A2 shifts from a brand to a category, with Nestle and Mengniu now on board

It is only six weeks since mega-sized Fonterra in New Zealand and medium-sized Freedom Foods in Australia announced their intention to produce A2 dairy products, these being products free of A1 beta-casein.  Since then, both Nestle and Mengniu have stepped up to announce that they too are developing brands for A2 infant nutrition products.

To place this in perspective, and as reported by Rabobank, Nestle is easily the largest global dairy company by turnover, followed by Lactalis, Danone, Dairy Farmers of America and then Fonterra. Further down comes Mengniu at number 11 globally, but number 2 in China.

It is now evident that dairy products free of A1 beta-casein are shifting from being a niche brand belonging to The a2 Milk Company (A2M) to becoming a broader dairy category. This was always going to happen, but the speed at which it is now occurring is taking most people by surprise.

Almost certainly, the decisions made by Fonterra, Freedom Foods, Nestle and Mengniu were all made independently of each other. For each company, those decisions have been in the pipeline for many months or even longer, as they reacted to the stunning success of a2 Platinum infant formula marketed by A2M in Australia and China.

Over time, there will be more of the dairy mega companies that move to branded products free of A1 beta-casein.  Those companies that were previously not giving active consideration to the threat posed by this new disruptive category, will now be doing so.

There are also numerous micro brands of A2 milk that are now starting to appear in many countries.

There are always challenges to establishing major brands. It takes time and a lot of money. The starting point will be to establish a pool of A2 milk at scale. For most, that will not be easy.

For the next five years, the potential supplies of A2 milk are largely restricted to wherever there are dairy farmers with multiple herds. These farmers can segregate out and concentrate the A2 cows from within each of those mixed herds, so as to produce pure A2 herds.  In practice, this largely means the USA, New Zealand and China.

In Australia, there are also some limited opportunities, but these are very limited compared to the previously mentioned countries. Most of the limited opportunities there will have already been ‘spoken for’ by either The a2 Milk Company or Freedom Foods.

In Northern Europe, there are no significant opportunities beyond some niche producers with Guernsey herds or some exceptional farmers who have been specially breeding for A2.

In Southern Europe, there may be more opportunities arising from some of the ‘brown breeds’ with high initial levels of the A2 gene, but it will still be very hard to put together large pools of A2 milk.

Throughout all of Europe, there are only very limited numbers of farmers with multiple herds and this will be the big stumbling block.

India is the other country which has large pools of A2 milk from cattle that are  native Indian breeds. But the Indian dairy industry has a long way to go before it can compete on international markets.

Nestle has decided to call its milk ‘Atwo’, and market it in China from within its Wyeth subsidiary stable.  Nestle says it sources its milk globally, but industry sources suggest it is currently getting A2 milk exclusively from America. This is dried and shipped to Ireland, then blended with other ingredients and canned.

It is often forgotten that infant formula contains a lot more than cow milk. Also, there is a requirement for more whey protein than is found naturally in cow milk. This additional whey protein can come from A1 milk, but only if the whey protein can be demineralised and isolated from any A1 beta-casein.

Production of demineralised whey isolate is specialised and the manufacturing plants are mainly in Europe. Hence, in all likelihood, the Nestle/Wyeth ‘Atwo’ product contains demineralised whey isolate from Europe that is combined with A2 dried milk from the USA.

In New Zealand, where the a2 Platinum is produced, there are no demineralised whey isolate plants, and it has to be imported from Europe. Without this product, a lot more A2 milk is required for each can of infant formula.

It is reasonable to assume that in future demineralised whey protein isolate is going to become increasingly valuable as multiple companies bid for limited supplies.

Given the dominance of Fonterra in New Zealand, together with Fonterra’s new alliance with A2Millk, plus the existing and increasing demand by Synlait for A2 milk, it is apparent that most of the New Zealand supply of A2 milk is ‘spoken for’.  Nestle’s statement that they searched unsuccessfully for a New Zealand supply of A2 milk provides confirmation.

In China, all of the major dairy companies control a major part of their milk supply through their own herds. Accordingly, they are in a strong position to organise herds of A2 cows from within their existing herds.

This appears to be exactly what Mengniu has done, initially putting together a pure A2 herd of some 2000 high-producing cows.   They and other companies can quickly replicate this.

The challenge for Chinese companies is that milk produced in China is not what Chinese mums and dads prefer to give to their babies, toddlers, and even older children. They want a product that is sold on international markets.

For Chinese mums and dads, choosing a brand of infant formula has been likened to a major decision that sits alongside buying a house or buying a car. Only the best will do for their little prince or princess. So, the Chinese companies will have to work hard to compete against international brands such as a2 Platinum coming from A2M.

With most of New Zealand’s A2 milk already spoken for, together with consumer caution towards product from China, it is inevitable there will now be a focus on the USA for a global supply of A2 milk.

A key point is that in the USA there are many farmers who own multiple herds and there are some with up to 60,000 cows in total. Whoever can get access to the milk from the re-organised and concentrated pure A2 cows from within these herds has potential to create a leading global position.

