Media Updates, page-7978

Forsyth Barr recently undertook channel checking visit in China. Dated 19 March 2021.

We recently visited 40 Mother & Baby stores in China, interviewing sales reps & store managers, analysing a2 Platinum's shelf presence, pricing, marketing and digging into foreign vs local brand preferences. Travel restrictions meant the channel checks were undertaken by our colleagues in Hong Kong. There is nothing to change our view that the opportunity for The a2 Milk Company (ATM) is material in offline channels in China, where it currently under-indexes, and we see ATM as well placed to continue to grow. However there are increasing headwinds evident in our channel checks (slowing industry growth and growing competition from local brands) which means execution is important and suggests a continued lift in marketing and investment in-store will be required by ATM (as reflected in our forecasts).

Five key takeaways

• a2 Platinum performance mixed across stores, skewed towards higher tier cities: Performance was cited as "strong" by 43% of respondents in Tier 1 cities visited, 57% in Tier 2, 40% in Tier 3 and 0% in Tier 4.
• a2 Platinum brand loyalty high: Sales reps from other brands said a2 Platinum customers were the hardest to acquire.
• Preference for foreign brands, but observable domestic shift: 55% of stores cited foreign brand preference (vs. 5% for local). Albeit there were multiple comments that consumers are increasingly seeking local brands (led by Feihe).
• ATM marketing low vs other brands. Well targeted, or not enough? Likely a combination. Marketing is an important driver of brand awareness (particularly while daigou is weak), and corresponded to higher sales performance in our sample. ATM intends to lift marketing spend in 2H21. Our forecasts also assume spend as a percentage of revenue meaningfully above historical levels.
• Industry growth solid, albeit some caution around outlook: 81% said IF sales have been either flat (44%) or growing (37%).
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Other notable points of interest

• a2 Platinum pricing consistent across stores, and unchanged on recent visits (October 2020 and September 2019).
• No observable inventory turn issues. With expiry dates fresh and ATM’s new lid at all stores visited.
• a2 protein competition still increasing. Enfamil a2 (launched late 2020) was available across 65% of stores visited.