Analysis: Reckitt Benckiser tightens grip on U.S. infant formula market as shortages persist

Canned Enfamil infant formula made by Mead Johnson sits on a partially empty shelf at a Target store amid ongoing nationwide shortages of infant formula in San Diego, California, U.S., May 25, 2022. REUTERS/Bing Guan

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LONDON, May 27 (Reuters) – The U.S. baby formula crisis has boosted profits at Britain’s Reckitt Benckiser and helped it take the top spot in a $5.8 billion-a-year market. The challenge now will be to stay there.

With the sale of the business, the stakes are reportedly even greater.

Rickett (RKT.L) Has ramped up production of its Enfamil formulation since U.S. competitor Abbott Laboratories (ABT.N) In February, the company recalled dozens of products in the U.S. after customers complained of germs in babies.

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The U.K. consumer goods company, which has boosted formula production by 30 percent, told Reuters last week that it now accounts for more than 50 percent of the total U.S. infant formula supply, up from about a third before the crisis.read more

Parents tend not to switch brands their babies prefer. A Reckitt spokesman said the company hopes to retain acquired customers when Abbott products such as Similac are removed from shelves.

The company said this week that it fed 211,000 more babies than before the recall.

The stakes are high. Reckitt has long sought to sell its formula business to focus on higher-margin household and consumer brands, from Dettol sanitizer to Durex condoms, according to reports. The Wall Street Journal said Friday that it is retrying a sale that could fetch about $7 billion.

But the boost from the U.S. crisis may not last long.

The U.S. Food and Drug Administration (FDA) said on May 19 that Abbott was on track to reopen its main infant formula plant in Michigan within one to two weeks, though FDA Commissioner Robert Califf told a week later. Legislators, this won’t hit shelves until July and it’s full across the country.

While Abbott’s recall opens up opportunities for other companies, such as Gerber maker Nestlé (NESN.S) and Neocate maker Danone (DANO.PA)which benefited the most was Reckitt Benckiser, which was already Abbott’s No. 2 prior to the crisis.

On April 1, Barclays raised its 2022 organic sales forecast for Reckitt to 4.4% from 4.0%, with its nutrition segment, which includes infant formula, raised to 7.4% from 5.0%.

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

Analysts have raised Reckitt’s full-year earnings forecast by an average of 4.35% over the past 30 days to about 311 pence per share, according to Refinitiv data.

“In the near term, the biggest financial impact will be on Reckitt Benckiser,” said Barclays analyst Ian Simpson. “The big question is to what extent Reckitt will retain its recent market share gains once Abbott is back on the shelves.”

Will it last?

On its own, increased sales will lead to increased profits. But U.S. said it would temporarily cover the cost of infant formula for low-income families who depend on state discounts contracted with Nestlé and Reckitt Benckiser, boosting profit margins further.read more

Companies typically bid for state contracts to be the sole supplier of infant formula for low-income families under the Women, Infants and Children (WIC) program. In their bid, they offered states “rebates” in the form of discounts.

Government intervention aimed at incentivizing companies to increase supply effectively compensated for this rebate.

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“Financially, it’s great for revenue and profitability because they don’t need to offer rebates to the state on the sale of formula,” said Bernstein analyst Bruno Monteyne. “As long as this continues, it will likely increase margins by at least 20-30 basis points.”

Barclays’ Simpson agreeing not to be bound by the WIC contract would be a boost, estimating their EBIT (earnings before interest and tax) margin of 5%, compared to around 40-45% for the non-WIC contract.

But some analysts say the boost may be temporary and Reckitt may not be able to retain new customers.

While Bernstein’s Monteyne said the idea that Reckitt could benefit long-term from Abbott’s damaged reputation “makes some sense,” he noted that the U.S. company overcame a similar backlash from a 2010 formula recall in just one year.

“There’s a good precedent,” he said.

Reckitt shareholder Waverton Investment Management also doubts the market share gains will prove short-term.

“The U.S. is looking for other sources to meet demand,” said Tineke Frikkee, a fund manager at Waverton. “Over time, Abbott will re-list their formulations and RB will return to normal market share.”

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Reporting by Richa Naidu Additional reporting by Leah Douglas Editing by Matt Scuffham and Mark Potter

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