A2 Milk competitors will face up hill battle - analysts

A2 milk says its competitors face an uphill battle. Picture/Bloomberg.

A2 Milk's competitors face an uphill battle because their businesses consist entirely of products from the A1-beta protein, analysts said.

Most cows produce the A1 and A2 versions of beta-casein protein, but about 30 per cent of the world's herds produce just the A2 variety.

Central to a2 Milk's business model is the theory — supported by a growing body of research — that A2 beta-casein protein milk is better for people, particularly those who have trouble digesting standard milk.

In the last 10 years or so, a2 Milk has been the only provider of A2 products — which range from fresh milk to infant formula.

Last week, the company's share price took a hit after a Nestle spokeswoman confirmed that the multi-national Fortune 500 company had launched an A2 infant formula product in China in February, in response to "a rapidly growing and constantly changing consumer market".

In a statement yesterday, a2 Milk said it was the only company engaged in the sourcing, processing and marketing of solely A1 protein-free dairy and nutritional products in global markets.

"This core principle contrasts significantly with likely new entrants who will need to consider how to communicate internally and externally the benefits of a new A1 protein free variant whilst their traditional range of products continues to include A1," it said.

One source close to a2 Milk said the biggest difficulty likely to be faced by Nestle would be how it goes about marketing an A2 product when all its products — "from icecream to yoghurt" are based on A1.

"So it's difficult for them, because it leads to inconsistencies," he said.

Shane Solly, portfolio manager and analyst at Harbour Asset Management, said the extreme volatility of a2 Milk's share price was not unusual for a high-growth company, but that it stood out because there were so few stocks like a2 on the local market.

Harbour Asset once owned more than 10 per cent of a2 Milk and still retains a significant stake.

In yesterday's statement, a2 Milk said it remained "uniquely positioned" to benefit from its A1 protein-free products and that the company continued to perform strongly.

The company has previously said it expected broader interest in the A1 protein-free category generally, "given positive developments in the science and the strong growth being achieved by the company".

The company also had a comprehensive suite of intellectual property including patents, trademarks, proprietary processes and know-how.

The infant formula market in China is vast with an estimated retail value in the order of US$20 billion ($27.8b) and volume exceeding one million tonnes.

"There is a multitude of brands and recent experience of other businesses has demonstrated how challenging it is to establish new products in the absence of a strong and unique consumer proposition," it said.

The stock closed yesterday at $12.47, up 7c, having slumped at one point during the day to $11.60. A2 Milk traded at $13.84 just before last week's announcement from Nestle.