Bitter pill for Blackmores boss as China turns sour


Last week vitamin company Blackmores lost 24 per cent of its sharemarket value in one day. On Tuesday it lost its chief executive Richard Henfrey and its ability to tell investors why he had gone.

If Blackmores is trying to convey that last week’s disappointing China sales result  is a short-term glitch from which it will soon recover, the departure of Henfrey is precisely the wrong signal.

The announcement that he would vacate his role was unexpected, abrupt and short. There is no replacement named, no mention of Henfrey taking another job and a cursory thanks for service and commitment.

Equally, if the company wants investors to think that the disappointing China sales slowdown was all about the Chinese economy and thus outside the company’s control, then replacing the chief executive that had only been in the job for 18 months only suggests otherwise.

And this probably explains why the Blackmores share price fell  3 per cent by lunchtime.

While some of the slowdown in sales to China can probably be blamed on the Chinese economy, analyst commentary on the Blackmores result was generally negative.

Take Thomas Kierath from Morgan Stanley. He accuses the company of a “lack of channel clarity”.

He points out that China sales growth slowed from 30 per cent in the first quarter of the year to minus 14 per cent in the second quarter which indicated the company had broadened China distribution too quickly.

‘Too much stock in the channel creates near-term earnings risk but more importantly brand risk which impairs long-term earnings power.” He says the key focus must be undertnding what is sold into the channel against what is sold out of the channel.

Another name for this inventory blockage in the distribution pipe is “channel stuffing”, although this term usually suggests that having a backlog of inventory sitting in various market channels is a deliberate means of disguising sales and  profits.

Those with a bit of corporate memory will remember the great US Treasury Wines  channel stuffing story of 2013. It was a major inventory disaster and it ultimately led to a change of chief executive and $35 million of inventory having to be destroyed.

(Interestingly, the latest result from Treasury Wines suggests its China sales are chugging along nicely.)

No one is suggesting Blackmores has been deceptive but there are concerns now that it has inventory inside these channels that will need to be cleared. Nor is Blackmores’ problem in the same league.

But it does appear to have too much stock sitting in the China channels that is yet to have found its way to the consumer.

At last week’s profit announcement Henfrey told the market in an outlook statement that “our China sales in the third quarter are being impacted by continuing changes to the way customers purchase our products as well as higher inventory in the trade and a general softening of consumer sentiment”.

It is hard to escape the conclusion that clearing this inventory should limit sales growth to China – certainly in the short term.

It does appear to have too much stock sitting in the China channels that is yet to have found its way to the consumer.

Citi’s Sam Teeger noted that Blackmores had previously flagged at its first quarter result that there had been significant increases in Australian retail customers engaging in their own wholesaling business – reselling Blackmores products to Chinese resellers/exporters (‘big daigou’) and directly to Chinese consumers through e-commerce platforms. According to Citi, this decreases inventory visibility for Blackmores.

Assuming there is nothing more sinister in the outlook for Blackmores, the recent fall from sharemarket grace reflects, in part, the fact that the company’s shares had been priced for continuous significant growth – or perfection.

Any news that interferes with this growth trajectory can result in a severe market response. The longer term trends within Blackmores are solid.

When the previous chief executive, Christine Holgate, left to run Australia Post, Blackmores chose internal candidate, Henfrey.

Eighteen months on and his job is now to keep the seat warm for his replacement rather than embark on changing direction or strategy. He will presumably keep tabs on the cost-out program that was announced recently.

If the company is to overhaul any aspect of its distribution, investors will need to wait until Henfrey’s replacement is found.

Given the deafening silence from Blackmores no one knows how long this will take.

By Elizabeth Knight


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