Thursday, July 7, 2022

Synlait gets A2 contract for China infant formula

Three or four farmers have started supplying A2 milk to the Synlait processing plant in Canterbury, which A2 Corporation hopes is the start of at least a US$50 million export business in the next three to four years.

It has contracted Synlait to manufacture packaged, shelf-ready infant formula which it in turn will sell to China State Farm for retail sales in China. Production will start with sample products before moving up to commercial quantities.

A2 hasn’t said how many suppliers it expects to sign up but the numbers will build up over the next two years, managing director Geoff Babidge said.

First shipments of premium-price products to China are expected in the May to June period next year and China State Farm, a big State-owned business, will first target sales in the five major cities and follow that up with about 40 cities in the second tier population status.

“The volume of milk we need will be linked to that market plan and we would be optimistic that we could do better than that sales target,’’ Babidge said.

Suppliers of A2 milk will receive payments at about a 10% premium to A1 milk supply, based on the Fonterra price.

Some time next year, A2 might also be looking for more suppliers as it targets new sales of fresh A2 milk in the South Island and greater North Island sales.

This is part of a strategic review presented to shareholders at the annual meeting, though Babidge said afterwards the New Zealand milk sales are lower in priority for the NZAX-listed company than the potentially high profit infant formula initiative and a new joint venture selling fresh A2 milk into the United Kingdom, as well as further growth in the core Australia fresh milk market.

A2 has a non-exclusive licensing arrangement with small Northland company Fresha Valley for NZ milk sales and the parties have been talking for a few months how this can be extended. A2 wants to retain the relationship, but envisages a change so that it can make an investment in marketing and distribution, Babidge said.

South Island planning is at an early stage, but A2 does want to take this project forward next calendar year.

Sales of A2 milk began in 700 stores covering three UK grocery chains, including Tesco, at the end of October. “We’ve had five or six weeks of sales and are very pleased,  but it is a very early stage and we are looking for a progressive, slow build-up in the next one to two years,’’ Babidge said.

Television advertising is due to start in January.

A2’s joint venture partner is the UK’s biggest dairy product distributor Robert Wiseman Dairies, which has about 35% of the market. This gave the JV great access to the market and a very credible reputation to start out with.

Credibility was also helped by A2’s success in Australia, where it increased sales by nearly 50% year on year and has raised grocery market share to 6.4% of total fresh milk sales on latest quarterly sales, from 4.3% in the September quarter a year earlier and from a start-up about five years ago. Babidge believes a value share of about 10% of the market is achievable.

A2 last traded on the NZAX at 67c (at time of writing), for a 179% gain for this year, after starting at 24c.

The company has started discussions with NZX about a move from the AX to the NZX main trading board.

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