A2 Milk rethinks its Chinese business as profits plummet

Struggling dairy business A2 Milk will seriously rethink its approach in its key Chinese market in an effort to drive future growth following a tough year that saw profits plunge 80 per cent.

A2, which produces a range of infant formula products along with its namesake milk brand, told investors on Thursday it had commenced a strategic review of the business focused on finding new avenues for growth moving forward.

a2 Milk CEO David Bortolussi is reviewing the China business.Credit:

Chief executive David Bortolussi acknowledged the Chinese market, which makes up for nearly half of the business’ revenue, was changing rapidly off the back of COVID-19 and would require a new approach.

A drop in China’s birth rate has shrunk the market for infant formula, and the pandemic has also seen a sharp reduction in ‘daigou’ resellers, which drove a significant chunk of A2’s sales into the region.

Due to this, domestic formula producers in China have stepped up to fill the gaps, creating more competitive intensity and faster product innovation, Mr Bortolussi said.

“We recognise that the China market and channel structure is changing rapidly and we are undertaking a comprehensive process to review our growth strategy and executional plans to respond to this new environment,” he said.

This review will include A2’s approach to driving growth in infant formula across both Chinese and English-labelled products, its infant formula product portfolio and innovation strategy, further growth opportunities, and its overall brand positioning.

The new move comes after A2’s revenue for the 2021 financial year fell 30.3 per cent to $NZ1.21 billion ($1.16 billion) and net profit after tax plunged 79.1 per cent to $80.7 million.

A2 has been seriously affected by the pandemic and has had to downgrade its earnings forecasts four times throughout the financial year as an expected recovery in its Chinese market did not eventuate and the business was forced to write-down $90 million in nearly out-of-date stock.

The company did not provide any specific guidance or sales figures for the start of the new financial year and warned investors conditions would continue to be volatile and challenging, with English label products expected to recover sales slowly and Chinese market growth to be subdued for some time.

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