With a business model that used to depend on Chinese resellers known as 'Daigou' and exports to China, a trade war with the country and COVID-induced border closures could have been ingredients for disaster at infant formula company Bubs Australia (ASX: BUB).
But like the goat from which it derives its product, Bubs has proven itself a resilient beast that can find nourishment to survive no matter what the circumstances.
This confluence of factors led to a $74.6 million loss for Bubs in FY21, but the company has revealed green shoots today such as a doubling of its retail market share in Australia within some of the nation's leading retailers.
"Bubs Infant Formula has more than doubled in domestic market share throughout the year, showing strong brand health metrics as the lead challenger brand and is the clear No.2 in both the Goat and Organic Formula sub-categories," founder and CEO Kristy Carr said.
"Bubs Australia has outperformed the total category in FY21 and remains the fastest growing infant formula manufacturer across Woolworths, Coles and Chemist Warehouse with combined retail scan sales growth of 51.5 per cent."
A reset strategy, including the replacement of joint venture Beingmate with Bubs' own subsidiary in China, has given Bubs more control in its largest export market with 26 per cent growth in cross-border e-commerce (CBEC) sales to China.
"Direct sales to China, while down on last year, showed quarter-on-quarter growth over the last three quarters, partially offsetting the domestic contraction in Daigou sales," executive chairman Dennis Lin said in a letter to shareholders.
"With the rapid trend towards China channel merging across omni-channel and digitalisation, we took the strategic decision to establish our own operating subsidiary in Shanghai to manage all China trade with our e-commerce partners.
"This provides us with operational oversight to drive growth across the reimagined Daigou 2.0 omnichannel sales model and growing our Online-to-Offline (O2O) sales via Mother & Baby and community stores."
Lin said the Daigou 2.0 strategy had effectively merged with CBEC and was no longer considered a 'grey channel'.
"Its legitimacy has been established via participation in the Chinese government tax system," Lin said.
"Daigou 2.0 has now been reinvented as a digital social selling channel, including live streaming e-commerce with delivery ex-Australia or via cross-border warehouses in China."
Regional diversification has also been key to softening the blow for Bubs, with 57 per cent growth in international gross revenue outside China, including ingredient sales.
"Over this year, we have continued to nurture our partnerships across South East Asia, covering Mother and Baby retail chains and e-Commerce platforms," Lin said.
"Last year we flagged North America as our next target and the lessons learned in responding to the pandemic sharpened our focus on the most appropriate market entry strategy.
"The creation of our USA entity, Aussie Bubs Inc, and the successful development, production and importation of two new toddler formula products aligned to FDA label compliance, was another hallmark achievement of this financial year."
The company is currently on track for its inaugural USA launch in September with 'Aussie Bubs' to launch on Walmart and Amazon online channels.
"That we can consider these diverse options to grow internationally is based on our agility, scale and established supply chain security," Lin said.
"Our approach will be disciplined choosing new markets that have the highest potential to leverage our unique advantage as a premium dairy nutrition specialist and Australian leader in goat dairy production."
Carr told shareholders the continuing impact of border closures remained the single most adverse disruption on the business.
"With the lack of tourists and international students, the domestic Daigou channel trade was the most significantly impacted," she said.
"We saw a sharp decline in conventional Daigou channel contribution to domestic sales and ongoing disruption to outbound supply chain logistics with increased international freight costs.
"Considering that conventional domestic Daigou sales had made up a significant proportion of the Australian infant formula category sales, it is unsurprising that our gross revenues were adversely impacted leading to a FY21 decrease of 24 per cent year-on-year to $46.8 million."
Like Lin, Carr noted the positive outcome of reset efforts to revitalise supply chain and China channel strategies.
"We have experienced half-on-half group gross revenue growth of 10 per cent and fourth quarter results being just 4 per cent below pcp (prior corresponding period) as a result of increased domestic penetration and channel shifts in our China and International trade," she said.
"In collaboration with our strategic channel partners, we saw Corporate Daigou gross revenue1 increase 34 per cent in the second half of FY21 compared to the first half, which was up 17 per cent on the same period last year."
The founder also noted work to prioritise cash conversion from bulk powder excess inventory, while overhauling and right-sizing the supply chain to ensure a "more balanced supply and demand profile".
"Having managed through this volatile period, we are confident that our supply chain is fit for purpose in the post-COVID paradigm – with a much clearer view of what is in the inventory pipeline, particularly with our new corporate structure in China," she said.
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