China boom: a2 milk reports strong growth from mother-and-baby stores and domestic online channels

31-Aug-2022 - Last updated on 31-Aug-2022 at 02:18 GMT

The a2 Milk COmpany's Platinum Premium Toddler Milk Drink.

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The a2 Milk Company (a2MC) said it has seen strong sales of its infant milk formula in China via both mother-and-baby stores and domestic e-commerce channels.

The company, which is listed on both ASX and NZX, said revenue was up 19.8 per cent to A$1.45bn (US$997m) and net profit after tax (NPAT) jumped 42.3 per cent to A$114.7m (US$79m) in FY22.

The growth was largely driven by China, where its China label and English label infant milk formula sales were up 12.2 per cent and 11.6 per cent respectively.

In particular, demand for its China label product, a2 Zhi Chu (至初), had been strong over the year, and the firm had bumped up its presence in both offline and online stores.

For instance, the number of mother-and-baby stores selling its products had expanded from 22.8k last June to 26.5k this June.

In fact, the company has been experiencing growth when retail sales for the mother-and-baby stores were shrinking.

Citing data from Nielsen, although retail sales for mother-and-baby stores by value were down 2 per cent in value in FY22, the firm’s market value share in this channel had however, increased to three per cent at the end of June 2022. This was also higher than the 2.2 per cent seen last year.

It also focused on the domestic e-commerce channels to sell its China label products, with retail sales from this channel up four per cent.

The firm also uses cross-border e-commerce (CBEC) to sell its English label products into China.

However, there has been a market shift towards China label products, with these products accounting for 85 per cent of its sales – slightly higher than the 84 per cent reported in FY21.

“Our significant increase in marketing investment has driven further gains in brand health metrics and record market shares delivering strong growth in our China infant milk formula business,” said CEO and managing director, David Bortolussi.

Higher brand awareness

According to the firm’s consumer survey, there has been a higher brand awareness of a2mc’s products in China between January and July this year.

Its brand awareness in China was up from 16 per cent to 21 per cent between January and July this year, following a 36.3 per cent increase in marketing investment.

The percentage of consumers who have tried the company’s infant milk formula product was also up from 19 to 20 per cent, and those who claimed to use the company’s products most often had grown from 12 per cent to 13 per cent.

Factors driving growth

The strong demand for China label IMF was partly due to COVID-19 related lockdowns, product pricing, and favourable foreign exchange, the firm said.

While consumers are willing to spend more amid the trend of product premiumisation, the increase in spending was not enough to offset the reduction in sales volume, it added.

Last year, the number of births in China was down by 11.5 per cent to 10.6 million, according to China National Bureau of Statistics.

The several years of declining newborns had a cumulative impact on stages 2 and 3 products, but this was “partially offset by increasing household penetration particularly in relation to growth in stage 4 [products].”

Stage 4 products are for toddlers age three to six.

According to data from Kantar Worldpanel, China’s infant milk formula market volume had shrunk 4.3 per cent in FY22.