Chinese baby formula shake-up: Is the ‘white gold’ boom over?

ONCE a share market darling, baby formula maker Bellamy’s lost more than $500 million in market capitalisation when investors fled. What went wrong?

Bellamy’s boss Laura McBain says the company’s China strategy is sound.

THIS time last year, Bellamy’s baby formula was one of the hottest items being sold into China by the network of personal shoppers known as daigou.

The company was also a share market darling, thanks to its popularity with Chinese parents willing to pay a premium for the organic, Tasmanian-made product — in such high demand that supermarket shelves in Sydney and Melbourne were cleared of stock to be shipped overseas.

But all that changed abruptly when Bellamy’s announced that its profit guidelines had been too optimistic.

Despite more than doubling its year-on-year sales for Chinese online shopping event Single’s Day on November 11, the $93 million worth of revenue “fell short of expectations”, Managing Director Laura McBain confessed in a market update on Friday.

Investors responded by dumping Bellamy’s stocks, wiping 45 per cent off the share price on Monday — knocking more than $500 million from its market capitalisation in just over an hour. It came after Ms McBain and chairman Rob Woolley sold off a combined $5 million worth of company shares in August.

A joint venture between vitamin maker Blackmores and Bega Cheese, who paired up to supply baby formula to China, has also been hit; Bega shares fell by almost 30 per cent after it was revealed that sales of its product, too, fell short of expectations.

So is the “white gold” boom over? Has the Chinese fad for “clean and green” Australian products finally come to an end?

FICKLE WORLD OF THE DAIGOU

Bellamy’s performance on Single’s Day, Alibaba’s 24-hour online shopping festival, is only part of the picture, said marketing expert Ben Sun of Think China.

The product’s waning popularity with daigou shoppers has also contributed lower-than-expected sales.

Daigou are online traders who recommend and ship products to family and friends in China, adding a commission onto the retail price — including baby formula tins sold for as much as $200 as demand reached its peak.

They use local social media platforms to promote their wares, and command a broad influence, with 60 per cent of Chinese consumers shopping through dagoui.

And while catering to these channels is essential for any business that wants to sell into China, dagoui shoppers can be perilously fickle.

With zero brand loyalty and no obligation to companies like Bellamy’s, daigou are drawn to products that are not just in high demand, but which they can onsell at a hefty profit.

“You need to understand the dymanic of this model,” Mr Sun said. “For daigou, it is demand and margin-driven.”

He said the private sellers were now favouring A2 and Aptamil baby formula, which could be sold at a premium because stocks were running low.

Daigou margins had been hit across a number of health and supplement products, he said, as producers and distributors entered the Chinese market through traditional channels, making their stock available for cheaper on supermarket shelves.

But while their influence was vast, Mr Sun said it would be a mistake for companies to focus solely on daigou sellers.

He said brands needed to implement a “push-pull” strategy to lure Chinese customers, through pricing and promotional spend.

The “push” approach involved discounting stock, while the “pull” focused on increasing demand from within China through things like celebrity endorsements — which saw demand for Weet-Bix skyrocket after Sanitarium recruited Chinese model and reality star Alyssa Chia to promote their products on television, prompting fans to pay up to $50 a box for the iconic Aussie cereal.

CHINESE REGULATORY CRACKDOWN

Bellamy’s said a regulatory crackdown by the Chinese government was partly to blame for its sales woes, but that the impact would be temporary.

Chinese authorities tightened regulations of baby formula imports in October, in a bid to increase safety standards and minimise the risk of contamination. Just nine importers will be accredited under the new system, which will give local brands a stronger position in the market.

“Brands that are unlikely to gain registration are liquidating inventory at discounted prices, which impacts both imported brands such as Bellamy’s and the market overall,” Ms McBain said on Friday.

Dairy processor Murray Goulburn has blamed the import regulation changes for its decision to abandon a planned infant formula supply partnership with a US producer, saying it made the strategy “unviable”.

But Bellamy’s insists it is well placed to come out on the other side of the crackdown, which would allow it to expand its reach in China once accredited.

“The opportunity for Bellamy’s in China remains vast,” Ms McBain said. “Bellamy’s is currently stocked in less than five per cent of the potential distribution points in China. The company’s team is extending its online presence as well as broadening its offline, bricks and mortar presence.”

Only time will tell whether Bellamy’s strategy is sound. One thing is sure: There will be winners and losers in China’s baby formula game.

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