China's Growing Market for Australian Baby Formula
China has been a growing market for Australian baby formula companies seeking to expand to the international markets. In China, Daigou, which is a concept of buying on behalf of others have helped create popularity for Australian products. Market influencers such as Daigou can make the demand for a product to grow exponentially, but it can also destroy it just as fast. Bellamy is a case in point. The company enjoyed massive growth in demand for its products in the Chinese markets because of Daigou. However, following new regulations regarding e-commerce, Bellamy decided to use local Chinese retailers instead of Daigou, a process that led to a decrease in sales and loss of market share.
Issues Facing Bellamy Baby Formula Products
The report identified key issues facing Bellamy in China as failure to understand Chinese consumers, damage to the brand image and discounting prices. In Australia, the main challenge is the fall in the share prices/market capitalization. The report recommends that Bellamy re-establishes contact with Daigou and use it to rebuild its brand image and grow market share. Furthermore, Bellamy should seek to rebuild an alternative channel that would ensure a seamless transition in case of future disruptions caused by government regulations. In Australia, the company should change the leadership to rebuild the trust and confidence of investors.
Introduction
Bellamy is a mid-sized company that supplies organic baby products to customers in Australia, China, Vietnam, and New Zealand among others. The company was established in 2003 and has its headquarters in Launceston, Australia (Bellamy, n.d., para 3). The company trades in the Australia stock exchange as BAL. The major growth in the demand for the company’s products is because they are organic. In other words, the range of baby products that it supplies to the consumers are natural and thus considered safe and healthy. In an era marked by growing concern for inorganic foods, organic ones such as Bellamy’s baby formula products have seen a spike in demand. For instance, New Zealand, A2 milk (another organic baby formula product) has also seen a growth in the demand.
Bellamy’s baby formula range of products have attained certification from NASAA, USNOP, and JAS, thus affirming the safety of the products and implying that they can be sold in these markets; Australia, the United States, and Japan. In Australia, the company used to control 95% of an organic segment of the market (Morgan, 2016, para 4). The distribution channel for the company in Australia is to supply directly to major retailers, such as supermarkets and pharmacy networks. The company’s products in Australia are designated as premium, meaning they attract relatively higher prices and preferences by consumers. In the Chinese market, which is the largest export market for Bellamy’s baby formula products, its products were rated as super-premium thus attracting higher prices and demand.
The distribution channel to the Chinese market was through Daigou. The idea of Daigou is buying on behalf of another person, often friends, relatives or acquaintances. In a market marked by the cynicism of large manufacturers, Daigou works to ensure build trust and confidence of the products to the would-be consumers. Daigou uses social media sites such as Weibo, WeChat to network with consumers. Once the Chinese consumer is convinced about a product, they can ask a friend in Australia to buy it on their behalf and deliver it through the mail, courier among other methods.
The rise in demand for Bellamy's baby formula products in China led to a rise in market capitalization for the company as demand for its shares increased. However, changes in market regulation in China created fear about Bellamy’s supply chain. Consequently, the company decided to supply directly to the major retailers in China such as JD.Com, Taobao, and Alibaba to resell its products. Unfortunately, the company performance through this supply channel did not work as expected, demand for its product slumped. To spur demand, the company lowered the prices of its products on both JD and Alibaba.
On the other hand, competitors such as A2 milk continued to use Daigou as its supply strategy to the Chinese market and saw a rise in the demand. In other words, while Bellamy experienced a decline in the sales in the Chinese market, A2 milk (a major competitor) experienced impressive growth rates. Bellamy continued lowering the prices of its products on both Alibaba and JD to try to resuscitate the demand, but the strategy failed. Notably, the prices of Bellamy’s products in China fell below those in Australia but still that did not recreate the demand it had experienced when it sold through Daigou. Importantly, these high discount rates of its products in China meant the company would make losses, and revenues would be lower than expected. When the company finally revealed the news to investors about lower than expected sales volume, their shares fell, as investors raced to dispose of the stocks.
Issues Facing Bellamy Baby Formula Products
Bellamy faces many issues concerning its market performance and long-term growth. The main issues facing the company can be categorized as follows.
