Analysis: As shortages persist, Reckitt tightens grip on US baby milk market

Packages of Enfamil infant formula, produced by Mead Johnson, lie on partially empty shelves in a Target store, amid continuing nationwide shortages of formula for infants and toddlers, in San Diego, California, US, May 25, 2022. REUTERS/Bing Guan

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

With news of the company going up for sale, there’s more at stake.

Reckitt (RKT.L) has ramped up production of its Enfamil formula since US competitor Abbott Laboratories (ABT.N) in February withdrew dozens of products in the United States after customers complained of bacterial infections in children.

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The British consumer goods company, which boosted formula production 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, up from about a third before the crisis. Read more

Parents tend not to switch brands that their kids love. A Reckitt spokesperson said the company hopes to retain customers it has acquired while Abbott products, such as Similac, are on the shelves.

The company said this week that it is feeding 211,000 more children than it was before the recall.

The stakes are high. Reportedly, Reckitt has long been looking to sell the formulations business to focus on higher-margin household and consumer brands ranging from Dettol disinfectants to Durex condoms. The Wall Street Journal said Friday that it is making a renewed sale attempt and could bring in about $7 billion.

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

The FDA said on May 19 that Abbott was on track to reopen its main Michigan baby milk plant within a week or two, although FDA Commissioner Robert Califf told lawmakers a week later that it would take until July before Store shelves. all over the country.

While Abbott’s pullout has presented an opportunity for other companies, such as maker Gerber maker Nestlé (NESN.S) and maker Neocate Danone (DANO.PA), Reckitt is the most to benefit, having already been Abbott’s No. 2 before the crisis.

On April 1, Barclays raised its 2022 organic sales forecast for Reckitt Inc. to 4.4% from 4.0%, including an increase to 7.4% from 5.0% in the nutrition division, which includes infant formula.

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 on average have raised their full-year earnings forecast for Reckitt Inc. by 4.35% in the past 30 days, to about 311 pence per share.

“In the short term, the biggest financial impact will be on Reckitt,” said Ian Simpson, an analyst at Barclays. “The big question is how much recent market share gains Rickett retains once Abbott returns to the shelves.”

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Higher sales will by itself increase profits. But the United States boosted margins further, saying it would temporarily cover the cost of infant formula for low-income families that rely on government discounts in states contracted with Nestle and Reckitt. Read more

Companies typically submit to state contracts to be the sole provider of infant formula for low-income families under the Women, Infants, and Children (WIC) program. In their bids, they offer a “discount,” in the form of discounts, to the states.

The government’s intervention, aimed at stimulating companies to increase supplies, effectively covers this discount.

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“Financially, this is great for both earnings and profitability because they don’t need to give a state government rebate to sell the formula,” Bernstein analyst Bruno Montaigne said. “It will probably add at least 20-30 basis points of higher margins as long as this continues.”

Barclays’ Simpson agreed that not sticking to a WIC contract would be a push, and estimated they have a 5% EBIT (earnings before interest and tax) margin versus about 40-45% for contracts outside of WIC.

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

While Bernstein’s Montaigne said there was “some truth” to the idea that Reckitt could profit long-term from the damage to Abbott’s reputation, he noted that the US company overcame a similar backlash from the 2010 formula recall in just a year.

“There is a decent precedent,” he said.

Waverton Investment Management, a Reckitt shareholder, also doubts that increasing its market share will be short-lived.

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

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(Reporting by Richa Naidoo) Additional reporting by Lea Douglas Editing by Matt Soffham and Mark Potter

Our Standards: Thomson Reuters Trust Principles.

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