a2 Milking the Chinese formula gold mine

AN Australian milk producer is cashing in big time on the lucrative baby formula market. But how much of it is actually reaching Aussie mums?

THE a2 Milk Company has nearly doubled its full-year earnings guidance today off the back of “exponential” growth in infant formula sales into the $US30 billion Chinese market.

The dual Australian and New Zealand-listed dairy producer is being forced to significantly reorient its business towards the lucrative infant formula market, which attracts much higher margins than fresh milk.

But in a move to ease consumer concerns about shelf shortages, a2 Milk Company Australia chief executive Peter Nathan told news.com.au the company would be roughly doubling its supply to Australian retailers in the coming three months.

“We are committed to ensuring Australian consumers have access to the best and most premium infant formula in the market,” he said.

The long-running issue of infant formula shortages has dominated the headlines in recent weeks after a Melbourne mother posted a photo of a group of shoppers loading up an entire pallet load of formula into two trolleys at Woolworths.

Consumer group Choice has argued the Government should consider introducing limits and controls on the amount of formula individuals could export, similar policies in Hong Kong and New Zealand.

Woolworths has since lowered its existing eight-tin per customer limit to four, matching Coles. Coles boss John Durkan last week blamed the shortages on manufacturers prioritising overseas markets and snubbing Australian consumers.

Mr Nathan dismissed that suggestion. “That’s not the case,” he said. “We very much value our relationship with Coles, and have been committed to supplying them.”

Revenue for infant formula in the four months to October 2015 was around $NZ38 million, nearly as much as the entire 2014/15 financial year when it made $NZ41.7 million.

The company is projecting infant formula will account for around 47 per cent of total group revenue in the next financial year. That’s up from 27 per cent last year, and just 3 per cent the year before.

Springvale Woolworths lack of baby formula product.

The a2 Milk Company had previously forecast group revenue of $NZ267 million and before-tax earnings of $NZ12 million in FY16. Based on current trends, the company is revising that outlook upwards to revenue of $NZ285 million and earnings of $NZ22 million.

“a2 Platinum infant formula [is] showing exceptional sales growth, despite continuing out of stocks on shelf,” the company said in an update to the ASX this morning.

“The Company is making every endeavour to ensure that Australian consumers can purchase a2 Platinum in Australian retailers.”

Australian chief executive Peter Nathan told news.com.au last week he couldn’t speculate on what proportion of domestic infant formula sales were being purchased for resale on the Chinese market.

But the company is capitalising on its strong reputation among Chinese consumers in Australia as a premium western brand alongside the likes of Bellamy’s and Blackmores.

Rival Bellamy’s has previously estimated some 40 per cent of its sales were destined for China via Chinese personal shoppers in Australia.

“Clearly the very strong brand reputation of the a2 Milk Company in Australia plays out very positively back to the China market and that is core driver of the credibility [among Chinese consumers],” Mr Nathan said.

a2 has “significantly strengthened” its local team based in Shanghai and has set up dedicated pages on e-commerce sites including JD.com, Tmall.com and others.

According to Tmall, a2 Milk’s online store has the fastest growing number of unique visitors, with more than 100,000 for the month of September.

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