A2 milk turns the dairy world on its ear

A raw sample at a2 Milk, which has challenged common wisdom in dairy retailing, grabbing almost 10 percent of the fresh milk market in Australia. Photo / Bloomberg

A2 Milk has been at the forefront of local news coverage over the last few months. Now global news agency Bloomberg has taken a look at how it is turning the dairy industry on its head.

For Gillian Fyvie, a splash of milk on her cereal typically led to stomach ache, bloating and a swollen tongue. Not since making the switch.

Fyvie's symptoms were avoided not with soy, organic or even lactose-free dairy, she says, but a type of cows' milk from a2 Milk Co. The Sydney-based company is gaining an international following for its products, developed from the premise that the milk most of the developed world has consumed for generations is causing everything from digestive discomfort to diabetes.

"I tried it expecting to be allergic," said Fyvie, 30, a nurse from Inverness, Scotland. "I didn't react. I love it. I'm going to look into making ice cream with it, maybe making yogurt, too."

Since its debut in 2003, a2 Milk has challenged the common wisdom in dairy retailing, grabbing almost 10 percent of the fresh milk market in Australia with a product that sells for about A$2.80 a litre, more than double the price of regular house-brand milk.

Last month, the company raised its profit forecast and predicted revenue may surge 126 percent to as much as NZ$350 million in the year ending June 30.

The point of difference is that a2 Milk products come from dairy cows that produce only the A2 type of beta-casein protein, whereas most dairy contains both A2 and A1. Sales of the company's A1-free fresh milk, milk powder, ice cream and other dairy goods drove an 80-fold increase in first-half profit and enabled a2 Milk to fund a foray into China's booming $19.9 billion market for infant formula.

Founded in 2000 by New Zealand scientist Corran McLachlan and multimillionaire farm owner Howard Paterson, a2 Milk's market value has more than tripled to NZ$1.2 billion over the past year. It entered Britain in 2012 and expanded into the US last year.

Production at a2 Milk Co.'s factory in Australia. Photo / Bloomberg

In Australia, where a2 Milk's products are sold in every major grocery chain and more than 140 cafes, the shares have jumped 190 percent to A$1.64 since they began trading in Sydney less than a year ago. By far the best performer on New Zealand's S&P/NZX 50 Index the past year, a2 Milk has outperformed a gauge of major global dairy producers.

"In Australia, a2 has become mainstream," said Oyvinn Rimer, a research analyst at Harbour Asset Management in Wellington, which holds just under 5 percent of a2 Milk stock. "Very sophisticated consumers are buying into this product. They believe it's better for them, and they're willing to pay more for it."

Very sophisticated consumers are buying into this product. They believe it's better for them, and they're willing to pay more for it.

A2 Milk has outstripped sales of organic milk in Australia, said Michael Harvey, a senior dairy analyst with Rabobank International in Melbourne. Its expansion has been particularly remarkable given the competitive response from established dairy companies, he said.

One competitor, Lion Dairy & Drinks, owned by the Philippines' San Miguel Corp., added "naturally contains A2 protein" to the label of its regular A1- and A2-containing milk. Parmalat SpA's Australian chief executive officer Craig Garvin said a2 Milk may be damaging the dairy industry with a scare campaign that's misleading consumers.

Xu Jun, Chairman China State Farms Holdings Shanghai (distributor of A2 milk products in China) and Geoff Babidge Chief Executive Officer of A2 Corporation at the A2 milk powder infant formula on the production line.

Theo Spierings, chief executive officer of Fonterra Group Ltd., the world's biggest dairy exporter, said in an interview that A2 milk was just a "marketing concept."

Rival companies have looked for ways to slow a2 Milk's growth, said Geoff Babidge, the company's managing director since 2010. "Clearly, in our experience, that has not been successful," he said in an interview on January 22.

To understand how A2 milk became a dairy-aisle sensation, go back about 5,000 years. That's when scientists say a genetic mutation occurred in north European cows and the A1 protein began showing up in milk that had until then only contained A2 protein, says Keith Woodford, an agri-food professor at New Zealand's Lincoln University and occasional consultant to a2 Milk.

Holstein-Freisians, the black-and-white mainstays of modern dairies that originated in the fields of northern Germany and the Netherlands, typically produce milk that's about 50 percent A1 protein, according to Woodford.

The theory proffered by a2 Milk and supportive scientists such as Woodford, who published a book in 2007 on the A1 vs. A2 debate called "Devil in the Milk," is that A1 forms a fragment that when digested can trigger inflammation in the body, potentially leading to ailments from irritable bowel syndrome and eczema to schizophrenia and autism.

Australia's a2 Milk Co. is gaining an international following for its products. Photo / Bloomberg

A 2005 review published in the European Journal of Clinical Nutrition found no convincing evidence A1 protein has an adverse effect on humans, and the Dietitians Association of Australia says most of the claims made about A2's benefits are anecdotal and not based on a lot of evidence.

"Conceptually, it seems like a long shot," said Malcolm Riley, a nutrition epidemiologist with Australia's Commonwealth Scientific and Industrial Research Organisation in Adelaide. "But the sort of impacts that have been suggested to A1, or the corollary of not being impacted by A2, are so important that it seems to me it's worth investigating."

The sort of impacts that have been suggested to A1, or the corollary of not being impacted by A2, are so important that it seems to me it's worth investigating.

A2 Milk has championed research into A1's purported deleterious effects and promoted the idea that people who drink the company's milk "just feel better." It says a quarter of consumers in western countries report some kind of discomfort after drinking regular milk, citing a 2010 paper from the Innovation Center for U.S. Dairy, an industry research group.

When it comes to China, that figure is closer to 85 percent, said Andrew Clarke, a2 Milk's chief scientific officer, pointing to company surveys.

That's made China a particularly attractive market for a2 Platinum, the infant formula brand whose first-half sales rocketed 340 percent to NZ$73.9 million. Managing Director Babidge is also targeting the U.S., which he said could overtake Australia as the company's biggest market in as little as four years.

The company sources its American milk from four U.S. dairies, mostly in Nebraska, and sells to stores owned by Whole Foods Market Inc., Sprouts Farmers Market Inc., Albertsons Cos., as well as Kroger Co., the largest U.S. grocery chain.

The National Milk Producers Federation, the lobby group for U.S. dairy farmers, welcomes "innovation in the dairy aisle to ensure cows' milk and dairy foods meet consumers' needs," said spokesman Christopher Galen.

In Australia, a2 Milk has been a boon for Paula and Michael Gray, whose farm at Rollands Plains, about 400 kilometres north of Sydney, has been supplying the company for almost four years. That means every tanker-load of milk -- and they sell almost 2 million litres a year - is checked to make sure it contains no A1 protein. Tissue samples from each cow are also sent to the company for testing.

A higher milk price is only one of the benefits the Grays enjoy supplying a2 Milk, said Paula, 39. Her 8-year-old son's eczema has cleared up since the family started producing, and drinking, it. Another son, 10, gets bloating and diarrhea after consuming regular milk but not when he drinks A2, she said.

"We only drink A2 milk at home, straight out of our vat," Paula said. "The health benefits are certainly there. For some people, A2 is a real assistance in their life."

-Bloomberg