Just before Christmas the company substantially downgraded its revenue guidance because covid-19 disruptions had impacted daigou sales revenue.
The daigou channel consists of Mandarin-speaking agents buying infant formula cans in Australia and couriering them to customers in China.
It accounts for half of total infant formula sales for a2MC, some $745 million in FY2020.
The company has been trying to diversify away from daigou, but it remains a profitable way to attract customers as new mothers come to need infant formula.
Craigs analyst Mohandeep Singh has called the daigou channel a double-edged sword for a2MC.
“The daigou channel has allowed a2MC to rapidly scale up its move into the Chinese market, however the flipside of this equation has been a relative lack of control over the supply channel,” he said.
It appears the loss of sales due to the disruption in the daigou channel has not been offset by increased sales in other channels.
Singh says the outlook is uncertain given regulatory risks, political tensions and closed borders.
A2MC seems to be facing declining demand and loss of market share overall and it is unclear when or if this will reverse.
Forsyth Barr senior analyst Chelsea Leadbetter says the sharp and protracted downturn in daigou sales was not being made up in other channels.
While the much lower recent share price made a2MC a good punt, the forward path was not likely to be smooth.
“Channels to market are opaque, the geopolitical risk is higher and the company’s credibility is dented,” Leadbetter said.
A rebuild in market confidence will take time, but a2MC does have a large cash balance that could be used for a share buyback.
She says a2MC appeared to react to a downturn in daigou sales by putting more products into the cross-border e-commerce alternative channel, but this made the diagou margins worse for the sole operators.
“Price discounting on some platforms created even more pressure on daigou margins,” she said.
The daigou practice began in the wake of the melamine horror in China in 2008, when expatriate shoppers in Australia and New Zealand bought our unadulterated infant formula cans and sent them to family, friends and contacts in China.
NZ’s Ministry of Primary Industries (MPI) then made the exporting of infant formula in any quantities subject to export licencing, which cut out the private operators.
With the huge growth of trading websites such as WeChat, the Australian diagou trade expanded and became semi-structured, from which a2 infant formula sales soared.
Before covid-19 impacted travel there were an estimated 150,000 daigou traders in Australia, a guess that appeared to include pretty much every student supplementing their allowances and funding their studies.
Larger internet operators bought supplies from Australian wholesalers such as Chemist Warehouse, where a2 Platinum Toddler stage 3 is currently advertised at $33.49.
But a potential customer comments that it is always out of stock.
The going rate for a 900g can in China is equivalent to A$90, so a good margin can be made after the freight is paid.
Daigou traders don’t have a good public image as they are often blamed for stripping supermarket shelves of the latest must-have products and even causing panic buying episodes.
One Australian commentator said, “these shelf clearers are a highly organised and malignant global syndicate.”
Another consumer said: “Sorry a2 and other organisations like yourselves, but I’m absolutely grateful that hordes of shoppers aren’t descending on supermarkets and stripping shelves, leaving regular consumers desperate to get a normal volume of their preferred product.”
One NZ sales consultant in China said a2MC was being challenged by other a2 products and differentiation would be difficult in the future.
“Daigou is good for small companies just getting started, but a big company like a2MC shouldn’t be using it any longer,” they said.
The Chinese government didn’t like losing the sale taxes or import duties and could crackdown on the trade in many different ways.
“It can say it doesn’t want infant formula to come in through the post for whatever food safety reason,” he said.
He thought that travel for education was not going to resume quickly and that other destinations than Australian would be preferred.
