The more something costs, the less of it people buy. That holds true for most consumer goods — and is the reason why inflation is such a bugbear for the likes of Nestlé and Danone. But parents will skimp on most things before they trade down on baby food. That makes infant nutrition a good place to be when price hikes bite.
Making money out of baby food is not child’s play, of course. Falling birth rates make for skimpy volume growth — as Reckitt Benckiser found to its cost. The UK group took a £5bn writedown on its Mead Johnson baby food acquisition in 2020, on lower than expected birth rates in China.
Rules and regulations abound, too. In the US — which suffered disastrous supply shortages in 2022 — almost half of all infants receive formula through the contractors selected by a subsidised state programme.
But while baby food may not be a volume business, its margins are the cream of the crop.
Volumes do not generally react to price hikes, according to a Bernstein analysis of Nielsen data. Premiumisation is rife. Parents who want to give their children the best possible start in life are a soft touch for — say — Nestle’s Nutrilearn, which promises to increases the myelination that’s crucial for cognitive development.
Meanwhile, own-label products find it hard to penetrate the category. They only accounted for 6 per cent of sales in the US in 2022, according to Jefferies. The figure for bog-standard toilet roll is north of 25 per cent.
All this makes baby food a healthy place to be. Danone’s infant nutrition business has averaged 7 per cent organic sales growth since 2008, reckons Redburn. Operating margins inched up to more than 20 per cent. Over the same period, ebit margins in the rest of the dairy group’s business almost halved to 8 per cent.
The baby food business is not all milk and honey. Margins need to be managed. Indeed, high prices are starting to attract a political backlash in the UK. But when consumers are feeling the pinch, brands that sit close to people’s hearts are the last to be squeezed.
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