a dampening down of inflammation and the effects people are experiencing.”
Last December The a2 Milk Company’s gross full-year earnings were expected to be $31-$35 million. In February this was upgraded to $43-46 million. By June the company expected to end the year on $49-$51 million. a2 expects its global group revenue to be $331-$340 million for 2015-16.
A REWARDING BUSINESS FOR a2 MILK COMPANY SUPPLIERS
The company was added to the S&P/ASX 200 index in June, just 14 months after listing on the Australian Securities Exchange. Shares hit the market in March last year at 56 cents, before racing to a high of $2.15 in December.
a2 Milk Company this week featured in the ASX’s list of the top 10 stocks Australian users invested in over the past three months.
Its infant formula, launched in November 2013, accounted for 53 per cent of a2 Milk’s first-half year revenue ($70 million), which surged 86 per cent to $133 million.
All this from a company that struggled to survive after entering the market in 2000. “When we took over in 2006, the brand was operating, but it was floundering,” Peter Nathan says. “I would say on death row – it really had limited brand life left.
“It was failing to communicate the key benefit of A2 and the brand owner at that stage hadn’t understood how to solve that problem. There were also some logistical and quality issues.”
At the time, Nathan and colleague Geoff Babidge were with allergy-friendly company Freedom Foods as general manager and chief executive respectively.
They moved over to The a2 Milk Company as it launched in Australia, with Babidge now a2 Milk managing director. “Since that point the business and the brand has experienced significant growth,” Nathan says.
a2 Milk Company’s global spread.
The company was founded in New Zealand in 2000 by scientist Corran McLachlan and business partner Howard Paterson as an alternative milk brand. The pair created a genetic test to determine whether a cow would produce milk without the A1 protein.
The a2 Milk Company floated on the New Zealand Exchange in 2004 and dual listed on the Australian Securities Exchange last year. “Now, compared to when the company first listed, we have more shareholders in Australia than NZ,” Nathan says.
“We’ve grown a very significant number of shareholders in the past six months. We’ve had an extraordinary interest from a range of investors so it’s fair to say we’ve been very positively surprised by the breadth of interest.
“We do have a lot of institutions, and a lot of retail investors have come on board who come from a variety of backgrounds.”
In 2012 the company launched a joint venture in the United Kingdom with Robert Wiseman Dairies, which was, at the time, subject to a takeover bid from German-based dairy multinational the Muller Group. In January 2014, The a2 Milk Company fully acquired its UK division. The UK arm is now on track to break even financially this year. Last year a2 Milk added a US branch to its business, setting up shop in northern California, with plans to extend to other states.
The brand was launched with a TV advertising and social media campaign, as well as in-store promotion to help consumers understand the product.
When a2 Milk first hit the shelves it was purely a fresh milk brand turning over about $7 million. Global revenue this year is forecast to be about $334 million. “We’re now the only truly national fresh milk brand in Australia and have distribution right across the country from Tasmania to NT and even Torres Strait,” Nathan says. “Our distribution is wide and we have a very engaged consumer.”
When Nathan and Babidge took over, a2 Milk could be found in about 20 per cent of the outlets in the grocery retail sector. The company now reaches 100 per cent of the sector. “From there we wanted to launch in other dairy categories and the first category was infant formula, which clearly was a different pathway to what all of our competitors had taken,” Nathan says.
Full bottle: a2 Milk sells in every major grocery chain and is the only branded milk in Aldi and Costco.
The a2 Milk Company has been in the infant formula category for 2½ years and already business is booming. It has also launched into ice cream. “Since we took over we’ve had some pretty ambitious plans and we’re pretty positive about how they’ve come to fruition.”
Nathan says the company is “always assessing” how to grow the business. “The beauty of our proposition is that it can enter into pretty much any dairy category, the challenge for us is to understand which is the most lucrative,” Nathan says.
