Performance of giants declined
This week, Danone released third-quarter sales [1], revealing baby formula business changes in the Chinese market.
Specialized Nutrition sales declined 5.7% on a like-for-like basis, with a decrease of 2.9% in volume and in value, penalized by China's performance which posted a steep double-digit sale.
Sales of infant formula in China through cross-border channels contracted sharply by 60%, given the continuous border closure and reduced tourism with mainland China.
Danone's third-quarter sales totaled 5.82 billion euros, a decrease of 2.5% year-on-year. Among the three business segments, the Essential Dairy and Plant-Based unit had revenues of 3.11 billion euros, a year-on-year increase of 3.7%, while the Specialized Nutrition unit and the Waters unit fell 5.7% and 13.5%, respectively. The COVID-19 has severely impacted the Daigou and cross-border businesses, which is a crucial part of Danone's infant nutrition business in China or about 40% of it [2].
The Australian a2 Dairy Company also experienced a contraction in the sales of Daigou channels. In last month, the company announced that it has lowered its fiscal 2021 performance expectations [3], saying that due to the impact of the epidemic, the Daigou channel sales' contraction has exceeded their previous expectations. The company expected its revenue for fiscal 2021 to grow by 4.05% to 9.83% year-on-year, a significant drop from the double-digit growth in the previous years.
Stagnation of Australian baby formula sales
According to ABC News (Australian Broadcasting Corporation) [4], Chinese consumers' overseas purchases have dropped sharply due to the COVID-19 pandemic, which has stricken a blow to many Australian brands. 30% of the Daigou stores closed down, and the infant milk powder became unsalable. It's clear that Australia's multi-billion-dollar Daigou industry has suffered greatly.
Before the epidemic, an estimated 150,000 people in Australia engaged themselves in the Daigou business. In addition to professional Daigou traders, many tourists and international students also acted as temporary Daigou, which has supported the development of about 1,000 Daigou brick-and-mortar stores. However, during the epidemic, the number of overseas arrivals dropped sharply, especially international students and tourists. The closure of the Australian border and the blockade ban's implementation have greatly impacted the Australian retail trade represented by the Daigou business.
Besides, the epidemic is reshaping the way Chinese people consume. For safety reasons, Chinese consumers tend to choose products produced or stored in China. They would not need to wait a long time waiting for delivery due to logistics disruption caused by COVID-19.
The outlook of Daigou business
Since 2008, the overseas baby formula Daigou business has emerged due to Chinese consumers' increasingly concerns about milk powder's quality and safety. Public data shows that the total amount of milk powder entering the Chinese market through non-bulk trade channels accounts for about 20% of the 80-billion-yuan infant formula market [3].
At the beginning of this year when China was fighting the epidemic the hardest, the baby milk powder Daigou business has experienced a downturn. The reasons for this new round of decline in the third quarter might be due to:
The epidemic has driven some consumers to shift to domestic official channels to buy baby milk powder for safety and convenience.
Since the third quarter, competition in the milk powder market has intensified as major players try to use a low-price strategy to win more shares. Some price-sensitive consumers may give up the higher-cost of Daigou channel.
However, the flagging overseas milk powder Daigou business is temporary, and whether it can recover depends on the overseas epidemic situation.
Some overseas milk powder companies are also trying to offset this part of the loss. Wyeth has launched cross-border purchase and sales platforms for terminal stores in an attempt to boost the sales of cross-border milk powder through direct commissions to mother&baby stores. Some brands leveraged the online cross-border marketplaces like Tmall and JD to open cross-border flagship stores. Aptamil ESSENSIS, Wyeth illume goat milk formula, Bellamy's organic goat milk entered the Chinese market through brand cross-border flagship stores.
