I know there's been a lot of speculation about A2M Management asleep at the wheel, too busy lunching etc and I know it's crazy but lets just imagine for a moment they are acting in the best interests of advancing the company and growing revenue opportunities (crazy I know but hear me out):
I've been looking further into US consumption and purchasing of infant formula and, in particular, the WIC (Women, Infants, Children) programme. Firstly, a few stats I've been able to find as well as some educated assumptions:
- According to the USDA Economic Research Service, 60-70% of all infant formula purchased in the US is purchased through WIC.
- Through fiercely competitive bidding and exclusive rights grants, WIC buys from manufacturers at steeply discounted prices
- WIC claims $1.5-2Bn of savings and spends around $1Bn on formula implying an average discount from manufacturers of around 60-65%
- In Australia, a $35 tin of formula sold at a 25% margin assumes a fully loaded (incl. transport, marketing, wages, rent etc) cost per tin of $30
- If WIC is purchasing at 65% discount to retail this equates to around $10-12 per tin.
- Every tin sold to WIC invites a loss of $18-$20
We can speculate on US Govt funded shipping etc but that won't really impact the reality above and it's more likely than not that the long held monopolies in the US will resume their power after November.
Bubs has jumped on the opportunity to provide formula to the US and all praise to them. There is little doubt they are losing a fair bit of money by doing so but they are essentially investing in marketing to raise their brand profile and that works for them. They may get some advantage from selling outside of WIC in the longer term but I'd put a low percentage chance on that.
A2 Milk is in a very different position to Bubs and I would rather they focus on driving revenue and increasing margin in the most appropriate long term channels. I'm not saying they shouldn't entertain selling formula in the US but only if the deal is right and it's a long term play.
Finally, a lot of people are saying management should communicate more - I'd personally love to hear more from them but for what benefit? So I can profit from short term trading and speculation? That's not their role, they are there to drive long term growth in the business and they have clearly stated when they'll provide updates. Any commentary outside of that just invites complaints from those who feel they were misled.
We will no doubt see ups and downs over the remainder of the year and beyond but I have a lot of faith (and investment) in the long term growth of this company. The fundamentals impress me and there are some good contributions on these threads with real data, charts and commentary, everything else is just distracting noise.
GLTAH
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