Former market darling and infant milk formula company Bellamy's Australia Ltd (ASX: BAL) has been unceremoniously dumped in recent times following disappointing sales, supply issues, a class action and management upheaval.
I was a shareholder in Bellamy's for a short time, but fortunately managed to sell out at a small profit before recent news sent the share price tumbling. Prior to that I had thought the stock was overpriced at $5 (a much lower price than I ultimately paid for the shares!) because I had not realised the company was undergoing such dramatic growth culminating in a stellar set of results in 2016.
Bellamy's current sales guidance for this year doesn't look too bad to me as it is only slightly lower than last year. And Bellamy's are not the only ones to experience disruption of sales channels into China, with Blackmores Limited (ASX: BKL) also announcing disappointing sales in the first quarter of 2017.
I believe that growth will return to both these companies as their Chinese distribution networks mature.
Blackmores and Bellamy's have also both taken a large hit to profitability despite only slightly weaker sales as overproduction has impacted margins.
I don't think Bellamy's were necessarily wrong for negotiating minimum purchase orders with suppliers who probably insisted upon such conditions. It is easy to criticise in hindsight but really nobody could have predicted far enough in advance that sales trends would change so quickly and dramatically. It's also possible that demand will recover much sooner-than-expected anyway.
I had always wondered if Chinese consumers bought Bellamy's because of the brand or simply because it was not Chinese. In 2008 hundreds of thousands of Chinese babies fell ill because of contaminated baby milk formula creating an opportunity for foreign providers. Given Bellamy's once dominant market position has been eroded by rivals including a2 Milk Company Ltd (Australia) (ASX: A2M), I suspect that not being Chinese is more significant than any perceived brand power.
I expect Bellamy's will sort out its supply chain issues over time and I can see profit margins returning to previous levels. That would make the stock attractively priced at the current share price of around $4 per share, especially as the Chinese market is gigantic and still represents a massive opportunity for the company.
However, who's to say that Chinese consumer allegiances won't switch again in the future or which Australasian brand (if any) will ultimately win out?