Just when you thought the A2 Milk Company Ltd (ASX: A2M) share price was heading up, it has sunk below $6 yet again.
The future of the a2 share price looks grim, especially after reporting poor FY21 results. What’s ahead for the a2 share price?
A2M share price
What now for a2?
We know a2 has been adversely impacted by the closed international borders, consequently losing its key daigou sales channel. There’s been plenty of reports about this.
But how about the future?
Management did not provide guidance but expect heightened competition in China and a shrinking addressable market. They plan on combatting this with increased brand investment.
This strategy relies heavily on swaying milk and infant powder consumers to a2. So it’s important to understand where consumer sentiment is heading.
But how can we forecast this?
For example, sports energy juggernaut, Gatorade has dominated the US market for nearly half a century but in 2017, it experienced negative volume growth. It noticed consumers were reaching for other drinks of hydration instead.
As a result, it launched Gatorade Zero with zero sugar in 2018, helping sales rebound from negative territory. Consumers wanted optimal health benefits from sports drinks, Gatorade responded.
In the case of milk and infant powder, what do consumers value?
I think the initial attraction to a2 was the perception of it possessing superior health benefits and to its credit, sales compounded at a rapid rate until the pandemic. But if competitors are marketing and offering the same and different benefits like oat and goat milk, consumers suddenly have more choice.
The Gatorade story tells us how fast consumer sentiment can change and the expanding substitutes for a2 will likely accelerate this, making it more difficult to forecast.
My thoughts on a2
Whilst analogies are useful, they can also be perilous as outlined by Matt Joass.
The reason why I’m highlighting the importance of consumer sentiment is that I think it forms the foundation of the a2 investment thesis. So, as an investor, you’d want to have data points to signal consumer preferences, especially in China.
Given borders are closed, China has essentially stamped out all Aussie journalists, this task is almost impossible.
At Rask, we view potential investments with an asymmetric lens where the odds are in our favour. In this situation, I’d prefer businesses that I have greater oversight and are easier to forecast.
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