A2 Milk selling infant formula in US could help improve its market performance
A2 Milk's access to the United States infant formula market offers a lifeline to the company's efforts to turn a profit in North America.
The company, along with several other big international competitors, wasrecently granted permission to sell infant formula in the US, to help offset a short supply in the domestic market, following a recall of products produced by Michigan-based Abbott Laboratories.
"We are supportive of the US entry as an earnings diversifier but the earnings benefit may only be minor," Forsyth Barr said in a market report.
"The market is highly competitive, margins are structurally lower, and the market now offers limited 'free' near-term market share capture opportunities with the Abbott production shortage largely over."
However, Forsyth Barr head of research Andy Bowley said the addition of infant formula to its product range could help A2 Milk improve the performance of its existing loss-making liquid milk business in the US, which was currently available in more than 27,000 stores there.
"Their share of the liquid milk businesses is pretty small, less than 1 percent. They need to add to that, either through liquid milk and or other products, ie infant formula, to improve the broader economics of their business in the US."
He said it would not be easy for A2 Milk to increase its share of the market, given the infant formula market was dominated by four businesses, who together hold more than 90 percent market share.
While the US market was the second biggest market for infant formula, it was just 15 percent the size of China, which was one of A2 Milk's key markets along with Australia.
"They're making material losses in the liquid milk business and we envisage that without infant formula, as a potential addition to their portfolio of brands in the US that the liquid milk business wouldn't last two or three years."
Forsyth Barr expected sales of infant formula to the US market to add about $10 million to A2 Milk's underlying profit, based on a market share of about 1 percent and with best-case margins of about 15 percent over the medium term.