Around 15 months into the supermarket price wars, private-label milk sales have grown by between 10 and 20 per cent and there aren’t many winners left in the fresh milk sector.
Kirin-owned Lion, which supplies private-label milk to the Big Two and owns the Pura and Dairy Farmers brands, announced at the end of last year that its milk business had made a loss. It blamed the loss of key private-label contracts and “deep discounting of private-label milk”.
Similarly, Lactalis-owned Parmalat, which owns the Pauls and Rev milk brands and supplies private-label milk to Woolworths, has said the supermarket price wars have the potential to destroy the dairy industry in Queensland and NSW.
One relatively new milk company, however, is flourishing. The New Zealand company A2 Corporation (A2C) has, after a slow start in this country, become one of Australia’s fastest-growing grocery lines.
In the six months to 31 December 2011, A2 milk sales increased by almost 50 per cent in Australia compared to the previous half. Its share of the local fresh milk market is estimated to have climbed from 3.5 per cent to 4.7 per cent by value in the last year.
Overall, the company achieved a 247 per cent increase in profitability on the corresponding prior year period, albeit off a low base.
Point of difference
In an environment of acute price consciousness, the ability to sell milk for $2.50/litre when private label milk is priced at just $1/litre seems fairly remarkable, but Peter Nathan says A2 consumers are prepared to pay extra for the health benefits.
Regular milk found in supermarket aisles contains two main types of beta-casein protein – A2 and A1 – the latter emerging as a mutation in European dairy cows hundreds of years ago.
A2 milk is produced by cows specially selected to produce only A2 beta-casein protein, which consumers with a perceived dairy intolerance have found to be easier to digest.
An estimated 23 per cent of the Australian population has a perceived intolerance to dairy, but the general halo effect around the digestive health benefits of A2 means that it’s being more widely consumed.
“We have a unique point of difference that consumers recognise as being beneficial to their health,” Nathan says. “A2 is the only milk that contains [only] the A2 protein and many consumers who can’t drink [standard] dairy milk have found they can drink A2.
“Many [A2 consumers] do suffer perceived intolerances while others presume that if it provides digestive benefits for people with intolerances, it’ll be beneficial for them as well.”
The local market
A2C launched in Australia around eight years ago as a joint venture with Freedom Foods.
Nathan says, however, that it only really began to gain traction in this market when a new management team took over the running of the business in 2007. Freedom Foods remains a major shareholder.
The company has contract packers in New Zealand, Victoria and Queensland and freights milk to WA, but the NSW plant, which cost $8.4 million to build and equip, is its first owned processing facility.
Previously, A2 milk was freighted to NSW from Queensland.
“There were some capacity constraints with our overall supply network and we had an opportunity to take some costs out of the business due to the freight issue,” Nathan says.
The plant, which opened in late March, is 20 minutes from Sydney and has been designed to minimise the use of utilities and waste generation. Built on approximately 2500m2, the site includes a purpose built food-grade factory with segregated areas for raw materials, processing, packaging, a cool room, milk collection facilities to accommodate B-Double train trucks, staff amenities, laboratory, offices and car parking. It employs a staff of 14.
The fresh milk processing technology was supplied by Tetra Pak and Nathan says it includes “the most up-to-date pasteurising equipment in Australia”. The facility will initially process around 10 million litres of milk a year, with capacity to increase this to 50 million litres over time. To fulfil increased demand, A2C has taken on additional dairy farmers in both Victoria and NSW, including one “very large supplier” in NSW.
Overseas opportunities
Having established a very successful business model in the Australian market, A2C is now looking to replicate this success overseas. Its first port of call is the UK, which Nathan says is a fertile market for the A2 proposition with many similarities to the Australian market. It has partnered with the UK’s leading dairy company Robert Wiseman, which processes a third of the UK’s annually consumed 6.5 billion litres of fresh milk.
The joint venture, which launches in September, will be engaged in the sourcing, processing, marketing and selling of A2 milk and A2C will provide intellectual property, know-how and marketing services.
While details are being kept carefully under wraps, discussions are also underway with prospective partners in the US, Canada and elsewhere in Europe for other joint ventures. A2C has also disclosed that it will start producing milk powders and infant formulas in the next six months for the Chinese market.
Whether these will be produced by A2C or under contract is unclear. Geoffrey Babidge, A2C’s managing director, has said that the company is focused on building sales, marketing, branding and utilising IP, rather than “investing in stainless steel”, suggesting the latter.
Jalna currently produces A2 yoghurt in Australia under licence and the new Smeaton Grange facility has been designed as a fresh milk plant.
“If we progressed to other capabilities, we’d have to expand,” says Nathan. “It’s not something we’re planning now, but possibly in the future.”
We can expect to hear a lot more about A2C in the next few years as it expands into different products and different markets, but there’s one area Nathan is adamant it won’t be exploring – private-label A2 milk.
