Mead Johnson Milks Growth Of Emerging Markets’ Middle Class
This article was originally published in The Tan Sheet
Executive Summary
Mead Johnson sees growth in emerging markets largely because per-birth consumption of infant formula is well below developed regions. The firm invests nearly $100 million in research to provide the pediatric nutritionals innovation sought by parents, VP of Investor Relations Kathy Ann MacDonald says.
Mead Johnson Nutrition Co. expects the growing middle class in emerging markets to pave “a long runway for growth” in sales of the company’s infant formula and other pediatric nutritional products, says executive Kathy Ann MacDonald.
During an investor forum in Hong Kong on Sept. 22 sponsored by CSLA Asia-Pacific Markets, MacDonald, Mead Johnson’s investor relations VP, also said parents’ preference for premium infant formula help drive the firm’s sales.
MJN sees room for growth in emerging markets largely because per-birth consumption of infant formula and children’s nutritional products is well below developed regions – for instance, 26.5 pounds in Latin America and 37.5 pounds in Asia compared to 75 pounds in Europe and 92.6 pounds in the U.S.
MacDonald pointed to “significant opportunities of meaningful scale” in Columbia and Peru. Mead Johnson has market-leading positions in the two countries after taking an 80% stake with Argentinean dairy producer SanCor Cooperativas Unidas Ltda. in a joint venture to market dairy infant nutrition products under the SanCor Bebe brand in Argentina, Bolivia, Chile, Paraguay and Uruguay (Also see "Mead Johnson Hopes To Milk JV For Latin American Growth" - Pink Sheet, 27 Feb, 2012.).
In China, MacDonald said Mead Johnson sees “strong, long-term growth prospects” because of rising incomes and the company’s innovation. In June, the firm launched an online sales site geared toward busy young parents in the country.
Mead Johnson says with birth rates growing in emerging markets, the consumption of infant formula and children's nutritionals in those regions will increase.
Image courtesy of Mead Johnson Nutrition
MJN sales in the second half of 2012 slowed by about $70 million in China after the firm raised prices on its products only to see no changes in competing product prices, causing a retail inventory backlog. MacDonald said sales are back on track despite Hong Kong’s restrictions on the amount of infant formula consumers are allowed to take out of the territory (Also see "Mead Johnson Upbeat On China Outlook After Series Of Setbacks" - Pink Sheet, 9 Sep, 2013.).
The $11.85 billion Nestle SA paid for Pfizer Inc.’s international pediatric nutritionals business in 2012 indicates the potential of emerging markets in the infant/child nutritional space. With the acquisition, Nestle boosted its position in countries such as Mexico, China and Thailand (Also see "Nestle Pays Nearly $12 Bil. For Desirable Pfizer Nutrition Portfolio" - Pink Sheet, 30 Apr, 2012.).
Chinese authorities earlier in 2013 investigated Mead Johnson, Nestle, Abbott Laboratories Inc. and other formula providers on allegations of price-fixing investigation, eventually levying fines against MJN, Abbott and several other firms, while clearing Nestle of any violations (Also see "In Brief: NAD trims BPI claims, formula price-fixing in China, FDA warns Formulife and identifies spiked supplements, NBTY’s consumer redress" - Pink Sheet, 12 Aug, 2013.).
Parents Turning To Premium Products
Parents’ focus on children’s health shows in strong growth in the high end of the pediatric nutritionals market, with premium products accounting for more than 75% of infant nutritionals sold, MacDonald said.
With more better-educated women pursuing careers, “one of the highest priorities for families as incomes increase is a strong desire to give their children a better start in life,” she said.
Mead Johnson capitalizes on parents’ regard for premium formula through its research and development program, she said. Because “it’s often the sole source of nutrition,” parents will not compromise on quality, she observed. “We continue to see the infant category become more premium.”
Premium products also are gaining in the children’s category, MacDonald said. Nearly 60% of children’s nutritional product sales are premium products, she pointed out. “With the quality and scientific innovation that goes into our products, the premium positioning and reputation of our brands, we are well positioned in light of this trend.”
MJN currently has more than 100 clinical studies in progress, highlighting its focus on innovations that stem from “in-depth understanding of nutritional needs for children,” MacDonald added.
Mead Johnson has invested roughly 2.5% of its sales in R&D since 2006, up from 2% previously. The firm’s nearly $100 million R&D investment in 2012 was about double its 2005 spending on research and innovation, she noted.
“Evidence is becoming increasingly clear that early childhood nutrition has a significant impact on shaping lifelong health, metabolic health, the immune system, resistance to allergies and mental development.”
U.S. Birth Rate Decline Slows
Mead Johnson is more cautious about its U.S. prospects even though the country’s birth rate has stabilized after a five-year decline. MacDonald noted that expectations for a 1% volume decrease in U.S. are “still an improvement” from the estimated 3% decline experienced in 2012. She attributes lower sales to higher breastfeeding rates, due in part to higher unemployment among women.
* These estimates are based on June 2013 12-month Nielsen data for markets, which represent around 90% of total estimated routine MJN's global infant formula and children's nutritional product sales.
Image courtesy of Mead Johnson Nutrition
Mead Johnson is not forecasting the extent and timing of an upturn in birth rates, “but we should see volume growth at some future point if U.S. unemployment continues to decline. Importantly, surveys over the last 50 years indicate that the intended number of children per family has held relatively constant despite multiple recessions,” MacDonald said.
However, the firm anticipates sales in its North America/Europe segment to grow in the low single digits in 2013, driven by share gains in U.S. sales outside of public support-subsidized purchases.
Noting the cost side of the firm’s ledger, MacDonald emphasized that increases in dairy prices will not affect Mead Johnson as much in 2013 as in 2012. A large spike in Oceania region milk prices in the second quarter due to strong demand and drought in New Zealand has ebbed in recent months, MacDonald said.
Mead Johnson holds a three- to four-month inventory of dairy products so spot prices will not affect its cost-of-goods-sold for about seven months. Additionally, pricing in many of the company’s supply contracts is based on prior-quarter price indices.
“This gives us good visibility on our dairy input prices through the end of 2013,” MacDonald said.
She said MJN will have a lower gross margin percentage in the fourth quarter due to the higher milk prices, but, “on an annual average, we expect a low single-digit increase in our dairy inputs in 2013 compared to the high single-digit increase experienced in 2012.”
She pointed out the firm has had a gross margin of 62% to 63% over the past three years, “despite the dairy inflation, thanks to the combination of productivity and pricing.”