Ex-A2 Milk boss Peter Nathan says Bubs ‘picked a fight’ with biggest customer and needs China’s daigou market

Australian infant formula brands lost millions of dollars from the collapse of the daigou market, but ex-A2 Milk boss Peter Nathan says it would be foolish to ignore Chinese resellers.

A2 Milk’s former Asia Pacific boss Peter Nathan says companies still need to engage with China’s daigou or reseller market as he eyes the top job at Bubs.

Bubs, A2 and other China-focused companies were burnt during the pandemic-fuelled collapse of the daigou market – with A2 alone seeing billions of dollars wiped from its market value.

Daigous are traditionally students and tourists who buy products in Australia and ship them back to China. Pandemic border closures halted the market and have prompted many companies to redirect their focus to China’s general trade.

For infant formula producers, general trade represents about 80 per cent of the overall market, and is seen as a way of delivering more consistent earnings. But entry to the market relies on gaining what is known as SAMR approval from Beijing – an increasingly difficult task as China clamps down on the foreign brands.

Bubs was planning to piggyback on a Chinese manufacturer’s SAMR registration but its board led by Katrina Rathie ditched that plan in favour of seeking to get its factory in Melbourne registered instead, a process expected to cost more than $1m.

Bubs has been trying to get SAMR approval at the Melbourne factory since 2019. Non-executive director Reg Weine said last week that coupled with permanent US FDA approval - which he expected an outcome by 2025 - a successful SAMR registration would fuel a 10-fold rise in Bubs’ market value.

“If we get the FDA approval and execute well in that market Bubs is probably worth 7x,” Mr Weine said. “If we reset China and build it out consistently over the next few years – and therefore demonstrate growth in the two biggest infant formula markets in the world – we will be worth 10x.”

But Mr Nathan and former Elders deputy chairman James Jackson, who have been put forward as potential chief executive and chairman respectively at Bubs if a board spill is successful later this month, criticised Mr Weine’s comments, saying it was more hope than strategy.

James Jackson has been put forward as Bubs’s potential chair if a board spill is successful.

Mr Nathan said it appeared Bubs was walking away from the daigou channel when it had no interim plan to fill that void.

He said compounding the problem was that the company had “picked a fight” with its biggest customer and daigou distributor AZ Global.

AZ Global has been blamed for a collapse in Bubs’ China earnings, after it failed to sell Bubs Supreme infant formula and is holding about five years’ supply in inventory. Bubs also says AZ has failed to pay it a $5.6m debt, while AZ hit back with its own claim, saying Bubs owed it more than $20m in refunds and credits. AZ has also joined the push to spill the board led by founder and sacked chief executive Kristy Carr and former executive chairman Dennis Lin. “They’ve created an enormous conflict with a very capable distributor,” Mr Nathan said of Bubs’ fight with AZ Global.

“The way to grow this business again is to make sure the most capable player in this space is re-engaged – which I know I could do – and therefore you can start to gain some momentum in that channel based on the fact that you have got tourists returning in big numbers, students returning in very significant numbers.

“So this opportunity, if properly presented and margins properly managed, would result in a very significant opportunity. But they (Bubs’ board) clearly don’t want to do that and they cannot do that without AZ Global, which is streets ahead of any other player. That will certainly be a priority to re-engage with that channel.”

While the daigou channel catapulted many companies to riches during the past decade, it has attracted criticism given it doesn’t offer infant formula brands much transparency over sales. The collapse of the market and subsequent dramatic fall in A2’s share price from $20 to less than $5 also sparked several shareholder class actions in Australia and New Zealand.

Bubs is expecting to deliver annual sales of $80m this financial year – a 35 per cent jump on FY23 – and a gross margin of 40 per cent. It is forecasting to become cashflow positive by FY25.

Mr Jackson said based on those estimates, Mr Weine’s comments about a 10-fold increase in market value if SAMR approval was obtained was “very unrealistic”.

“That would be a market cap of $1.5bn,” Mr Jackson said.

“You need sales of $330m to achieve that. Now the current sales are at $80m and they’re saying that they will be cashflow neutral in 2025 – that means they will have burnt through the existing cash reserves they have between now and 2025. So how on earth can they get a 10-bagger?”

Mr Weine said Bubs had cut its “monthly cash burn” from about $5m to $2m, citing an end to “widespread indiscriminate spending” and its growth plans were fully funded.

“I’m pleased to say we have now reduced annual operating expenses by circa $10m and we reallocated above the line and below the line expenditure to better match our strategic priorities,” he said.

“We must arrest the decline in shareholder value and get Bubs back on track. Capitalising on our first mover advantage in the US and resetting China are two significant components of our strategic plan.

“We have a clear competitive advantage in goat infant and adult nutrition, and we need to focus our efforts on this part of our portfolio.”

Meanwhile, Ms Rathie said: “The board is confident that we now have the right governance structure and operational teams in place and have identified the key people and strategic partners to execute with precision to deliver strong and profitable growth. We look forward to updating shareholders regularly on Bubs’ progress.”

James Jackson has been put forward as Bubs’s potential chair if a board spill is successful.