A2 Milk (A2M) is a global branded dairy company that has its core competency in marketing. Its a2-beta protein fresh milk and infant formula has achieved fast growth and significant market share in both Australia and China. Shareholders have been very well rewarded with share price increases from A$0.56 at its Australian listing on 31 March 2015, to a high of A$12.74 in March 2018, a 22-bagger within three years.
Everybody can see the rapid share price appreciation in the past three years, but ignore the fact this is an 18-year overnight success story.
A2 Milk was incorporated in 2000 to commercialise the intellectual property of the a2-beta protein related research. Current CEO Geoff Babidge joined the Company on September 1st, 2010. The share price was $0.08 on that day.
We have followed the Company since 2013 (in my prevoius role) when the Company has just launched its A2 Platinum Infant Formula in Australia. We picked the stock (in my previous role) at around $0.60 in June 2015, and have owned it continuously under different ownership structures and through job changes.
Every success story has some luck in it. For A2 Milk, its first break was the Australian supermarkets’ $1 price war on fresh milk that kick-started A2’s significant growth in Australia fresh milk market. When everyone was focusing on cheap milk, a differentiated product at a premium price became the shining light that captivated a segment of the market preferring quality over price.
The second fortunate event happened in 2014. 2 years after A2 launched its infant formula, China established its free-trade zones which opened China’s fast-growing internet retailing market in a highly streamline and tax-friendly way. If A2 were a few years too early, it would have suffered more setbacks in penetrating the Chinese market, like its experience in the UK and US.
Masked by these two fortunate events and numerous other setbacks, we discovered one of the best management teams in Australia and Zealand for the past decade.
7 key decisions on the road to success
In hindsight, A2’s management led by Geoffrey Babidge made all the right decisions, which navigated the Company to its current success. Let’s flashback to some of these decisions:
- Babidge led Freedom Food to partner with A2 Milk in 2006 for the commercialisation of a2 milk products in Australia;
- In 2010, Babidge gave up his CEO position at Freedom Food to lead A2 Milk;
- They positioned the business as a capital-lite and capital-smart operational model. This was an important factor as the subsequent fast growth was not hindered by capital requirements;
- A2 milk was marketed as everyday premium pricing in Australia fresh milk, rather than the high-low model that destroys brand equity over the long term
- Launched A2 Platinum Infant Formula with the perfect market positioning: being the most expensive and premium formulation in Australia, without any discount. The lack of discount did slow its uptake initially but was vital to build the value of the brand;
- Negotiated a flexible contract with Synlait to produce A2 Platinum Infant Formula. This contract was so well structured that A2 survived the China channel disruption in 2016. This can be compared to their peer Bellamy’s suffering a substantial shareholder value destruction, due to its over-commitment to production capacity.
- Continued significant investment in the US market to create more value for the business over the long term.
We admire how Geoffrey Babidge has built such an amazing business, and how many cows he’s brought us.
Weimin has more than 10 years direct experience in the Australian small to mid-cap equity market honed over 3 years with Ophir Asset Management as a portfolio manager, and 7 years with Kosmos Asset Management as an analyst.
It's always interesting to hear the history of a firm and understand how management have shaped the company and their decisions. It would also have been good to get a view on the outlook for A2 Milk especially since you have been following it for a number of years.
The only concern i have is the independant science that is out there where A2 milk ior its associates is not involved does not back up its claims. Yes it is very good marketing but if a product has holes in the scientific community then it could come unstuck eventually. The other problem is a large % of its market is in China and if regulations change or any other unexpected problem occurs, A2 will feel it big time because so much of its revenue is in that one market. It is easy to ride the wave that every one else is on but sometimes smarter to look deeper into the realities.
I agree with Ben's point. Other issues include the high growth of the industry attracting new entrants. A visit to the supermarket every now and again will show you new brands being stocked on shelves.
Will - agree with your comment. A contact in China has advised that Nestle is advertising very aggressively, so we’ll see what this means for A2M and others over the next 6 months.