DON'T PANIC A2 HOLDERS, YOU ARE IN A BETTER SPOT THAN MOST

Baby formula market

With thepandemic hitting the world it is interesting to see what impact this is havingon the baby formula market in Australia.

The Retail Australianbaby formula market is in significant decline. The decline is a simple factorof the Daigous no longer being able to play in the baby formula space. If youvisit almost any retail or pharmacy store across Australia the shelves arepacked with products, almost zero out of stocks and unfortunately with somebrands they have exceptionally low used by dates which will ultimately end upas landfill.

Most of thestock that was purchased in the Australian retail and pharmacy outlets waspredominately for the Chinese market. The current decline has shown the realmarket size of the baby formula market in Australia.

The goodnews is that Australian mums no longer have the stress of shopping at multiplestores to find their favourite product for their bubs. So, what has happened tothe Chinese babies that relied so heavily on the Australian Daigou? This israther simple; China has systematically acquired strategic overseas brands orforged partnerships with brands that Chinese mums trust and are happy topurchase, the hope for China is that they will control or partly controlbusinesses that are not linked to the manufacturing of the 2008 Melaminescandal, that scandal will become a distant memory.

Considerjust a few positive changes for China, like the acquisition of the Bellamy’sOrganic business and China forging strategic partnerships with reputable brandslike A2milk via its 75% buy out of Mataura Valley Milk, which is 82% owned by aChinese state-owned enterprise.

Mataura Valley milk not only has new processing facilities but also has access to milk, which makes A2 milk completely vertically integrated. The A2 milk deal with China’s Animal Husbandry Group is a smart strategic move that almost guarantees A2 milks survival in the extremely competitive Chinese market, but more importantly for China it gives Chinese mums comfort that they can still buy their favourite Australian and New Zealand brands which are the most favoured by the Chinese community.

So, willthe Daigou come back? Whilst ever the international borders are closed and theincoming and outgoing flights to China are at an absolute minimum, the Daigoussupply chain model is broken. A big portion of Daigous are Chinese students whoare no longer coming to Australia and a big part of their supply chain is usinginternational flights to export stock. Both have stopped. In time the Daigouwill be back but with China reorganizing direct access to reputable brands theDaigou model will be at realigned levels and the force they once were will bediminished.

So wheredoes this leave the wannabe infant formula businesses that banked their entirebusiness plan on the Chinese market? These businesses will struggle forrelevance in the declining Australian market, they will struggle to be given alicense or will struggle to hold a license to operate in the Chinese market.

Is therestill an opportunity in the baby formula market? Yes, but no longer is it goodenough just to be Australian and no longer is it good enough to just beorganic. These businesses need to rethink their business model. My concern is thereis not one wannabe baby formula business that I look at that has not onlypicked the changes but adjusted to the new world order of baby formula. Thebaby formula business is extremely expensive, extremely competitive, and nowvery crowded with desperate brand owners. Many infant formula brand owners thatfind themselves with low use by date on shelf will also have the added lossesof out-of-date stock on hand which will need to be written off. The wannabe babyformula businesses are bleeding money and have done for an awfully long time.Tough decisions need to be made in these businesses as the old-world thoughtsand millions of dollars of losses simply cannot continue. If these businessesdo not change, they will simply die, and along with that death will be millionsof invested dollars and shareholders wondering what happened to the promised riversof gold.

AS ALWAYS DYOR