Failure to Understand Chinese Consumers
Bellamy did not fully understand how a Chinese consumer makes their purchases decisions. In essence, they assumed that the demand in China was driven by the quality of its products as compared to word of mouth and recommendations made to consumers through Daigou. In other words, Bellamy did not appreciate the value of Daigou in growing the demand for its products in the Chinese market.
The slump in the Share Value/Market Capitalization (Market Updates, about Poor Sales in China)
The news that Bellamy had overestimated its sales performance in the Chinese market led to fears of losses. Consequently, Bellamy shares were dumped in the market leading to a fall in the company’s share prices by 43%. The market capitalization for the company fell by an almost similar margin.
Oversupply and Price Discounts (Risks of Brand Inferiority Perception among Consumers)
After undervaluing the contribution of the social influencer (Daigou) for its sales performance in China, Bellamy sold directly to the Chinese consumers through JD.Com, TaoBao. Unfortunately, the demand for the products in JD.Com and TaoBao was lower than expected. To clear the stock, the company lowered the price of its baby formula products by up to 30%, such that it priced lower in China than even in Australian supermarkets.
Brand Image Damage
Up until the Chinese authorities announced the new e-commerce regulations, Bellamy's had used Daigou to sell its products to China. After the new regulations of stricter control of good coming through the mail, courier and other services were announced, Bellamy chose to go directly to the Chinese consumers instead of Daigou. Daigou, a social influencer that drove the demand for Bellamy’s product in the Chinese market. Moreover, the company had lowered the products prices on JD.Com and TaoBao to encourage consumers to buy directly rather than through Daigou. In turn, Daigou, saw its business interests decline. Consequently, it turned to the competitor A2 Platinum, promoting the A2 products while dis-reputing Bellamy. The result was a fall in consumer brand preference for Bellamy as consumer turned to A2 Platinum products. Therefore, while Bellamy sales performance was declining, its competitor A2 Platinum enjoyed massive growth in sales. The implication is that Daigou was discrediting Bellamy brand while building a profile for A2 Platinum products, hence the changes in consumer preferences and demand. Moreover, the reduction in the price created a perception of inferior quality among the consumers, such that Bellamy’s product lost their super premium rating. In this case, Bellamy failed to understand that what the Chinese consumers wanted is not cheap products, but goods that had positive reviews.
Regulations in Chinese Market/Loss of Market Share in China
A key issue that has contributed to the challenges facing Bellamy in the Chinese market is new regulations regarding e-commerce purchases. Like already discussed in the introduction, Bellamy’s products were sold in China through Daigou. In this case, Chinese migrants would buy the baby formula products in Australia and send it to consumers in China. However, Daigou does not work as an online shopping site such as Alibaba or Amazon. For instance, while vendors in Alibaba or Amazon register to sell, Daigou is just socialization process, where the Chinese living in Australia, recommend the product to a friend or relative living in China, buy the product on their behalf and send it to them. The new regulation required stricter checks of the goods bought through e-commerce platforms.
Analysis of the Issues (Effects and Consequences to Bellamy)
Damage to Brand Image
According to Petrauskatie (2014, 3), brand image is a powerful tool to entice new customers by influencing their behaviors and making them loyal to one brand. A key determinant of the loyalty of the consumer to a brand is the equity or perceived value of the brand. If the brand has positive equity, that is, people perceive it as of high value, they become loyal to it. Brand equity builds a feeling of confidence in consumer about the brand to the purchase process (Petrauskatie, 2014, 28). On the other hand, customers would be unwilling to buy a brand that has negative reviews. The implication of negative review is that consumers do not make repeat buys for the product. In the case study, negative reviews from Daigou about Bellamy's baby formula product would be expected to reduce the number of repeat buys. On the other hand, the rise on positive reviews of A2 Platinum products would make the customers shift loyalty to that brand because they perceive better value or equity. Therefore, this would explain why Bellamy's baby formula products were falling in brand equity while A2 Platinum enjoyed booming sales and growth in market share.
