The a2 Milk company has almost quadrupled its half-year profit, bucking the industry trend

WHILE its rivals struggle to survive, the a2 Milk Company has more than tripled its profit to $37 million. So what’s its secret?

The A2 Milk Company has posted a first-half net profit of $37 million: Paul Miller

THERE are winners and losers in the dairy game.

It’s been a tumultuous six months for an industry marred by farmgate price fluctuations and dramatic shifts in China’s baby formula market.

But while its competitors have taken a beating, the a2 Milk Company has come out on top, posting a half-year profit of almost $37 million — close to quadruple the previous period.

Sales of its a2 branded milk in Australia are up three per cent, as consumers lap up the product marketed as having health benefits compared to ordinary milk.

Beloved of shoppers who are sensitive to dairy products, it contains only the a2 beta casein protein, which some studies claim is easier to digest than standard supermarket milk, which contains both a2 and a1 beta casein proteins.

But the real triumph has been in China, where a2 has bucked the industry trend by more than tripling revenue to almost $38 million.

“The growth is driven predominantly by the growing recognition and trust of the a2 brand amongst Chinese consumers,” managing director Geoffrey Babidge said during an investor call on Wednesday.

‘WHITE GOLD’ BOOM AND BUST

Chief executive Peter Nathan could not resist a dig at the company’s less fortunate rivals, giving his take on the crisis faced by companies like Bellamy’s, which went into a meltdown after a dramatic fall in sales came to light in December.

Once a share market darling, Bellamy’s lost more than $770 million of its value in an investor bloodbath after it issued two profit warnings.

An over-reliance on China’s personal shoppers or daigou, a major sales channel in a country where personal recommendations can make or break a brand, has been blamed for Bellamy’s woes.

Once a favoured brand of the daigou, Bellamy’s sales fell when rivals offloaded discounted stock into China ahead of the government’s coming regulatory crackdown on the industry.

By contrast, a2 has taken a conservative approach to managing its inventory.

“We are growing the business but in a measured way; we want to make sure our product is moving out quickly and finding an outcome with consumers,’’ Mr Babidge said.

And the company was careful never to assume that the pot of Chinese gold would never run out.

The a2 Milk Company’s chief executive Peter Nathan never thought selling to China would be easy.

“I think there’s been a lack of appreciation from the broader market about the difficulty of successfully launching in the infant formula market,” Mr Nathan said.

“There was a broad view that it was quite straightforward and that all you had to do was have a product sourced from Australia or New Zealand and you would largely be successful, which has proven to be anything but the case.”

The a2 Company’s success came down to its nimble culture, strong brand differentiation and communications strategy, along with “a very deep understanding of the relationships between the daigou and the various channels within the China market”, Mr Nathan said. “The reality is that we are by far the exception and not the norm.”

LEGAL CHALLENGE AHEAD

The a2 milk brand’s health claims are subject to a Federal Court dispute with rival Lion Group, the maker of Pura and Dairy Farmers, to be heard in November.

Each company accuses the other of misleading and deceptive conduct in a legal battle that began when a2 sued Lion for putting a label on its Pura- and Dairy Farmers-branded milk, stating that it “naturally contains A2 protein”.

Mr Babidge said he was confident of a2’s position.

“As every day goes by, the science in support of the a2 proposition continues to be enhanced,” Mr Babidge said.

“There’s a number of studies coming through in 2017 that will support our position. But even in the absence of those, our position is very strong.”

In its release to the ASX, the company referenced a Monash University study looking at the effects on consumers with irritable bowel syndrome, two Chinese studies of digestive benefits in adults and children, and a US study on its potential benefits to gut and systemic inflammation.

The claimed benefits, which have divided opinion among nutritionists, will be scrutinised in open court when the misleading conduct matter is heard in November.

Meanwhile, a2 is pushing on with its mission to become a globally recognised brand, with a marketing blitz planned to build on its fledgling presence in the UK and US.

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