a2 Milk’s first corporate daigou no longer buys

However, when the market was buoyant again, he says his stock allocation was reduced – meaning he made less money – as a2 Milk pushed boxes of formula into e-commerce. cross-border.

A2 Platinum’s brand awareness remains strong in China, the world’s largest infant formula market, valued at approximately $26 billion.

Brand Loyalty

But Mr Zhang says a2 Milk has lost sight of the power of the smallest daigou that helps propel brand loyalty among mothers amid rising nationalism of locally made products.

In 2016, Bellamy’s smaller rival also sought to circumvent this important marketing channel, and it nearly went under.

“It’s essential to renew the consumer life cycle of a brand. For a brand to be successful, the brand, the channel and the consumer must be in vertical balance,” said Mr. Zhang. The Australian Financial Review.

“If you disadvantage those who create value for your brand, there is a problem.”

The recruiting channel (like daigou) is traditionally closest to the consumer in China. These small businesses and distributors are on the front line to discuss the brand and educate consumers who recommend the brands to new users.

Mr. Zhang is clear that the daigou recruitment channel has not just disappeared into a vacuum, but because the trade has become less profitable.

“A brand’s success requires an appropriate pricing structure,” says Zhang.

“If a brand floods the market to further increase sales to the point that the retail price on the e-commerce channel is lower than the wholesale cost on the daigou recruitment channel – there is no incentive to promote the brand.”

A2 Milk boss David Bortolussi expects 2022 sales to top the NZ$1.21 billion achieved in fiscal 2021 – buoyed by growth in label formulas Chinese and English in the second semester. But the company must also overcome China’s low birth rate to grow.

Two years ago, shares of a2 Milk were trading at nearly $20 per share. They now sit at around $4.50 each. Since taking the helm in February 2021, Mr Bortolussi has moved quickly to address overstocks of baby formula last year.

Exclusivity offer

He said The Australian Financial analysis this daigou channel still plays a vital role in new user acquisition and brand development, but hinted that Mr. Zhang was not willing to exclusively commit to dealing with a2 Milk – without commenting directly on his allegations.

“Over the past year, we’ve increased our direct engagement with the daigou community, provided more marketing support, and seen an increasing number of daigou represent our a2 Platinum brand,” he said.

“In line with our growth strategy communicated to the market last year, we are simplifying and expanding our English Label infant formula distribution network. In doing so, we are evolving our distribution network towards partners willing to engage in more exclusive, transparent and performance-based agreements, and we are pleased with the progress made to date.

According to Citi analysts, consumer preference for domestic brands continues to rise in China and the perception of the quality of foreign brands has deteriorated since last year.

But despite a rise in Chinese nationalism, international formula brands are still popular with Chinese mothers. Often, local brands can sell for over 500 RMB with high profit margins of 70% and above, and can be less affordable than imported brands.

“We are seeing on the ground that the cost of living has a significant impact on consumer buying behavior, especially post-pandemic,” an industry source said.

Amid China’s COVID-19 restrictions and inventory imbalance in the market, Mr. Zhang took the opportunity to centralize his business through an “AZ Global” app – so his army of recruiters could work from home. It works like a franchise system.

The [daigou] channel is the brand’s shoe… just because there are brighter and prettier shoes out there doesn’t mean they’ll fit your foot size.

— Wenjun Zhang

It used to have merchants buying from Coles and Woolworths but ran into trouble with its slew of smaller shoppers no longer operating here in Australia due to longstanding COVID-19 travel restrictions.

With online consolidation, its recruiters have been able to continue supporting infant formula brands.

Mr. Zhang says he has end-to-end proprietary technology that supports his business through the recruiting channel with detailed data and visibility.

“Without [cost effective] recruitment, it is difficult for an infant formula brand to be sustainable and competitive in China,” he says.

According to Zhang, a “recruiter” is someone who makes sales despite tough market dynamics, while a “reseller” can only sell when market demand is strong.

Mr. Zhang started his business with just $30,000 around 2013-2014. He was looking for an infant formula brand to introduce to Chinese parents since Bellamy’s was already more established. About a year later he started working with a2 Milk.

The pair profited from this relationship: at its peak in 2019, China contributed 40% of a2 Milk’s sales.

Mr. Zhang has grown his business to around $500 million a year in revenue and has 11 warehouses in Australia, New Zealand and Greater China.

The board of directors of a2 Milk – led by David Hearn – expressed concern over its main exposure to a single major client in China – Mr Zhang. But a2 Milk always came back to this relationship, which now appears to be irreconcilable.

As Mr Zhang’s relationship with a2 Milk headed south, his relationship with smaller rival Bubs Australia grew stronger.

In March, entities associated with its AZ Global signed an equity incentive agreement with Bubs.

Mr. Zhang says that the daigou channel must be respected.

He remembers telling Peter Nathan, the former head of a2 Milk’s Chinese operations, that “the channel is the brand’s shoe, the feet. Just because there are brighter, prettier shoes out there doesn’t mean they’ll fit your foot size. It can cause injury and doesn’t make you walk or run any better.”

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