China’s seemingly insatiable appetite for Australian infant formula appears to have come to an end.
Discounting has set in and Bega Cheese says its partnership with Blackmores to sell infant formula to China isn’t getting the results it expected.
Sales haven’t materialised as forecast when the joint venture started in January and the partnership has also hit strong headwinds in the Australia market.
Bega told its shareholders today that it plans a provision of $5 million to $7 million on inventory, representing the company’s share of the Bemore partnership.
A short time ago, Bega shares were down more than 13% to $5.64.
The share prices of other Australian infant formula players were also taking a hit. a2 Milk Company was down 4.7% to $1.90 and Bellamy’s 1.8% to $13.02.
“There has been a great deal of interest in the partnership between Bega Cheese and Blackmores,” executive chairman Barry Irvin told the AGM.
“It is a great example of two Australian companies coming together to leverage the strengths of both. The partnership’s first products in infant formula and growing up milk powders destined for the Australian and Chinese market.”
The 50/50 partnership was created on two sets of expertise: The long history and technical knowledge Bega Cheese’s subsidiary Tatura Milk has in making infant formula and nutritional powders; and Blackmores’ strengths in brand development and record of growth in the China market.
However, the mad scramble in China for clean and green Australian infant formula has eased. Newer players aren’t getting the traction of early adopters such as a2 Milk or Bellamy’s.
“We have great confidence in the value of the combination of the skills and capacities of both companies however there is no doubt that we have seen significant change in the nutritionals market since the partnership launched its first products in January,” Irvin says.
“While this time last year supermarket shelves were empty and customers in Australia and internationally were providing ever increasing orders, the combination of a regulation change in China, a supply response to the demand signals and the evolution of supply channels to market now sees significant discounting in the market place and signs of short term oversupply.
“This change in market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong headwinds for the partnership particularly in the Australian market.”
Irvin says Bega and Blackmores are keeping the business under constant review.
Bega in 2016 increased revenue by 7.5% to $1.2 billion and after tax profit by 132% to $28.8 million.
Blackmores, which has a very healthy business selling vitamins in China, is holding its AGM on Thursday.
In August, Blackmores said early sales of the joint venture infant formula had hit $9 million. Its share price was steady today at $112.55.
When the partnership was announced the company’s shares exploded above $200.