a2MC announces 40.5% revenue increase and expresses confidence amid stricter Chinese CBEC laws

By Cheryl Tay

- Last updated on GMT

a2MC's products are now available at approximately 9,000 outlets in almost all 50 US states, including major chains like Costco, Walmart, Whole Foods Market and Target.
a2MC's products are now available at approximately 9,000 outlets in almost all 50 US states, including major chains like Costco, Walmart, Whole Foods Market and Target.
The a2 Milk Company (a2MC) announced a 40.5% year-on-year rise in its total combined revenue for 2018 at its recent annual meeting in Melbourne, where it also detailed its US expansion plans.

The firm has been working on building awareness of its brand in the US, having increased its distribution in the country by 50% since end-June 2018; it is now available at approximately 9,000 outlets in almost all 50 US states, including major chains like Costco, Walmart, Whole Foods Market and Target, as well as over 1,000 Food Lion stores.

To further establish its reputation in the US, the company also collaborates with local dairy farmers to select cows that produce only A2 milk naturally, so their milk can be processed separately and made available to consumers who are sensitive to milk containing the A1 protein.

US CEO Blake Waltrip said that a2MC's relationship with a "high-calibre retailer" ​such as Food Lion "bears out the promise" ​of the brand while also helping dairy farmers.

The company also posted group revenue of US$629.57m, a 68% increase over the previous year, and a net profit after tax of US$133.5m, up 116% from the previous year.

Building a broad-scale brand

At the annual meeting, MD and CEO Jayne Hrdlicka said: "An additional 3,000 stores have been added to the network since the end of FY18, taking our store count to about 9,000.

"We have made significant investment in national brand advertising, and it's delivering pleasing increases in brand awareness and sales velocity through both new and established key accounts.

"Recent USA research data looks a lot like our experience with fresh milk in Australia. The a2 Milk brand in the USA is successfully growing category consumption, sourcing volume across multiple product segments, and trading up consumers from conventional milk.

"It's encouraging as it shows our ability to build a broad-scale brand that is ripe for further growth and expansion."

Home and away

The firm has also been performing well in its home market of Australia, where it has more than 10% share of the total supermarket milk category and an approximately 33% share in the country's infant formula market.

Additionally, it has continued to do well in China, where it has a 5.6% share — worth an estimated US$18bn — of the infant formula market. Its China-label infant formula sales have also risen by more than 75% from a year ago.

It has also increased distribution in China to an additional 2,000 Mother & Baby outlets, bringing the total number to 12,000 stores.

More recently, the a2MC achieved record sales during the annual Singles' Day event, with three-fold year-on-year growth, its a2 Platinum the second bestselling infant formula brand via cross-border e-commerce on four key platforms (Tmall, JD, Kaola and Yunji), and its a2 Platinum Stage 3 the bestselling product overall.

In his address at the annual meeting, Chairman David Hearn said: "During the last 12 months, we significantly strengthened the company's strategic supply chain arrangements with an enhanced relationship with Synlait Milk and a new strategic partnership with Fonterra."

He was referring to the company's acquisition of additional shares in Synlait Milk in August, bringing its stake in the latter to 17.4%, further reinforcing its existing comprehensive supply agreement with Synlait.

In February, the brand also entered into a comprehensive strategic relationship that would allow it to avail of Fonterra's global milk pool and supply chain, manufacturing capability and in-market sales. The partnership has since achieved national distribution, and according to a2MC, has been performing well.

Regulatory considerations

Hrdlicka added that the company believed the regulatory outlook in China would be positive for its business, in light of the Chinese government's recent announcement of new e-commerce laws.

She said, "For infant formula, there are two registrations required for (our) China-label products. One is for the individual products and the other is for the blending and canning facilities used to produce the product.

"The registration of our infant formula products was secured a year ago and the Synlait Milk manufacturing facility that produces our products in the South Island of New Zealand is also registered.

"We believe we are in a good position relative to many other international companies, particularly those with smaller brands, and we will invest heavily in market to ensure we are building a China based business that is very respectful of the regulatory framework."

She also alluded to a new law with regards to a framework for all cross-border e-commerce (CBEC) activities in China to ensure consumer protections are in place and taxes are duly paid.

Earlier this month, Chinese president Xi Jinping had assured industry​ that there would be lower tariffs on imports into China and easier customs clearance, despite the impending implementation of stricter tax regulations for all goods entering China via the CBEC and daigou​ channels.

Hrdlicka said, "We expect this legislation to require that all CBEC platforms and daigou retailers be registered as import retailers into China, abide by basic consumer protections, and pay the full taxable amount.

"The a2 Milk Company and our well managed daigou network have been anticipating and preparing for these changes for some time. We are not concerned about the current regulatory dynamic in China and elsewhere in the world (as we are) well prepared for increased governance of the growing e-commerce channels into and across China."

Onward strategy

Hrdlicka also revealed that later in the firm's financial year, its first investor strategy conference would be held, during which its future plans would be discussed more extensively.

She went on to outline three 'macro trends' in the market that would enhance the company's business opportunities.

"The first isconsumers around the world are increasingly focused on products that enhance their health andwellness, and as a part of this, there is increased focus on digestive health and its long-term relatedbenefits.

"The second is a growing focus on food safety, naturalness, and the provenance of food. Thethird is the growing middle class in Asia and China, in particular.

"The aspirational nature of this growingsegment of the market, combined with the growing focus on health and wellness and natural quality thatyou can trust, puts the a2 Milk Company in a good position for continued significant growth."

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