Strategic Positioning Of The A2 Milk Company

Executive Summary

The a2 Milk Company is one of the major milk companies established in New Zealand. Dr. Corran McLachlan founded the company in 2000 after a significant discovery that the different milk proteins have different effect on the people. He discovered that cow milk contains two different types of beta-casein protein, a1 and a2, which have different impact on the digestion system of the consumers of cow milk. It has been found that a2 protein is easier to digest (Jianqin et al., 2015). With this principle, the a2 Milk Company was established. It is a publicly listed company in both New Zealand and Australia. Since its establishment in 2000, the company has expanded its business in Australia, China, UK and in the USA. The mission of the company was to explore more to know the scientific benefits of a2 protein type in order to spread the nutritional goodness of the natural and real milk to more and more people (Thea2milkcompany.com., 2018). Over the years the company has emphasized on the fact that the cow milk contains two different beta-casein proteins and those have different effects on the people, especially in terms of digestion and delivering the most nutritional value. The company uses specially selected cows that produce a2 protein milk naturally and advertises it as a marketing strategy. It has been able to create awareness among the people about the goodness of a2 protein and a2 milk, which is high in nutritional value. The customers admit that they feel the difference in their digestive system and overall health, which brings business to the a2 Milk Company.

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The purpose of this report is to present a strategic positioning of the a2 Milk Company which would help it to further expand its business and increase its profitability by capturing a bigger market share.

This report provides recommendation on the product lines, geographic segments along with five potential financial and non-financial measures for future success through the analysis of the current strategies of the milk company and its environment by using Porter’s Five Forces Model and Porter’s generic strategies.

The research for the report is conducted by collecting and analyzing secondary data. The data was collected from the official website of the a2 Milk Company of Australia and various online publications including annual reports. Porter’s five forces model and Porter’s generic strategies were applied on the data to get the outcome of environment and competitive analysis of the company and to provide recommendations on strategies for improving the product lines and geographic segments.

Background of The a2 Milk Company

The a2 Milk Company is a leading publicly listed company in New Zealand and in other locations belonging to the food and beverage sector. The company has launched various categories of milk in different markets, such as, a2 MilkTM fresh milk, Blue and Lite milk, that is, whole milk and skim milk, infant formula milk, whole milk powder, and chocolate milk. In Australia, the company has a grocery value of around 9.3%, and the infant formula milk’s market share has increased from 16% to 26% (Thea2milkcompany.com., 2018). In New Zealand, the fresh milk brand AnchorTM is the endorsement partner of a2 Milk. In China, the profit for the infant milk by a2 jumped by 150% to $98.5 million in the first half of 2018 (Pash, 2018). In all the markets, the company has been able to capture a significant market share.

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Figure 1: Porter’s Five Forces Model

(Source: E. Dobbs, 2014)

The intensity of the market competition in the Australian market and the profitability scope of a2 Milk Company have been analyzed using Porter’s Five Forces Model.

Threats of new entrants

· Low marketing cost

· Innovative products by other companies, such as, high growth UHT milk, low fat yoghurt

· Lower barriers to entry

· Lower value proposition to the customers

Threats of substitutes

· Low switching cost

· Rival brands addressing the core needs of customers

· Lower availability of substitute milk with a2 protein

· Availability of substitutes, such as, lactose free milk, organic milk, low fat skim milk, high protein full milk etc.

Bargaining power of suppliers

· Higher priced products due to higher price charged by suppliers

· Higher price charged by distributors

Bargaining power of buyers

· Purest quality is demanded at a lower price

· Demand for offers for a lower price

Industry rivalry

· Dairy Farmers

· Pauls

· Green Pastures

· Zymil

· Devondale

· Farmhouse Gold

· Tempo

· The Complete Dairy

From the Porter’s five forces analysis of a2 Milk Company, it can be inferred that,

  • The company has a high threat of new entrants in the market due to low marketing cost, lower barriers to entry, and innovative products by the rivals or new competitors.
  • On the other hand, the threat of substitutes is medium. It has a low switching cost for products such as lactose free milk, varieties of full fat, low fat and fat free milk, but there is lower amount of substitute products focused on providing a2 protein only. Thus, slightly differentiated products from competitors are available in the market, as those are not perfect substitutes.
  • It is seen that the price of the a2 milks are relatively higher than the other brands’ products. It can be assumed that the price of the a2 products is higher due to higher priced raw materials and higher price charged by the suppliers and distributors, that is, the suppliers have higher bargaining power due to the exclusivity of the product.
  • On the other hand, the buyers also have higher bargaining power as they demand highest nutritional value from the purest quality milk at a lower price. Although, the company’s market share has increased in the past few years, the size of the customer base is not yet dominant in the market, since not every customer prefers to consume milk with a2 protein only.
  • Lastly, there are many other popular brands in the Australian as well as global market providing close substitutes, although none of them provide only a2 milk (Westbrook & Greenfield, 2018).

Figure 2: Porter’s generic strategies

(Source: Wicker et al., 2015)

Porter’s generic strategies are applied to find out the relevant competitive advantage of the a2 Milk Company in the Australian market. As seen from the above analysis, the company faces challenges from lower barriers to entry in the market, low switching cost, innovative products by rivals, higher product cost, and consumer’s demand for highest quality product at a relatively lower price. There are geographical barriers also as the company also operates in four other countries apart from Australia.

