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How life for milk's market darling turned sour in China

There have been few bigger darlings of the Australian sharemarket than Bellamy's. 

Everything about the company has been a feel-good story. It's the small family-owned organic food company from Tasmania that grew to become a giant of the Chinese infant formula boom.

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China's crackdown stings Blackmores, a2, Bellamy's

While Blackmores will suffer the worst of China's new import restrictions, there's trouble ahead for dairy products.

Along the way it promised to "make a positive contribution to the wellbeing of this and future generations" by "promoting healthy eating practices in our children".

In 2013, chief executive Laura McBain was crowned Telstra's businesswoman of the year and has been feted in corporate and marketing circles. 

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But the fairytale ride ended last week after Bellamy's Australia announced a "business update" that wiped more than $500 million from the company's share price in a matter of minutes.

After trading as high as $16.50 this time last year, Bellamy's shares collapsed to a low of $6.80 last Friday. There has been no recovery in the week since.

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The collapse has left shareholders furious. The company's annual meeting was held just two months ago, and there was no indication of a major slowdown in sales.

Now serious questions are being asked about just how much the board and chief executive knew about the company's change in fortunes ahead of this week's announcement, and whether or not Bellamy's has fulfilled its continuous disclosure obligations.

Confidential supermarket and pharmacy sales data seen by Fairfax Media reveals that Bellamy's market share plunged from 25 per cent of the domestic infant formula sales in April to just 12 per cent by October. 

In dollar terms, that means Bellamy's went from earning one in every four dollars spent on baby formula in the country to just one in nine. 

Such was the slump, the company went from being the second-biggest player in the Australian infant formula market to fourth.

Despite the massive decline, Bellamy's failed to issue a single update to the market or investors that warned of issues that may impact the company's bottom line. 

 

According to company insiders, all of this was "well known" within the walls of Bellamy's corporate headquarters, as consumers switched to rival brand A2, but nothing was announced to the sharemarket. 

It's little wonder the ASX is asking questions. In a letter to the company on Tuesday, the ASX reminded Bellamy's of its disclosure obligations, and referred the company to Listing Rule 3.1.

It "requires a listed entity to give the ASX immediately any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities".

The ASX quizzed Bellamy's about when it became aware of the bad news. According to the reply, the company's monthly sales data was "considered" at a board meeting on November 22. The board then asked management to prepare a revised forecast for revenue for both the full-year and half-year.

Those updates were presented at a board meeting at 8am on December 2. The numbers were dire, and a market update was quickly prepared.

According to Ms McBain, despite more than doubling its year-on-year sales for the Chinese shopping event called "single's day" on November 11, the $93 million worth of revenue the company banked "fell short of expectations".  

The board meeting "concluded at 9.09am and the CEO finalised the announcement", the ASX was told.

According to company secretary Brian Green, who drafted the response to the ASX, "the company confirms it is in compliance with the listing rules, in particular listing rule 3.1".

The market quickly savaged Bellamy's. After opening at $12.09, the shares were placed in a trading halt. It re-opened at $8.50 at 10.26am, and closed the day at $6.85.  

Aztec data tells all

Every time a product is scanned and sold at a supermarket or pharmacy in Australia, that data by uploaded by a company called Aztec. It can provide real-time sales data to the supermarkets and its major suppliers, for a fee, but the majority of its customers buy weekly or monthly reports.

"I doubt there is a major supermarket supplier in the country that doesn't take a look at the Aztec data," said the chief executive of one of Australia's largest dairy conglomerates.

"In my view, it borders on the negligent not to, but even if you don't, your own internal sales data and warehouse data tells you what is going on. I doubt anyone could lose significant market share and not know about it."

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Aztec's scan data for infant formula is particularly accurate. More than 95 per cent of the formula sold in the country is bought from supermarkets or pharmacies, and more than half of it ends up in China.  

What the Aztec data shows for Bellamy's is that its sales woes began in April, and its woes are far greater than one bad "singles day".

At the end of April, Bellamy's controlled 25.6 per cent of infant formula sales in the country. The company was worth almost $1.2 billion, but all that was soon to change. 

Industry insiders say Bellamy's downfall stemmed from failing to understand and protect the interests of daigou – influential personal shoppers, many of which are recent Chinese migrants or international students, who buy infant formula off supermarket and pharmacy shelves in Australia and sell to their networks of customers in China via online stores and social media applications like WeChat.

Livia Wang, director of strategic consulting firm Access CN, said daigou accounted for as much as half of Bellamy's total sales in Australian supermarkets.

Unfortunately, she says, the company overestimated the ease at which it could maintain its sales growth to China, and then compounded its errors by slashing its prices on its direct online sales channels including JD.com and Taobao due to oversupply.

With daigou in Australia forced to discount their sales prices to remain competitive, their profit margins were eviscerated.

"Daigou felt like, 'I'm someone who helped you become famous, but now you ignore us'," Ms Wang said. "The reality is if they can't make money, it is easier to turn against the brand."

And turn they did, It's no accident that the downturn in Bellamy's sales is matched by a sudden surge in the performance of rival A2 Platinum.

With sales down, Bellamy's began discounting markedly on JD and Taobao mid-year, and pushed prices down further.

Unfortunately, it seems the brand damage was done. "It's often a fad with overseas products, once the novelty wears off then it's hard to win that back," said one daigou, who goes by the name "Cola", in a discussion with Fairfax Media on WeChat. "Most daigou now are selling other infant formula like A2."

In some cases, Bellamy's prices online in China are even cheaper than if bought off the shelf in Australia. The average price of Bellamy's range of infant formula is between $22 and $25 on JD, compared to $32 to $36 for rival brands like A2.

"We are concerned the cheaper pricing is creating a consumer perception of inferior quality," Citi analyst Sam Teeger, who predicted Bellamy's troubles in China back in October and maintains a sell call on the stock, said in a note to clients.

"We prefer to see Bellamy's holding or increasing pricing, and investing in … marketing or a brand ambassador as opposed to discounting its product."

Another to pick the decline of Bellamy's was Melbourne-based investment adviser Boyd Peters, managing director of Investment Company Services, who has been working in China since the 1980s.

In an email note dated October 28, just days after Bega announced its infant formula joint venture in China with Blackmores was failing, he warned his inner circle of clients of the impending doom awaiting Bellamy's in China.

"Bellamys are screwed," he wrote. "I can't believe the fund managers didn't see this coming. For Barry Irvin (Bega) to come out and say they didn't foresee the oversupply and discounting is laughable. Your local daigou knew this."

Mr Peters added: "A huge percentage of those in the formula, milk and vitamins game have absolutely no idea what is about to hit them."

Among them, it would seem, was the management at Bellamy's.

Between April and August this year, Bellamy's had lost 10 per cent of the Australian infant formula market to its rivals. But there was no announcement of  that decline when Ms McBain and her chairman, Rob Woolley, sold down their investment portfolios in August this year.

Ms McBain clinched a sale price of $14.55 a share for her parcel. Mr Woolley did a little better at $14.60 for nearly half his stake in the company, and the pair realised a 1450 per cent gain on their stock since the company listed in  2014.

"Laura and Rob will be investing in personal assets and supporting private family investments," the company said at the time.

Ms McBain's remaining shares in Bellamy's have fallen in value by $19 million since her big sale in August.

​BusinessDay put a series of questions to Bellamy's regarding the Aztec data on Friday. "Basically I can tell you now we are just not commenting, but thank you for getting in touch," said Kate Scanlon from corporate spin doctors FleishmanHillard.

Time will tell if Bellamy's shareholders remain so cheerful.

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