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‘Severe demand shock’ clips Bubs’ wings, but the future looks bright

The Covid-related border closures have had a heavy impact on listed Australian children’s nutritional products maker Bubs results, causing a “severe demand shock” – but fourth-quarter figures have shaped the company’s belief that the worst is now behind it. 

The company reported a post-tax underlying loss of $28.5 million, but impairments of $44.6 million took that to $73.1 million as the company had to write off unsold materials and product inventory due to the collapse of the daigou market – the practice of Chinese citizens travelling abroad to import products for resale back home. 

However, while full-year revenue fell 24 per cent to $46.8 million, by the fourth quarter the company had recovered significantly, by adapting to the new market conditions and improving its home-market performance. Gross second-half revenue rose 10 per cent and fourth-quarter profit was just 4 per cent below the same period a year ago. 

“There is no doubt that the disruptions caused by the Covid-19 pandemic significantly impacted our performance, with international border closures triggering a severe demand shock and sharp decline in revenues in the first quarter, followed by subdued Daigou sales throughout the remaining three quarters,” said Bubs founder and CEO Kristy Carr. “In addition, we experienced disruption and increased costs associated with outbound international supply chain logistics.”

Carr said the company worked with key domestic and international trading partners to reset its supply chain and identify new ways of doing business. 

“Our agility and resilience have underpinned our momentum toward a rebuild phase, following the setback in the first quarter. The strategies implemented to redirect product through the ecosystem led to an uplift in the second half.”

Among those strategies, said Carr, was the decision to discount sales of bulk powder to clear excess inventory and prioritise cash conversion, resisting pressure to push inventory to distributor channels. “This enabled the company to return to a balanced inventory position, with milk supply right-sized to match stabilised offtake demand forecasts.”

Chairman Dennis Lin said that, notwithstanding the pandemic, large and growing addressable markets remain on the company’s horizons “and we are well placed, from farm to consumer, to take advantage of new market opportunities,” as seen with the launch into North America announced in June.

“We remain confident the strengths of Bubs business model will enable the company to navigate the continuing challenges posed by Covid-19, and anticipate a gradual return to growth as we continue to focus our efforts on our core competencies, and stretch our brand awareness to support new categories in line with our position as a specialist producer of dairy-based nutritional products.” 

Sales data shows that in Bubs’ Australian home market, the company was the fastest-growing infant formula manufacturer across Woolworths, Coles and Chemist Warehouse with combined retail scan sales growth of 51.5 per cent in a category that declined 46 per cent during the same period.

“Bubs Infant Formula has more than doubled in domestic market share throughout the year, showing strong brand health metrics as the lead challenger brand and is the clear No 2 in both the goat and organic formula sub-categories.”

In China, strong cross-border e-commerce sales growth partly mitigated the collapse of the daigou market, with infant formula revenue up 26 per cent year on year. Gross revenue rose by 34 per cent in the second half against the first half, and by 17 per cent year on year.

Sales in other overseas markets rose by 57 per cent, including ingredient sales. 

“We ended the year with a return to a healthy price architecture across all China channels and momentum building in the facilitated Daigou 2.0 omnichannel sales model intended to positively accelerate demand throughout the entire ecosystem,” said Carr.

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