Woolworths Did the Right Thing in Blocking Baby Formula Orders

Woolworths [ASX:WOW] has come under fire for the second time this week after several customers had online orders of baby formula cancelled by the retailer. Publically, three customers have accused Woolworths of xenophobia, believing their ethnicity led to their orders being rejected.

Woolies isn’t contesting that it cancelled the orders. But it rejects any notion those decisions were based on racial profiling. So why are they preventing people from buying baby formula?

It all has to do with China. Demand for Australian baby formula in China shot up in 2008, after six babies died from melamine contamination. And there were 300,000 further cases of babies falling seriously ill. Since then, there have been a number of other food relates scares in China. Concerned parents have started buying Western products they perceive as safer in light of these cases.

In fact, it’s become so popular that demand easily outstrips supply. And anytime there’s money to be made, you can bet someone will be trying to make it.

In this case, it’s Aussie shoppers. They buy baby formula domestically in bulk. And they sell it for four times what it’s worth back in China. It’s a very profitable business venture. And it’s no surprise that there are people out there trying to capitalise on it.

Yet, instead of loading up on cartons of baby formula at the shop, many buyers have started ordering online. People figure they’d arouse less suspicion online. And they could get around the limits that retailers like Woolies have put in place in store.

Some have even started using multiple accounts online. Attempting to lower the risk of getting caught. But it doesn’t take a lot to figure out where the orders end up. There are easy ways of tracking the original source of multiple accounts. Woolworths claims it has evidence of accounts linked to a single address.

One of the customers, who purchased four tins of baby formula, also had their order cancelled. Woolworths does allow customers to buy up to four tins. But the retailer claimed the account was linked to suspicious activity.

Whether it was right to do that is debatable. But Woolies took precaution because it had to. After all, one tin of baby formula still fetches $30. At a fourfold mark up, one could sell that on for $120 in China. Multiply that by four, it amounts to a $360 profit for the reseller. That’s no chump change.

So Woolworths is right to reject any orders that it deems suspicious. Anyone that buys four tins of baby formula (which is a lot) deserves some kind of scrutiny. Up to now, Woolies has marked products ‘out of order’ for any that arouse suspicion. But they rarely go to such extremes, according to a Woolies spokesperson.

No overreaction, just common sense from Woolworths

Is Woolworths overreacting in cancelling these orders? Well, it might be. These could very well be customers that have zero intention of reselling the formula into China. Woolworths can’t know that for certain. And it can’t excuse customers for buying in bulk on the basis of good faith alone. It’s important that Woolies sticks with its harsh stance. Even if it means upsetting genuine customers on occasion. Unfortunate as is it, some customers have accused Woolworths of racism in response.

One of them, carrying the surname ‘Kong’, feels they were targeted because they have an Asian sounding name. Kong just so happens to be South Korean, which doesn’t portray Woolies in a good light. Yet this instance should be taken for what it is. It’s an unfortunate outcome of a process Woolies is still getting to grips with. And, make no mistake, Woolworths has to deal with this situation in a way that benefits it, and its suppliers.

It’s in Woolworths’ best interests to protect its supply chain against the loss of potential income. It’s likely these suppliers pressured Woolworths into taking a stand in the first place. That includes key suppliers like A2 Milk and Bellamy’s [ASX:BAL].

These companies can’t allow Aussie consumers to effectively smuggle goods out to China. And really, that’s what it amounts to — it’s no different to alcohol or tobacco smuggling. Buy goods at a cheaper price, then make a mint selling it on where the demand is.

You can make over $300 in profit with just tins. That’s a significant loss of income for suppliers. Export a few boxes of the formula every week and you could quit your day job. Woolworths can’t allow that to happen. They can’t afford customers to siphon off profits away from the domestic market. Nor can they allow customers to become the biggest beneficiary in the supply chain.

At the same time, allowing this to go on hurts everyday Australian customers. They’ve already complained of baby formula shortages as a result of this practice. Those parents that plan on using the products to feed their babies are playing second fiddle to Chinese buyers. That mustn’t be allowed to continue any longer.

Putting an end to the fiasco

Woolworths needs to re-examine the limits it has on baby formula sales. Lowering the four tin limits for a single person, to two or less, would be a start. Coles [ASX:CGJ] already has limits set at two. Woolworths should follow their lead.

Yet the situation may require both retailers to place even harsher limits. One baby formula tin for all? It’s drastic and inconvenient — as parents would have to run to the shops or re-order every few days — but until they stamp out the practice, it may be necessary.

Ultimately, banning orders on suspicious activity is always going to be touch and go. In such circumstances, some customers will be wrongly accused of inappropriate behaviour. Should Woolworths issue an apology to those they find were acting in good faith? Absolutely.

Should they stop looking after suppliers, and the integrity of both businesses? Absolutely not. Until Woolworths ends the practice, they should cancel any orders they feel are suspicious. If that causes some anguish for a handful of customers, then so be it.

What we mustn’t do, above all, is confuse this as racism or xenophobia. Woolworths is doing the right thing here, and we shouldn’t let political correctness get in the way of it.

Mat Spasic,

Junior Analyst, Markets and Money

PS: As with the rest of the share market, Bellamy’s has gotten off to a rough start in 2016. Shares are down $2, to $13 a share, since the turn of the year.

Yet as a consumer staple stock, Bellamy’s could end up outperforming the market this year. And considering the sobering outlook for the ASX in 2016, it wouldn’t come as a shock.

Markets and Money’s Vern Gowdie believes the market is heading towards a large crash. Vern is the award-winning Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. He’s ranked as one of Australia’s Top 50 financial planners.

Vern wants to help you avoid this coming wealth destruction. His special report, ‘Five Fatal Stocks You Must Sell Now’, will show you how. In it, Vern shows you which five blue chip Aussie companies could destroy your portfolio…you almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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