Keith Woodford says that Bellamys infant formula woes has lessons both for New Zealand 's organic dairy farmers and the broader New Zealand infant formula trade with China

Keith Woodford says that Bellamys infant formula woes has lessons both for New Zealand 's organic dairy farmers and the broader New Zealand infant formula trade with China

By Keith Woodford*

For the last two years, Bellamy’s organic infant formula out of Australia has been one of the two rising stars of the Chinese infant formula market. The other has been ‘a2 Platinum’ produced here in New Zealand by Synlait for The a2 Milk Company (ATM). 

In recent weeks, the Bellamy’s business has run badly off the tracks. This has sent jitters more widely through the infant formula industry.

First, there was a cautious market guidance release by Bellamy’s on 2 December, and the Bellamy’s share price immediately crashed 40%. Then on 12 December, Bellamy’s asked that its shares be suspended from trade for 48 hours while they assessed their position. This suspension has subsequently been renewed twice and currently runs through to 13 January 2017 while further assessment occurs.

It is now apparent that Bellamy’s had been losing market share for some months, but things really went awry during the second half of November. Bellamy’s has blamed regulatory disruption and competitive price-cutting in China for their problems.

The market-fear contagion spread rapidly to ATM investors, and ATM shares suffered a reactive decline in early December approaching 20%. However, ATM has assured its shareholders that its ‘a2 Platinum’ sales continue to grow strongly and that all is well.  Increasingly, it is looking as if many of the problems are indeed specific to Bellamy’s and perhaps some other companies to a lesser extent, but that there continue to be winners as well as losers. The challenge is to identify who fits into each category.

There are three key reasons why Bellamy’s misfortunes are relevant to the New Zealand dairy industry. The first is that it demonstrates yet again that value-add dairy is not an easy game. Strategies can quickly come apart at the seams without all of three key elements: a sustainable point of difference, strong marketing   and coherent logistics. Even apparently successful fast-growing businesses can get the speed wobbles.

The second reason is that although Bellamy’s is Australia-based, it has important contractual arrangement with New Zealand-based Fonterra. Specifically, Fonterra has contracted with Bellamy’s to be a key long-term processing partner at Fonterra’s Darnum Park facility in Victoria.  Those arrangements are now looking in jeopardy.

Third, Fonterra’s new-found enthusiasm for organic milk here in New Zealand has in all likelihood been built on assumptions that the Bellamy’s business will continue to thrive.  Without Bellamy’s and its China market for organic infant formula, the international demand for New Zealand sourced organic milk powder looks shaky.

Obtaining information on market shares for infant formula in China is fraught with difficulties. This is because there are multiple channels.  There are Chinese supermarket channels which are in major decline. There are ‘mother and baby’ stores, which have become increasingly important as ‘bricks and mortar’ outlets.   And at the top-end of the market, online sales are the most important of all. 

Online sales include both formal and informal imports. The formal channel is regulated by China Customs and shows up in Chinese statistics. The informal channel, also known as the ‘grey trade’, does not show up in these Chinese statistics.

This grey trade is managed by overseas Chinese who buy product either wholesale or retail in overseas countries, and then ship it to customers back in China in packs of up to 10 tins. These packages are able to pass through with minimal formal documentation. The expatriate Chinese buyers who manage the trade are known as daigou, literally ‘buyers on behalf of’.

Describing the daigou business as ‘grey trade’ can lead to false assumptions. For example, the Chinese authorities know precisely what is happening and they are happy to let it proceed, at least in the meantime. It provides competition in the market place and stops price gouging by the registered importers.

This daigou activity is a major reason why infant formula prices in China have been reducing rapidly over the last 18 months, which is precisely what the Chinese Government has been wanting to achieve. Prior to that, the mark-ups in China were outrageous.

For both Bellamy’s and ATM, the daigou trade has been fundamental to their growth. For a while, part of this trade was functioning from New Zealand, but that has largely ceased. This is because New Zealand now allows only registered exporters to send infant formula overseas. Accordingly, the trade from ‘down under’ now focuses on sourcing from Australia.  In this regard, Australia also presents better opportunities because there is no GST on infant formula.

In the last three years, supermarket and pharmacy sales of infant formula in Australia have trebled. Now, we know that Australian women are not suddenly having a lot more babies, and we also know that there has been no sudden move away from breast-feeding. The explanation is that all of this extra infant formula is going to China.

