It is surprising how quickly a company’s fortunes can change; the A2 Milk Company (A2MC) played a dangerous high-stakes game, relying heavily on an informal network of Chinese students and personal shoppers to distribute much of its product into China. It’s a game that has cost other companies dearly in the past.
Daigou, buying on behalf, is a network of Chinese nationals living in or visiting Australia who buy local products and ship them back home to groups of friends, customers cultivated via the social media app WeChat. It is not uncommon for Chinese tour groups to visit stores like the Chemist Warehouse and buy products in bulk, much to the ire of locals.
Such is the demand from China for Australian packaged products that in 2019 a Sydney store owner was found to have stockpiled 4,000 1kg tins of baby formula ready for export.
Covid-19 has stopped daigou in its tracks with Chinese students and tourists no longer able to visit Australia now or for the foreseeable future. In December A2MC slashed its full year earning forecast from $1.8 billion to $1.4 billion and saw its share price dive by 23%, placing the blame squarely on interruptions to the daigou channel.
A2MC’s misfortunes are not, of course, confined to themselves. As a shareholder of Synlait and one of their largest customers, they are dragging Synlait’s share price and profitiability down with their own.
Daigou grew from a handful of personal shoppers to a multi-billion-dollar backchannel into China in the wake of the 2008 baby formula scandal, a disaster which left 300,000 Chinese infants sick. Confidence in local supply never recovered and demand for Australian product in the original Australian packaging skyrocketed
The daigou channel has been the making and the breaking of more than one publicly listed company in Australia. New e-commerce regulations introduced by China in 2019 saw many smaller daigou purchasers exit the market due to more onerous paperwork. Some goods attracted higher safety requirements than had been needed before and were also subject to stricter tax requirements, regulations that had an immediate negative impact on vitamin maker Blackmores. Blackmores, who had been experiencing double digit growth on the back of daigou transactions, saw sales immediately slump and their share price drop by 23% while $531 million was wiped from their valuation, setbacks from which they never fully recovered.
Analysts at the time were concerned A2MC would experience the same troubles as Blackmores, but they were quickly assured that the new Chinese laws didn’t affect baby formula and business continued apace.
A similar fate befell Bellamy’s Organic Infant Formula in 2017. After a meteoric rise on the daigou wave and taking 21% of the Australian market share, Bellamy’s started discounting their infant formula through their official online Chinese channels. Bellamy’s had a strong presence on online retailer Alibaba and began participating in their famous “Singles Day” sales. Daigou shoppers, who didn’t have access to these discounted prices in Australia, found their margins slashed and abandoned Bellamy’s Organic in favour of A2 Platinum infant formula.
Bellamy’s, who were suffering from other issues as well, never recovered from being deserted by their daigou shoppers and have now been taken over by the Chinese Mengiu Dairy Company. The A2MC stepped in to fill the void and have been reaping the benefits ever since.
Given the tensions between China and Australia and the uncertainty over when international students will return it remains to be seen if the A2 Milk Company can buck the trend and survive the collapse of its daigou channel.
A2MC once had a unique, premium product but now they’re facing stiff competition, with nearly every dairy company with a presence in China putting A2 products on the shelves as fast as they can to take advantage of the sudden void.
Once Chinese consumers abandoned Bellamy’s Organic in preference for A2 Platinum they never came back, it is not yet clear whether they’ll return to the A2MC fold once the Covid induced dust finally settles.
