Out-of-stock situations for its China-label infant milk formulas in Q4 have led consumers to switch to competitor brands.
At the moment, uptake of its China-label infant milk formulas is estimated at 40% of the pre-disruption level. Recovery is expected to be gradual in FY 2027.
The China-label infant milk formula, a2 ZhiChu, went out of stock in Q4 due to various factors, including freight challenges indirectly caused by the Middle East crisis, production backlog and extended product release times, as well as additional customs clearance requirements and testing measures.
“These factors have been resolved and availability has significantly improved. However, the in-market product availability issues necessitated a large proportion of our existing users to switch to alternative brands, which, as you can see, significantly impacted our China label market share during the fourth quarter,” he said. “The rate of recovery will depend on our ability to regain past users, new user recruitment momentum, and the performance of our new China label IMF products.”
The New Zealand-based company reported a 12.4% increase in revenue to NZD$1.97 billion (US$1.17bn) during its annual results presentation on August 17.
Net profit after tax fell 5.8% to NZD$207.5 million (US$122.8m).
While revenue had increased, the company acknowledged that this was driven by the premiumization of products, which had cushioned a low single-digit decline in volume.
In Mainland China, where the bulk of its infant formula business is, the business grew 5% supported by strong English label growth, with China label sales significantly impacted by temporary supply chain disruption in the fourth quarter.
Specifically, revenue of its China-label infant milk formula fell 14% year-on-year to NZD 544 million.
“This was very much a story of two halves, with revenue up 6.5% in the first half and down 33% in the second half as a result of the fourth quarter supply chain disruption,” said Li Zhao, Business Unit Leader - China Label infant milk formula (IMF). “As previously mentioned, the contributing factors are now resolved. IMF availability has improved significantly.”
As of end of June, stage 1 to 3 of a2 ZhiChu formulas were back in stock, while stage 4 will be restocked in August. Meanwhile, kids fortified powder is available as a substitute for its stage 3 and 4 infant formulas.
The a2MC sells China-label infant milk formulas via daigou and mother-and-baby stores across Mainland China, while English-label products are sold into China via cross-border e-commerce (CBEC). English-label products are also sold in other countries such as Vietnam.
Aside from infant formulas, the company also sell a2 fresh milk and health supplements for children and seniors.
Challenging to get those early-stage users back quickly
While the factors causing supply chain disruption have been resolved, CEO David Bortolussi acknowledged it would be challenging to get back early-stage infant formula users, and a period of recovery was expected.
“Now at about 40% offtake run rate, we have lost the majority of our early-stage customers through forced product switching to other brands,” he said. “We have probably maintained the majority of our later-stage users...It is challenging to get those early-stage users back quickly.”
He explained that most mothers with young infants are generally not inclined to switch brands unless they have encountered issues with the new products.
However, there might be opportunities for past users to return to the brand when progressing to the next stage of infant formulas.
“Some may wait till the next stage of transition, which is when you transition from stage 1 to 2 or from 2 to 3, that provides another opportunity to regain those consumers,” he said. “As those consumers did change to other brands, the competitors couldn’t help but offer them attractive deals, which means that some of them (consumers) have significant pantry inventory to consume as well before they would contemplate switching back to us.”
The company is now focusing on its China infant formula recovery, regaining past users and accelerating new user recruitment.
One way of doing so is the launch of a traceability tool in mid-June which features batch-by-batch testing.
The company believes that these initiatives are rebuilding confidence in quality and supply and driving positive sentiment.
Upcoming plans
The a2MC is planning to launch two new China-label infant milk formulas as well as a range of health supplements.
In the first half of FY27, it is launching a2 ZhiChu QiRun (a2 至初启润) and a2 ZhiChu ZhiChun (a2 至初至淳). The former is targeted at the ultra-premium category in lower-tier cities and the latter at the organic ultra-premium category in higher-tier cities.
It is also upgrading its English-label products, namely a2 Platinum and a2 Genesis. The former comes with increased DHA levels and the addition of lutein, while the latter will have its human milk oligosaccharides (HMOs) increased from three to six.
In the first half of FY27, the company will also launch three new English-label pediatric supplements for immune health and bone development. Its new calcium supplements, for example, come in liquid sachets. These products will be sold in Australia, New Zealand and Mainland China via cross-border e-commerce.
According to the company, its past new product launches had accounted for more than 50% of its sales growth in FY26.
