The A2 Milk Company

Case Analysis

Group 1
Nitika (E001)
Rohan Bhatia (E011)
Saurabh Dubey (E021)
Shaily Kasaundhan (E031)
Siddharth Mishra (E041)
Pankaj Rungta (E051)
Tanmay Tiwari (E061)
Q1) Is the Australian Dairy processing industry attractive or unattractive? Justify with reasons.

Milk has always been one of the major beverages all around the world, constituting around 5% of
the daily fluid intake for adults. Although Australia was near the upper end of the per capita milk
consumption, the consumption was found to be declining by 1% over the past 70 years for various
reasons like bloating, gas, diarrhea and lactose intolerance. Below is the detailed analysis of the
Australian dairy industry attractiveness:

• Threat of New Entrants- High: A2MC had an established market in Australia, with its USP
lying in the fact that it produced A1-free dairy products and infant formula. But soon after,
Nestle officially announced that it had already begun selling A1-free infant formula in China
and it was planning to enter into Australia very soon. Although A2MC had a first mover
advantage, Nestle was a huge player with deep pockets and better advertising, marketing
and distribution channels, which provided it with an advantage in terms of innovation and
new ways of doing things. Also with the expiration of A2MC’s patents on milk testing, many
new companies were planning to enter the A1-free market. Each of these companies were
bringing with them new value propositions which in turn put a lot of pressure on A2MC to
continue being profitable.

• Rivalry among Existing Competitors- High: There were a lot of dairy processing firms
besides A2MC, but the distinguishing factor that gave a competitive advantage to A2MC was
the fact that it sold dairy products containing A2 beta-casein protein only. Its initial
competitors like Fonterra- that sold A1 milk- claimed that this was just a marketing gimmick
that earlier made customers question its benefit. Once the importance of the A1-free milk
was established, many firms started selling these milk products and consequently ate into
the market share and stock prices of A2MC. There was also intense competition at the retail
level in the dairy industry, with supermarkets pricing milk items aggressively to generate
store traffic.

• Threat of Substitute Products- High: Since milk can be consumed both hot and cold,
beverages that are consumed hot like tea and coffee as well as cold beverages like soft
drinks, fruit juices and sports drinks can be considered as its substitutes. Apart from this,
based on consumer demands, there were various categories of milk like organic milk, A1
inclusive milk, plant-based milk etc. all of which can be considered as substitutes to A2MC’s
milk products. With increasing digestion issues with milk products and health consciousness,
there was a high probability that consumers would replace milk with any of these
substitutes.

• Bargaining Power of Suppliers- Low: The first step of the production and sale of dairy
products is the procurement of raw milk, which the Australian Dairy Processing Firms got
from dairy farms. There were around 5800 dairy farms in Australia, producing around 9
billion liters of milk, thus reducing the switching cost of the firms from one supplier to
another. The farmers’ earnings were also hugely dependent on the firms, who were paid the
same price for raw milk despite what the final product was, and the large firms were not
willing to increase their production costs.

• Bargaining Power of Buyers- High: With a large number of firms- both small and big-
entering into the A1-free milk product market as well as other markets like organic milk and
plant-based milk, the number of options for the consumers to choose from was high. This
brought down their switching cost from one type of product to another, which in turn built
 pressure on the firms to constantly innovate and lower the prices aggressively in order to
hold on to their customer base.

Q.2 Is Nestle’s Entry helpful or harmful?

The entry of Nestle is a threat for A2 Milk Company

Reasons:

1. Financial Resources: As per the 2017 year-end financial statements of Nestle, milk products
and ice-cream constitute around 15% of the sales which is CHF 13,447 million which is
approximately NZ$19,390 million. Nestle enjoys the profit margin of 17.3% in milk products
and ice cream. So, based on these financials, it can be seen that Nestle has far more
resources than compared to A2 Milk Company. It can use these resources to enter into
Chinese A2 milk market and can produce the A2 milk at lower cost than A2 Milk Company
which will pull down the overall price of the A2 milk and hurt the profitability of the A2 milk
company.

