China marketing blitz pays dividends for A2 Milk

Infant formula maker A2 Milk’s marketing push in China has helped it post a double-digit jump in profit and allowed the company to ride out the zero-COVID lockdowns imposed on its most lucrative market.

A2 on Monday posted a 22.1 per cent jump in net profits after tax to $68.5 million for the first half of fiscal 2023, with earnings for the period rising to $107.8 million.

A2 Milk has grown its China business in the first half of the 2023 financial year.Credit: David Rowland

Its results were largely driven by a 43.5 per cent growth in China label sales. However, the overall Chinese market shrank by 12.5 per cent during the half, due to declining birth rates in the country.

A2’s shareholders weren’t impressed sending the company’s share price down 8.6 per cent to $6.49 at the close of Monday’s session.

David Bortolussi, the chief executive of the infant formula maker, said while a range of marketing and distribution efforts had driven greater brand recognition of A2’s brand within China and lifted sales, the daigou (reseller) channel of its English-label business suffered 39.5 per cent because of China’s zero-COVID lockdowns.

A2 Milk chief executive David Bortolussi.Credit: Adam Firth

“No doubt [the lockdowns] had a significant impact,” Bortolussi told this masthead.

He also signalled a reassessment of the role played by the daigou channel – a network of shopping agents who buy things for residents on mainland China – in driving A2’s future growth.

The daigou channel was crippled at the onset of the pandemic, which cut off international travel and stopped resellers from bringing infant formula product in and out of the country. In August 2022, the dairy giant had signalled a renewed focus on building the channel back to its heyday, but the recent lockdowns have forced yet another rethink.

“It was starting to show signs of stabilisation, but it did decline,” Bortolussi said. The company has ramped up engagement with daigou resellers and has created a dedicated marketing team.

“We’re absolutely fully engaged in supporting [them] and it’s still an important channel for us. It’s just at a market level for the reasons we’ve discussed, there’s a lot of change and shift going on ... We’re considering ways that we can kind of change the model for them as well.”

China is the Auckland-headquartered company’s most important market, representing nearly half of A2’s total revenue. However, birth rates in China have been declining for several years, meaning the business will have to fight for a greater slice of a shrinking infant formula pie.

“It’s really a share game because there’s no volume growth in the market,” Bortolussi said. A2 Milk holds just 5 per cent of the China market.

“When you look at where we play in the market and how well we are positioned with that brand and execution, I think there is still significant opportunity for us to grow over time. But in essence, it’s a share game ... because the market is not growing.”

E&P Financial retail analyst Phillip Kimber said that A2 Milk’s business turnaround was “on track” after swinging back to profit late last year, but said investors expected more from the company.

“Given a strong share price and only modest consensus upgrades – we expect the share price to be flat (maybe down little) post the result,” he wrote in a note to clients.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.