A2Milk Case Study PDF

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The A2 Milk Company Case Study

Table of Contents Executive Summary

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Porter’s Five Forces Analysis

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SWOT Analysis

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Alternative Solutions

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Optimal Solution

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Executive Summary Dr. Corran McLachian and Howard Paterson founded The A2 Milk Company in New Zealand on the foundation of the health efficacy and potential of a2 protein based milk and milk products over the typically produced a1 protein based products. Initially based purely on licensing its developed intellectual property, The A2 Milk Company expanded to sell milk and milk formula in Australia, the United States, United Kingdom, China, and other countries. Its expansion led the company to a return on equity of almost 40% with a public market cap of around NZ$6B in 2018. In 2018, multiple factors changed the company’s global position: their relationship with their daigou (grey market) sales channel in China and China’s government, a change of CEO from Babidge to Hrdlicka with plans for new growth, new partnership with Fonterra, and new competition with Nestle, Mengniu, Happy Valley Milk, and other potential new entrants. Some options considered by Babidge and then Hrdlicka included investing more heavily in advertising, distribution, and partnerships within China, locking dairy farmers into long term contracts and converting herds into a2 cows, growing sales and product categories in the U.S. and U.K., and licensing their IP to other dairy processors.

Porter’s Five Forces Analysis The A2 Milk Company relies on its partners for the majority of its business. One such major partner is a2 protein cow dairy farms from where the company sources its milk.A2 Milk assists farms convert their cows into a2 protein cows and creates contracts to source from them. Because of their ability to lock farmers into contracts and their ability to pay more because of the inflated profit margin of their products over regular milk products, they have a strong bargaining

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position with their suppliers. However, future intellectual property protection erosion threatens this position. Similarly, distributors and sales companies and chains such as Fonterra and retail stores had little initial bargaining power against A2 Milk because of the scarcity of their products and intellectual property protection. The benefit of being first in a new market is the ability to become the most well known brand and lock in contracts. End buyers who were sensitive to a1 protein based dairy products had little alternative to a2 protein based dairy products, limited to soy, oat, rice, and other plant based products with dissimilar tastes. For those who could not detect any difference between the types of dairy products, only A2 Milk’s ability to convince them that a2 dairy products may be healthier could convince them to pay a premium. In that sense, substitutes for a2 dairy products were limited to some customers and plentiful for others, making it a mixed bag. Substitutes to each dairy product are wildly different. The replacements for milk could extend from the plant based milks to other drinks such as orange juice and water, while the replacements for cheeses, yoghurts, and other dairy products vary in other ways. Each product has a different level of threat from its unique potential substitutes. The introduction of similar a2 protein based dairy products by Nestle and other companies could interfere with A2 Milk’s sales. Nestle and the other companies had access to markets which A2 Milk had not yet entered, or lacked the funding to properly penetrate. With protective trademarks and patents in place, competitors could not compete directly, but could still easily find a way around it; the expiration of some patents certainly could not help. The size of the a2 milk market was attractive enough to entice Nestle, with its large existing supply chains to compete.

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Additionally, new entrants such as Mengniu and Happy Valley Milk were already eying and attempting to enter the new a2 protein based industry. Such a new type of product with its multitude of options and optimistic future potential could entice any dairy company to attempt to enter; with the ability to convert cow herds into a2 cows over time, such entry would not be difficult either, making the threat of new entrants relatively high as well. However, since The A2 Milk Company had capabilities to capture large segments of the milk, cheese, yoghurt, infant formula, and other dairy product markets with a head start and its catalog of intellectual property, they would be able to enter as many relevant markets as possible to prevent competitors and new entrants from entering and taking majority market shares. Each industry may be different, but when left alone, each could provide competitors with profit that would have otherwise gone directly to A2 Milk.

SWOT Analysis The A2 Milk Company's initial and predominant competency was its research and development of a2 protein intellectual property. Owning the central IP of a new industry allows for a head start in branding and acquisition of market share. While a core patent did expire in 2015, the company's powerful brand and understanding of its existing and potential future products enables it to form intelligent partnerships, capture suppliers and customers early, and develop additional innovations within the scope of its product umbrella. While IP protections can keep other entrants at bay for some time, the eventual proven profitability of the industry pulls them back in; plentiful resources and partnerships allow other companies to enter relatively easily. With relatively low barriers to entry, the a2 dairy industry and The A2 Milk Company’s strong position may be easily challenged by powerhouses like

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Nestle and others. Additionally, the time it takes to convert a1 cow herds into a2 cow herds may be too long. As they are just beginning their global expansion, the foremost opportunities may be to expand into current and additional dairy heavy markets such as the U.S., Canada, and China, but also countries where they may be less challenged such as Finland and Ireland. Expanding into relatively small countries with high dairy consumption rates can contribute to building up their brand image as the central provider of a2 dairy products. The core threat to The A2 Milk Company is large dairy companies such as Nestle. Their existing partnerships with dairy farmers and resources along with similar core competencies will enable them to quickly enter the market.

Alternative Solutions The first solution posited by the team at A2 Milk was to more heavily invest in the China market through advertising, lowering existing prices, expanding their retail network, and partnering with Chinese firms. The second option was to increase back end efficiency through focusing on converting partner and potential partner dairy farmer herds to a2 cow herds and attempting to lock as many as possible into long term contracts before competitors can reach them. The third option was to increase sales in the U.S. and U.K. to quickly capture the majority of market share. The fourth option was to take advantage of their IP, trademarks, and branding to profit from other dairy producers’ efforts through licensing; because they essentially captured the scientific and best known terms for the products, other companies may believe their best options to increase sales would be to use trademarked terms.

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Optimal Solution Potentially one of the optimal directions The A2 Milk Company could take would be to combine multiple options into a single advertising plan. It would be possible to advertise in U.S., U.K., and China markets to strengthen the legitimacy of their brand while reaching out to other dairy companies to license trademarked terms before their IP weakens further. Because converting a1 herds into a2 herds takes time, if they can also lock farmers into long term contracts with higher profit margins than competitors, they can have a head start to capture the majority of market share.

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