Q&A: How Innovation in Premium Milk Will Drive Dairy's Growth

Blake Waltrip is U.S. CEO of the a2 Milk Co., the 22-year-old, New Zealand-founded maker of milk products sourced exclusively from cows that contain only a2 proteins (vs. a1 or a combination of a1 and a2) for easier digestion. He's also a new member of the International Dairy Foods Association's Fluid Milk board. In a recent interview with WGB, Waltrip discussed innovation in the dairy milk category, the cost pressures the industry is seeing in 2022 and what's necessary to ensure the health of the category in the years to come. 

Christine LaFave Grace: Your company entered the U.S. in 2015, pre-oat-milk explosion, pre-pandemic, even before grass-fed milk was really finding its footing here. What has the evolution in the dairy aisle looked like to you? How have you seen awareness about a1-free options change? 

Blake Waltrip: A lot of people are trading up from conventional to premium milk. We think we’ve got a really strong potential to build this business. In Australia today, we’re at almost a 13% share of the entire milk category, and 60% of those users have no milk intolerance at all.

We firmly believe that the a1-free segment will become a significant subsegment of the milk category over the next 10 years. It’s interesting if you think about this—farmers have known about a2 for a very long time, but it’s consumers who didn’t know a lot about a2. What consumers have done is they’ve looked at this protein and seen that it’s easier for digestion, and it’s led them to say, “Well, that’s a higher-quality protein.” They’ve elevated the a2 milk to more consistent with an organic set of milk. We find that a lot of people who were organic users are a2 users.

One of the selling points of dairy milk that seems to continue to resonate most strongly with consumers is from the nutrient angle, in particular for kids. Still, as you have a growing variety of plant-based milk alternatives coming to the market touting assorted health and sustainability claims, what's going to continue to drive freshness, so to speak, in the fluid-milk category?

Milk is a $13-billion-plus category; plant-based alternatives are a little over $2 billion. There’s definitely a place for plant-based, for different need states and for certain consumers who might prefer it. But the first and most important difference (between the two) is the taste—people love the taste of milk. You grew up with milk; it’s viewed as a fundamentally good and healthy product. When you start looking at the nutritional density, milk is a complete protein, delivering all amino acids in the proper balance. Most plant-based alternatives fall quite short when it comes to nutritional density.

There’s a reason that milk is on the USDA food pyramid. The nutrition, it’s hard to beat. It’s a combination of the taste, habitual patterns, and it’s viewed as a fundamentally healthy product that delivers for consumers and for kids as they’re growing.

It is true that fluid milk has been declining as an overall category for many, many years, but you’re still talking about a category that has over 90% of household penetration. What’s happening over the last several years is that because innovation is the only way out of declining-quantity categories, the innovations that are happening in premium milk are driving all of the growth in milk. You look at Fairlife, what the Coca-Cola company has done with Fairlife, with a very simple, direct proposition that has been incredibly successful. And then if you look at the super-premium category, the grass-fed side of the business has added a lot of value. Organic in general is down a bit, but these other innovations—that’s what’s driving growth.

Innovation is going to be part of the future of the milk category—innovation of all kinds—and the dairy industry is going to have to be open to that innovation and probably be more rapid in their approach to adopting those kinds of innovations as well. Ultimately, it’s about getting more people to drink milk, because I think everybody in the industry feels it’s fundamentally a healthy product for people to consume.

Given the accelerated pace of innovation and the need to keep customers and win the next generation, what’s next for dairy?

Innovation takes many forms, right? You’re going to see innovation in products; you’re going to see innovation in packaging; I think you’re going to see a lot more action around sustainability. You look in the last seven years, between Fairlife and a2 and what’s happened in grass-fed, there’s a lot of opportunity to innovate with value-added propositions for consumers.

Packaging is one of the most undervalued—the ability to go down the path of more-sustainable packaging is going to be critical. Supply chains that are more sustainable—all of these things I think you’re going to see innovation in that the milk industry is working on, and it creates more reasons for consumers to stay in it and continue with milk consumption.

The U.S. is kind of a unique market as it relates to milk and milk alternative beverages because there’s a repertoire of purchasing in the category. Consumers on average have three to four different kinds of milk or milk alternative beverages in their refrigerator at any one time. So the key is, you want to be part of that repertoire. It’s very unlikely that anybody’s going to be the only milk any household consumes, but you want to be part of that repertoire. That repertoire may include a commodity milk, a private-label milk, organic or value-added for the kids, a plant-based alternative for different need states or for different people in the house. Giving the consumer more reasons through innovation to consume milk is really going to be the key, I believe, to future growth.

Retail milk prices were up 11.2% in February year over year, outpacing inflation for groceries overall. How do you see the inflationary landscape shifting in 2022?

The entire dairy industry is dealing with inflationary pressures just as the rest of our economy is. The inflationary pressure on milk prices is one part of that; the inflationary pressures on freight costs, logistics, are enormous. And more recently, with the sad events that have happened in Ukraine, you’ve got new inflationary pressures on the cost of gas. And so all of those things are going to put a lot of pressure on the industry, and ultimately you will see the price of private-label products have to go up, and you’re going to see the price of branded products also move up, because branded products can’t continue to build strong marketing programs and support their products without [it] and at the same time cover really high inflationary pressures. I think you’re going to see, generally speaking, an increase across the board in milk prices to consumers, just as you’ve seen in almost every other category in the store.