2022 – As shortages persist, Reckitt tightens grip on Reuters’ US baby food market

© Reuters. FILE PHOTO: Cans of Enfamil infant formula, manufactured by Mead Johnson, sit on partially empty shelves in a Target store, amid an ongoing shortage of infant formula across the country, in San Diego, California, US, on May 25, 2022. Reuters / Bing Guan

By Richa Naidoo

LONDON (Reuters) – The US baby food crisis has boosted profits for Britain’s Reckitt Benckiser and helped it take the top spot in a market worth $5.8 billion a year. The challenge now is to stay there.

With the news of the company being put up for sale, the stakes are even higher.

Reckitt has ramped up production of the Enfamil formula since its competition in the United States Abbott Laboratories (NYSE:) It recalled dozens of products in the United States in February after customers complained about children developing bacterial infections.

The British consumer goods company, which has increased production of infant formula by 30%, told Reuters last week that it now accounts for more than 50% of the total supply of infant formula in the United States, compared to about a third before the crisis.

Parents tend not to switch brands that their kids love. A Reckitt spokesperson said the company hopes to retain the customers it wins while Abbott products like Similac are taken off the shelves.

The company announced this week that it was feeding 211,000 more babies than before the recall.

It is about a lot. Reportedly, Reckitt has long sought to sell the formulations business to focus on higher-margin consumer and household brands, which range from Dettol sanitizer to Durex condoms. The Wall Street Journal said Friday that it is trying to sell again and could raise about $7 billion.

But the buildup from the US crisis may not last long.

The U.S. Food and Drug Administration (FDA) said May 19 Abbott is on track to reopen its main Michigan baby milk plant within a week or two, though FDA Commissioner Robert Califf told lawmakers a week later that it would take until July / July to store shelves. In stores across the country.

While Abbott’s withdrawal presents an opportunity for other companies such as tannery maker Nestlé and maker Danone, Neocate, Reckitt benefits the most because it was already No. 2 for Abbott before the crisis.

On the first of April Barclays (LON 🙂 raised its forecast for Reckitt’s 2022 organic sales to 4.4% from 4.0%, including a 5.0% to 7.4% increase in the nutrition business, which includes baby food.

Less than five weeks later, it raised its forecast again to 6.0% for the group and 12.4% for the nutrition department.

According to Refinitiv, analysts raised their full-year earnings forecast for Reckitt by an average of 4.35% over the past 30 days to about 311 pence per share.

“In the short term, Reckitt will have the biggest financial impact,” said Ian Simpson, an analyst at Barclays. “The big question is how much of the latter’s market share gains will Reckitt hold once Abbott returns to the shelves.”

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Increase in sales alone will lead to higher profits. However, margins increased when the US said it would temporarily cover the cost of baby food for low-income families who rely on government rebates in states contracted with Nestle and Reckitt.

Companies typically compete for government contracts to be the sole supplier of baby food to low-income families through the Women, Infants, and Children (WIC) program. In their offers, they offer states a “discount” in the form of rebates.

Government intervention aimed at incentivizing companies to increase shipments effectively covers this discount.

“Financially, this is great for both sales and profitability because they don’t have to discount the state government for formula sales,” Bernstein analyst Bruno Montaigne said. “It is likely to add at least 20-30 basis points of higher margin as long as this continues.”

Barclays Simpson agreed not to be bound by the WIC contract and estimated that they had a 5% EBIT (earnings before interest and tax) margin, versus about 40-45% for contracts outside of WIC.

However, some analysts say this boost is likely to be temporary and Reckitt may not be able to retain its new clients.

While Bernstein’s Montaigne said there was “some truth” to the idea that Reckitt could benefit in the long run from damaging Abbott’s reputation, he noted that the US company faced a similar backlash from the 2010 formula recall in more than a year.

“There is a decent precedent,” he said.

Waverton Investment Management, a Reckitt shareholder, also suspects that the increase in market share will be short-lived.

“The United States is already looking at other sources to meet the demand,” said Teneke Fricke, director of the Waveton Fund. “Over time, Abbott will bring its formula back to shelves and Reckitt will return to its normal market share.”