New Zealand's a2 Milk to double down on China after profit plunges 80%

New Zealand's a2 Milk is warning of continuing uncertainty in supply chains and growth in its top market China, and said it plans to double down on the world's most populous country after it reported a near 80% plunge in profit.

26 August 2021

2 minute read

Oceania

Reuters reports that the company's shares, which have already lost around half their value since December, fell a further 12% following the warning and as it did not issue forecasts on revenue or core earnings margin.

COVID-19-led travel restrictions have largely wiped out a key informal sales channel for a2 Milk to get its products into China, leading to a build-up in inventory and prompting it to launch a review of its growth strategy.

The company expects to match marketing spending to fiscal 2020 levels. That, along with a rebalance in its channel inventory, will see revenue come in "significantly" higher in the second half against the same period in fiscal 2021, it said.

Piling on to its issues, a2 Milk also said it sees the value of the overall infant nutrition market falling as China's birthrate slows.

"It was a challenging year for but we remain confident in the long-term opportunity that the infant nutrition market in China represents," CEO David Bortolussi said in a statement.

Citibank analysts said in a note that a2 Milk needs to make material changes around driving growth, innovation and brand positioning to address structural headwinds. "It seems like a leap of faith to assume that a2 can turn its fortunes around."

The firm posted a net profit after tax for the year ended June at NZ$80.7 million ($56.28 million), with revenue down 30% to NZ$1.21 billion.

It had flagged the possibility of a share buyback, but decided against it by saying the funds would rather be used for re-investments or potential acquisitions.

($1 = 1.4339 New Zealand dollars)