Just six months ago, organic baby-food company Bellamy’s was flying the flag for a new Australian economy. Australia’s reputation for healthy, clean food was going to pick up the resources slack as China’s growth transitioned from infrastructure to consumption,
No stock encompassed the opportunity better than Bellamy’s, where sales grew from less than $30m in 2013 to $245m in the most recent financial year.
The stock is in a trading halt this morning. Another downgrade is likely, just a few weeks after the company’s first profit downgrade caused the share price to halve.
Knives will be out. The company’s lack of infrastructure will be scrutinised. Its lack of marketing expenditure will be blamed. But the cause of its woes is much simpler.
Here today, gone tomorrow
In China, there is nothing extraordinary about a product experiencing a dramatic surge in sales. A company’s brand can quickly become the latest, hottest product. With a growing middle class of more than 150 million people, becoming hot can be transformational.
And then, all of a sudden, the latest and greatest will be usurped by the next hot thing. Sales evaporate and bewildered executives can’t do anything about it.
This comes as a shock for a lot of Western investors. They think they have found the next Coca-Cola or Gillette – a brand that can grow for many decades in a market that itself is growing rapidly – only to see its growth prove remarkably ephemeral.
Asia’s best brands don’t exist yet
It should not be that surprising though. As I was starting high school in 1990, China’s GDP was less than $US2,000 per person. Most of its population was still well below the poverty line. While Coca-Cola was telling me sugary water was going to give me a six-pack and make me happy, my Chinese equivalent was already in the work force trying to feed his family. There was no point advertising to someone who couldn’t afford to buy your product.
Almost by definition, a strong brand is one that has been around a long time and has a permanent place in its customers’ psyche. China’s economy is so new and changing so fast that very few brands have been able to establish themselves. So what’s hot one day can be very cold the next.
Local brands will reign in China
Second and third generation Asian consumers are already shying away from Western brands and flocking towards “cool” Korean and Japanese products. Korean cosmetics companies have been prime beneficiaries. I don’t doubt that Asia will have plenty of established local brands in a few decades’ time. Indeed, entrenched Australian food brands may well have a place.
Bellamy’s might just be one of them.
For every company that manages to reach the peak, though, there will be hundreds that get a foothold only to tumble back down. It is almost impossible to pick the winners today. Indeed, the victors might not even exist.
If Ben Graham’s cigar-butt approach to investing appeals, there are hundreds of deeply discounted assets plays in China and Hong Kong. They tend to be traps not bargains. If you are a fan of Charlie Munger’s high quality businesses, picking winners won’t be any easier. China’s economy is a primordial soup where the survivors will be few and far between.
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