A2 Milk's strong run threatened by rivals in China

The days of The a2 milk Company enjoying first-mover advantage with its A2 beta protein milk products are drawing to a close. Picture / Getty Images

The days of The a2 milk Company enjoying first-mover advantage with its A2 beta protein milk products are drawing to a close.

The company, which this year became New Zealand's biggest in terms of market capitalisation, has seen its share price come under pressure since the Herald broke the news that international food group Nestle had launched an A2 beta protein infant formula in the lucrative Chinese market — a market that has played a key role in a2 Milk's success.

A2 Milk's share price closed on Thursday at $12.34, down 60c on the day, and following on from Wednesday's 6.5 per cent drop. In the last two days of the shortened week, a2 Milk has seen its market capitalisation decline by $1.1 billion.

Nevertheless, fund managers were quick to note the company has had an extraordinary run from this time last year, when it was trading at $2.94.

A Nestle spokeswoman confirmed this week that the company had launched an A2 infant formula product in China last month.

"Nestle launched the new Illuma Atwo Stage 3 formula in China at the end of February 2018, in response to a rapidly growing and constantly changing consumer market," said Margaret Stuart, head of corporate and external relations at Nestle Oceania in Sydney.

Milk for Nestle's Illuma Atwo was sourced globally. Stuart said Nestle did try to source A2 milk from New Zealand, "but what was needed was not available".

Craigs Investment Partners head of private wealth research Mark Lister said a2 Milk's share price was being pared back on the threat of new entrants.

"I guess it's just the threat of competition," Lister said. "They [a2 Milk] have been lucky enough to enjoy a lucrative market in infant formula in China for a while now and they have benefited significantly," he said.

"Competition was always going to be something that would be there," Lister said.

"Now you have got a larger player [Nestle] with very deep pockets that has chosen to enter the market.

"They have had first mover advantage and we are about to find out just how strong their brand is."

Mark Brown, chief investments officer at Devon Funds Management, said new competitors in the A2 beta protein space were "probably the tip of the iceberg as others move to extract margins far higher than is normal for an industry beset by poor profitability".

Brown said Chinese dairy giant Mengniu was already selling A1-free children's UHT milk and Freedom Foods, under the Australia's Own label, was about to produce a range of A1-free products including UHT milk.

Hokitika-based Westland Milk Products is currently researching the viability of a number of differentiated milk products, including A2 milk.

A spokeswoman said research into A2 milk was part of an overall strategy to build Westland's product differentiation.

In February, a company called Happy Valley Milk was granted resource consent to build a factory near Otorohanga that will focus on making A1-free formula.

"It seems that many are eyeing the mouth-watering margins that a2 Milk has managed to achieve without competition and are desperate to claim some for themselves," Devon's Brown said.

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

A2 Milk believes that the A2 beta-casein protein milk is better for people, particularly those who have trouble digesting milk.

In February, Fonterra said it had formed a strategic alliance with a2 Milk.

Harbour Asset Management portfolio manager and analyst Shane Solly said Nestle's move, and the Fonterra tie-up, was a strong endorsement of the science from two global power houses of the dairy industry.