New Zealand's a2 Milk flags higher marketing spend as 'daigou' sales dry up
* Shares fall nearly 15% after annual profit misses
* a2 Milk sees 12% of revenue in FY20 to be used for
* Looking to build brick-and-mortar store presence in China
(Recasts throughout, adds background on China and marketing
By Nikhil Nainan
Aug 21 (Reuters) - New Zealand's a2 Milk missed
expectations for annual profit on Wednesday on the back of
higher marketing costs which ate into gains from robust Chinese
sales, sending its shares plummeting nearly 15%.
The company has been pushing into smaller Chinese cities as
demand for foreign milk and infant formula grows in response to
health scares around Chinese milk products, a strategy that
helped drive a 41% leap in revenue for the year.
But marketing spending soared about 84% to NZ$135.3 million
($86.73 million) - or 10.4% of sales - and the company said it
expected to invest about 12% of sales in the 2020 financial year
as it opened physical mother-and-baby stores in China.
"Margins are key for a company that is priced for
perfection. They need to beat expectations and this was a slight
miss, but only a slight miss," said Jeremy Sullivan, an
investment adviser at Hamilton Hindin Greene.
a2 Milk said it was prioritising physical stores in China in
a shift from its reliance on so-called "daigou" shoppers, who
purchase products in bulk from stores outside China and import
them informally to the mainland.
If a2 were to push heavily into brick-and-mortar stores then
that would be a sign they are worried that the grey channels are
slowing, Sullivan said.
"There's a lot of costs involved in running those stores,"
A Chinese crackdown on such informal importers has impacted
firms which had used them to avoid the higher costs of marketing
their products directly in China.
Australian vitamin maker Blackmores Ltd last week
flagged lower first-half profit and said it would begin
investing directly in China, citing the impact of regulatory
change on the daigou network.
a2 said net profit after tax for the year to June 30 was
NZ$287.7 million, missing a forecast of NZ$296.7 million
according to Refinitiv data. This year's number compared with
NZ$195.7 million it reported last year.
Total revenue for the year rose 41.4% to NZ$1.30 billion.
While China's slowing economic growth has troubled many
other consumer goods companies, a2 Milk managed to grow its
share of the infant formula market in China to 6.4% over the
year. Its a2 milk product is marketed as easier to digest than
conventional milk because it lacks the A1 caesin protein.
a2 shares were trading at NZ$14.35 in morning trade, its
lowest level since the start of July, while the broader market
was down 0.8%.
a2 Milk also said it planned to exit its British liquid milk
business in the first half of 2020 to focus on its core markets.
($1 = 1.5588 New Zealand dollars)
(Reporting by Nikhil Kurian Nainan, additional reporting by
Ambar Warrick in Bengaluru; Editing by Bernard Orr and Stephen
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