Daigou top company a2 Milk no longer buy

However, when the market was once again volatile, he claimed his stock allocation was reduced – meaning he made less money – as a2 Milk pushed cans of formula into e-commerce across borders.

Brand awareness remains strong for a2 Platinum in China, the world’s largest infant formula market – valued at $26 billion.

Brand loyalty

But Mr Zhang said a2 Milk had lost the power of smaller daigou which helped drive brand loyalty with mothers amid growing nationalism of locally made products.

Little rival Bellamy in 2016 also attempted to bypass this important channel into the market, and nearly went bankrupt.

“This is very important to renew the consumption life cycle of the brand. For brands to succeed, brands, channels and consumers must be in a vertical balance,” said Zhang Australian Financial Review.

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

Recruitment channels (such as daigou) are traditionally closest to consumers in China. These small businesses and distributors are at the forefront of discussing brands and educating consumers who recommend brands to new users.

Zhang explained that the daigou recruitment channel didn’t just disappear in a vacuum, but because trade became less profitable.

“Brand success requires a suitable pricing structure,” Zhang said.

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

A2 Milk’s boss, David Bortolussi, expects 2022 sales to be higher than the $NZ1.21 billion achieved in fiscal 2021 – supported by growth in Chinese and British label formulas in the second half. But companies also have to overcome China’s low birth rate to grow.

Two years ago Milk a2 stock was trading at nearly $20 per share. They now sit at around $4.50 each. Since taking over in February 2021, Bortolussi has moved swiftly to address last year’s oversupply of infant formula.

Exclusivity deal

She said Australian Financial Review that the daigou channel still plays an important role in new user acquisition and brand development but hints that Zhang is unwilling to commit exclusively to dealing with a2 Milk – without directly commenting on his allegations.

“Over the past year, we have increased our direct engagement with the daigou community, provided more marketing support and seen an increase in the number of daigou representing our a2 Platinum brand,” he said.

“Consistent with our growth strategy communicated to the market last year, we are simplifying and delaying our English Label infant formula distribution network. As such, we are expanding our distribution network towards partners who are willing to commit to a more exclusive, transparent and performance-based arrangement, and we are pleased with the progress to date.”

According to Citi analysts, consumer preference for domestic brands has continued to increase in China and the perceived quality of foreign brands has deteriorated since last year.

But despite rising Chinese nationalism, international infant formula brands are still popular among Chinese mothers. Often local brands can sell for over 500 RMB with 70 percent plus a hefty profit margin, and can be cheaper than imported brands.

“We see on the ground that the cost of living has a material impact on consumer buying behavior, especially after the pandemic,” said one sector source.

Amid the COVID-19 restrictions in China, and stock imbalances in the market, Zhang took the opportunity to centralize his business through the “AZ Global” app – so that his army of recruiters could work from home. He operates like a franchisee system.

It [daigou] channels are shoes for brands…. Just because there are shoes that are shinier and prettier, doesn’t mean they’re the right size for your feet.

— Wenjun Zhang

Previously he had merchants who bought from Coles and Woolworths, but faced problems with many of his smaller buyers no longer operating in Australia due to long-standing COVID-19 travel restrictions.

With online consolidation, recruiters can continue to support infant formula brands.

Zhang said he has proprietary end-to-end technology that supports his business through recruitment channels with detailed data and visibility.

“Without [cost effective] recruitment, it is difficult for infant formula brands to survive and be competitive in China,” he said.

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

Zhang started his business with just $30,000 sometime in 2013-2014. She was looking for a brand of formula to introduce to Chinese parents since Bellamy was more established. About a year later he started working with a2 Milk.

The pair both benefited from the relationship: at its peak in 2019, China accounted for 40 percent of a2 Milk’s sales.

Zhang grew his business to a turnover of around $500 million per year and has 11 warehouses in Australia, New Zealand and China.

A2 Dairy Council – led by David Hearn – is concerned about its main exposure to only one significant customer in China – Mr Zhang. But a2 Milk is still back in the relationship, which now seems irreconcilable.

While Zhang’s relationship with Milk a2 headed south, his relationship with little rivals Australian Bubs grew stronger.

In March, an entity associated with its AZ Global wrote an equity incentive deal with Bubs.

Zhang said the daigou channel should be respected.

He recalls telling Peter Nathan, former head of a2 Milk’s business in China, that “the channel is the shoe for the brand, the foot. Just because there are shoes that are shinier and prettier, doesn’t mean they’re the right size for your feet. It can cause injury and not make you walk or run any better.”

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