What now for Bellamy’s? Three key stages of the troubled infant formula company’s life

infant formula bottle bellamy's

Infant formula maker Bellamy’s Organic remains in a trading halt on Tuesday after a shocking fortnight for the business following the release of a less than impressive sales update that sent the market into a spin.

The business has been lauded for its growth since listing on the Australian Securities Exchange in 2014, but shareholders now face uncertainty, which is caused in part, analysts say, by changing food and drug e-commerce regulations in China, where Bellamy’s has found an enthusiastic audience.

Bellamy’s Organic was founded as a family business in Launceston in 2004, before being purchased by investor group Tasmania Pure Foods in 2007. But after a rapid 24-month growth spurt since going public, what now?

Here’s a breakdown of key events in the life of Bellamy’s since it listed in 2014

The journey and growth

An initial public offering of the Tasmanian formula business saw shares offered at $1 each, but the stock opened on its first day at $1.31 and was sitting at $12.30 on November 30, 2016, before the trading update started to cause problems.

At the time of listing, chief executive Laura McBain told SmartCompany the strength of the stock market debut “shows the confidence investors have in the Australian food industry, not just within Australia but in other countries too”.

The business and one of its partner, Tatura Milk Industries, received certification to sell organic baby formula into China in 2014.

Bellamy’s then joined the likes of Blackmores in its growth trajectory through sales in the Chinese market, increasing its revenue 95% between the 2014 and 2015 financial years, to $244.5 million. Profits increased 322%, to $38.3 million.

In 2015, the company said the demand for its products took it by surprise, at a time when local shoppers complained of formula being bought in bulk from Australian supermarkets with the intent of being sent to China for resale.

Read more: Blackmores and managing growth—lessons from the big end of town

The disappointing numbers

On December 2, Bellamy’s released a trading update to the market that resulted in 40% of its share price being wiped off over the following two days.

In the statement to the ASX, the company outlined “temporary volume dislocation in Chinese sales channels which are adjusting for regulatory changeover”.

This refers to the effects of the China Food and Drug registration requirements, which will start next year. Companies will be required to meet a strict requirements to continue selling in the country, and those that will not qualify are currently liquidating stock, which is affecting Bellamy’s sales, according to management. This has been flagged by analysts at major brokerage houses over the past few months.

Bellamy’s is continuing to grow, but shareholders responded swiftly because the growth is not at the scale expected. Management said that sales during the annual Singles Day promotion were “significantly stronger” that last year, for example, but still not at the level anticipated.

Between July and December 2016, the company’s revenue was up 24% to $93 million.

Revenue for the first half of 2017 is expected to be around $120 million, with a similar forecast for the second half of the year, according to management. This would put annual revenue at $240 million.

What now?

The Bellamy’s share price was sitting at $6.68—compared with $15.48 in December last year—before the business entered a trading halt on Monday afternoon at the request of the company, “pending a release of an updated announcement on the impact of trading conditions”. The request to the ASX was to put this at a limit of two days, or until the company delivered an announcement.

Analysts remain sceptical of a quick recovery in the share price of a company like Bellamy’s, and have outlined over the past week the significant challenges posed by China’s regulatory landscape, which is out of a business’s control.

For now, the market will await further further information from the company this week.

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A past employer
A past employer
4 years ago

Okay, so this is MY perspective on why industry analysts are wrong to
downgrade Bellamys and why those BRANDS that are approved as one of the
three from each CNCA approved factory will have a good future.
I
wrote this back in July in response to an article titled: Influence of
New Infant Formula Registration Regulation upon Industry & Market in
China. by a Chinese dairy researcher that seemed to think this set of
rule changes would lead to a big improvement in the China IF market by
addressing some of the real and serious problems that exist there. Bellamys is doing
okay in China, their sales are growing for heavens sake! but it is caught by the market chaos that is beginning
and this will continue for some time until most of the 2400 or so brands
that need to be cleared from the shelves in China have been removed from the equation. As a bit of context, there are a lot of fake brands, brand copies, under-the-radar imports and some 3000 brands that exist across the country. Many of these are imports but there are also a lot of Chinese brands.

I am not sure I agree with your conclusions! You state:

“1)
Chinese consumers are to benefit from a better-regulated market of
infant formula. Higher quality and safer products could be easily
accessed to with lower price but less sham advertisements.”

While
the genuine products might well be higher quality and safer, the demand
for the 600 brands that will need to replace the 3000 brands will put a
lot of strain on the suppliers to make up enough product to meet this
additional market demand. In any supply shortage, the price is forced
up and as the brands try to position themselves as premium quality, they
will have no interest in discounting or have any potential to supply
greater volume at a cheaper price. When combined with the relaxation
of the one child policy that will see a potential increase in the number
of Chinese infants in coming years, I fail to see how the prices will
fall. In such conditions the incentive for fake products and illegal
activity will increase significantly.

In the short term there
will also be market chaos. 2400 brands that need to be cleared from the
market will be desperate to sell their stock before it becomes illegal
and this of course will cut many prices significantly. It will make it
very difficult for the 600 brands to develop their marketing strategies
in the short term and then over a short period they will suddenly have
much less competition.
Another issue is that the marketing channels
within China are often based on established relationships and the
opportunity for many companies to make some income by providing product
will suddenly end. Will the owners of the distribution rights for the
600 brands suddenly offer their products to the networks of the 2400
displaced brands? I think not. So what will happen to the smaller
cities and towns in China where those 2400 brands may have a trusted and
reliable supply chain? How will the 600 brands suddenly be able to
establish their own distribution networks and keep prices at an
affordable level for the consumers? I see huge risk of product
shortage, price inflation, counterfeit products and industry confusion.
This in turn will motivate more of the middle and upper class market
segments to seek direct supply from overseas, regardless of cost so that
they have confidence in the safety and genuine nature of their supply.
One
more point that I think has been overlooked is the issue of dairy
intolerance and the need for special formulations. Some manufacturers
are currently offering products based on alternative feed-stock like
goat milk or camel milk. On purely economic grounds the manufacturer
will delete these lines in favour of supplying greater volumes to more
traditional cow-milk based formulations, so for those with lactose
intolerance, where will they get supply from?

Will the government
then adjust the policy? What happens to supply chains while the market
adjusts? Will smaller overseas manufacturers suddenly see an opportunity
to apply to have new brands offered to the China market? Will CNCA
visit and approve these alternative factories?

I see a lot of
confusion and difficulty for the consumers, the dairy industry and
regulators/officials that must interpret the rules. I see massive price
fluctuations and more incentive than ever for criminal activity. The
best thing to come out of this may be a move by more mothers to return
to breast feeding in the face of such uncertainty with formula products