Importantly, the brand loyalty is also affected by brand equity/perceived value. In essence, the more loyal the customers are to a brand, the stronger the position of the brand in the market and the less the number of consumers who would be willing to change brand they regularly purchase (Petrauskatie, 2014, 31). In other words, the consumer loyalty to a brand is dependent on the market share that the brand controls. Notably, the consumers perceived brand value (equity) determine the market share of the product. Therefore, a decrease in the market share would create a perception among the consumer of a decline in brand equity of a given product. Consequently, those consumers would be willing to explore other brands to achieve the brand equity that they desire. In essence, this would explain the fall in sales of Bellamy's products in the Chinese market. A decrease in sales created a perception of low brand equity; thus, more consumers turned to A2 Platinum products. The effects were further compounded by Bellamy's strategy of lowering prices to drive up sales volume. The reduction in prices only made consumers to confirm a loss in brand equity of Bellamy’s products and thus a shift in preferences towards A2 Platinum.
Brand image impacts consumers behavior by influencing preferences and purchases intentions as well as the willingness to pay a premium price and recommend the brand to others (Tekin, Yiltay and Esra, 2016, 2). Daigou created a positive brand image of Bellamy among the Chinese consumers. However, the decision by the company to ditch Daigou and go directly to Chinese consumers through TaoBao and JD.Com created a feeling of resentments in Daigou. Consequently, Daigou reacted by promoting A2 Platinum and degrading Bellamy brand equity profile. Therefore, though Bellamy’s products were priced lower than A2 Platinum on JD.Com and TaoBao, consumers were willing to pay higher prices for A2 products because they perceived them to be of greater equity or value.
Failing to Understand Chinese Consumers Behaviors (Chinese Cultural Values)
Al Karim (2015, 184) notes that international marketers need to pay attention to cultural factors; specifically issues of cultural differences because these could affect the way in which a product is marketed to the consumers. Furthermore, international marketers should pay attention to cultural differences because cultural norms and beliefs strongly influence the perceptions, dispositions, and behaviors of consumers (Al Karim, 2015, 185). In China, consumers value information and recommendations made by friends and relatives about products or services. In other words, the buying behaviors of the Chinese consumers can be influenced by the suggestions/comments made by a friend about a product. Notably, it is this through this culture of valuing information shared by friends that Daigou thrives. WeChat and Weibo are popular social media sites in China, and these are the marketing platforms for Daigou. Essentially, Chinese in Australia would make recommendations about a product, in this case, Bellamy's baby formula to friends in China. The more friends that are given information about the product and recommended to buy it, the higher the demand. Essentially, this approach would explain the growth of the demand for Bellamy’s products within the Chinese markets. Typically, people who get the product can use word of mouth to recommend the product to their friends, thereby creating exponential growth in demand. It is worthy to note the demand for Bellamy's products in China was rapidly expanding, and the profits reached 332% (Morgan, 2016, para 1).
By choosing to sell directly to the Chinese consumers, Bellamy miscalculated the value of Daigou in driving the demand for its products in China. Consequently, the market share and the brand perception of Bellamy plummeted, leading to lower sales volume. In essence, Bellamy assumed that the products demand was driven by quality (which played a part) only failing to underscore the invaluable contribution made by Daigou in influencing demand. Moreover, even when the company sold through Chinese retailers, it failed to keep the momentum for demand by marketing, assuming instead that the product was popular and would inevitably attract large numbers of consumers. While the action taken by Bellamy was informed by changes in the regulatory framework introduced by the government regarding e-commerce purchases, it acted quickly instead of studying the market to see the impacts. Notably, the regulations were only enforced for a short duration and then stopped. In essence, it would have been better to increase the price and continue selling through Daigou, which had already proven to be an effective strategy rather than go directly to the Chinese consumers.
The slump in Share Value/Market Capitalization
In a free economy, demand and supply determine the price of securities (Avdalovic and Milenković, 2017, 561). Therefore, a rise in demand should increase the price of the securities/stock. In this case, growing demand for Bellamy's baby formula products in China resulted in an increase in the share price to around $16, and the market capitalization of about $1b (Morgan, 2016, para 3). The converse is also true. In other words, in such a free economy, the decrease in demand should result in a decline in the share prices, and market capitalization. In this case, Bellamy’s shares slumped to around $ 6, causing huge damage to the company market capitalization (Morgan, 2016, para 3).
