Keeping a premium label — despite the cost
Jim Delegat’s wine business in Britain started giving him huge headaches from January 2010 in the wake of the GFC.
Not only were currency markets going against his company, major British retailers were pressuring him to drop prices while they competed against him by taking advantage of a glut of Marlborough sauvignon blanc and bottling it under their own private labels.
The retailers were able to greatly undercut Delegat’s Oyster Bay while still making better margins than they could from selling the Kiwi brand.
But rather than give in to British retailers’ demands for discounting, Delegat responded by upping Oyster Bay’s already premium price by a pound from October, 2010.
Delegat knew he would cop a huge drop in sales volumes in Britain, but judged that a much better option than devaluing the Oyster Bay brand.
Once you discount a premium brand, you destroy that premium image, he reckoned.
He wasn’t wrong about the impact on volumes.
Case sales to Britain, Ireland and Europe plummeted from 957,000 in the June 2010 year to 594,000 in the 2014 June year.
Volume still hasn’t recovered, although it may come close this year after a 31 per cent surge in the firsthalf to 469,000 cases.
To compensate for this huge hole in his biggest market, Delegat focused on growing sales in North America. Volumes sold there rose from 357,000 cases in 2010 to 1,250,000 in 2018 with growth of 13 per cent in the first half of the year just ended.
A2 plays its cards pretty close to its chest but it’s clear that, like Delegat, it’s all about the brand.
Former managing director Geoff Babidge didn’t wait for the science to catch up — it is doing so now — but went all out on a marketing effort to
convince Australians that A2 milk is easier to digest.
He then used that platform as a springboard, with infant formula — currently the company’s largest seller — only the beginning of a larger story.
His success can be seen in A2’s near 11 per cent share of Australia’s fresh milk market.
Since 2015, the company has been riding burgeoning Chinese demand for food, particularly for “safe” imported foods like A2 Platinum infant formula, from a country with a clean, green image.
That has taken A2’s market capitalisation from $326.4 million at the end of April, 2015 to more than $12 billion now and its share of China’s infant formula market went from nothing to 5.7 per cent in December last year. The company will no doubt update that when it releases its annual results later this month.
A key route into China for A2, before it got its own operation established in that country, was the daigou trade — people buying products in Australia and New Zealand for resale in China.
It’s no accident that A2 Platinum is market leader in Australia with more than 35 per cent of the infant formula market and that far more is available in Australia than there are babies to feed.
Comvita is another local company trying to ride that same daigou tiger but with results that have been spectacularly bad. The company expects to report a net operating loss of about $7.8 million for the year ended June.
Chair Neil Craig confirms his company has been selling directly to daigou while smaller daigou players buy at retail.
But Comvita hasn’t been following Jim Delegat’s playbook — it’s been discounting to those daigou.
The company had a 49 per cent joint venture partner on the ground in China and BusinessDesk understands it wasn’t at all happy with how Comvita was dealing with the daigou and reacted by collapsing its own prices and effectively collapsing the daigou trade in Comvita products.
Comvita bought out the JV partner, which became a major Comvita shareholder in exchange.
All this explains what Comvita means by its plans to achieve “price harmonisation” and having a “consistent pricing strategy”.
When Comvita went into the United States, which retailers did it choose? A retailer like natural foods specialist Whole Foods? Stores in which consumers expect to pay premium prices?
A2 chose Whole Foods in Northern California for the launch of its fresh milk sales in North America in May 2015.
But not Comvita.It chose Costco and Amazon, two retailers which are a byword for discounting.
Neil Craig won’t allow criticism that Comvita chose such retailers for its US launch. “You don’t have a choice. You still have to get approved and selected. Just because the supplier wants to go one route to market, it doesn’t mean to say you can do that.
“It’s hard work to get into any distribution channels in the US,” Craig says. “The Costco one has worked extremely well for us and so has Amazon. It’s taken five years to get reasonable volumes and margins. Once you’re in those channels, you can build out to other channels.”
Now what was that Jim Delegat was saying?