The basic economic principle that states the more something costs, the less of it people will buy holds true for most consumer goods. However, in the unique case of baby food, parents will skimp on most things before they trade down on infant nutrition. This makes the market for baby food a lucrative one, especially in times of economic hardship and inflation. Nevertheless, making money in this market isn’t child’s play.
Falling birth rates result in skimpy volume growth, as Reckitt Benckiser found to its cost when it took a £5bn writedown on its Mead Johnson baby food acquisition in 2020 due to lower than expected birth rates in China. Additionally, there are strict rules and regulations governing this market sector, especially in the US, where almost half of all infants receive formula through the contractors selected by a subsidized state program.
However, despite these challenges, baby food is an attractive market because of its high-profit margins. An analysis of Nielsen data by Bernstein reveals that volumes do not typically react to price hikes, and premiumization is rampant. Parents who want the best for their children are willing to pay for high-quality baby food products like Nestle’s Nutrilearn, which promises to maximize cognitive development.
Moreover, competition within this market is minimal. Own-label baby food products account for only 6% of sales in the US, while consumers are willing to pay premium prices for established brands like Nestlé and Danone.
All of these factors contribute to making baby food a healthy place to be in terms of sales growth and profitability. Danone’s infant nutrition business, for instance, has averaged 7% organic sales growth since 2008, with operating margins inching up to over 20%. In contrast, ebit margins in the rest of the dairy group’s business almost halved to 8% over the same period.
Although high prices are beginning to spark a political backlash in the UK, brands that sit close to people’s hearts are often the last to be squeezed. Thus, while the baby food business is not without its challenges, it remains a lucrative market with a robust demand for high-quality products.
So, if you are planning to invest in this market, it’s critical to manage your margins well, as high prices won’t always be palatable to consumers. Nevertheless, this market is ripe for innovation and growth, with endless opportunities to cater to parents’ ever-evolving needs and desires.
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