How daigous became a retail flood

A new breed of shopper is putting producers on notice.

Johnny Liu says he is struggling to keep up with demand. Picture: Aaron Francis.

When Johnny Liu came to Australia just over a year ago to study commerce at the University of Melbourne, he didn’t think for a moment of making pocket money stacking supermarket shelves, pulling beers or serving patrons in fancy restaurants.

Instead, he came with plans to start a small business. He did that and now he works 10 hours a week, has a turnover of $1500 a month and a profit margin of about 20 per cent.

It’s growing so fast he recently opened an online shop.

“In the first few weeks I got one or two orders a week, so I’d just go to a Chemist Warehouse or Priceline and buy no more than 10 products. But these days at least every Wednesday and every weekend I have to use two hours to just purchase things and get them delivered,’’ Liu told The Weekend Australian.

The 20-year-old is one of tens of thousands of so-called daigous, which means “buying on behalf of’’, in Australia. They buy sought-after products off the shelves of Australian chemists and super­markets and send them back to friends and family in China. The more sophisticated act as traders, buying goods wholesale, repacking them and sending them direct to homes in China. And while it is often individuals doing the buying and selling, their collective buying force they can literally make or break a business.

Take the contrasting fortunes over the past six months of Australian infant formula producers Bellamy’s and The a2 Milk Company. The former spurned the daigou at its peril. The latter embraced it and this week its value on the Australian sharemarket touched $2 billion for the first time.

Yesterday, Taiwanese-born public relations specialist Livia Wang hosted her second annual conference for Australia-based Chinese daigous in Sydney. About 500 people attended and Ms Wang said there was a waiting list of another 300.

It also featured a dozen special influencers, who are famous on social media in China, and helped local companies such as Manuka Health and Sukin skincare spruik their wares to daigous.

All are capitalising on the Chinese consumers’ willingness to pay inflated prices for safe and healthy Australian long-life food, drink, baby formula, vitamins and skincare products.

But not everyone is happy.

This week Woolworths chief executive Brad Banducci said he was at a loss for a solution to stop his loyal customers staring at empty shelves in their local supermarket because products had been bought and exported to China.

“It’s a very vexing issue for us as we end up out of stock for our poor customer. We used to be out of stock on infant formula for Bellamy’s and now it has moved to a2 milk and others,’’ he told The Australian and Visy’s fifth Global Food Forum in Melbourne.

“It really breaks my heart that our poor customer, who comes in to buy the product, finds it’s not there, it’s been exported.’’

But those who do business with the daigous say Banducci was speaking only of the impact on the frontline of his stores. They say the Australian retailers do nicely out of the daigou trade as pallets of stock are sold to daigous from loading docks and warehouses before they get anywhere near the supermarket shelves.

Blackmores chief executive Christine Holgate told the forum: “I think some of the China trade for Woolworths perhaps doesn’t go off the shelf at the front of the store but out of the back of the store. That’s just my assumption.’’

A2 Milk Australasia chief executive Peter Nathan described the daigou phenomenon as “a very positive force for retailers because they are buying products and exporting them legitimately to China. That has been beneficial to many businesses, small and large’’.

Wang says she understands Banducci but says Australian retailers and manufacturers can’t ­afford to be naive on the lucrative and growing daigou trade.

She says there are about 40,000 fulltime daigous in Australia, making it the largest market for this sort of buying and reselling in the world “by far’’.

“It is just a fact that demand is so strong that we don’t have enough supply. Don’t blame that huge demand … it’s time to ask how we can structure the market better to correct and to (have daigous) properly engage with brands directly so we don’t affect the Australian market,” says Wang, whose business eCommerce China advises Australian brands on their ­Chinese strategy.

Wang says between 1200 and 1600 “gift stores’’, which cater to daigou buyers, exist in Australia and she says the more brands and retailers wholesale to those sites, the less Australian shoppers will be affected by Chinese demand.

“Daigous don’t want to go to ­supermarkets. It’s very difficult. They will be discriminated against at the supermarket — they don’t want that — but they have to if they don’t have other proper business channels to pursue,’’ she says.

Even firms such as the Chinese-owned Van Diemen’s Land dairy company are using the daigou to send their Hobart-made milk to China. But losing the daigou trade can be especially damaging for companies with lofty sales forecasts that are based on the growth of their China business.

