Signs of the size of the problem that Blackmores has with its crucial Chinese market became evident after the release of first-half result a few months ago when sales to this territory fell an alarming 11 per cent.
The Blackmores challenge is now to reset the strategy on how it sells to China. It is not relying on the defence of a slowdown in economic growth.
Blackmore admits it has much more to do with, firstly, how the company markets and distributes its product and secondly its failure to develop sufficient new product to whet the appetite of its Chinese customers.
In some respects Blackmores’ biggest problem is a lack of control around how its products are sold into this market.
While one distribution channel is selling directly into the Chinese market, a more important channel has been the daigou market – which is a wholesale market mechanism in which small and larger Chinese entrepreneurs buy Blackmores product off the shelves from Australian retailers like chemists and supermarkets and sell it to Chinese consumers.
Those companies whose products are sold into China via the daigou operators – be it baby formula or vitamins – are dealing with a distribution channel over which they have limited control.
During the past three months the daigou market was further complicated by new Chinese government rules that these vendors need to be regulated.
“The Chinese government now says they have to register their business and, of course, in registering they have to pay tax,” Blackmore said.
Speaking about smaller daigou operators, Blackmore said, “They work on such really small margins. They work out of their lounge rooms at home. They are a tiny business and can’t afford to have their product impounded.”
But it is the larger daigou companies that can upset the distribution chain and influence the inventory price of Blackmores products.
These players typically buy products from large pharmacies like Chemist Warehouse by the pallet load.
Blackmores is in the process of establishing a new and direct relationship with these bigger daigou operators – selling directly to them rather than through Australian retail outlets.
“That means a reduction in frequency and size of promotion in Australian retail.
We have all understood – as did Swisse a couple of years ago – that the daigou was not just supplying the product they were marketing the product for us,” Blackmore said on Tuesday.
“I suspect we didn’t appreciate the extent of what they were doing.”
Establishing this more direct sales relationship with China explains why China segment sales were up 19 per cent in the quarter and why revenue from Australia and New Zealand was down by 26 per cent – it was more about a reclassification.
The company said that when China influenced sales through Australian retailers were taken into account the overall sales to China consumers were down 6 per cent.
Meanwhile, a big marketing campaign in the third quarter added to costs and negatively impacted profit – something that should be reversed in the fourth quarter according to Blackmores.
The message of a strategy reset, a cost-cutting drive and a new management team to implement it seemed to get traction with investors as the day progressed.
By the end of the day the company’s shares had fallen off the list of worst performers and its share price staged a recovery to close down less than 2 per cent.
Elizabeth Knight comments on companies, markets and the economy.