Bellamy's Australia Ltd (ASX: BAL) shares are down and appear out for the count.
What happened to the Bellamy's share price?
One look at the 12-month chart of Bellamy's share price tells us that something bad happened between late 2016 and early 2017 — and it was a shock to investors. To understand it, we have to go back 12 months.
This time last year, Bellamy's shares were riding high on elevated levels of demand for its infant formula products. Here is the top search for news of infant formula sales and the supermarkets a year ago:
The top search result says it all.
A year ago, Chinese consumers couldn't get enough of the 'white gold'. So much so that local consumers were buying a trolley full of infant formula tins from supermarkets and pharmacies to sell them online into China for five or 10 times the retail price.
Bellamy's couldn't keep up.
And neither could local mums and dads looking for quality formula at Coles or Woolworths Limited (ASX: WOW). Following a media frenzy, the two supermarkets were forced to limit sales.
But these buyers, called 'daigou', were relentless.
For example, my partner, who worked in a pharmacy at the time, recalled many instances of customers trolling the shelves in search of Bellamy's, Aptamil and s20 infant formulas. It was clear they wanted only those brands — and not for their children.
The customer's next move was even more surprising. They would ask a shop assistant, "Can you order me 100 tins of Bellamy's?"
The reply was typically a "no" for a number of reasons. But one reason was that the pharmacy could not get five tins of infant formula for itself — let alone 100 for a single customer!
When did the craze end?
Things appear to have changed around April 2016.
At that time, the Chinese government announced a change to future regulation in infant formula sales. The changes would make the 'back channel' or 'grey market' sales more difficult and force suppliers of infant formula to be certified.
Bellamy's, having just signed big deals with its suppliers to manufacture more formula (note: it contracts out manufacturing), was all of sudden in a pickle.
It had to get certification but also had to improve its sales channels. That's a supply-side and demand-side risk. But investors appeared confident in the ability of management to meet these challenges.
Unfortunately, at the time the impending regulations were announced, many rival infant formula producers were concerned that they would not achieve certification and began to flood the market with their products while they could.
Bellamy's, having been caught between a rock and a hard place, had two choices:
- Maintain a high market price, which improves brand strength but could drastically reduce sales volume. Note that many Chinese consumers believe price is the single most important sign of quality, especially when it comes to natural health products. That is, the higher the price, the more appealing the product.
- Sell at a lower price to increase sales volume and lower inventory.
Given its inventory pickle — which included massive increases in the number of tins being produced — Bellamy's appears to have taken the second option.
Sure enough, in late 2017 concerns came to the fore. Surprisingly, sales were going to be lower despite the company having increased supply.
And when the company announced the issues, things got messy. Bellamy's shares entered a month-long trading suspension over Christmas as it calculated its financial forecasts and was forced to renegotiate with suppliers.
Are Bellamy's shares 'white gold'?
At today's reduced prices, some investors will be running the ruler over Bellamy's. After all, if the company can resurrect its brand, sort out its high inventory levels, and its suppliers can achieve certification, it could go on to be a winning investment.
And such is investing that Bellamy's shares are, right now, far better value than they were two months ago. But using hindsight is easy — after all, we don't invest looking through the rear vision mirror.
However, it is important to remember that you can still lose 100% more of your investment after a share has fallen 70% — or 99%.
Personally, I think the risks are too great to invest in Bellamy's right now. Especially when there are many other appealing alternatives…
