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China’s $US6 billion a year nutritional powders market will have a new competitor next year with the launch a2 branded ‘natural milk’ powders. To further its entry into the Chinese market which is growing around 12 per cent a year, A2 Corporation has appointed China State Farms (Shanghai) as its distributor.
The powders will be produced in New Zealand by Synlait in Canterbury from designated A2 herds that do not produce the A1 protein that has associated with milk digestion problems and auto-immune diseases.
Developing an infant formula business in highly prospective markets is part of A2C’s strategic agenda. The global infant formula market is valued at greater than $US 17 billion at the retail level, with China accounting for around $US 6 billion and growing rapidly at approximately 12% annually.
A2’s Managing Director Geoff Babidge signed the agreement with CSF last night. A2 Corporation’s shares (code ATM) have performed strongly this year following further revenue and income growth for the 2012 financial year and the formation of a joint venture to launch fresh a2 milk in the UK.
Earlier this year, the company announced a strategic agreement with Synlait Milk Limited (“Synlait”) to source a2™ milk from accredited New Zealand dairy farms and manufacture a2™ brand milk powders and infant formula at Synlait’s facility in Dunsandel, New Zealand. Having established supply, A2C has now appointed China State Farm Holding Shanghai Company (“CSF”) as the exclusive distributor of a2™ brand infant formula in the Peoples Republic of China.
CSF is a wholly owned subsidiary of China National Agriculture Development Group Corporation the only Chinese State Owned Enterprise that operates in the production of agriculture, animal husbandry and fisheries. CSF has extensive operations in the major agricultural regions of China, including the trade and distribution of agricultural inputs and high end consumer products. CSF has the strength of local relationships and financial capacity to establish a dedicated infrastructure, distribution network and marketing activity to support the A2C infant formula business plan. Both CSF and its parent have demonstrated strong commitment to the a2™ product proposition.
The distribution agreement is for three consecutive three-year terms with renewal conditional on the achievement of agreed performance hurdles including distribution coverage. A joint Marketing Committee comprising representatives from A2C and CSF will control marketing activities for a2™ brand infant formula, funded by contributions from each party and linked to sales volumes. The chairman of the committee will be Geoffrey Babidge (A2C Managing Director).
CSF plan to establish a support infrastructure, appoint sub-distributors and initially establish distribution in five core Tier 1 cities that have a combined urban population in excess of 50 million and progressively expand across China, Hong Kong and Macau. A2C has established its own management team to support the A2 Infant Nutrition business, including a divisional CEO, marketing, supply chain and quality functions and a manager based in Shanghai to closely co-ordinate activities between the parties.
A2C will derive its revenue from the sale of a2™ brand infant formula to CSF. This infant formula will be sourced in New Zealand and packaged in a form that is shelf ready to ensure that quality is maintained through the supply chain. The business plan currently assumes annual sales revenues growing progressively to approximately USD 50 million in year four.
It is expected that production of a2™ brand infant formula will commence from December 2012, with the first sales to China to take place by June 2013. A2C expects to commit funding of USD 5 million during 2013/14 for administration, initial marketing contribution and working capital to support the establishment of the business. The Company is positioned to fund these requirements by virtue of its internally generated cash flows and strong balance sheet.
About A2 Corporation
A2C is a differentiated, premium-priced, dairy company which is building a global business based on unique intellectual property relating to a2 Milk™ and related products. A2C has operations in Australia, New Zealand, the UK and China and is pursuing growth opportunities in Asia, North America & Europe.