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It has been lucrative for infant formula makers including Bellamy's Organic and a2 Milk, but Australia's newest baby nutrition brand wants to stay well clear of the Chinese grey market.
The grey market, in which goods are bought and sold outside legitimate channels, has resulted in thousands of tins of infant formula being stripped off Australian supermarket shelves and sold through various e-commerce channels or mailed directly to China.
But new infant formula brand Nuchev wants to avoid unauthorised shipments of its products. It is even avoiding Australia's biggest supermarket chains, opting instead to sell exclusively into pharmacies.
It has nothing to do with a lack of supply for Nuchev's goats' milk-based formula.
Company chief executive Ben Dingle – who co-founded New Zealand dairy group Synlait, which produces formula for a2 and others – says if a company wants to secure its longevity is has to look after its home market first.
Then there is the theory that to make inroads in China a company must create strong demand for its products locally.
"Ultimately I think most people in the pharmacy channel understand Australian consumers are the people they need to be focusing on if they are going to build a long-term, sustainable business," Mr Dingle said.
Australian parents angered
He said it was not wise to cross Australian parents, and indeed hoards of mothers and fathers were angered late in 2015 when several popular brands of infant formula were sold out in supermarkets after China's biggest online sale, Singles Day.
"We have decided that it's a very sound strategy to absolutely focus on Australian mums, make sure we deliver what's important to her and understand where she sees value, and try to limit as much as we can any product following through the grey channel.
"We can't stop a customer walking into a store, buying product off a shelf and putting it in a box and sending it offshore. But what we can keep our finger on are the retailers diverting product from a store shelf and sending it directly to export.
"And the first thing you do is sit down with those particular people, have a chat about it and say, 'This is not our model. We want you to stop doing that and focus on the Australian mums, who are your customers.'"
Fairfax Media revealed in December about half the infant formula sold by Australian supermarkets had been shipped overseas, most probably to China.
Sales of formula have almost doubled but the number of Australian babies has declined since 2012, from 310,000 to 300,000. There has also been no significant fall in breastfeeding rates of Australian mothers over the same period.
Stratospheric formula rates
However, formula rates in China are stratospheric. It is estimated that of the country's 20 million babies, 25 per cent are breastfed.
Mr Dingle said Nuchev had eyes on China and was "well advanced" on gaining certification to sell its Oli6 brand of formula, hopefully by early 2017.
The company is raising $20 million to strengthen is distribution across Australia, then into China, engaging Greenstone Partners and Bell Potter as joint lead managers for the fund raising.
"The Oli6 brand will be available in China through the more regular channels – baby stores, online, high-end supermarkets," Mr Dingle said.
"Our market research also tells us that mums in that premium space for infant formula in China aren't interested in buying products through the grey channel.
"And if you are going to encourage a whole heap of products to flow through the grey channel, your distributor partners . . . will get a bit grumpy because you are essentially competing with them for customers."
