Bellamy’s is a prime example of how Australian companies can capitalize on China’s growing demand for high quality Australian products. Recently it has also become an example of how carefully Australian companies must understand the Chinese market. After growing to around $12 a share from $1.69 a year earlier, the infant formula maker recently took a tumble and entered a trading halt in mid-December at $6.68 a share, and has since reopened and fallen as low as $4.
The sudden volatility in the company’s share price can be explained in one word, China. In recent years, several food safety issues in China have led to consumers looking abroad for infant formula products to ensure quality and safety. This change in sentiment has largely been what led to the growth in Bellamy’s infant formula business. But recently, some unfortunate regulatory changes in China aimed at tightening the industry, combined with less than expected demand, has caused problems for the company.
Bellamy’s is not the only company that has experienced the power of the Chinese consumer. The entire infant formula industry in Australia has experienced large demand from China, subsequently leading to large revenue increases. Blackmores saw a 632% increase in its China revenue from $7.6m in 2015 to $48 million in 2016, largely driven by infant formula. The A2 Milk company also saw their Chinese revenue rise 932%, from $3.91m to $36.45m over the year.
Much of Bellamy’s success has been driven by what is known as ‘Daigou’. These are Chinese that buy products in Australia on behalf of others and then send the products back to China for consumption. This practice has grown in popularity over the past couple of years, causing products like infant formula and some supplements to be in short supply across the country.
While the media coverage in Australia about the Daigou trade has largely been focused on the economic incentives of the Daigou to sell Bellamy’s product, it is crucial to understand the role of the Daigou as social influencers. Referrals from people you know and trust go a long way in a country where there is often a cynicism of large institutions. This in turn can drive many household purchasing decisions. For many Chinese consumers, they often prefer to purchase products from Daigou and similar channels rather than directly from the company, and Bellamy’s is no exception. A turning point in this story was last year when the company made the strategic decision to change its route to market by focusing on selling directly into China through resellers, rather than indirectly through channels such as Daigou. While they may have made this decision based on any number of reasons, it shows a lack of understanding about the Chinese consumer and how they prefer to purchase this product. The subsequent decline in the business has shown just how reliant Bellamy’s was on the Daigou trade.
As a result of the issues surrounding Bellamy’s, other competitors in the space have had to justify their own China strategies, citing their ability to handle the regulatory changes and their continued brand efforts in the Chinese market. Despite recent events, the Chinese infant formula market is still huge, and demand is not set to decrease anytime soon, particularly with the lifting of China’s one child policy. This market still offers the great opportunity for adaptable infant formula companies over the long term.
All of this paints a bigger picture about how powerful and at times, overwhelming, the Chinese consumer can be to Australian companies, and it really emphasizes the absolute size and scale of the Chinese market that is sometimes often hard to conceptualize for those in the west. In just a couple of years, the Chinese consumer has taken the Australian baby formula industry from relatively small to one of the best performing industries in the country. At the same time, failure to fully understand the Chinese consumer and the preferences of those you are selling to can lead to companies falling just as quickly as they rose.
At MAI Capital, we work to bring Australian stories to China. We see the importance of understanding Chinese customers and working with the right strategic partners to help guide people through the Chinese market. We are always looking to engage with early stage companies with an eye to China within our focus sectors: Health, Agriculture, Education, Logistics and Clean Technology.