In reality, markets are not always free, inside trading; insiders’ knowledge among other things affects the share performance of a company. For instance, while Bellamy had its annual general meetings with shareholders two weeks before the market update was issued, it did not disclose the information to the shareholders at the time. Notably, such failure to timely disclose inside information raises fears among shareholders over the integrity and transparency of Bellamy. In other words, investors cannot trust the management to communicate in good faith about the company’s forecasts and performance. The long-term effects of such lack of trust are that the company may struggle to attract investors.
Surprise negative news or market updates usually have downward pressure on the share prices of the company (Coatsworth, 2018, para 3). Conversely, positive market updates drive the share prices up. In the former, investors become worried about the future of the company and race to dump the shares. The key factors driving the share prices down is the expected earnings or return on investments and prospects. It is evident that with poor sales volume that was expected in China, the dividends payable to shareholders were going to be low or none at all. However, other factors such as the company size also drive the reaction of the investors to bad news. For instance, markets would under-react to information about the short-term prospects of the firms but overreact to information about long-term prospects in an efficient market (Corgnet, Kujal, and Porter, 2013, 2). Therefore, overreaction by investors to bad news occurs over short horizons, while under-reaction would be expected in the long horizons (Corgnet, Kujal, and Porter, 2013, 2). In other words, if investors are confident that the bad news does not reflect the long-term growth and performance of the company, there will be less volatility in the market share prices. In this case, investors act with conservatism. Equally, if the bad news appears to reflect the long-term growth prospects of the company, investors over-react by dumping shares. The over 40% slump in Bellamy’s share prices reflects an overreaction, which demonstrates the fear among the investors of the long-term growth prospects of the company in the Chinese markets. The fact that Bellamy is a small company exacerbate its ability to weather down the effects of the market volatility.
In the previous years, the company sales had been growing rapidly, and the expectations of the people buying the shares were that the company would continue experiencing growth in the sales. In particular, signals such as the expected review of China’s one-child policy would play a significant part when investors are making predictions about the growth in the sales volume. However, people’s expectations as a factor of predictions can be inefficient (Naderi and Mekanik, 2012, 230). The inefficiency of peoples predictions drive market volatility, but arbitrageurs use facts to make adjustments on the valuation of the stocks. Therefore, over the time the share prices of Bellamy will stabilize and come to equilibrium as investors adjust their income estimates.
Another effect is the investors’ sentiments. The investor sentiments over the ability of the company to rebound and make profits will dog the efforts to win back the confidence of shareholders on Bellamy’s stock. Investors’ sentiments are the belief about the future cash flows and investments risks, which are not justified by facts (Baker and Wurgler, 2007, 129).
Concisely, the effects of the crash in Bellamy's shares is a loss of investors’ confidence, which will affect the market capitalization in the long-term as arbitrageurs re-evaluate investment risks and cash flow issue of the company. Consequently, this loss in the market capitalization will affect Bellamy recovery process, as it will be starved of the money it will require to revitalize the brand through new products offerings and marketing.
The chart below shows the performance of Bellamy’s shares in ASX, courtesy of Bloomberg (Burgess, 2018, para 9). The shares increased from below $5 in 2015 to register a high of $16 before the crisis caused a slump in the share prices. Post-crisis, Bellamy's shares still shows volatility, which can be seen as a consequence of investors’ sentiments. On the other hand, A2 Milk (Bellamy’s competitor) has enjoyed a steady growth in share prices outpacing the performance of Bellamy in 2017 onwards.
Oversupply and Price Discounts (Risks of Perception of Brand Inferiority among the Consumers)
Adding to the challenges facing Bellamy is the accumulation of stocks among the Chinese resellers (JD.Com, TaoBao, and Alibaba). To finish the remaining stocks, Bellamy started discounting its products in China. However, these sales promotions through discounts can have negative effects on the brand image. According to a study by Waanders (2013, 34) deep price promotions (price reduction above 20%) negatively affects the taste experiences of the store brand negatively. In other words, customers lose the trust in the brand if there is a deep fall in the price. Low price gives a perception of low quality (DelVecchio and Puligadda, 2012, 465). Therefore, lowering the price to increase sales can have negative effects on the consumers’ perception of the quality. The phenomenon can explain why lowering the prices of Bellamy’s baby product did not spur sales but rather reduced demand. Erdil (2015, 203) argues that price image affects the perceived risks of purchase by the consumer. In this case, the reduction in prices created doubts about the quality of the product and affected consumers’ intentions to make purchases.
