By Jenny Ruth
Aug. 27 (BusinessDesk) - A crackdown on the daigou trade by Chinese authorities has prompted Ebos to establish a presence on the ground in China by opening an office in Shanghai.
The office opened in May and currently employs 10 people.
Ebos chief executive John Cullity says the crackdown on the daigou – which literally means buying on behalf of somebody else and in practice sees Chinese buying consumer products in New Zealand and Australia for resale in China – has had a noticeable impact on the firm's Australasian sales volumes.
The company has found that Chinese regulatory changes can impact its sales quite suddenly and “as we understand it, the Chinese authorities have made that phenomenon less attractive,” Cullity says.
Like other Australasian companies, the daigou have been instrumental in the past in introducing brands into China. A2 Milk, for example, leaned heavily on the daigou, which aided the phenomenal sales growth of its infant formula business from 2014 onwards.
But also like A2, which now deals directly with physical “mother and baby” stores within China, Ebos has realised that it needs to change tack if it is to build on its initial success in China.
“If you’re going to successfully grow your market in China, you have to have a presence in China,” Cullity says.
The consumer products part of Ebos is tiny – revenue in the year ended June was $113.9 million compared with the company’s total sales of $6.93 billion.
But it’s growing faster – group revenue actually fell 0.8 percent in the latest year while revenue from consumer products rose 4.9 percent.
Ebos’ mainstream business is as a wholesaler of other companies' brands – it represents brands such as Ansell, Bausch+Lomb and SCJohnson in Australasia.
But it ventured into owning its own consumer brands first in its animal health business with the Vitapet, Animates and Masterpet brands and then bought the Black Hawk pet food brand in late 2014.
It already owned the Anti-Flamme herbal creams business and acquired the Faulding vitamins and probiotics brand through the takeover of Symbion in 2013.
Ebos went on to buy the Red Seal brand of vitamins, herbal teas and toothpastes in late 2015 and it bought the Quitnits brand, a treatment for head lice, in the latest financial year.
The push into China has mostly been with the Red Seal brand but Cullity says it also sells small volumes of Black Hawk products there too. The group's animal care sales grew 1 percent in the latest year but Black Hawk sales rose 11.4 percent.
“In the longer-term, we’re quite confident we can grow that to more significant volumes. The main thing for us is to establish a presence and do background work on how those markets operate,” he says.
Consumer brands definitely figure in Ebos’ continual search for potential acquisitions. It has plenty of firepower – it estimated it had $300-350 million in available capacity without taking its gearing out of its target range of 1.7 to 2.3 times net debt to earnings before interest, tax, depreciation and amortisation.
That ratio was only 1.41 times at June 30 following Ebos’ $175 million capital raising in May.
Cullity says Ebos’ search for acquisitions is still focused on New Zealand and Australia and the company isn’t looking any further afield.
“We’re still heartened by the number of opportunities we believe we can act on in this market,” he says.
Consumer brands tend to have fatter margins and margins are certainly an issue for Ebos.
It took a sideswipe at Australia’s government and its pharmaceutical benefits scheme when it announced its annual results last week, Cullity saying that the financial stability of the pharmacy industry “is at a critical juncture with wholesalers being significantly impacted by PBS reforms.
“Approximately 80 percent of distribution volumes now generate a margin of less than $1, given there has been no effective increase in wholesaler remuneration since 2010,” he said. The Australian government has to provide additional financial support if the wholesale industry is to maintain its service standards, he said.
But Cullity says although “consumer brands have got fatter margins, let’s call them more healthy margins, they also attract a higher purchase price and trade at higher multiples, so it’s a balance.”
Ebos is continually looking at potential small, medium and large acquisitions and Cullity won’t rule anything out.
“The nature of that type of activity is that it can be somewhat opportunistic” but Ebos has “a strong pipeline of opportunities.”