Tasmanian organic baby food and infant formula producer Bellamy’s was once one of the glamour stocks of the Australian sharemarket.

Last year, after uncertainty about the Chinese regulatory regime for infant formula and after the company tried to cut out the daigou by selling direct to Chinese consumers, it was caught with too much stock in China and was forced to discount. This robbed the daigou of their crucial price gap between what they could sell to Chinese consumers and what they could pay on the supermarket shelves in Australia, prompting them to abandon Bellamy’s products. The rest is history.

The company issued two profit warnings, lost its chief executive following a boardroom brawl and is now effectively controlled by a dissident and founding shareholder, former Kathmandu founder Jan Cameron.

And on Thursday, Bellamy’s revealed it could not guarantee its infant formula and toddler ­nutritional powder brands would be able to be sold in China from January next year, when a Chinese regulatory crackdown on the number of Australian infant formula brands licensed to be sold takes effect.

“The daigou can only sell what consumers in China want. Unless there is consumer demand in China, the daigou do not have a role to play. For them to do that they need to be able to make money through their margin,’’ Nathan says.

“And you need to make sure you don’t produce too much inventory to prevent the daigou making margin along the way.’’

A2 Milk is still to win over some sceptics, but its business is booming More than half of its revenue comes from sales of its flagship Platinum infant formula product.

In Australia, about 95 per cent of infant formula is sold either in supermarkets or pharmacies, compared to only 25 per cent in China.

One quarter is sold through mother and baby stores, another quarter through cross-border e-commerce channels (into bonded warehouses in China and then delivered) and about 27 per cent is sold through daigous.

A2 has bet big on the daigou and at the moment is reaping the rewards.

There is market speculation the company may need to further upgrade the bullish forecasts it gave at its half-year results presentation in February because its China sales are so strong.

The latest Aztec data for Australian supermarkets shows there has been a surge in infant formula sales over the four weeks, soaring 57 per cent between mid-February and mid last month.

The founder of private equity firm Wattle Hill, Albert Tse, told this week’s Global Food Forum that they key to a2’s success so far with the daigou was its supply management.

Tse is the husband of Jessica Rudd, the daughter of former prime minister Kevin Rudd, whose business, known as Jessica’s Suitcase, has more than 75,000 regular shoppers in China who buy 150 different products online.

Last year she became an ambassador for China’s biggest e-commerce platform, Alibaba, and has long been a proponent of the daigou, also known as the “suitcase trade’’.

“Keeping supply a little bit short of demand was a key to the success of a2 from an investor’s perspective. Bellamy ran out of stock and a2 were really in the sweet spot, in my opinion, to catch that market. Then Bellamy really experienced an inventory issue,’’ Tse told the Global Food Forum.

“I think once you have issues with controlling inventory, then your pricing suffers. And once your pricing suffers, then your brand is damaged. And having a brand means margin.’’

So small-time daigou like Johnny Liu are struggling to keep up with demand.

“I went back to China around December and a lot of my friends asked me to buy something for them, like healthcare and skincare products and milk powder,” he says.

“They love the products here and asked me to buy for them. And I was getting tired of explaining it over and over again to different people so I decided to open an online shop.”

Wang uses WeChat, the most used message app in China, to communicate with friends, family and other clients.

Sales driven by daigou have been steadily building over the past nine months amid concern about new regulations governing direct sales into China through cross-border e-commerce channels.

But last week, after a year-long review, China’s Finance Ministry said the current tax and regulatory framework governing direct online sales into China was set to remain largely in place when new rules come into effect on January 1.

Goods imported to China through this channel are now expected to be treated by the customs and quarantine authorities as personal parcels, like those sold by the daigou.

It was a relief for companies like Blackmores, Bellamy’s and other Australian exporters to China who want to use the cross-border e-commerce channel to sell product directly into China alongside the daigou trade.

Holgate this week described the decision as a really positive step, not just for Blackmores, but for Australia.

While her fledgling infant formula joint venture with Bega Cheese into China has had its problems because of concerns about changing regulation and lack of consumer recognition of its branding, she says you have to continue to plan for success in the world’s fastest growing economy.

“I wish we had not ordered quite as much (infant formula) stock as in the future forecast that the traders gave us but, you know, you have to plan for success — considered success — and I think that’s what we did,’’ she told the Global Food Forum.

“Things change but you have to take risks, considered risks. If you don’t, you can’t grow a business.’’