The deal, which will last until July 2021, entails Fonterra supplying Bubs with organic milk powder from grass-fed cows, sourced from its farms in New Zealand and manufactured at its facility in Victoria, Australia.
The premium range of Australian-made formula will consist of stage 1 infant formula, stage 2 follow-on formula and stage 3 toddler formula, and will be available in Chemist Warehouse outlets across Australia within the next three months. It will then be exported to China via its main China e-commerce partner, Alibaba, and sold on Tmall and Taobao.
Cow is the time
Founder and CEO Kristy Carr told NutraIngredients-Asia: "Organic infant formula has been part of our product road map for many years, and we'd been working with Fonterra on this development for at least six months.
"We wanted to combine organic and grass-fed elements in a premium formulation, which required a lengthy procurement and development process. The formulation also has a high level of DHA and ARA, as well as prebiotics and probiotics, which is not currently offered in the marketplace.
"From a consumer perspective, we wanted to be able to offer a premium organic infant nutrition option, regardless of the age or development stage of a child."
She added that since Bubs' baby food products were all organic, an organic infant formula product was a 'natural fit' for the brand.
Carr is also confident that partnering with Fonterra will bode well for Bubs' brand image.
"Fonterra is definitely a trusted manufacturing partner that will help to raise our profile, both at a corporate and a consumer level. As a manufacturer in the organic space, identifying a suitable supply chain partner is very tricky, and I'm glad we've collaborated with Fonterra."
Although the partnership is focused on the infant formula launch for now, Bubs is keen on expanding the range and possibly developing new products with Fonterra in the future.
Carr also noted that cow milk formula accounts for nearly 95% of Australia’s formula market, and that there was a global trend towards milk and other dairy products made from grass-fed cows.
While this trend is particularly prominent in the US, a growing number of consumers in China are prioritising 'clean and green' eating, as well as sustainable farming.
What have we goat here?
Carr was also quick to confirm that despite Bubs' venture into the cow's milk formula segment, the company remains determined to expand its goat milk business, for which it is best known.
"We're still very much focused on growing our goat dairy infant formula line. We're investing very heavily in brand positioning in that regard, so we can expand our distribution network in China and increase consumer awareness.
"In addition, we have plans to more than double the size of our milk pool over the next 18 to 24 months. We're definitely not walking away from the goat dairy sector — although we'll stay 100% focused on premium infant nutrition, we will continue to evolve and innovate across our goat dairy product line, so we can have a full portfolio."
She acknowledged that goat's milk formula was not usually the first choice for most parents in Australia and China, but was a necessary option that gave Bubs the opportunity to be market leaders in the category.
"Many children have some sort of intolerance or sensitivity towards cow milk protein in the early days of switching from breastmilk to infant formula, as their immune and digestive systems are still very immature. They need a more digestible product, like goat milk-based formula.
"Goat milk formula still accounts for only about 5% of the market, so we want to be a clear leader and educator in the digestive benefits of goat dairy, and offer a product that is the first choice for at least 90% of the category."
Despite the company's reliance on cross-border e-commerce (CBEC) when selling to China, it does not see the Chinese government's clampdown on e-commerce platforms as a major cause for concern.
Carr said, "We aren't concerned from a financial perspective. However, we have had to adapt the way we do business and move products through that channel. This comes back to the partners we work with, and how the products move through the different layers of the channel to reach the end consumer.
"Still, our overall outlook hasn't changed. Navigating such changes is just part and parcel of the business we're in."
At the same time, Bubs is also looking to expand further outside of Australia and China. Apart from those two markets, its organic baby food products are sold in New Zealand, South East Asia and the Middle East, where it intends to introduce more products.
"We're focusing on Singapore and Hong Kong, where we have plans to launch our products this calendar year. We're also planning something in the goat dairy space for infant formula and adult milk powder in the Middle East.
"About 3% to 5% of our total revenue comes from export outside of China at the moment, but we're talking to major distribution partners in those markets. We have a dedicated in-house team to focus on markets other than China, particularly in South East Asia and the Middle East," said Carr.
Bubs has been steadily expanding over the last two years, after listing on the Australian stock exchange at the start of 2017.
10 months later, it acquired NuLac Foods, followed by the New Zealand Nutritional Goat Company in December that year.
In June last year, the firm signed a supply agreement with Chinese supply chain and service provider New Times Asia, ramping up its distribution in China.
In March this year, Bubs announced a joint venture with Chinese dairy firm Beingmate, which saw its infant formula and baby food products enter more brick-and-mortar stores in China.
A month later, Bubs signed a deal to acquire its production facility, Australia Deloraine Dairy, with which it had previously entered into a binding manufacturing agreement.
Carr said, "In our first year of publicly listing the company, we really concentrated on our supply chain. With our core focus being on goat dairy, we had to procure the source for it, and these acquisitions were the beginning of our vertical integration journey."
"With the Deloraine acquisition this quarter, we've now closed off our vertical integration loop".
Bubs' shares have also risen following its partnership with Fonterra: as of May 6, they were 18.87% (25.5 cents) higher at A$1.58, representing an increase of over 100% in the past two weeks.