a2 is the future

A decision by Dean Foods in the US to bid for the shares of the quirky and little-known Australian/New Zealand dairy company a2 Milk has the potential to take a successful Down Under oddity and to raise it to the level of a significant marketing challenge. Thanks to a2’s connection to the powerful key trends of “free-from” and “digestive health,” in the hands of Dean, it could pose a challenge for dairy companies, not only in the US, but in Asia and even Europe.
Dean Foods is America’s biggest milk company, with an estimated 35% market share and $9.5 billion (€8.6 billion) in sales. Its proposed bid for the shares of a2 Milk, a company quoted on the Sydney stock exchange and which had sales of just $110 million (€99.4 million) in the year to 30 June 2014, has come as a surprise in the industry.
Although a2 has rejected Dean’s initial offer, stock analysts reported in the Australian business press are saying it is “just a matter of time” before a takeover goes ahead.

Milk of difference
So what is it that a2 Milk offers? First launched in Australia and New Zealand in 2004, a2 Milk is a standard milk with one important difference – it does not contain any A1 protein, one of the two main types of beta-casein protein fractions found in milk. The other main type is A2 protein, from which a2 Milk gets its name.
Most dairy cows produce both A1 and A2 proteins in their milk, but some produce only A2. Normally it isn’t possible to tell these cows apart. However, A2 Corporation has developed a straightforward, non-invasive genetic test – which it has patented – that makes it possible to do so. This means A2-only cows can easily be segregated from other cows in a herd to produce A2-only milk.
Why go to these lengths? Quite simply, a2 Milk believes that many people who are intolerant to milk have an intolerance specifically to A1 protein. As a result, when they consume standard milk products, they may suffer symptoms of digestive discomfort, such as bloating, abdominal pain, nausea, diarrhoea and constipation.
These symptoms are not dissimilar to those associated with lactose intolerance. But A2 believes that many people may wrongly believe themselves to be lactose intolerant when they might in fact be A1 protein intolerant. The company argues that while one fifth of people struggle to digest milk and dairy products, less than one third of this group suffer from lactose intolerance.
The company supports this hypothesis by reference to a number of studies, such as one published in the European Journal of Clinical Nutrition in 1999, which found that of 406 randomly recruited men and women, 20.2% of them reported abdominal discomfort after consuming dairy. However, only 6.4% of the 406 subjects had been diagnosed with lactose intolerance. A2 Milk concludes from this that 68% of those reporting discomfort after consuming dairy did not have lactose intolerance. According to a2 Milk it is possible they actually suffer from an intolerance to A1 protein.
Needless to say, the a2 milk story and the scientific evidence has been highly controversial. However, the concept has been a hit with Australian consumers.

Almost 10%
From zero in 2004, today a2 milk has reached an astonishing 9.2% share of Australia’s $1.1 billion (€940 million) fresh milk market. Products include fresh milk, yogurt, cream and infant formula.
This has been achieved despite selling at a super-premium price of A$2.80 ($2.09/€1.89) per litre, compared to A$1.25 ($0.93/€0.84) for supermarket own brand milk (private label dominates the Australian milk market). This 120% premium is all the more remarkable since Australian consumers are intensely price-sensitive and have been encouraged to be even more so by price wars between the two major supermarket groups – Coles and Woolworths – in which milk has been used as a loss leader.
The success of a2 Milk is a reminder that in every market there exist small groups of consumers who are willing to pay premium prices for products that match their needs and beliefs and which can be the basis for creating successful, profitable niche brands. Volume often matters less than value – and with its 4% volume share and 9.2% value share a2 Milk is a good example.
Underscoring the selling power of a product that enables people to “feel the benefit”, in Australia, the strapline used to market a2 Milk is “Feel the difference.” And clearly enough people do believe that they feel a difference.

Lost in translation
Outside Australia, the a2 Milk company has been less successful. Its entry into the UK market, in partnership with German’s Müller Dairy, one of the biggest players in the UK market, has yielded little. In part this was because of a weak marketing strategy, which saw the company drop the clear and easy-to-understand “feel the difference” message which had proven so successful in Australia and instead use a message which was both weaker and confusing to the UK consumer: “The natural answer to A1 milk protein intolerance.”

Game changer
The a2 Milk Company made an abortive foray into the US in the mid-2000s, but it is the company’s most recent launch, in early 2015, in California, which is likely to have got Dean Foods’ attention. Marketed with the strapline “the milk that could change everything,” a2 is almost an ideal product for health-conscious, allergy-fearing urban Americans, who are the main drivers of the free-from market globally. Not only that, but as a2 milk is normal fresh milk without modification, it has a significant taste advantage over the very sweet lactose-free milks currently marketed in the US.
Dean Foods will be aware of the fact that in America’s declining liquid milk market, lactose-free milk is a rare success story. The biggest brand, LactAid, delivered 7% growth in 2014 to sales of over $425 million (€390 million), despite a premium price. Ownership of a2 Milk would enable Dean Foods to serve the growing market of people who are trying to tackle digestive health symptoms they believe are caused by standard milk, as opposed to the true lactose-intolerant niche.

Clear benefit
By offering something that is both free-from and has a clear digestive health benefit, Dean has a potential double-whammy of connecting to two powerful trends. If Dean Foods believes that it can make a business out of a2 by using the change in protein type as a first-mover advantage in the US market, this could have serious implications for dairy marketers and producers.
Also likely to be of interest is the toehold that a2 Milk has secured in China’s large, profitable and fast-growing infant formula market.
At the very least, Dean Foods is likely to see an opportunity to create a super-premium brand as a way of offsetting the ever-growing pressure from supermarket own label brands, along with improving its overall margins, since the cost of producing a2 milk is almost the same as conventional milk.
The product that once had seemed like an odd niche milk that was specific to Australia and of limited interest to other markets has proven itself to be a profitable sector, capable of success in a tough environment.
The possibility that its presence in China, the US and elsewhere could now be accelerated under the ownership of Dean Foods is potentially a game-changer.

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