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How Australia's infant formula companies are riding the China boom

But an unusual thing happened on the stockmarket in the past fortnight. Aside from the ASX 200 busing through the 6000 point mark, shares in a2 Milk, the market darling of 2017 whose share price has more than tripled this year alone, actually went down four days in a row.


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After the spectacular failure of the Got Milk? campaign in the U.S. it seems someone took notice and came up with a game plan to change the dynamics of supply and demand.


The conclusion of Got Milk? was the demand function is inelastic because of the homogeneity of the product being supplied by the industry. Market competition was all about market share of a low priced commodity. Ergo, if you can't change the demand function, change the supply function through product differentiation and provide the consumer greater choice on a higher margin product.


The way to do this it would seem is come up with some nebulous scientific fact, reinforce over and over with more nebulous fact, shush the naysayers off the stage and provide stellar market returns to ensure fact or fiction, nobody cares because of the obvious economic benefits.


And now, they are company of the year. A $6bn company. FBU a $4bn company with all the employment and billions of dollars of revenue it has and AIR a $3.5bn company with its obvious business operations. I could go on and on but the point is, how over valued is this company?




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A2 Milk Company is set to make one of the biggest strategic moves in its 18-year history, expanding into the most populous region of North America as the centrepiece of plans to double the size of its business in the US. The company is today set to announce plans to move into the northeast region of America, adding more than 1000 retail outlets to its US network including through the Amazon-owned gourmet retailer Whole Foods.


The northeast of the US offers a potential market of 60 million consumers for A2, which was one of the best performers on the Australian sharemarket last year and in December lured former Qantas executive Jayne Hrdlicka to be its next chief executive, replacing Geoff Babidge.


"The northeast is the market in America that makes the most sense as the next step for A2,'' the company's US chief executive, Blake Waltrip, said in an interview with The Australian in Los Angeles. "We will target every major retailer in the northeast. We have a lot of interest from retailers already so we are confident in our ability to build broadbased distribution." Mr Waltrip said the expansion could "easily double the business (in America) in the short term".


A2 .... is eyeing North America as its next growth engine, as analysts question whether the company can continue to justify the high trading multiple on its share price. A2 shares are trading at over the $7 mark, after a year ago trading below $2.20.


At the group's annual meeting late last year, the company revealed it had a presence in 3600 stores in the US after adding 600 stores in the four months to October. It is now in 3800 stores, including in seven of Whole Foods' 11 regions nationally. It also has a strong presence in fellow national retailer Sprouts.


"I am quite confident we will be in every region of Whole Foods in the next year,'' Mr Waltrip said. "There is tons of white space in America to build this business and we have lots of retailers asking for the product."


He said following Amazon's acquisition of Whole Foods last year, there were broader opportunities for A2 to be involved with the internet retailing behemoth in the US.


"Right now we are sold on Amazon, they just pull it from distributors. Amazon pricing is actually more expensive than in store when you add in shipping,'' Mr Waltrip said. "There will be a point in time where it makes sense to have more of a conversation with them about national distribution."


He said the company had achieved its KPIs on sales velocity and brand awareness in California and the southeast of the US during 2017, underpinned by its move into retailer Publix in March and an associated "Love Milk Again" advertising campaign. The move into the northeast will involve further marketing expenditure, including on national broadcast media.


Conventional milk sales in the US have been declining for a number of years ... "I think one of the major reasons could very well be that 25 per cent of the US population have self-diagnosed themselves as lactose intolerant,'' Mr Waltrip said.


A2 is supplied by four family-owned dairy farms and a dairy processor in the US northeast at Syracuse near New York. It also has farms and a processor in Nebraska and in California.


"We have established a supply chain which allows us to grow in the US,'' Mr Waltrip said. "And we pay a premium at the farm gate to help comply with the protocols for farmers to be part of A2. "We have got significant upside potential in terms of our current supply chain to drive our expansion. And on top of that we have significant opportunity to increase by adding new cows into our supply chain."


He said the group was also looking at other product innovations similar to what it has introduced into the Australian and Chinese markets. The group's Platinum infant formula product has been a big hit with customers in Australia and China and especially with the daigou trade.

Damon Kitney travelled to the US courtesy of A2 Milk



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A2M gets covered by Marcus Padley in this article - A couple of hot stocks. The other "hot stock" is APT



Short positions are on the rise. so some may not agree with Macquarie's recent BUY recommendations. Macquarie bought 35 mil shares in August last year :)



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A2M gets a mention in Mirrabooka's Half yearly

The other main feature of the market was the very strong performance of a select number of companies in Mirrabooka's investment universe.


Many of these benefited from a significant expansion in their already elevated valuation metrics given their perceived prospects for higher than average market growth.


This included A2 Milk where Mirrabooka does not have a holding.

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