Can the a2 Milk success story continue in 2020?

The A2 Milk Company Ltd (ASX: A2M) share price has been growing at a very impressive rate and there are no signs that this growth is going to slow down anytime soon. So what’s in store for 2020?

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A2 Baby formula shares

The A2 Milk Company Ltd (ASX: A2M) share price has performed well over the past month, with a2 shares up 10.84% on this time last month to be trading for $14.82 at the time of writing.  

Overall, a2 Milk has been growing at a very impressive rate and there are no signs that this growth is going to slow down anytime soon.

The company has made significant recent investments in marketing and distribution and it appears that all this effort is now starting to bear fruit.

In the Australian market, with its well-established brand name, and entrenched market position, it is better placed than other infant formula providers such as Bubs Australia Ltd (ASX: BUB) and Nuchev Limited (ASX: NUC).

However, it is the markets outside of New Zealand and Australia that will provide a2 Milk with the greatest growth opportunities.

Why success in China and the US is vital for a2 Milk

Continued strong growth in the US and China will be key to a2 Milk’s success over the next 3–5 years.

In November, a2 Milk revealed that its China label infant nutrition sales are forecast to grow by 84% in 1H20, while cross-border e-commerce infant nutrition are forecast to grow at 54%. US sales are forecast to rise by a staggering 110%.

The China market growth potential, in particular, is massive, with an enormous potential market waiting to be tapped.

Many Chinese consumers are increasingly choosing premium products over mass market products, with a further preference for foreign brands, and specific brands like infant formula.

However, entering a highly complex market like China doesn’t come without a high degree of risk.

The market has already witnessed the big impact that Chinese regulations can have on infant formula players such Bellamy’s Australia Ltd (ASX: BAL).

Competition is already starting to pop up in China, with a new local player, Junlebao Dairy, recently entering the market.

Expect more competitive threats like this in the future for a2 Milk in China.

Growth in the US market has been very strong in the first half of FY20, with a2 Milk focusing on selling fresh milk, rather than infant formula.

Other overseas markets outside US and China await

While a2 Milk has been growing quickly in both US and China from a small base, there are plenty of other potential locations globally where it could also launch.

New overseas markets should be added in the future.

Although it did pull out of the UK market, a2 Milk is continuing to test markets in South East Asia and is extending its Korean range.

Foolish takeaway

a2 Milk has managed to move past negative reaction associated with its previous earnings target miss and its recent withdrawal from the UK market.

With earnings growth back on track, and marketing expenses under control, a2 Milk appears to be reasonably well placed to meet future targets, which should bode well for future share price growth.

However, the market has factored in ambitious growth targets for a2 Milk, and if these targets are not met, then the a2 share price could be negatively impacted.

a2 Milk needs to continue to perform solidly in its traditional Australian and New Zealand markets, while also continuing to rapidly grow in its overseas markets to justify its relatively high valuation.

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Motley Fool contributor Phil Harpur owns shares of A2 Milk. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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