Milking the China Market

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It is no secret the risks can outweigh the rewards for Australian companies trying to milk China's appetite for infant milk formula and other baby products.
That demand is not going away and the next wave of Australian entrepreneurs eyeing off the world's second largest economy is learning from the lessons of the trailblazers like Bellamy's which have stumbled in the region.
While the $240 million market capitalisation of infant formula newcomer Bubs Australia is dwarfed by Bellamy's and a2 Milk Company, it is catching up fast.
Shares in the company, which were already trading six times higher than their January listing price, jumped another 19 per cent on Friday after the company announced it had appointed Mandarin-speaking corporate advisor Dennis Lin as its new chairman. Lin replaces Alan van Noort who annoyed the company's investors by stepping down in January just a week after the company listed.

That did not stop the company forging ahead with its China strategy, announcing two partnerships giving it access to the country's online and bricks-and-mortar market. Bubs hopes to sell the goat milk infant formula product it sells in Australia via Coles in some of China's largest cities.

Lin's appointment adds to the list of talent within the company who have genuine insights into the opaque Chinese market, a skill set that many Australian firms have struggled to tap into.
This is crucial ahead of the changes to regulations covering China's infant milk formula market at the end of the year.
Wattle Hill, the private equity fund run by Jessica Rudd's husband Albert Tse who is well-connected in China, is one of the company's backers along with Ellerston Capital's Ashok Jacob and Kerry Stokes' family investment vehicle.
Charles Li, the chief executive of Bubs' Chinese distribution partner Brilite Nutritionals, says changing regulations mean around half the volume of infant formula in China is being sold in so-called "mother and baby stores" – a network of privately-owned stores usually run by small groups of family members.

He is advising Bubs on new infant formula regulations, which kick in next year, which mean the tins of formula lining the store shelves can no longer display any commercial marketing material.
They will just be plain cans with a brand name and a nutrition chart. This means producers will rely on clerks in the stores promoting their products to shoppers who will not have a lot of information to go on when selecting from up to 20 different brands on the shelves.
Li says Brilite has a team of trainers who go from store to store educating the clerks about the products it distributes.
He says Chinese mothers are fussier and often better educated about baby products than their western counterparts so will be hungry for information. Store clerks are also trained to give technical advice on mixing the formula and problems feeding.

Li and Bubs chief executive Nicholas Simms have been doing the rounds with investors in Australia over the last two weeks to explain the strategy.
Simms says it is important to have a partner which would enable Bubs to have control over the supply chain so they did not lose track of what was happening once the goods arrived at a mainland Chinese port.
Shares in a2 Milk Company have also been on the tear, more than doubling so far this year. The company now has a market capitalisation of $3.4 billion. Given its steep market valuation, a2 will have to deliver when it reports full-year results next week.