The organic status of Bellamy's could be behind its sales problems

A customer selects baby milk in a supermarket in Haikou, south China’s Hainan province. Photo: STR/ AFP/ Getty Images.

The key feature of Bellamy’s – its organic status which makes it so attractive but more expensive to infant formula buyers in China – may be behind its current sales problems.

Analysts believe that Bellamy’s infant formula is being pushed into the background in a wave of discounting in China brought about by regulatory changes.

The key question is: How long will this discounting, sparked by a change in regulations requiring formula makers to be registered, last?

The Tasmania-based makers of the organic infant formula seen as clean and safe in China first raised sales concerns less than three weeks ago.

Since then its share price has halved to $6.68, the company went into a trading halt while it worked out a more detailed report to the market, and then went into a voluntary suspension which was due to end this week but has been extended into January.

The key reason for the latest extension was so the company can continue “negotiations with key supplier/ manufacturers”.

The problem with stellar growth is being able to meet demand. In 2016, revenue from China/Hong Kong grew 331% to $62 million.

To help meet that demand the company this year signed a five year strategic manufacturing arrangement with Fonterra, the world’s biggest dairy exporter.

Fonterra’s Australian manufacturing plant at Darnum in Victoria was contracted to make a range of baby powders.

Bega Cheese, a key supplier to Bellamy’s, says it’s in discussion on supply arrangements and volume forecasts with Bellamy’s. However, Bega says its own profit guidance is unchanged.

When Bellamy’s issued the sales warning on December 2, the company said: “Bellamy’s will continue to experience temporary volume dislocation (our emphasis) until regulatory registrations are completed in China.”

Bellamy’s says other brands are liquidating their stocks at discounted prices as they go through the process of gaining registration.

This wave of cheaper brands is driving consumers away from Bellamy’s and other imported brands.

The company now expects first half revenue to be about $120 million but the second six months could be flat if this sales blockage isn’t cleared.

This would put full year revenue at $240 million, well below analyst expectations of about $330 million.

“Bellamy’s has experienced restructuring of the sales channels into China since the regulatory announcements,” the company said earlier this month.

“Management has worked closely with the various e-commerce networks to build stronger, more efficient routes-to-market that are expected to support increased demand following the regulatory change over.”

The company insists its premium organic offering is well positioned for long term opportunities in the China market.

However, Goldman Sachs analysts note that prices in China have been under pressure from regulatory-related disruption, tax increases and increased competition from other brands.

“We believe the majority of the downgrade is due to BAL losing share to other brands in China,” Goldman Sachs says in a note to clients.

Bellamy’s is at the top end of the infant formula market in China because of the higher costs of being an organic brand.

“We believe its ability to compete effectively in a falling price environment has been negatively impacted,” says Goldman Sachs.

“We also believe that its brand proposition has eroded given the popularity of other imported organic brands and the rise of other alternatives with more unique selling propositions (such as another Australian brand, a2 Milk).”

Other Australian dairy businesses aren’t feeling the same pain as Bellamy’s.

a2 Milk’s infant formula was a top three brand online at the Chinese site Tmall Global in November.

And, after seeing its shares sold down because of the Bellamy’s warning, a2 issued an announcement, confirming its product is still selling well in China, sending its shares 6% higher yesterday to $2.07.

“The company wishes to confirm that, consistent with the trends communicated at the annual meeting, the business continues to trade very strongly reflecting, in particular, significant year-on-year growth in its infant formula business.”

The Bellamy’s share price performance this month:

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.