Stocks exposed to booming Chinese consumerism are suffering today with the Bellamy's Australia Ltd (ASX: BAL) share price and A2 Milk Company Ltd (ASX: A2M) share price tumbling lower.
The BAL share price lost 3.7% to a three-week low of $8.38 while the A2M share price shed 2.7% to $12.34 in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.3%.
These aren't the only stocks on the nose. The Treasury Wine Estates Ltd (ASX: TWE) share price and Wattle Health Australia Ltd (ASX: WHA) share price are also sharply lower as they too depend heavily on Chinese demand for their products for their growth.
Bitter pill
But confidence that China can keep fuelling earnings growth for the group are being tested after vitamins company Blackmores Limited (ASX: BKL) posted a disappointing outlook when it handed in its profit result today.
Blackmores warned that second half earnings will be lower than its first half because of a sharp slowdown in its Chinese business.
Could this herald the end of the Chinese dream for these high-flying growth stocks? Afterall, all these stocks have been (or had been in 2018) outperforming the market on the belief that they can sustain their double-digit earnings growth for the next few years at least because they've managed to tap into the growing middle-class in China.
There are around 400 million Chinese that's classified as middle class and Statista is forecasting this number will jump to 700 million by 2020!
That's a lot of potential new customers for Australian infant milk formula, vitamins and wine.
But Blackmores' results show this isn't a smooth path upwards even if you had a well-regarded brand and quality product. Should investors be worried?
Foolish takeaway
I don't think so. The issue with Blackmores appears to be more to do with its distribution channel as the company is trying to move away from smaller third-party distributors and wholesalers in favour of building its own direct-to-customer sales channel.
I fully understand why the Blackmores share price has crashed by nearly a quarter today. It's a high risk manoeuvre whenever you mess with your sales channel – particularly in China.
It wasn't that long ago that Bellamy's found itself in the same leaky boat although it managed to eventually overcome those issues.
Having a more direct control over your sales channel is generally a good strategy move as it puts a company much closer to the customer, although execution risks are high and there's a lot of short-term pain you will need to endure before you can reap the benefits.
This is why it may be better to leave Blackmores on the shelf for now but to use the price weakness to buy other growth stocks that are still well placed to deliver double-digit growth in 2019 and beyond.
Having said that, it will be interesting to see what earnings result and outlook A2 Milk pulls out of its hat when it fronts investors tomorrow.
