Blackmores Tries to Grab Chinese Market from Established Competition

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Blackmores [ASX:BKL] is expanding into baby formula. The vitamin supplement company has seen the demand from China, and they want in. The infant formula market is huge. And it’s not just any old formula that China is demanding. The Chinese only buy high quality, nutritional formula. That’s why BKL decided on Saturday to launch their new product line of infant nutrition products.

Venturing into infant formula might not be that much of a stretch. BKL has promoted wellbeing from the start. So jumping into the infant formula market is a smart move.

It all started in China

Chinese demand for infant formula skyrocketed late last year. Supermarkets Australia-wide struggled to keep infant formula on their shelves. Some stores have even resorted to limiting infant formula to consumers all together. Supply simply cannot keep up with the demand.

But why is infant formula in such high demand?

If we wind back the clock to 2008, Chinese parents had little preference whether they bought infant formula domestically or internationally. Yet later that year their opinions completely changed. A scandal involving infant formula caused the death of six Chinese infants. Thousands of children across the region had to be hospitalised.

It was later discovered that domestic infant formula contained toxic levels of melamine.

Chinese parents knew the fear all too well. Just four years prior to the 2008 scandal, 13 Chinese infants died from malnutrition. Parents who thought they bought nutritious formula where distraught and confused. What Chinese consumers actually received was a watered down substitute.

Since 2008 Chinese parents have been buying infant formula from international producers. Chinese consumers had to look no further than Australia. Companies like Bellamy’s Australia [ASX:BAL] and A2 Milk [ASX:A2M] have already established themselves as major supplier of infant formula to China. Both companies have revised earnings up multiple times because of higher than expected sales.

So can BKL do the same, or are they already too late?

Blackmores Partners with Bega to break into infant formula

BKL decided to pursue an infant formula product line last year in October. Investors showed their enthusiasm for the venture as BKL share jumped up 13%. Politicians are also sharing in the excitement.

Trade minister, Andrew Robb is hailing the BKL and Bega Cheese [ASX:BGA] partnership. He said the venture was being watched by other Australian businesses as a learning example.

Mr Robb believes companies can learn about downstream processing of agriculture products from BKL and BGA. Not to mention high end manufacturing.

Blackmores has also tried to take a market edge by supply 80% of initial output to Australia. The goodwill play may turn out positive for BKL. Yet it’s not were the market is. But it’s a different angle that will separate them from the competition.

Just like big banks committing to act more ethically, Blackmores might benefit from a simular tactic. BKL’s competition has supplied limited stock to Australian consumers. You might think that they are big businesses trying to make money. Well you are right in a sense. But they are just looking out for the shareholders. It’s their job. And there’s no guarantee BKL won’t expand production to China and limit Australian production in the future.

Blackmores is using their loyalty strategy to do exactly the same thing.

Good or bad news for Blackmores share price?

Both BKL and BGA’s management are excited about the potential success. And they should be. The infant formula market is huge. And it has put agribusinesses in the spotlight.

Both companies have enjoyed success within the Asian region separately. Now with their joint venture, some are saying that BKL and BGA’s success will impact the whole Australian business sector. This could be a whole new wave of Australian agricultural businesses. Instead of mining, it could be food manufacturing that is Australia’s competitive edge.

Harje Ronngard,

Junior Analyst, Money Morning

PS: We are seeing agriculture pop up all over Australia. Their hope is based on Asian demand. And Blackmores could be in for another big year. But agriculture isn’t the only place to look for investments. According to Money Moring’s Publisher Kris Sayce there are five ‘must-buy’ ASX stocks for 2016.

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