a2 Milk To Cut Back on Consultant Fees
Chief Executive of a2 Milk, Geoff Babidge, has announced that the firm is likely to slash consultant fees at the infant formula company. However, marketing expenditure will remain despite concerns surrounding the impact of the deadly coronavirus in the region. Mr Babidge had recently taken over the $11.2 billion company after former CEO Jayne Hrdlicka abruptly announced her resignation in December 2019 over tensions between the board and herself.
Specifically, one burning issue was the consultancy fees spend under Ms Hrdlicka’s leadership which reached $NZ20 million in 2018-2019. Additionally, marketing costs rose to $NZ135 million, in turn, weighing heavily on margins. While such spending allocation may be viewed as excessive to some, Ms Hrdlicka’s initial intention was to grow the brand’s presence in China. Thus, even as planned marketing mix is expected to continue, the flexing of its strategies is put on hold due to the coronavirus.
Furthermore, the firm intends to spend approximately $NZ200 million on marketing in 2020. Meanwhile, Mr Babidge reassured investors that the firm’s performance remained stable even as its key supplier, Synlait Milk proceeded to downgrade earnings expectations. This move was due to registration delays in China for infant formula brands. In February, a2 Milk had close to fifty employees who were working from home due to government regulations. Meanwhile, its Chinese infant nutrition partner, China State Farm Holding Shanghai Co Ltd, is trying its best to maintain smooth operations and minimise disruptions regarding the delivery of its product.
From a broader perspective, the a2 Milk company had previously donated NZ$1 million to two education institutions towards fighting the novel coronavirus that has hit China. The two donations of NZ$500,000 to the Peter Doherty Institute for Infection and Immunity as well as the University of Queensland’s School of Chemistry and Molecular Biosciences. Specifically, the former institution comprises a joint venture between the Royal Melbourne Hospital and the University of Melbourne who will work together to assist the development of a vaccine to contain the spread of the virus.
Aside to the long-standing agreement with Synlait which holds the exclusive rights to manufacture its infant formula, a2 Milk also has a nutritional milk powder manufacturing agreement with Fonterra. While the a2 board has been considering whether or not to transit from brand ownership to manufacturing for five years now, Mr Babidge cited that it was unlikely for the firm to follow the footsteps of Blackmores in purchasing its factory. Instead, he stated the firm’s preference for working with others in undertaking investment activities in manufacturing capacity.
To date, the company continues to perform well as sales of a2 instant formula in China soared 100 per cent to $NZ146.7 million in the six months leading to 31 December. Additionally, sales in China remained steady in the first two months of the year despite the bleak outlook of the deadly coronavirus. Despite its stellar performance, the company did not announce plans of paying an interim dividend.
By Caroline Wong
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