A2M has a major global advantage at the outset, in that it does not have to protect any existing brands of A1 milk. This is a major issue for all of the other major companies, with the possible exception of medium-sized Freedom Foods in Australia. A2M also has valuable trademarks and first mover status, together with proprietary systems.

A2M also has some 15 families of patents, some lasting through to 2035, which it can defend. However, as someone with relevant expertise relating to the A2 issue said to me many years ago, it is best to use patents as shields and bang loudly on them, but also best not to test them in battle.

Two key patents, both now extinguished by time, were very effective until recently in keeping competitors at bay.  By definition, anything those patents protected is now not protected. However, existing patents may still allow A2M to do certain things more efficiently than other companies can do, and also make some protected claims that others cannot do.

There is a range of scenarios as to how events will play out from here. A key issue will be how fast the A2 category grows, and the extent to which each company focuses on growing the category as well as their own brand.

It is clear that The a2 Milk Company has the most to gain by growing the overall category Other companies may choose to simply tag along with the category growth, and put all their focus on developing market share for their own brands.

The rate at which the A2 category grows will also determine the future farm-gate premiums for A2 milk. Until now, the A2M has had minimal competition for the existing milk pools. This has led to market premiums being captured and largely retained by A2M rather than by their supplying farmers, or even A2M’s processors.

Whatever happens, things have recently become a lot more interesting in relation to the health attributes and industry politics of dairy products that are free of A1 beta-casein. It looks like things will remain interesting, with many twists and turns.
***
Disclosure of Interest: Keith Woodford consults internationally for a range of dairy companies that hold diverse positions in relation to A2 Milk.

 

 

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in A1 and A2 milk, Fonterra, Uncategorized. Bookmark the permalink.

11 Responses to A2 shifts from a brand to a category, with Nestle and Mengniu now on board

  1. John Martin says:

    Dear Keith,

    I read all your posts with great interest.

    I am aware of a2Milk’s constant assurance of the value of its protected intellectual property, but no idea of what those protected IPs are. Can you advise they are?

    My view is that they would have a protected trade mark, but not much more.

    I understand that they can’t have privilege over the scientific term “A2”, there seem to be unprotected ways of determining whether a cow is A2 or not, and they surely don’t have any manufacturing privileges – so what do they have?

    I look forward to your advice.

    Regards,

    John Martin

    • Keith Woodford says:

      John,
      Their key advantages are brands, trademarks and first mover status, plus some proprietary systems IP. Also, they do not have to defend existing A1 brands. In my opinion they only have very limited patent protection. and that has been the case for the last year since two crucial patents ran out.
      One should not under-estimate the value of the advantages that they do retain.
      Keith W

  2. Honora Renwick says:

    I’m looking forward to seeing an A2 brand here that keeps well in the fridge. Such a pity that Retro Organics, with their Jersey herd, went under in December last year.

    • Keith Woodford says:

      Honora,
      The Fresha Valley A2, now labelled as ‘A2 protein’, and without the A2M trademark , has had much better keeping quality recently. Those two changes are presumably independent of each other. Hopefully the improvement is permanent!
      Keith

  3. Bruce says:

    LIC have a very limited range of A2A2 Freisian bulls & a number of Kiwi cross A1 bulls, will this be an issue for NZ dairy farmers moving forward?

    • Keith Woodford says:

      Bruce,
      As I understand it, LIC believe they have sufficient bulls, by using a mix of daughter proven and genomics.
      I expect that there will be no loss of breeding worth (BW) potential for Jerseys and minimal for KiwiCross, but that there will be some loss of potential BW gain for Friesian.
      If farmers are worried about this potential loss of gain (and note that it is loss of gain, with herd BW still increasing rapidly), then farmers should select replacements from their first calving animals as is done everywhere else in the world. Not only will this reduce the amount of time required for A2 herd conversion, it will also more than compensate in terms of BW from having to use bulls with lower BW. This is because these first calving heifers are the cows with the highest BW, and hence their calves (if mated with top bulls) are also the calves with highest BW.
      Keith W

  4. Steve says:

    Dear Keith,
    Thanks very much for sharing your invaluable insights which I truly appreciate. It’s given me the confidence that the threat from A2 wannabe competitors is dwarfed by the opportunity of “brand to category” for A2M, as outlined by you. I personally remain bullish for A2M’s continued stellar rise in the long term, and be the dominant player in all the key global markets that it wants to participate in…thanks very much again for sharing this insightful article.

    Regards,
    Steve

  5. Dr Steve Short says:

    Somehow I think that a certain Dr Fuller at The Conversation is going to be be feeling very sick in his stomach by now hah hah!

    • Keith Woodford says:

      Steve,
      It may also be that he sails onward with self righteous belief. And there are still many non-believers out there. The journey is not over; lots of twists and turns yet to come and still lots for all of us to learn! The science of casomorphins, particularly in relation to systemic effects within humans, is still in its early days.
      Keith W

  6. Pingback: Rural round-up | Homepaddock

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