The world of infant formula attracted the attention of M&A commentators this week with the proposed sale of own-label group PBM to healthcare giant Perrigo Co. The downturn has made private label more popular but, as Dean Best finds, infant formula is dominated by big brands – and their power is unlikely dented too much by the sale of PBM.
Like most categories in the US, private label accounts for a small portion of infant-formula sales.
However, like most categories in the US, the downturn has led to private label increasing its share of the infant-formula category.
According to data from Euromonitor, own label accounted for 6.8% of formula sales in 2008 – up from 5% in 2007. And that share is likely to have grown in 2009, as cash-strapped US shoppers turned to private label in their quest for value.
This week, PBM, the biggest own-label formula maker in the US, agreed to a sale to healthcare giant Perrigo Co. in a deal with US$808m.
The acquisition of PBM, which makes products for retailers including Wal-Mart, Kroger and Target Corp., promises to strengthen Perrigo’s already-strong relationship with US retailers, particularly in a climate where private label is popular.
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However, some industry watchers believe the dominance of big brands in baby formula will present stiff competition for Perrigo and that the likes of Mead Johnson Nutrition, Abbott and Nestle have the marketing strength to withstand a larger own-label rival.
Virginia Lee, senior industry analyst at Euromonitor, insists the coming-together of Perrigo and PBM will create a stronger private-label supplier and a company that will cause the own-label part of the category to grow.
“Perrigo already has strong relationships with retailers as a contract manufacturer for private-label OTC products. The company should be able to persuade more retailers to introduce private-label baby formula in the US as well as other countries,” Lee tells just-food.
However, big brands and big companies dominate the baby-food business in the US. Abbott’s Similac, Mead Johnson’s Enfamil and Nestlé’s Gerber Good Start are the big players in a baby-formula category that has seen consumers tend to perceive greater quality from brands – and therefore being better for their children.
Other players, like Hero Group’s Beech-Nut Corp., have indicated their confidence in branded baby food. Yesterday, in an earnings statement, Switzerland-based Hero said its Beech-Nut business had gained share in the US in 2009. A further sign of Hero’s optimism is the construction of a $150m manufacturing facility in the country. As such, Perrigo and PBM face a strong competitive set.
Debbie Wang, an analyst covering Perrigo for Morningstar, says brand-owners have distinct advantages over own label in baby formula.
Wang points out that PBM is not part of the WIC contracts in the US, public programmes that offer nutritious food to low-income or malnourished women, infants and children in the country.
These contracts account for around half the market in the US, Wang tells just-food. “This means PBM can’t reach a much wider audience of moms and get them comfortable with their product,” Wang says.
The Morningstar analyst says Perrigo will likely use its retail contacts to move towards PBM supplying the “house-brand” infant formula but insists brand-owners have marketing tools they can use to their advantage.
“The branded products benefit from detailing of pediatricians and contracts with hospitals – all medical providers who are influential in the mother’s choice of brands. I don’t expect Perrigo is well-versed in this sort of marketing,” Wang explains.
Nevertheless, Lee argues that the brand owners will have to continue developing new products to ensure it can continue to attract consumers in the face of a stronger own-label competitor.
“In order to retain market share, [Perrigo’s acquisition of PBM] will force the three other US baby formula companies – Abbot, Mead and Nestlé – to step up their innovation as retailers such as Target and Wal-Mart seek to promote the higher-margin private-label formulas at the expense of the national brands,” Lee insists.
This deal, however, is not only about the US. Unveiling details of the agreement with PBM, Perrigo was quick to point to say the formula maker was the “world’s largest” manufacturer of store-brand formulas. PBM sells products in Canada, Mexico and, notably, China, a market of course with great potential.
According to Lee, own label accounts for an even smaller proportion of formula sales worldwide. In 2008, she says, private-label sales were just 1.7% of the $22.3bn global formula market.
However, Lee says Perrigo, with its interests in markets like the UK, India and Germany, has the scale to boost PBM’s international presence.
“Perrigo should be able to sell PBM’s baby formula expertise to markets outside the US and benefit from the growing middle-class and the increase in the numbers of women working outside the home in emerging markets such as China and India. Its acquisition by Perrigo should boost sales of private-label formula globally,” Lee says.
And does the deal mean there will be further consolidation in baby food? The spin-off of Mead Johnson last year from pharmaceuticals giant Bristol Myers-Squibb has meant that company is favourite among commentators to be sold – with Heinz and Danone named as potential suitors.
Morningstar’s Erin Swanson sees no short-term wave of M&A. “While this deal might not prompt further consolidation, we do believe that Mead Johnson Nutrition could be a target down the road,” she says.