China still the main game for A2 Milk despite challenges ahead, says its chief executive

China’s infant formula market is going through an upheaval but it’s still biggest opportunity for growth, says A2 Milk chief David Bortolussi.

A2 Milk chief executive David Bortolussi.

The Chinese market continues to be the biggest single growth opportunity for infant formula company A2 Milk, according to chief executive David Bortolussi.

Speaking after A2’s annual meeting, he said the Chinese market faced challenges including the prospect of further falls in the number of babies being born over the next year.

But the hope is that the number of births will recover as the impact of Covid-19 on the confidence of Chinese couples began to wane.

Mr Bortolussi said the Chinese infant formula market was going through an extreme level of turmoil which he hoped would settle down once the adjustments were made. This included the introduction of new standards for infant formula and the requirement that all products sold in the market go through a re-registration process.

“The reality is that the China market opportunity dwarfs all the other opportunities we have,” he said. “We need to focus on China while we explore other opportunities over time.”

China is the biggest single source of revenue for the company, which reported a 10 per cent rise in revenues for the 2023 financial year to $NZ1.59bn, with an increasing shift towards sales of its Chinese-labelled formula.

While the total market in China for formula fell over the past year, A2’s revenue from China increased because of its increasing share of the market.

“The infant milk formula category in China is still over $30bn in retail sales,” Mr Bortolussi told the meeting. “We only have a 5-6 per cent share and it is our biggest growth opportunity.”

He said sales in China over the last year had grown by more than 8 per cent while the total market had fallen by 14 per cent.

“We are one of the top share gainers in a fiercely competitive market,” he said.

The requirement for re-registration of infant formula products had been a “massive challenge” for all suppliers in the market.

A2 Milk has just launched its new product in the online market in China and is now rolling it out into the broader market.

“There is no doubt there are significant category headwinds ahead of us with the cumulative impact of fewer newborns plus the pricing pressure during this transition process when products have to be re-registered,” he said.

“But we are executing really well. Our brand health (in China) has never been stronger, and we have gained significant market share in store and online.”

Shareholders expressed concern at the sharp fall in the share price this year, falling from $7.08 in February to $3.74 on Monday on worries about the outlook for the China market.

Outgoing chair David Hearn described the share price fall over the year as “horrible”, but urged shareholders to keep faith in the company’s strategy which he said would eventually be reflected in a stronger share price.

Mr Bortolussi expected conditions in the Chinese would be more challenging in the current year with further double-digit falls in the total market.

But he argued A2 was well placed to continue increasing its market share. Its plans for China include launching new products in the infant formula market as well as moving into the toddler and seniors market.

“Despite these headwinds, we expect to continue to gain market share,” he said. “Capturing the full potential of China infant formula market is central to our strategy.”