Trust drives A2's China growth

Demand for imported formula has boomed in China following a string of food safety incidents. Picture / Bloomberg

Research shows reputation more important than country of origin.

New research has shed light on potential factors driving A2 Milk's stellar sales growth in the booming yet notoriously fickle Chinese infant formula trade.

Sharebrokers UBS surveyed 1279 parents and pregnant women in China in order to gain a better understanding of trends driving that country's baby milk market, which has been projected to grow to US$25 billion ($36.4 billion) by next year.

In a report published this month, UBS analyst Jordan Rogers said the research suggested having a premium and trusted position with Chinese consumers was more important for a product than being manufactured outside China.

Demand for imported formula has boomed in Asia's biggest economy following a string of food safety incidents, including the 2008 melamine scandal, which killed six babies and sickened thousands more.

A2's Platinum formula brand, which launched in China in 2013, is manufactured in New Zealand by Canterbury-based dairy processor Synlait.

"[A2 Milk's] recent success may be more as a result of the product's perceived benefits and brand quality - compared to its production origin - than we previously thought," Rogers said.

"We believe that the A2 Platinum brand benefits from online consumers valuing the super-premium position of the brand in its home markets, Australia and New Zealand, while still being priced at a modest discount to other super-premium peers."

A2's profit in the six months to December 31 saw an 80-fold increase to $10.1 million, boosted by a 340 per cent jump in baby formula sales across Australia, New Zealand and China, to $73.9 million.

The so-called grey market has been a significant driver in A2's recent sales growth in Asia's biggest economy.

This involves traders purchasing product from Australian supermarkets and dispatching it to China for resale.

UBS estimates 70 per cent of A2's formula sales in Australia and New Zealand actually end up in the Asian grey trade, predominantly China.

However, the company has been making progress in growing its direct exports into the Chinese market, where it is sold online - via platforms including Alibaba's Tmall - and in more than 1000 mother and baby stores in more than 50 cities.

A2 reported $8.4 million in direct revenue from its China and near Asia segment, which includes sales of fresh milk, formula and milk powder, in the six months to December 31, up from $1 million in the same period of 2014.

The firm's milk comes from cows selected to produce only A2 beta-casein protein. Most dairy products contain both A1 and A2 proteins.

The company claims the A2 variant offers health benefits over the more common A1 variety.

A2 last week released the results of a clinical trial conducted in China that suggested lactose intolerance may be a myth for some people, and that the symptoms associated with lactose intolerance are more likely to be caused by an inflammatory response to A1 protein.