China Food

A2 milk is expected to continue to grow revenue in the new fiscal year! CEO says demand for milk powder in China is still strong

Despite the outbreak of “black swan”, New Zealand milk powder company A2 milk company is expected to continue to grow.


Today, A2 milk gives specific performance guidelines for the fiscal year 2021. According to the company’s expectations, the year-on-year growth rate of revenue for the full fiscal year is the highest of nearly 10%.


In today’s announcement, Geoffrey babidge, CEO of A2 milk, also talked about the prospect of purchasing agent business and the expansion of channels such as mother and baby stores in China. In addition, at a recent Investor Forum organized by Lyon securities, A2 milk also disclosed more reasons for its planned stake in Matola milk powder plant.

Now, let’s take a look at them one by one.


On the influence of epidemic situation


According to the A2 milk announcement, revenue is expected to be between NZ $725 million and $775 million in the first half of fiscal year 2021 (currently about RMB 3.239 billion to 3.462 billion). It is about RMB 8.5 billion (about RMB 8.5 billion) before depreciation (about RMB 1.8 billion) and current profit margin of RMB 1.8 billion (about RMB 1.8 billion).


The total revenue of milk in New Zealand is $1.73 billion in fiscal year 2020. In other words, A2 milk is expected to increase revenue by 4.05% – 9.83% in the new fiscal year.


Looking forward to the post epidemic period, A2 milk appears cautious and optimistic.


Geoffrey babidge said A2 milk had pointed out in the fy2020 report that in fy2021, the outbreak could still bring uncertainty, coupled with the possible slowdown in economic activity, which may have various impacts, including those on supply chain participants.


“We have revealed that the new outbreak has had a lot of impact on our infant nutrition business.” This includes destocking and purchasing on behalf of Australia, babidge said.


According to the introduction of snack food agents, the demand for A2 infant milk powder in the Chinese market has also reached a peak in mid February. At that time, China’s milk powder market also experienced a “hoarding tide”. Although the performance of many milk powder enterprises in the first quarter has been greatly improved, but at the same time, some enterprises have “forecast” the late de inventory or lead to the change of growth momentum.


Babidge said: “after strong sales growth in the third quarter of fiscal year 2020 (i.e., the first three months of this year), the subsequent destocking effect continues into fiscal 2021.”

Geoffrey babidge, CEO of A2 milk


In addition, affected by the epidemic prevention and control factors, the number of local Chinese tourists and international students in Australia decreased, which also affected the Australian purchasing business of A2 milk. Babidge said that affected by the Australian epidemic, in September, the company noticed new fluctuations in the business of purchasing on behalf of enterprises and individuals.


However, in the view of A2 milk CEO, the change of purchasing agent is “not a big problem” for China’s milk powder business.


At present, he said, it is expected that the fluctuation of purchasing agency channels will continue for the rest of the first half of fiscal year 2021. “However, based on the continued strong growth of our Chinese infant formula brand health indicators (e.g. market share) and the performance of other businesses, we believe that (purchasing on behalf of others) is only a matter of single channel logistics. In the Chinese market, consumer demand for our brand is still strong. ” Babidge said.


He also said that if the epidemic related problems in Australia stabilized, the current short-term impact on purchasing agents would prove to be “temporary”.


Expand the proportion of maternal and infant stores, etc


In fact, A2 milk may not be so dependent on purchasing channels.


Babidge said in the announcement that purchasing agent is only part of the multi-channel and multi-product sales strategy of A2 milk in China’s infant milk powder market. “According to our growth plan, the share of maternal and infant stores and cross-border e-commerce sales in our infant nutrition business will continue to expand over time, driven by the continued growth of basic consumer demand.”. He said.


Snack food agents noticed that the market share of A2 milk was growing steadily in the milk powder channels of mother and baby stores and cross-border e-commerce in China.


According to the data presented by the company at the Lyon securities investors forum, by June this year, the share of A2 milk in China’s mother and baby shops and cross-border e-commerce companies had risen to 2.0% and 21.5% respectively in value terms.


It is worth noting that, in order to promote the faster growth of business in different channels in China, A2 milk has also made the positioning of Chinese and English versions of milk powder clearer.


In the conference materials, A2 milk proposed that infant nutrition products should focus on the strategy of “one brand, two label products”, and said that it would implement this strategy in key retail channels such as mother and baby stores, cross-border e-commerce and Australia and New Zealand personal purchasing agent.


A2 milk said that under this strategy, the Chinese label product series (i.e. at the beginning) will be positioned as ultra-high-end products, aiming at more online cities and mother and baby stores. While English label products are positioned in the high-end price range, aiming at personal purchasing and online channels, making it easier for some consumers to buy.


Behind “adverse investment”


Despite the uncertainty brought about by the epidemic, A2 milk is still investing against the trend, especially in the key market of China. According to the above conference information, the retail channels (including the channels where Chinese products are located and cross-border e-commerce channels) account for 48% of A2 milk infant nutrition income in fiscal year 2020.


“We have a strong local presence in China, especially in mother and baby stores, and we expect this momentum to continue.” Babidge says.

This is due to a series of market inputs of A2 milk in China. According to babidge, from the fourth quarter of fiscal year 2020, A2 milk has invested in marketing around the activation and construction of its brand. In addition, the company has invested in grassroots first-line capabilities in the past 18-24 months.


Babidge pointed out that taking market share and brand awareness as examples, these indicators prove that A2 milk’s continuous and vigorous marketing investment can effectively promote future growth. “These factors give us more confidence in the overall performance of the group in the second half of the year.” He said.


Outside the Chinese market, A2 milk is starting to increase production capacity.


Xiaoshidai introduced that the company has announced its intention to acquire the matoura milk powder factory of China animal husbandry group in New Zealand, and to acquire 75.1% of the shares of the latter for a total consideration of about NZ $270 million (now about RMB 1.22 billion). The deal is expected to be completed by the end of fy2021.


This means that A2 milk will own a milk powder plant of which it is the largest shareholder for the first time if the deal is successfully completed. Xiaoshidai noted that in the aforementioned Investor Forum, A2 milk also mentioned the strategic consideration of its equity investment plan for the first time.


First, A2 milk believes that this can help reduce the risk of over concentration of production capacity. The company said a stake in the Matola plant would allow it to diversify its suppliers and regions.


At present, the suppliers of A2 milk operated by “light assets” mode include Fonterra and Synlait dairy. Among them, Synlait dairy is responsible for the exclusive production of A2 Chinese infant milk powder sold in the Chinese market, and the cooperation agreement between the two sides will expire on July 31, 2025 at the earliest.


Second, A2 milk said: “Matola dairy is an advanced nutrition plant recently built and put into operation, which will complement our existing supply relationship.” It is reported that the factory has passed the independent inspection of industry experts, and is recognized as having the ability to produce high-quality nutrition products.

Matola factory


In addition, A2 milk said the Matola plant was “geographically located to reach the growing productive milk storehouse, with favorable climatic conditions and water support”.


Due to the limited number of pure breed A2 dairy cows, the supply of A2 protein raw milk was originally less than that of ordinary milk source. For A2 milk which only uses A2 protein raw milk, there is no doubt that sufficient A2 protein milk source is a necessary prerequisite for business expansion.


Finally, A2 milk also mentioned that the majority stake in the Matola plant is currently owned by a Chinese state-owned enterprise, China pastoral industrial and Commercial Group Co., Ltd., which will continue to hold a minority stake in the plant in the future. According to xiaoshidai, Zhongken Shanghai, the strategic partner of China animal husbandry group and A2 milk in China, is a “brother company”, both of which belong to China Agricultural Development Group.

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