By early 2016, Bellamy’s had achieved a 21.6% market share in Australia (Aztec supermarket and pharmacy commercial data), up from about 10% market share when the company went public in July 2014.  Based on an Australian market that had trebled in size - on account of daigou purchases – together with additional sales to China through the formal system, the overall Bellamy’s growth had been about six-fold. The shares that were offered for AUD $1 back in August 2014 rose to over $15 at the end of 2015. The market capitalisation of the company exceeded AUD $1.5 billion.

From March to November 2016, the shares bounced around between $15 and $10, but the market remained largely unaware that Bellamy’s was losing market share in Australia – dropping to 14.9% by November from 21.6% in March, according to the Aztec data. Bellamy’s gave no indication at its AGM in late October of anything that was astray and the shares rallied above $12.

However, it is now acknowledged by Bellamy’s that their own China online store was discounting products in early November. This included ‘Singles Day’ (11/11; i.e. 11 November), which has come to be a massive day for China purchases for all retail products. It would therefore seem that, at least by early November, Bellamy’s knew it had excess inventory.

This suddenly left the daigou who were purchasing at non-discounted prices in Australia at a competitive disadvantage. In mid-November, they shifted their allegiance to other brands. Accordingly, it would seem that Bellamy’s, by not properly factoring in the importance of the daigou, shot themselves in the foot.

When the share market began to recognise what was happening, the response was fierce. CEO Laura McBain gave a telephone conference to analysts, but that simply raised more questions. The answers McBain provided were fluffy answers such as that she was ’happy’ with the overall situation. Subsequently, there were also many negative online investor comments about the Chair and CEO of Bellamy’s having made substantial sales of their own shareholdings as recently as August. Did the Chair and Manager know something that the market did not know? 

The subsequent and ongoing suspension of the shares is extraordinary. Until there is clarification from the company as to the extent of the pickle they are in, then any judgement as to ‘where to from here’ can only be speculative.  

On perusing the original prospectus issued by Bellamy’s in 2014, I note that Bellamy’s put great weight on the fact that their products were 100% Australian-made and 100% organic-certified. This was their point of differentiation. What was never stated was that all the organic milk powder ingredients were imported, much of it from Europe and most likely since then also from New Zealand. So yes, the product was Australian made but the key ingredient was not! And there lies an Achilles heel of a non-transparent supply chain to go alongside the bullet-wounded foot.

It seems that the greatest short term beneficiary of Bellamy’s has been ATM with its ‘a2 Platinum’. Between March and November, while the Bellamy’s ‘Australia plus daigou’ market share was sliding, the ‘a2 Platinum’ market share in the same market rose from 15.7% to 24.8%. A somewhat enigmatic announcement from ATM CEO Geoff Babidge just prior to Xmas, that ATM continued to experience strong ongoing growth since its November AGM and was not experiencing regulatory barriers, would suggest that the ATM market share may well be heading even further north.  

Although I did not foresee the magnitude of Bellamy’s problems, I am not at all surprised that they have stuck difficulties. Some months back, I wrote that New Zealand organic dairy farmers should be watching Bellamy’s closely, because their New Zealand organic farming future was in all likelihood dependent on ongoing success at Bellamy’s.

In private communications with prospective organic dairy farmers, I went further with advice that they should be cautious of becoming reliant on major ongoing price premiums. And lying behind that was my own knowledge that Bellamy’s was reliant on non-transparent supply chains for imported organic powders of which the broader consumer market seemed unaware.

I have also written regularly that there will continue to be big winners and big losers in infant formula. In China, the important products are not only the Stage 1 and Stage 2 products that dominate in domestic New Zealand and Australian markets, but also Stage 3 products for one to three-year olds. Indeed Stage 3 is a considerably bigger market than the combined Stage 1 and 2.  

Linked to this, the New Zealand industry has not recognised that imported infant and toddler formula is now much more important in China than imported whole milk powder (WMP). The Europeans dominate the former which is experiencing rapid growth. In contrast, New Zealand dominates WMP imports for which the numbers bounce around but with minimal overall growth in the last four years.

The broader challenge now in New Zealand is that many of the stable doors have been left open and swinging for a long time. It is very hard to regroup once the horses have bolted and galloped over the horizon. 

*Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.  His articles are archived at

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Jan Cameron strikes at Bellamy's board
The Kathmandu founder wants to spill the board of the troubled infant formula maker and install herself and allies as non-executive directors.

