Shortage

Reckitt’s sales are booming on the baby formula shortage, but more competition could be coming

Thursday, July 28, 2022 by Robinhood Snacks |
Empty formula shelves (Samuel Corum/Getty Images)

Empty formula shelves (Samuel Corum/Getty Images)

A dystopian formula for success… As US parents scramble to feed their kids amid an ongoing baby formula shortage, British health giant Reckitt is raking in cash. Lysol-maker Reckitt and three other companies — Abbott, Nestlé, and Perrigo — produce 90% of US baby formula. Similac-maker Abbott (which also makes Covid tests) halted some formula production in February due to contamination, exacerbating supply shortages.

  • Airlifted: To boost supplies last quarter, Reckitt increased US production and got temporary FDA approval to airlift formula from abroad. Cue: a boom in sales and profits. Yesterday Reckitt lifted its annual forecast, sending shares up 5%.
  • Less formula… more market control. Reckitt’s formula market share surged to 55% from 40% during the shortage, while Abbott’s plunged to 20% from 40%.

Food for thought… To ensure all US babies get enough nutrition, the formula biz is heavily regulated. But the federal program that subsidizes baby food — called Women, Infants, and Children (WIC) — limits competition in the industry. That may have worsened the shortage.

  • WIC buys more than half of all US formula and then distributes it to low-income families.
  • But WIC requires each state to choose just one supplier, giving formula giants big market share. Reckitt has WIC contracts in 10 states.
THE TAKEAWAY

Emergency responses could create permanent changes… Biden temporarily invoked the Defense Production Act (DPA) to boost domestic formula production. The FDA also lifted limits on formula imports, temporarily allowing more foreign-made formula into the US. But some analysts expect the shortage to lead to reform of restrictive WIC rules, which could create more US formula competition — and shrink the big formula four's market share.