US infant formula industry will become as big as China – Bubs CEO

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Carr was answering questions from analysts on the company’s FY22 earnings call.

The ASX-listed company posted record gross revenue of A$104.2 million, up 123% year-on-year, while underlying EBITDA profit was 4, 84 million Australian dollars.

In China, revenues have exceeded pre-pandemic levels. Year-over-year market revenue growth increased by 166%, accounting for 55% of group revenue.

This was largely due to the success of its corporate daigou business with AZ Corporation, where gross revenue increased fivefold year-over-year.

In its international markets, of which the United States is a part, revenues increased by 202%, accounting for 28% of the group’s revenues.

Currently, the company’s infant formulas are available at more than 6,000 stores, including major supermarket chains Walmart, Target and Kroger, in 42 US states.

More than 800,000 boxes of Bubs infant formula have been exported to the United States since the company received US FDA approval under the Enforcement Discretionary Arrangement in late May.

The United States has introduced enforcement discretion to expedite the supply of infant formula following product shortages triggered by Abbott’s product recall.

“The U.S. infant formula market would have been a much longer term prospect for Bubs, we will now ensure that we continue to stay ahead of the curve, and the market dynamics give us confidence that the U.S. would become as important as China is to Bubs in the short to medium term.

“Overall, this will position Bubs Australia as the only global challenger with a comprehensive infant formula portfolio and we aim to be a significant industry player in both China and the US – two of the biggest infant formula markets in the world, while continuing to develop our home market, Australia,” Carr said.

Currently, the company has launched products covering the high-end segments of a2 milk protein, organic grass-fed goat’s milk and easy-to-digest goat’s milk.

The next step in the US is to introduce the products into Wholefoods, the company has also been in contact with the US FDA on upcoming arrangements to make its exports permanent in the long term.

US FDA announcement expected in September

Bubs Chairman Dennis Lin said the company expected the US FDA to introduce a specific framework to allow the company to continue exporting infant formula to the United States last November.

Earlier, the US FDA said it would exercise its discretion until November 14, and products approved on or before could remain on the US market after that date.

“From a regulatory perspective, we expect the US FDA to issue a very specific framework and guidelines, but only apply to the eight brands that have been given discretion to continue importing preparations for infants after November.

“We expect the regulatory framework to be published at the end of September, but we are still in weekly communication to work as much as possible on this, and we have something more to discuss closer to the date.

“The key point, however, is that there is no planned shutdown from the FDA or the US government as we transition from temporary to permanent,” Lin said in response to questions from investor analysts.

He also pointed out that Abbott has recalled approximately 70 million boxes of infant formula and by being the first to be granted discretion, the Bubs brand has become a must-have brand for the US FDA.

“By being the first to act, Bubs has now become the preferred infant formula for many thousands of American families, and so it’s a challenge for the FDA, because it no longer makes sense for them to again disrupt the families to need to switch from one brand to another”, he said.

Winning consumers in China

Bubs believes the key to winning over Chinese consumers is not just identifying the right path to market, but more importantly, providing enough margins for retailers to work with the brand and also launching innovative formulations.

“The question is not just about the pricing architecture, or if we sell through cross-border e-commerce, or if we sell through offline-2-online or daigou.

“The question really comes back from a consumer-centric perspective, how much is the consumer willing to pay; how does it work in a sustainable value chain and is there enough headroom for people to want to promote your brand and is your brand authentic and has the most innovative formulations to enable mothers and Chinese caregivers to be comfortable enough to buy your brand.

“These are some of the key factors,” Lin said.

Recently, the company also launched an a2 milk protein infant formula containing pre/probiotics and plant-based omega-3 DHA, which Lin says was specifically designed for the Chinese population.

“Plant-based DHA omega-3 is not something that is generally considered by Australian mothers and consumers, but it is very relevant in China and very specifically designed to ensure that consumers Chinese will take it as a very advanced formulation,” he said.

Over the past year, the company has experienced significant growth in its CBEC and social selling businesses.

“During the year, we experienced 29% revenue growth from the CBEC platforms and five-fold growth from what has traditionally been called the enterprise daigou and is now perhaps better called the recruiting channel,” Carr said.

With AZ Corporation, Bubs ran its social selling program and a Tik Tok campaign with its brand ambassador, Taiwanese celebrity Will Liu, reached 390 million views in China.

“We plan to continue to reinvent routes to market, so we can grow without having to engage in the same level of marketing as our peers.

“We will find different ways to skip the queue, be ahead of the queue and be at the top of consumers’ minds,”Linen added.

Get the right margins

In FY22, Bubs said its group gross margin reached 32%, while Bubs Goat infant formula gross margin was over 40%, up from 35% last year.

According to the company, this was achieved through optimizing the product and channel mix, improving the supply chain and inventory management.

At the same time, Lin noted that the margin on products was down for all brands in China, and that this is a “critical” area that the company would work on /

“For Chinese brands as for foreign brands, the margin decreases significantly in the channels. And we really see that as an opportunity for us in FY23 to really break through, not just taking advantage of a potential vacuum in Australia, because some brands may have actually changed their direction to another jurisdiction, as well than in China.

“If you look at the infant formula businesses of Chinese companies Feihe, H&H, Ausnutria, there’s a reason why their margins have all shrunk dramatically, because they haven’t achieved the ideal balance between supply and request.

“Our challenge is for Bubs to aspire to be the first brand that can achieve and communicate that level of visibility, not only for us as a management platform, but also to have the ability to communicate and conveying this confidence to consumers and also to investors is absolutely essential for us”, he said.

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