Jan Cameron has a track record of great success with start-ups (Alpsports, Kathmandu and Bellamy's) but less success when she has invested in established companies. I used to buy gear from her back in the early 1970s when she started out as a one person business, manufacturing outdoor clothing in Chrischurch, and I still have some of that gear, although now essentially 'pensioned-off'. (The gear, not me.) According to recent press reports, Jan retains about 2% of Bellamy's but has support from major shareholders representing 35% of the share register. She has also reportedly indicated willingness to fund short term working capital for Bellamy's. Jan has a reputation of being very determined and I am sure she 'means business' with this latest move. The key issue going forward will be whether there are some fundamental flaws in the business model which will constrain growth. They may need to refocus on baby food to complement the infant formula if they are to move back into a growth mode.
Keith W

This is one of the strangest moves. Who runs what? Seems the wrong people are for the chop.

Bellamy's CEO Laura McBain save in bizarre shareholder revolt

Kathmandu founder and former BRW Rich Lister Jan Cameron is gearing up for another fight.
Kathmandu founder and former BRW Rich Lister Jan Cameron is gearing up for another fight. Fiona Cruthers.

Jan Cameron's bizarre bid to roll selected board members of Bellamy's Organic has only added to the stink surrounding the troubled infant formula company's dramatic fall from grace.

Cameron, a Tasmanian entrepreneur who has never been afraid of a fight, is driving a push to roll four of the company's independent directors. The Kathmandu founder is part of a group of shareholders claiming to represent 35 per cent of the company's investors, which is seeking an extraordinary general meeting to dump the four directors.

The move is not your usual shareholder revolt though. Most board spills are designed to remove the key decision-makers. In this case, Cameron wants to retain chairman Rob Woolley, chief executive Laura McBain and the other senior executives at Bellamy's.

It is safe to assume the four directors Cameron wants removed – Launa Inman, Patricia Mann, Michael Wadley and Charles Sitch – have been asking management some tough questions lately. The four directors all have a solid track record and many serve on other boards so they know what they are doing. Inman is the former chief at Billabong, Mann is an ex partner at KPMG who sits on the boards of Event Hospitality, Ridley and Allianz, and Shanghai-based Wadley advises investors in China. The motivation for removing them is a move to protect McBain.

Bellamy's chief executive Laura McBain is under pressure. Bellamy's chief executive Laura McBain is under pressure. Bret Salinger Cameron and her backers at the mysterious entity known as Black Prince Private Foundation believe their nominated directors can do a better job than the current board but they also want McBain to stay. This is a fair call when you consider she grew the company's revenues from $3 million to $240 million. But does that excuse the company's appalling disclosure and the issues it now faces around supply contracts that have already wiped more than 40 per cent off the company's profits?

Cameron has not been clear in media interviews about what is motivating the push to roll the directors and why it is happening now when they will have a clearer idea next week about the company's financial position, when Bellamy's shares emerge from a trading suspension.

.Does Black Prince know anything that other shareholders do not? Cameron also told The Australian Financial Review she offered to help plug an anticipated shortfall in cashflow. Woolley will need to explain what conversations, if any, have taken place with Cameron on that issue.

Close-knit business community: It is important to understand that many of the players in the saga surrounding Launceston-based Bellamy's know each other. This is Tasmania. Everyone knows everyone, particularly in the close-knit business community. Many of the key players have neighbouring "shacks" (holiday homes) on the state's east coast and know each other's families. Tasmania's geographical isolation does not exclude Bellamy's from operating under the same rules that any other ASX listed firm has to.

Cameron and Woolley, whose family is well known in Tasmania and is an advocate for more local investment in agriculture, go back years. They have holiday homes on the state's east coast and have worked together on efforts to keep dairy group The Van Dieman's Land Company out of foreign hands. Woolley has chaired Bellamy's since 2007 when an investment group he created bought the assets of the then family-run organic business. Cameron was one of several wealthy backers in the investment group, Tasmanian Pure Foods.

The board is clearly split about the company's future. Some are firmly behind McBain, a former accountant who moved to Tasmania for a quieter life but ended up leading the company's incredible growth story. She has the relationships and the intellectual property and they believe she is the lifeblood of the company.

It is not the first time a company with its sights set on China has grown too fast, hit supply chain issues and was unable to meet overly-ambitious financial targets. The question is whether this is management's fault or did the board fail to ask the right questions and provide the appropriate support to keep things in check?

Cameron, who used to be the company's largest shareholder but sold down her stake in 2014, is a hard-nosed businesswoman who is not afraid of making tough decisions. She candidly says she wants to "eliminate the corporate bullshit". Like the other shareholders, she is unhappy about being left in the dark. It is highly unusual for a company to go into a trading halt for as long as Bellamy's has. It will be almost six weeks when the stock resumes trading on January 13.