2. Big pool of cash: While A2MC has limited funds to spend on its marketing and advertising
expenses, Nestle, on the other hand, have far more funds to spend on the advertising
expenses to communicate its A2 milk brand in the market. In fact, Nestlé’s Chinese milk
brand Wyeth also plans to spend NZ$ 300 million on marketing and advertising in 2018
which is far greater that A2MC’s NZ$42 million that they spent in the previous year.

3. Untapped market: The entry of Nestle could also mean that in future the A2 milk market
grows even faster and it can be seen as a lucrative business option and many other
competitors would enter to take advantage of such an opportunity.

4. Nestlé's presence in China: Nestle has already been existing in China for more than 20 years
and have already developed a customer database that is loyal towards Nestle. So, it can
leverage that loyal customer database and communicate its A2 milk brand to capture the
market.

5. Competitive Advantage: The competitive advantage of A2 milk company is that they are
producing the milk that only contains A2 protein which is easier to digest for the milk
consumers. But this competitive advantage can be imitated by other competitors and they
can enter into this space, which will erode the edge that the A2MC currently have.

Q3. Does A2 MC have a competitive advantage?

A2’s advantage is that its products contain only the A2 beta casein protein type, which is reported to
have greater digestive benefits. Instead of other milk products, which contain both the A2 and the
A1 protein, A2 Milk have the first mover advantage and sells products comprising exclusively of the
more digestively friendly A2 protein.

A2 Milk sells its competitive advantage by stating that there are many people who feel
uncomfortable after they drink ordinary milk or lactose-free milk yet they can enjoy A2 Milk without
discomfort. Growing consumer awareness of the benefits of A2 Milk for medical conditions such as
heart disease, autism, and the reduction in the incidence of childhood diabetes also gives A2 Milk an
edge over conventional milk brands. This ‘health first’ sentiment of consumers is key to A2 Milk’s
success especially when the customers are parents purchasing a dietary staple for children whom
they want to do the utmost to protect. This advantage over other milk brands allows A2 Milk to
charge a premium price while offering a differentiated product.

By focusing on emotional marketing and advertising the direct benefits of A1-free milk, with the
added benefits of being the the first movers, A2 Milk have managed to build a solid brand that
resonates with its customers.

Innovative capabilities - A2 Milk also possess VRIO resources (Intellectual property like patents,
copyrights, trademarks; brand equity; technological know-how; and reputation) and have an edge
over newer and potential entrants into the market. A2 Milk started off by focusing and developing
intellectual property so much so that they have now formally developed “The A2 System” which is
made up of the company’s proprietary commercial processes and know-how from milk supply
through consumer sales. They have trademarked the names A2 and A2 Milk, which gives them
massive advantage while becoming a full-fledged branded dairy company as these terms represent
the product’s critical point of differentiation and could be used for other dairy products. It also
means that no other company can have complete freedom to operate in the manufacturing, selling,
and advertising of an A1 free product.

Unique competences - A2 Milk have built a capital light-smart business model which focuses on R&D
and marketing rather than production. Unlike other dairy companies they do not own many physical
assets but instead outsource the work to other contractors, while imparting their knowledge and
expertise to these contractors in their supply chain. This allowed A2 Milk to be asset-light and still
charge a premium price generating operating margins that were five to ten times larger than the
margins on branded conventional milk. They are the only company engaged in sourcing, processing,
and marketing of solely A1 protein free dairy and nutritional products in the global market alongside
having a hugely flexible and scalable supply chain.

They have also taken advantage of the “daigou” channel which is kind of a gray market where
Chinese immigrants in Australia buy A2 Milk products and ship it to their friends and retailers in
China, thus avoiding import tariffs and postal taxes.

Their partnerships and JV’s with foreign countries’ largest processors, like their recent strategic
relationship with Fonterra, leads A2 Milk to fast-track market growth due to geographical
diversification and new product development opportunities and hinders the capabilities of new
entrants into those markets.

A2 Milk’s trademarks and patents, limited size of A2 milk pools for other competitors, and the
conflicts and dissonance for other brands trying to sell both A1 and A1-free products give A2 Milk a
unique competitive advantage.