When it comes to making an export buck, China is the place to go for many agribusinesses. a2 Milk is no exception. “We export our fresh milk to China as well as our UHT,” Nathan says. “Chinese consumers do have different consumption habits to Australians, so typically they’re not a cereal and breakfast drinking nation, but they do believe milk provides significant digestive benefits. On that basis, they’re prepared to pay a very significant premium for fresh milk – on average about 150 per cent compared to here.”
Nathan says there’s interest from other Asian markets, but the company is focusing its efforts on China for now.
“Given the scale of the opportunity in China, we’re focusing more attention on that market,” he says. “The very strong engagement that the Chinese have with our brand is exciting. Dairy intolerance is high in China and they have a greater benefit from our product than Western consumers.”
Green streak: The a2 Milk Company has made inroads by marketing its milk to those with a dairy intolerance.
The biggest challenge facing a2 Milk Company is explaining the benefits of drinking A2 milk.
“The science about the A2 protein is reasonably complex for consumers to comprehend, particularly in a category such as fresh milk, which is low involvement – people don’t want to spend a lot of time thinking about milk,” Nathan says.
Despite this, the company now sells in every major grocery chain and is the only branded milk in the notoriously private label-focused Aldi and Costco. “We’re one of the elite brands in that sense,” Nathan says.
Nathan says the key is not to communicate its message too technically. “We talk about the fact this brand is actually beneficial for a lot of people who do suffer from dairy intolerance, or who can’t tolerate normal milk,” Nathan says.
“There’s about a quarter of consumers that feel a level of discomfort from drinking normal milk and it’s not always due to lactose.”
The a2 Milk Company launched an advertising campaign when Nathan and Babidge took over, and the role of marketing has been an important factor in the company’s success.
“The journey started pretty much 12 months after we engaged with the business,” Nathan says. “And since then our propensity and ability to communicate the message has grown year on year as we’ve invested more and more in communicating the message.”
FACT OR FICTION
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Testing has shown cows in the US, New Zealand, Australia and other western countries produce the A1 and A2 protein, whereas herds in Asia, Africa and across Southern Europe produce more A2-only milk. Human milk contains A2-only protein.
Epidemiological studies have linked the A1 protein with allergies, heart disease, type 1 diabetes and autism. However, a critical review of the research, conducted by the University of Sydney’s Human Nutrition Unit and published in the European Journal of Clinical Nutrition in 2005, found there was “no convincing or even probable evidence that the A1 B-casein of cow milk had any adverse effect in humans”.
In 2009 a European Food Safety Authority review of scientific literature backed this up, saying it found there was “insufficient evidence” to prove that consuming only the A2 protein made a difference to dairy digestion.
In 2014, a trial published in the European Journal of Clinical Nutrition reported a digestive difference between the A1 and A2 protein.
Several new research studies are underway, including tests in China to assess the benefits of A2 protein among adults, preschoolers and infants. There is also a clinical trial underway in the US looking into the benefits of A2-only milk to digestive function.
But whether the A2 protein has real or perceived benefits seems to be beside the point.
Swinburne University of Technology senior marketing lecturer Julian Vieceli says branding is all about perception. “It hasn’t got a lot to do with reality and they have done a really good job of marketing themselves,” Dr Vieceli says.
“So when you look at the A2 protein, none of the studies have come out and said it doesn’t work, the studies have said it might not work.
“When you’re looking at things like the health food market, what they’re really interested in is things that might work – it’s called social proofing, where you try and follow the herd and you don’t want to miss out.
“The fact that people are willing to pay a premium for something they think might work is called brand equity – the price you’re prepared to pay for the promise of benefit.”
Dr Vieceli says The a2 Milk Company created a niche for itself by being the first company to target the A2 protein.
“They massively increased the size of the milk market by removing the A1 protein, which is the one that causes dairy intolerance,” Dr Vieceli said. “So even if the A2 protein doesn’t do everything it says it does in terms of health benefits, it does increase the size of the market that can drink cow’s milk now.
“It looks simple but it’s actually quite a complex campaign and they’ve done a really good job in being really consistent on that message for a long time.”
• Alex Sampson is The Weekly Times agribusiness reporter
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