To increase the market share and profitability, the a2 Milk Company should opt for the differentiation leadership strategy under the generic strategies of Porter. Under this strategy, the companies target larger market and aim to achieve the competitive advantage in the industry through product differentiation (D. Banker, Mashruwala, & Tripathy, 2014). The a2 Milk Company already provides a differentiated product in the dairy industries across five countries, that is, milk that contains only a2 protein, and this can be used as the leadership strategy for increasing market share. The other strategies that should be followed by the company are:

  • Innovative dairy products apart from the existing products
  • Branding through promoting strong brand loyalty of the customers and increasing the value proposition to the consumers
  • Increasing the distribution and display shelves in the grocery and supermarkets across all the geographic segments and creating a milk pool to keep the bargaining power of the suppliers in control. The company has taken an initiative by going in a strategic partnership with Fonterra, in New Zealand to create such a milk pool (Hargreaves, 2018).
  • Consistent promotional activities, such as, advertising addressing to different needs and preferences of the customers belonging to different geographic locations, sponsorships in various events
  • Keeping the premium price for all different types of products, giving the feel of high quality product to the customers.

The aim of the company is to improve its strategic position in the market and increase its profitability. Thus, it should focus on delivering a unique and innovative product at an average market price and simultaneously creating brand awareness among the customers across all segments.

Current Position of The a2 Milk Company

While implementing the differentiation leadership strategy, the a2 Milk Company should adopt the following financial and non-financial measures to evaluate the success of the strategies.

  • The a2 Milk Company should invest more capital for research and development of innovative products as per the needs and preferences of the customers, apart from the existing products. This would help them to implement the differentiation leadership strategy in a more effective manner and reach to a wider customer base.
  • It should attempt to increase the value proposition to the customers by promoting the brand and the uniqueness of the products. Providing a2 milk is the unique selling point of the company and they should highlight all the benefits of this protein through marketing.
  • The milk company should increase the distribution channels across the nation as well as in the other countries and this would increase the visibility and accessibility of the product to the customers by increasing the display shelves in the supermarkets, grocery and other convenience stores. This move will help to create a positioning in the minds of the customers and influence their purchasing decision.
  • It should conduct market survey from time to time to capture the customers’ preferences and desires and this would help them to decide on the next strategy. This would also help it to measure the success of the effectiveness of the different promotional activities, implemented in different locations.
  • The a2 milk company should continue to provide its principal component, that is, the a2 milk. Maintaining the premium price would give the consumers a feeling of highest quality milk product and it also increases the customers’ faith on the product. This also helps to create a strategic positioning of the company. The annual sales and revenue report would reflect the success of the measures undertaken by the firm.

Lastly, it can be suggested that, the annual sales report will reflect the revenue and profitability of the a2 Milk Company after the measures have been implemented. Apart from that, the company should conduct market surveys at a regular interval, bring more types of innovative milks with a2 protein and increase the customer awareness through promotional activities, highlighting the benefits of a2 protein and negatives of a1 protein. The company should also try to expand its business internationally in the markets, other than, New Zealand, China, USA and UK, through production as well as exports of existing and new products, such as, milk powder, formula milk, yogurt, cheese, sour cream etc.

Conclusion 

The a2 Milk Company has been experiencing growth in the recent past due to its unique product offering to the markets in Australia, China, New Zealand, UK and USA. However, as the market competition is high, the company should focus and invest in improving its strategic positioning in the markets. From the Porter’s five force analysis, it is found that the company faces some major challenges from low switching cost, higher bargaining power of the suppliers, leading to a higher cost of products and availability of close substitutes. To improve its strategic positioning in the market, the milk company should focus on investing on promotions highlighting the nutritional value of the a2 protein to create brand as well as product awareness. It should also focus on increasing its distribution channels and display options in the markets to create more impact on the minds of the consumers. The milk has no perfect substitute in the market, which is beneficial for the company to implement the differential leadership strategy to capture a bigger market.

References 

Banker, R., Mashruwala, R., & Tripathy, A. (2014). Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?. Management Decision, 52(5), 872-896.

Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Hargreaves, D. (2018). A2 Milk in ‘strategic partnership’ with Fonterra; Comprehensive deal outlined – but no financial figures. Retrieved August 17, 2018, from https://www.interest.co.nz/rural-news/92240/a2-milk-strategic-partnership-fonterra-comprehensive-deal-outlined-no-financial

Jianqin, S., Leiming, X., Lu, X., Yelland, G. W., Ni, J., & Clarke, A. J. (2015). Effects of milk containing only A2 beta casein versus milk containing both A1 and A2 beta casein proteins on gastrointestinal physiology, symptoms of discomfort, and cognitive behavior of people with self-reported intolerance to traditional cows’ milk. Nutrition journal, 15(1), 35.

Pash, C. (2018). a2 Milk Company smashes its profit and its shares go nuts. Retrieved from https://www.businessinsider.com.au/a2-milk-company-smashes-its-profit-and-its-shares-go-nuts-2018-2

Thea2milkcompany.com. (2018). About us. Retrieved August 17, 2018, from https://thea2milkcompany.com/about-us/

Westbrook, T., & Greenfield, C. (2018). Competition heats up for controversial a2 Milk Company. Retrieved August 17, 2018, from https://in.reuters.com/article/us-a2-milk-company-strategy-analysis/competition-heats-up-for-controversial-a2-milk-company-idINKCN1IH0T9

Wicker, P., Soebbing, B. P., Feiler, S., & Breuer, C. (2015). The effect of Porter’s generic strategies on organisational problems of non-profit sports clubs. European Journal for Sport and Society, 12(3), 281-307.