The companies linked up in January this year to form the Bemore partnership on the back of booming Australian infant nutrition sales to China.
However, a combination of a market saturated with Western companies, forthcoming regulations seeking to better control and restrict the number of brands on the shelves, and the resulting heavy discounting by firms wanting to shed stock before the new rules come into place, have taken their toll.
Bega executive chairman Barry Irvin told the company’s AGM this week that the market had undergone a significant change in the last year.
"This change in our market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong headwinds for the partnership, particularly in the Australian market," he said.
Bega shareholders have been told the company plans a provision of $5m to $7m on inventory, representing the company’s share of the partnership.
Despite the announcement causing Bega’s shares to drop to a three-month low and the concession that earnings for the 2017 financial year were likely to be flat, he mounted a robust defence of the partnership.
“There has been a great deal of interest in the partnership between Bega Cheese and Blackmores,” he said.
“It is a great example of two Australian companies coming together to leverage the strengths of both.”
“We have great confidence in the value of the combination of the skills and capacities of both companies. However, there is no doubt that we have seen significant change in the nutritionals market since the partnership launched its first products in January.”
Short term oversupply
“While this time last year supermarket shelves were empty and customers in Australia and internationally were providing ever increasing orders, the combination of a regulation change in China, a supply response to the demand signals and the evolution of supply channels to market now sees significant discounting in the market place and signs of short term oversupply,” he added.
On paper the partnership looked a sure bet for success; combining Bega’s dairy and infant formula expertise with Blackmores’ track record in China. The fact that it has struggled, however, shows how competitive and volatile the Chinese infant nutrition market has become in the last year.
Bega chief executive Aidan Coleman added the challenging environment in infant nutrition would likely offset gains from a growing dairy foods sector and positive dairy commodity prices in 2017.
All eyes are now on Blackmores’ performance, with the firm due to hold its AGM tomorrow (Thursday, October 27). We’ll have full coverage of the supplement giant’s numbers online at www.nutraingredients-asia.com