Deal focus: Cortina goes natural for debut Australia deal

Chinese fascination with Australian nutritional products began about six years ago when a tube of vitamin E anti-aging cream spilled out of actress Fan Bingbing’s handbag at an event. The manufacturer, Blackmores, saw its sales within China surge 536% to A$48 million ($33 million) in 2016. Overall revenue rose 52% to A$717 million. Chinese consumers were responsible for about A$200 million of this, including purchases made in Australia and personal shipments to China (the daigou channel).

A Credit Suisse equity analyst suggested in 2016 that China could account for A$580 million – or 50% - of Blackmores’ sales within four years. This was based on the notion that Blackmores could capture an additional A$200 million through penetrating offline retail channels in China. These bullish targets haven’t been met, but China still contributed 20% of Blackmores’ A$610 million in revenue last year, excluding purchases by tourists in Australia and daigou.

Meanwhile, the company’s two largest domestic competitors – Nature’s Care and Swisse Wellness – have both been acquired by Chinese strategic investors in recent years. Swisse even signed up Fan Bingbing as a brand ambassador until she was implicated in a tax evasion scandal in 2018.

Given these strong cross-border demand dynamics, vitamins and dietary supplements was a logical target area for Cortina Capital. The private equity firm, which is raising $100 million for its debut fund as well as $25 million for a parallel Australia-based vehicle, specializes focuses on Australian health and wellness brands with export potential in China and other Asian markets.

Its first investment is ATP Science, a manufacturer of health, sports and nutritional supplements. The company differentiates itself from the likes of Blackmores, Nature’s Care and Swisse Wellness by concentrating solely on products made from natural ingredients.

“China is the world’s biggest producer of vitamin C because it’s done through industrial processes,” said Alex Wu, co-founder of Cortina. “But when I first saw ATP’s products, they made me think of traditional Chinese medicine – all natural. The founders believe that food offers therapeutic benefits in addition to nutrition.”

The company was founded 10 years ago after husband and wife Jeff and Toni Doidge – who had launched their own sports supplement retail business but were generally unhappy with product quality – teamed up with Matt Legge. A naturopath and medical herbalist, as well as an expert in nutritional medicine, Legge had previously worked with the likes of Sanofi.

Their first product was Limitless Clean Energy, a pre-workout supplement made from natural forms of caffeine. It releases caffeine slowly, providing an energy boost without the jitters produced by unnatural caffeine spikes. More recent innovations reflect a shift from powder-based sports nutrition to fast-moving consumer goods. They include the protein-high, carbohydrate-low Noway energy bar, which doesn’t have the dryness of competing products because it is made from collagen.

ATP sought external investors because capital was required for capacity expansion; most of the manufacturing happens in-house. Dennis Lin, a Cortina co-founder with considerable consumer sector experience, was introduced to the company at the start of a competitive process.

Cortina was chosen as the preferred partner and a term sheet was signed last November. However, the private equity firm wanted to see financial results for the six months ended December before committing. It provided a bridge loan so ATP could start building its new factory.

Then COVID-19 intervened. ATP generated A$20.9 million in revenue for the 12 months ended June 2019, but sales have taken a hit in 2020 because of the lockdown measures. Terms were renegotiated and Cortina agreed to invest A$10-20 million for a substantial minority stake. It also has the right to appoint a company chairman, with Lin taking on the role.

Of Australia’s big three nutritional products retailers, only Blackmores has made a concerted effort to enter the natural ingredients space, Wu noted. In 2016, it paid A$23 million for Global Therapeutics, a leading domestic provider of Chinese herbal medicine formulations. As such, ATP sees huge expansion potential in the China-Australia axis, despite recent geopolitical tensions between the two countries. At present, 86% of ATP’s revenue comes from Australia, 8% from the US, and zero from China.

However, immediate plans do not include signing up local partners for distribution in China; Wu estimates this is 24 months away. First, Cortina will help the company penetrate key retailers such as Woolworths and Coles and mass-market pharmaceutical distributors like Chemist Warehouse. Then it will focus on cross-border e-commerce – through the likes of JD.com and Alibaba Group’s Tmall – and expanding daigou channels.

“You have to build your brand in Australia first,” Wu said. “There are over 1.5 million Chinese living in Australia and another 1.5 million tourists come every year. You need to be in those major retail channels in Australia. Right now, ATP mainly sells through specialist nutrition shops and gyms and then approximately 30% of its revenue is online. But there are more than 400 Chemist Warehouse outlets in Australia.”

The US market is also an expansion target for ATP. Its products are already available on Bodybuilding.com, the world’s largest online fitness store, and Cortina is exploring other channels.

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• Topics
• Australasia
• Greater China
• Expansion
• Consumer
• Australia
• China
• Cortina Capital
• Growth capital