Why A2 Milk isn’t really in the milk business

Over the past five years, A2 Milk’s revenue has grown almost tenfold and operating profits have risen 200-fold. The business has gone from making a net loss in 2015 to generating $275 million last year. And that’s just the start of it.

Over the same period, operating margins have gone from 2% to 32% while return on assets has increased from 1.5% to more than 30%. A2 now generates a higher net profit margin than Apple.

We have long argued that A2’s high margins would be competed away. This is, we reasoned, a commodity producer and high margins would invite competition. Returns would eventually fall. Only they haven’t.

There’s a reason for that, deeply embedded in the company’s business model.