Daigou were a huge part of the a2 business, Common Daigou were making $2-$6 a tin of formula in its prime that's what fed the beast. Based on my estimates this channel was worth $300-$400m to a2 last FY. When I mean common Daigou I mean daigou that would purchase from WWs, Coles, CWH and Pharmacy in large numbers and strip the shelves and they would have their own businesses or buy on behalf of corporate daigou. The added benefit of common Daigou were that they were like brand ambassadors aswell and would actively sell to their own network in China, and when you have 1,000's of these it is unpaid valuable marketing.
Yes a2 will shift volume to their network of Corporate Daigou but the pressure is on a2 management not to overload that channel as the how ecosystem can have bottlenecks and breakdowns (price drops) when there is to much stock in a particular channel. I have no doubt there was too much overselling last financial year causing the so called "pantry stocking" but now without common Daigou it will be hard to get stock moving again. And just on a side note it's not a great look having management sell a large number of shares several weeks before the announcement, I know there are reasons for this but I don't think the market saw to kindly to that.
People on this chart will see in my previous posts I did post about this last month and got shot down for serval reasons I wouldn't say I was 100% right but I knew things were 100% with a2 infant formula sales.
a2 will invest even more money in China which is a great thing as they need to attract more mothers to sustain growth and thats what it comes down to building market share it doesnt matter how many stores a2 is in its about attracting mothers and potential mothers to use the product. And its not an easy task especially when China government want to support local brands. All the focus needs to be in China Australian mothers just do use their infant formula which stating the obvious!!!!
CBEC and MBS stores will have great importance as they will pick up some of the Daigou sales but this channel especially CBEC with promotions and being very competitive acorss the platforms can drive pricing down. Margin is alot higher in ANZ IMF than China so I wouldn't be surprised to see a lowering of EBIT next results but these are the things they will have to sacrifice.
I know a few people say there is a huge opportunity in milk in the USA but this is a slow build and at the moment it's costing the business millions at the moment and even if they did get it to a $100m plus business in 2-3 years margin would be very low I don't think that is where you should look to see growth. Milk is a tough category it took Australian a2 milk at least 10-15 years to be where they are now and the USA is a harder market to penetrate as its very State specific.
NPD - a2 need to bring new NPD in the milk powder space and this due to one reason "MARGIN" is excellent and they need new growth drivers, a2 smart nutrition looks like its a slow build but they need more give the Chinese population more offerings in a2 powders.
For the hardcore followers of a2 follow the big sales days in China over the next 2-3 months this will give you an indication of how much demand there is for a2 infant formula and how sales are tracking.
Just before people start posting you dont even hold etc I was a holder for a few years sold my holdings last month and now I am just seeing how the next month plays out.
It's not all doom and gloom but the pressure is on a2 management and i don't think they will have it as good as they did before they will need to make sacrifices and they have the cash to do it! Me personally, I would like to see what they do in the next 6 months to see if I want to get back on board. The business will always make great profit but its where the next revenue drivers are going to come from is the key!
Also, a lot of the margin sustainability has come from price increases in infant formula I remember stage 3 used to be $26 from memory now on the shelf for $32 and I doubt COGs have increased comparability so will be interesting if this is another tactic
This is my two cents, if you want to shoot me down be my guest but I am just providing some of my insights.
A2M Price at posting:
$14.01 Sentiment: Hold Disclosure: Not Held
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