Frequent sale rumors

Australian media The Australian reported recently that New Zealand headquartered a2 Milk could be the target of a takeover, with Nestlé possibly an interested buyer. But no further news is expected before a2 Milk publishes its annual results on August 26.

This is not the first time a2 Milk has been tipped for a takeover. In this April, Australian media had reported that some global milk powder giants, including Nestlé and Mead Johnson, showed intention to acquire a2 Milk Company amid the company’s share slump. At that time, a2 Milk's market value had plunged by two-thirds of the past year from nearly AU $14.8 billion to AU $5.3 billion.1                                                                                 

Performance under pressure

As a well-known dairy company in New Zealand, a2 Milk has launched infant milk powder, adult milk powder, and fresh milk. Its products have entered into various markets, including China, Australia, the United States, and Canada, etc. The most significant feature of its products is A2β–casein milk source.

The infant formula business in China is in the limelight in its business landscape. Entering China in 2013, a2 Milk has become a dominant player in the A2 niche in Chinese dairy market, with more than 60% market share.¹ a2 Milk also listed "maximizing the growth of China's infant consumption business" as one of its four key strategic priorities at its annual meeting for investors at the end of 2020.

However, the epidemic and intensified competition from other international and domestic players have gloomed the company’s prospects.

In February, a2 Milk reported NZ $677.4 million revenue (June 30 – December 31, 2020), down 16% year on year. Sales of its Chinese-label infant formula brand, a2 至初®, increased 45.2% year on year, but sales of English and other label milk powder in cross-border e-commerce channels fell 35.5%.²

a2 Milk attributed the decline to the epidemic since the suspended Daigou and agent channel affected the cross-border sales. ChemLinked has introduced in a previous article that the sharp drop of Chinese consumers' overseas purchases under the epidemic had stricken a blow to many Australian brands, which relied heavily on Daigou and CBEC channels.

In May, a2 Milk cut its fiscal 2021 revenue forecast by almost NZ $200 million in a one-off move due to China’s challenging market and channel structures. 

A2 milk powder market is highly competitive

The A2 concept is like a magnet in recent years, attracting more infant formula companies to join the competition.

Source: China Dairy Team

The entry of many large-scale enterprises has posed a threat to the leading position of a2 Milk. Under the internal performance downward risk and external competitive pressures, being acquired may be the best way out for a2 Milk.

According to Chinese dairy analyst Song Liang, Nestlé’s acquisition would provide a2 Milk with a more comprehensive supply chain system so that its technology can be promoted nationwide and even globally. Besides, the international food giant would empower a2 in many aspects, such as channel layout and brand building.

For Nestlé, acquiring a2 Milk could further beef up its market share in the Chinese infant formula market. In recent years, Nestlé itself has experienced pressure on infant-formula sales in China due to challenges of falling birth rates and competition from local brands.

Relevant reading:

Trends Hub: a2 Milk Company Facing New Rivals in China’s A2 Protein Milk Powder Market

a2 Greater China CEO Li Xiao on a2's Accelerated Growth Strategy

China’s A2 Infant Formula Market Welcomes New Entrants

Devastated Daigou business severely impacts overseas baby formula sales

7 Points to Review the Chinese Infant Formula Market in 2021H1