This Swedish company made oat milk cool in the US. Now it's eying China

The Swedish oat milk brand's popularity has exploded across the United States in recent years, as more and more people look for alternatives to traditional dairy products.

US demand for the company's products has far outstripped supply, prompting people to sell cartons of Oatly on Amazon (AMZN) for up to $25, more than three times the retail price. The market for cow's milk in the country is waning, expected to decline by 2.5%, while that for plant-based alternatives like soy, almond and oat milk is expected to grow by more than 5% this year, according to market research firm Euromonitor International.

"We were growing really healthy in Europe and we've been there for a while, but then we entered the United States and the craze started," Oatly CEO Toni Petersson said.

"We didn't know it was going to explode the way it did," he said.

Oatly's popularity in the United States, driven by coffee drinkers who love it in lattes, prompted the company to open a factory in New Jersey this year, its first outside of Sweden. It's opening another one in Utah next year, and one in the Netherlands to cope with demand in the United Kingdom and Germany.

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The global market for so-called milk alternatives is expected to top $18 billion this year, up 3.5% from 2018, according to Euromonitor. That's still a fraction of the traditional milk market which will come in at just under $120 billion globally this year.

Oatly expects revenue to more than double this year, to more than 2 billion Swedish kronor ($216 million). The company lost money in 2018, will likely break even this year and expects to turn a profit in 2020.

Despite struggling to fill orders in Western markets, Oatly is trucking ahead with an aggressive push into Asia.

Huge opportunities in China

Petersson was in Hong Kong for an Oatly campaign introducing a new Chinese character for plant-based milk.

The concept of oat milk is an unfamiliar one for many Chinese consumers, said Petersson.

Oatly created the Chinese character "just to kind of educate people and make it easier to understand what it is and how to use it," he said.

In Hong Kong, Oatly partnered with Starbucks (SBUX) and several local coffee shops. In the United States, it has tie-ups with high-end cafés like Intelligentsia, Blue Bottle and La Colombe.

Cartons of Oatly are also popping up in major grocery store chains, including Whole Foods, Target and Britain's Sainsbury's.

Petersson said about half of Oatly's growth comes from "people who are converting from cow's milk into oat milk."

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The 51-year-old executive attributes some of the company's success to a generational shift in shopping habits. People want to drink oat milk, he says, because they like the health and environmental benefits that come with consuming less dairy. Plant-based milk requires less water and land, and produces less carbon dioxide than the production of traditional milk.

"It's not just about the product," he said. "The bigger idea of making the world better, also who are you as a company, is a huge question among Gen Z or millennials."

It will be hard for Oatly to effect change if the company continues to fall short on supply.

Oatly faces rising competition

The company is already fighting off a competitor for business in the United States. Starbucks in the United Kingdom and Hong Kong uses Oatly. But when the Seattle coffee chain introduced oat milk in a handful of its upscale Reserve stores in the United States, it went with New York-based rival Elmhurst.

Petersson said Starbucks has not made a final decision on its oat milk partners. "We'll see," he said, when asked if the company was still in the mix to supply oat milk to the US coffee chain.

Starbucks said in a statement that it "does not currently have plans to test or expand" oat milk to the rest of its US stores.

Other big brands are starting to get in on the oat milk craze. Quaker Oats, owned by PepsiCo (PEP), and Silk, owned by Danone (DANOY), both launched oat milk products this year. Both companies have the advantage of extensive logistics and supply chains at their disposal, but Petersson is confident that Oatly — which has been in the business for 25 years — can hold its own.

"The competition is definitely going to increase," he said. "Our method of making oat milk ... has a lot of craftsmanship behind it. You can't just go in there and copy us."

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