The Essential Baby Boomer Stock

Focus: STOCKS

Ari Charney Image Ari Charney Analyst and Associate Editor, Canadian Edge and Personal Finance

If you don't have healthy babies, it's impossible to have a population that grows into a dynamic workforce...so baby formula is a serious business with global implications, reports Ari Charney of Personal Finance.

During periods of economic uncertainty, investors often seek refuge with names that operate in resilient sectors such as health care and consumer staples. However, even consumer staples companies can suffer erosion in market share amid downturns, as price-conscious consumers opt for cheaper private-label alternatives over branded fare.

The one area where consumers are least likely to stint on their purchases is anything that pertains to their children, especially when they’re at their most vulnerable as infants. That makes infant formula one of the few truly enduring branded consumer staples.

When it comes to infant formula, parents at all income levels in the developed world—and increasingly, the emerging markets—are deeply brand-conscious. Indeed, while packaged food sales have grown 6.1% annually over the past five years, sales of baby food have climbed 9.6% annually over the same period.Rising populations in emerging markets are driving growth in the $36.7 billion global baby food market.

Exemplified by Nestle’s (NSRGY) recent deal to acquire Pfizer’s (PFE) infant-nutrition business, the industry is rapidly consolidating and manufacturers are expanding their share of developing world markets. While the top five brands account for 20.8% of the global market, the top five manufacturers have a commanding 57.6% market share.

The US market is dominated by three brands with a combined 90% share of sales: Mead Johnson Nutrition Co’s (MJN) Enfamil (40% of the market), Abbott Laboratories’ (ABT) Similac (40 percent), and Nestle’s Good Start (10 percent).

The Infant Formula Oligopoly
This oligopoly is derived partly from the US Food and Drug Administration’s stringent criteria for infant formula, making it difficult for both new and private-label competitors to enter the market.

These infant formula manufacturers have also shrewdly developed longstanding relationships with US health-care providers.