Contamination, acute supply shortages, and the recent baby formula controversy at Abbott Laboratories (ABT) have possibly opened a door of opportunities for competitors like Reckitt Benckiser (GB:RKT), Nestlé SA (NSRGY) and many other small players.
Baby Formula Market: A Duopoly
The baby formula market has essentially been a duopoly for decades, with Abbott Laboratories’ Similac and Reckitt Benckiser’s Enfamil dominating the share. Together, both products accounted for around 80% of the $4 billion in annual market revenues just before the nationwide shortage began.
Abbott Laboratories has been the market leader, with its Similac being the largest formula brand in the U.S. by sales. Last year, Reckitt Benckiser accounted for 38% of the country’s formula while Nestlé had a much smaller 10% share.
However, Abbott’s sales have been severely impacted by the recent contamination concerns and the resulting three-month-long shutdown of its Sturgis plant.
To address the acute shortage of baby formula, competitors like Reckitt Benckiser, Nestlé SA, and many other small players have increased their production capacities.
In fact, recently, formula sales of Reckitt Benckiser’s Enfamil and Nestlé Gerber have jumped 50% and close to 15%, respectively, according to analysts and data-tracking firms.
Shortage an Opportunity for Rivals Like Reckitt
Under the Biden administration’s efforts to speed up imports, non-U.S. players like France’s Danone (GB:OKFX), U.K.-based Kendal Nutricare Ltd., and Bubs from Australia have been temporarily allowed to enter the U.S. market.
However, there are high barriers to entry for the baby-formula market that include long-drawn necessary regulatory approvals, high investments, federal product-safety rules, and state contracts with major brands.
Given the high barrier to entry, existing top players like Reckitt are bound to benefit from the huge uproar in demand given the nationwide shortage. In fact, Reckitt is now running production 24 hours a day by offering unlimited overtime benefits to its employees.
Wall Street’s Take
The Wall Street community is cautiously optimistic about the Reckitt stock, with a Moderate Buy consensus rating based on 11 Buys, two Holds and three Sells. The average Reckitt stock forecast of GBp 7,048.33 implies 17.12% upside potential to current levels.
TipRanks’ Smart Score
Reckitt scores a 9 out of 10 on TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
Concluding Thoughts
Based in the U.K., Reckitt Benckiser Group plc manufactures and sells health, hygiene, and nutrition products in the U.K., the U.S., China, India, and internationally.
According to a Wall Street Journal report, Reckitt Benckiser has been reviewing a sale of the infant nutrition unit in a deal which could be worth around $7 billion.
In June 2021, Reckitt successfully exited its infant formula and child nutrition business in China, selling it to Primavera Capital Group for a whopping $2.2 billion.
However, now, with the growing agitation following a series of complaints and warnings regarding safety issues at Abbott’s baby-formula plant in Michigan, Reckitt Benckiser could gain further market share and consumer confidence.
It may see a huge growth in sales of its baby-formula sales and perhaps beat Abbott to become the top player in infant-formula business.
