As recently as 2016, Theo Spierings, chief executive of Auckland-based Fonterra Cooperative Group, the world’s biggest dairy exporter, described A2 milk as just a “marketing concept”.
Last week, Fonterra struck a “comprehensive strategic relationship” with the ASX-listed A2 Milk Company (A2M), where Fonterra farmers will supply A1 protein-free milk to A2M and develop herds, sell A2M’s fresh milk into the New Zealand market and assist A2M into new international markets where Fonterra has existing operations.
The agreement will also explore A2 Milk-branded butter, cheese and China-sourced liquid milk, as well as investing in blending and canning facilities, most likely in Australia.
It’s A2M’s biggest endorsement by the dairy industry yet, underscoring the power of branding in the sector.
It’s also the latest sign that A2M’s disruption of the highly commoditised milk market is being taken very seriously.
“The A2 proposition is very real, consumers have voted … this is a great opportunity and we should be practical and pragmatic about how we create value for farmers and shareholders,” said Rene Dedoncker, Fonterra Australia managing director, adding the group was beginning to talk to its farmers about supply and so far, the response had been “overwhelmingly positive”.
Coinciding with a better-than-expected result, the deal sent A2M’s market capitalisation soaring 35 per cent to about $10 billion, around the same level as Fonterra’s own – though A2M was only founded eight years ago by scientist Corran McLachlan, after he identified the fact that cows produce different types of milk protein.
Rabobank analyst Michael Harvey says the alliance is significant on a number of fronts for the dairy industry, and says the argy-bargy around the science of A2 milk proteins has been put to one side.
“It’s big news and it surprised me. My initial thought, it is one of the biggest dairy companies in the world providing support for A2 concept. People are against the science and people are for the science, there’s a lot of debate in the market about the validity,” he says, noting Fonterra had been among the dairy players pushing back against the concept when it started.
Fonterra has not been A2M’s only outspoken critic.
In December, A2M settled out of court a long-running dispute with Lion Dairy & Drinks. A2M argued Lion was engaging in misleading and deceptive conduct by including the statement “contains A2 proteins”, as its milk also contains A1 proteins.
During the dispute, Lion lodged cross-claims with the court arguing A2M’s representations that A2 milk makes many customers feel better than normal milk are false.
Consultant Keith Woodford describes the Fonterra deal as a “seismic shift” for the global dairy industry, arguing it may now force the other international dairy majors such as Nestle, Danone, Arla, FrieslandCampina, Yili and Mengniu to consider how to respond to the move.
“To see their fellow major Fonterra make the first leap will have come as a big shock. The dairy world is indeed going to change,” he wrote this week at a New Zealand business website.
From Fonterra’s perspective, Harvey says, it’s simply a means of adding in a higher margin product for suppliers and processors in a highly commoditised sector.
“Ultimately, you capture more margin across the supply chain, which is what every dairy company is trying to do,” Harvey says.
Harvey noted that Australian and New Zealand farmers have to “grapple with volatility in the global markets, because of the structure of the local industry … they ride the commodity wave more than anyone else, and it’s a real challenge in the industry”.
In terms of how significant the deal may be for Fonterra, Harvey says it will depend entirely on how many farms they convert.
In his view, it’s similar to adding organic milk, or branded consumer products, though he has previously pointed out that A2 sales now outstrip organic milk sales in Australia.
Harris Farm Markets’ Tristan Harris says A2 accounts for more of than 9.5 per cent of the group’s milk sales by value, noting it has eclipsed jersey milk sales by volume and value. Harris Farm has more than 25 stores around NSW.
However, he noted the A2 overall sales were flat year on year, and that there was limited competition in differentiated milk products, though he noted cold-pressed raw milk product Made By Cow was doing well in that space with far less marketing support.
“In terms of the market, what we are seeing is people moving towards products that are healthier and less manufactured,” he says.
In Australia, A2-branded fresh milk accounts for about 9.5 per cent of market share by value, and A2 Platinum is the fastest-growing infant formula brand by value in Australia with market share in mainstream retailers of about 30 per cent.
A2M has also expanded into other international markets, including the US. Fonterra’s Dedoncker has a simple explanation for why A2M has had more success with consumers than organic milk. Fonterra has organic herds and facilities in New Zealand, but none in Australia.
“Organic is a little bit of a slow burn, but demand is growing,” he says. “It’s an area that will attract more interest.
“The success of A2 is it’s a type of milk but also the name of a company that has a very successful brand marketing campaign … whereas organic is a choice you make around the source, and then there are multiple brands.”
How successfully A2M manages to translate that brand into other markets with Fonterra, and other products like butter, will be closely watched by the market.
Source: Financial Review