Daigou - the very thing that made a2 Milk great - has become its Achilles heel as a result of Covid-19 lockdown restrictions in Melbourne.
More than $1.5 billion was at one stage wiped off a2 Milk's market capitalisation after the company said its first-half revenue would drop because level 4 restrictions in Melbourne had affected its unofficial "daigou" sales.
Shares in the alternative milk and infant formula marketer last traded at $16.65, down $1.79 or 10 per cent from Friday's close, following the news.
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Daigou, sometimes called the grey market channel, involves individuals buying infant formula from pharmacies and supermarkets, and sending them to associates and businesses in China.
A2 Milk's success in this channel has propelled it from relative obscurity to being one of New Zealand's biggest companies by market capitalisation, driven by a long history of very strong earnings growth.
Over the last two years, "corporate" daigou entities have emerged, buying product wholesale and sending it to the PRC in bigger volumes.
Most of the daigou trade in a2 Milk's products is done out of Australia.
While daigou has been an important part of a2 Milk's strong growth story, the company has been reducing its reliance on it by expanding into the cross-border e-commerce channel through the likes of TMall, and through conventional mother and baby retail stores on the mainland.
A2 Milk, in an earnings update, said it expected first-half sales to come to $725 million to $775m, down from $805.3m in the previous corresponding period, due to slower sales through daigou.
The company expects to see a better second half, forecasting its annual group revenue to come in at $1.80 billion to $1.90b for the current year, up from $1.73b in 2021.
Disruption in the daigou channel had affected sales in September "and it is currently anticipated that this will continue for the remainder of the first half of FY21".
Daigou has historically been a key platform for a2 Milk, and it's an area that the company has proven itself to be better at navigating than many of is Australian peers.
Chief executive Geoff Babidge said the company started to see some evidence of daigou-driven softness at the start of its financial year, which ends next June.
"The reality is that the whole Covid-situation in Australia means that there is limited travel for many retail daigou traders who have supported our brand with product going into China," he said.
"Those numbers have reduced and the reality is that in fact the confidence in product being sourced, quite frankly, from a Covid-19 hotspot in Victoria, has reduced as a consequence of what has been happening in that market," he said, adding the current trend is expected to continue into the second quarter.
"The reality is that we are looking at a softer first half than we had originally expected.
"We are looking at a stronger second half, as we originally contemplated, so it's going to be a story of two halves in general."
Babidge stressed that he saw the problem as a "one-channel logistical issue".
"The rest of the business is doing pretty well, particularly through the Chinese mother and baby stores for example."
The liquid milk business in Australia and in the United States, where it is making a big push, was doing well.
"It's a one-channel issue. We expected it to be temporary but it will mean that our performance in the first half will be softer than our original expectation."
Outside daigou, a2 Milk has made inroads.
Babidge said China label revenue in the year to date was up 77 per cent on the previous corresponding period.
Market share in China's mother and baby stores was 2.2 per cent, up from 2.0 per cent in June.
Thanks to reduced reliance on daigou, China's mother and baby stores and e-commerce channels represented about 50 per cent of infant formula sales and that segment continued to grow.
"But the daigou channel has been important for us over many, many years," Babidge said.
"It has assisted us in establishing the brand in China in an innovative way and it is a channel that we will continue to support."
A2 Milk expects the second half to be better.
"The caveat to that is that Covid is brought under control in Australia, particularly in the Victoria market," he said.
While Victoria still suffers with Covid-19, Babidge said conditions in China had gone back to near normal.
"We are making the assumption that things will be under control in respect of Covid-19 and that our second half will be strong," he said.
Oyvinn Rimer, senior research analyst at Harbour Asset Management, which has a stake in a2 Milk, said he viewed the problem as transitory.
"I think the outlook is better than the market is expecting," Rimer said.
"Investors have to form a view as to whether this is a structural issue or a one-off that will come back quickly, and make their mind up around the answer to that question."