Importantly, because Bellamy misread the demand for its products in the Chinese market, it oversupplied. Consequently, the price would be expected to go down as resellers sought to finish the stock. Therefore, the reduction in the prices in China was also a consequence of low demand and oversupply of Bellamy’s products.
Regulations of China Market/Loss of Market Share in China
The graph below represents the changes in the market share for companies in the baby formula industry. The graph in figure 1 shows that Bellamy lost the market share in China in 2017 by 46.2% (Grigg, 2017, para 6). The market share loss was caused by the decision of the company to ditch Daigou in favor of selling directly to the Chinese consumers through Alibaba, JD.Com among others. However, A2 milk, which continued its strategy of using Daigou, gained in the market share by nearly the same percentage that Bellamy lost (42.2%) (Grigg, 2017, para 6). Notably, a strong association exists between the market share and profitability (Yannopoulos, 2010, 1). Therefore, the loss in market share effectively affected the market power of Bellamy in China and its profit performance, a concern that led to slumping of its share prices in ASX.
Recommendations
Bellamy will need to take some measures to regain its position in the Chinese market as a leader, a super-premium brand and win back the tastes and preferences of the consumers there. In addition, the company needs to rebuild the confidence of the investors by calming their fears over the long-term prospects of the company to jump to profitability. This section discusses steps that Bellamy can take to address the issues it is facing.
First, the Chinese market for baby formula products is not decreasing. The expected review of China’s one-child policy will only drive the demand up. Therefore, as part of its growth strategy, Bellamy must keep the focus on the Chinese market. The question then is the strategy that it should use to thrive in the Chinese market. As Mortimer and Glavas (2017, 2) note, the reason why Australian companies cannot go it alone in the Chinese market is trust between retailers and consumers. Therefore, while Chinese appreciate the high-quality products offered by Australian companies, they cannot trust that the brands supplied by the local retailer are genuine. Daigou establishes the trust, thus allowing the products to win the trust and confidence of consumers. Therefore, Bellamy has to revert to Daigou strategy to recapture its lost market share.
According to Tse (2011, 2), Chinese markets can grow exponentially overnight and then be lost just as fast. It is exactly what befell Bellamy. The company experienced abnormal growth rates in demand and steep dive in the same when it changed the supply strategy.
Essentially, to succeed in Chinese retail markets, foreign companies need to be resilient and flexible, committing to the long-term but also reacting quickly to changes (Tse, 2011, 2). The implication for Bellamy is that it must not quit the Chinese market. However, it must also act fast to changes in the market. In this case, Bellamy sold through Chinese retailers when regulations were announced. However, it should have reverted as soon as possible to Daigou when the regulations were halted. Importantly, as part of its long-term growth strategy, the company should start a brand awareness campaign in China. Such a strategy of using both Daigou and building trust with consumers will ensure that the company will not be affected by any unexpected regulation in the future. In other words, it will establish a parallel system that would allow a seamless switch in case one channel has difficulties.
A change in management would be important to rebuild the trust and confidence of investors in the company leadership. The quality of senior leadership has a tangible, measurable impact on the analyst opinion on whether the company will be successful in the future (Holland and Thom, 2012, 4). Therefore, bringing in new management may help the company rebuild trust with investors.
The other key focus for the company is to rebuild its brand image in the Chinese market. Essentially, if Bellamy wishes to regain the market share lost to A2 Milk, it has to rebuild the brand image, so that consumers consider it as a premium brand. Approaches to regaining brand equity are alliance advertising. Notably, alliance advertising offers a shortcut to increase the brand awareness and enhance its image (Maehle and Supphellen, 2015, 450). In this case, rebuilding the alliance with Daigou will offer a shortcut to increasing the brand awareness and image.
Conclusion
The report notes that Bellamy made crucial mistakes that led to the fall of sales in China and slump of the share prices on ASX. For instance, the company undervalued the role of Daigou as a social influencer and driver of demand for its product in China. In addition, the company oversupplied the Chinese stores with the products, while the demand was low. The result was discounting prices to drive finish stock a factor that affected the brand quality perception by consumers. The report recommends that Bellamy re-establish connections with Daigou to recover market share and build the brand equity. In addition, the company should change the management to win the confidence of investors.
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