Milking it: Bubs’ new China strategy pays off

Bubs has changed its daigou, or Chinese reseller, business model, sending its revenue soaring.

Bubs founder and chief executive Kristy Carr at home on Sydney’s northern beaches. Picture: John Feder / The Australian

As Australia’s international border closures wiped out half the value of the country’s infant formula sector, Bubs chief executive Kristy Carr embarked on a bold new strategy from which the company is now reaping benefits.

Overseas travel bans sparked the collapse of the traditional Chinese daigou – or reseller market – that mainly involved students and tourists buying tins of infant formula in Australia and sending them back to China.

Rather than wait for the international border to reopen and the return of retail daigous, Bubs took its products directly to China for distribution among the daigous.

It is a strategy that helped Bubs slash its half-year loss from $12.9m to $602,000, with the company now looking to the US to shore up earnings further

The strategy also catered to the evolution of the daigou from relatively disorganised groups – which required little capital investment from company’s like Bubs – to corporate resellers and more structured and costly distribution. “We referred to it internally as daigou 2.0 and that’s where we really reimagined our supply chain and how we could communicate and connect with our end consumers,” Ms Carr said.

Overall, Bubs’ revenue soared 84 per cent to $33.63m, with corporate daigou revenue surging 276 per cent, exceeding pre-pandemic levels. Investors lapped up the news, with Bubs shares surging as high as 9.3 per cent to 47c before easing to a close of 45c.

The result underscores the importance of the Chinese market to Bubs, with executive chair Dennis Lin offering a quick response when asked if the company would be profitable without the Asian powerhouse.

“Why don’t we ask Twiggy (Forrest) if he’d still be a billionaire without China?” Mr Lin said.

“The world doesn’t work like that, it’s just business really. And we will always go where there is a market. Unfortunately, there are things that make that market tougher than before. But you know, we’ve shown that when it’s not easy we still go ahead and get it done.”

As well as facing increasing hostilities between Beijing and Canberra, with Scott Morrison framing China relations as a key election issue, China’s birthrate fell 11.5 per cent to 10.6 million last year, prompting a 5 per cent contraction of China’s overall infant formula market.

But like rival A2, Ms Carr says the premium category it sells into is still in growth, while Mr Lin says 10 million is still a lot of babies.

“You can either look at the drop or the fact that there are still 10 million babies a year,” he said.

“So China, despite the falling birthrate, is still a very, very big market. Even though it’s falling, we’re still talking about a market that’s nearly three times as big as the US which is 10 times bigger than Australia.

“The market will always be big. And when the market is big, that means there will always be a demand for a business and products like ours.”

Still, Bubs is diversifying, launching in the US – one of the world’s toughest markets – and navigating the necessary approvals with the powerful Food and Drug Administration. Mr Lin has based himself in Los Angeles, citing that California not only has a high birth rate, it also has a significant Asian diaspora who understand Bubs’ value proposition.

The company is planning a staged approach, launching in California then Florida and Seattle before other key cities and states.

“If we were to simply carpet bomb on this market, we’d run out of money before we actually make a business. But right now, everything is on plan and I’m very pleased that the team is doing a pretty good job.”

Bubs has received FDA approval for toddler milk products and is awaiting the tick for infant formula. American parents last year spent about $US4.3bn on infant formula – a 4.5 per cent rise compared with 2020. The market is expected to hit $US5.6bn by 2027. Despite the growth, only a handful of US-based infant formula manufacturers are registered with the FDA, and just one international company.

Meanwhile in Australia, Bubs’ infant formula sales jumped 31 per cent to become the country’s fastest growing brand, according to grocery scan data, and it now has a market share of 3.9 per cent.

“In addition to increased scale, the company delivered a group-wide gross margin of 38 per cent, ahead of expectations for this stage of our development,” Ms Carr said. “It’s an interesting time in the Australian retail sector as the border closures led to significant decline in the infant formula category, which is now about half the size of what it was.

“And so we were very pleased to be able to retain our ranging and increase our ranging in many instances across both the major supermarkets with our full scope formula line, as well as our ­organic grass-fed formula.”

Mr Lin said the company expected to deliver modest half-on-half growth in revenue.