Questions over governance: There are some serious questions around company's governance and investors have long complained about a lack of transparency. The timing of share sales by management last year have not helped their standing with investors either. McBain picked up $2.4 million when she sold 200,000 shares in August at $14.60. Woolley sold 200,000 shares at $14.60. Bellamy's shares last traded at $6.68.

Bellamy's shares plunged following a 40 per cent profit downgrade in December. The company faces two class actions and allegations of continuous disclosure breaches.

More will be known about Bellamy's future next week when the trading halt is lifted. The lawyers are advising Woolley and the directors not to say anything until then.

The speculation ranges far and wide from another profit downgrade to a capital raising or a resolution to issues surrounding the company's supply contracts. One observer was predicting the shares could fall as much as 80 per cent.

The danger for Bellamy's is that if the share price falls as low as $2 it will be snapped up by an opportunistic raider. This is a company with few assets and the value is tied up with its brand and licence to sell products into China. It is believed several private equity firms are looking closely at the company.

One industry player says he is aware of up to 12 interested parties, including multinationals and private equity firms, taking a look. The company's brand alone and its license to trade in China are the attraction. The number of infant formula brands being sold in China will be whittled down to 450 under regulatory changes due to come into force this year. This should create an enormous opportunity for a company such as Bellamy's, which can provide unique formulations to the world's biggest market for infant formula rather than backfiring the way it has.

Heads must roll: Whether Cameron's motion is successful or not, heads will have to roll at Bellamy's.

Woolley will also need to answer questions about why there was no indication to shareholders earlier about the slowdown in sales. This was despite the availability of real-time sales data uploaded by two companies called Aztec and Nielson, which would have given weekly updates on how Bellamy's products were selling in the country's supermarkets.

Changes in the Chinese regulatory landscape have caused problems for other companies such as Blackmores but not to the same extent as Bellamy's. A2 Milk has distanced itself from Bellamy's supply problems while a newcomer to the Australian Securities Exchange, infant milk formula firm Bubs, has had a stellar run in the first three days of trading.

The split on the Bellamy's board and the involvement of the divisive Cameron is not a good look for the Tasmanian business community. Despite the success of many of the state's small businesses tapping into the opportunities from agriculture and tourism, the state's big corporate plays often seem to run into trouble, which was highlighted by the governance issues at timber group Gunns.

Henry if you don't know what to do with your 'windfall' profit from Belamys, this could be worth a look, don't forget to read the comments

Wind Fall Logging

Bellamy's former chief executive Laura McBain. Bret Salinger by Michael Smith

Bellamy's Australia has been forced to sacrifice the two women who spearheaded the infant milk formula company's extraordinary growth story as it attempts to salvage its financial future and ward off a rebel shareholder bid for board control.

The board had no choice but to remove chief executive Laura McBain and demote the company's finance chief Shona Ollington after the company slashed earnings expectations by around half and was forced to renegotiate a key supplier contract. Its share price fell more than one third. The question now is how long can chairman Rob Woolley survive given the company's poor track record around disclosure and concerns about share trades by key executives?

A bid by rebel shareholders led by Tasmanian entrepreneur Jan Cameron to roll four Bellamy's directors in an effort to save McBain still hangs over the company. The shareholders who claim to speak for 35 per cent of Bellamy's stock can still push ahead with their motion if they want.

Bellamy's key supplier Fonterra has thrown a spanner in the works though for anyone seeking to gain control of the company. Fearful of a rival taking over Bellamy's, it has negotiated new terms which mean it can terminate its manufacturing contract if a party acquires 30 per cent of more of Bellamy's voting shares. The move is effectively a poison pill for Bellamy's.

Why would the Australian's describe Fonterra as fearful? Why not say it has control without buying the worthless script.?

Take a look at the third picture down in the article, showing type of shop in Australia, where powder is bought by the can and then airmailed to china one can at a time.

With regard to the Organic industry, I wonder how many people picked this information up - The Mutual Recognition Arrangement for Certified Organic Products was signed in China by MPI Director-General Martyn Dunne and by Vice Minister Sun Dawei last week (14 November) Then this unbelievable claim - "New Zealand consumers can have increased confidence in organic food imported from China because MPI has assessed the Chinese system and found it to be robust. Does anyone seriously believe that Organic food out of China will be genuinely labelled.

Check out the Ceres organic brand common in our supermarkets. Mostly foods sourced in China. Ew.

You'll note that MPI have assessed the Chinese system.

You'll note that MPI have not assessed any Chinese product.

We can have confidence in MPIs response when the inevitable happens

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