Bubs Australia, a leading player in the food and beverage industry, recently completed a comprehensive business review that highlighted the company’s “failed” strategy for China and its negative impact on long-suffering shareholders. Reg Weine, the non-executive director, shared during a presentation to stakeholders how the company has accumulated losses of A$240m ($160.4m) since its IPO in January 2017.
The review revealed that investors have experienced a significant decline in the value of their investments, ranging from 59% to 81%, after seven fundraising rounds. In response to this decline, a group of shareholders, including founder and former CEO Kristy Carr, requested an Extraordinary General Meeting (EGM) on July 27th to address their concerns.
During the presentation, Weine emphasized the need for a change in strategy and governance, as well as a greater focus on accountability and clear leadership across key markets such as the USA, China, and Australia. He also highlighted the company’s excessive spending and stressed the importance of living within means to prevent further financial losses.
The company recognizes the pressing need to reduce its “cash burn,” which currently stands at A$5m per month. While Bubs Australia is determined to cut this by more than half, to approximately A$2m per month, it may take until the second quarter of fiscal 2024 to achieve this goal.
Efforts to optimize operations have already resulted in a A$10m reduction in annual operating expenses since the review began in April. The company projects a return to profitability in 2025.
Goat Formula Focus
Weine emphasized the need for Bubs Australia to concentrate its resources on its highly regarded goat-milk baby formulas, including its renowned Bubs and Caprilac brands. He expressed the possibility of decreasing focus on cow’s milk powders, specifically the underperforming A2 Supreme line. By aligning their portfolio with their competitive advantage and doubling down on goat milk products, the company aims to streamline its offerings.
Bubs Australia was granted preliminary approval to supply the US market in response to a previous supply shortage. The company sees the US as a “growth engine” and plans to prioritize it as part of their new five-point strategic plan. The China market, which has experienced setbacks, is also a key area of focus for improvement.
Other elements of the new strategy include portfolio optimization, repositioning of cow’s milk formula, and capitalizing on existing assets, such as the Deloraine facility in Victoria. By reducing operating expenses and cutting cash burn, Bubs Australia aims to enhance overall profitability.
While full FDA approval for formula supply to the US is anticipated, it may not be granted until late 2025, potentially resulting in a substantial increase in the company’s worth. If the company can successfully reset its strategy in China and demonstrate growth in the world’s two largest infant-formula markets, it could further enhance its valuation.
The “Failed” China Strategy
Bubs Australia’s ineffective go-to-market strategy, misaligned partnerships, and overreliance on rebates and discounts within the Daigou sales channel have contributed to the company’s difficulties in China. To address these issues, the company plans to apply for SAMR registration in China for its goat formula. However, this process is complex and time-consuming.
A recent non-cash impairment charge of A$20-25m has been recorded due to excess inventory of the A2 Supreme brand. Recognizing the urgency to rectify their China strategy, the company acknowledges the need for a comprehensive reset, including adjustments to pricing architecture and enhanced distribution points. Bubs Australia remains committed to exploring opportunities in other markets such as Canada, the Middle East, and emerging markets, although they recognize that the US and China will have a more significant impact on their valuation in the medium term.
