Why Baby Food is a Lucrative Market Despite Declining Birth Rates
The baby food market is a lucrative industry to invest in as parents are willing to skimp on most things before giving up on baby food. The more expensive the baby food, the less parents are likely to shy away from purchasing it. While declining birth rates may affect volume growth, premiumisation is widespread and parents often want to give their children the best possible start in life. Many factors contribute to the success of the baby food industry, including regulations, margins, and brand loyalty.
Regulations and Margins
Rules and regulations abound when it comes to producing baby food. In countries like the United States, nearly half of all newborns receive formula through contractors selected by a state-funded program. This can be both a blessing and a curse for companies trying to break into the market. The high margins that come with baby food production make it a worthwhile venture for many companies, though margins need to be constantly managed. Concerns about high prices have started to result in political backlash, like that seen in the UK. Overall, however, baby food sales remain a healthy place to be.
Brand Loyalty
Brand loyalty plays a significant role in the baby food market. Parents are drawn to trusted brands that have been around for decades. Own-brand products have struggled to make a name for themselves in the industry, accounting for just six percent of US sales in 2022, according to Jefferies. This is in stark contrast to the over 25% of market share that own-brand products hold in the swamp standard toilet paper roll market.
Premiumisation and Soft Touch Marketing
One of the key reasons that baby food remains a lucrative market is that it is subject to price inelasticity. According to a Bernstein analysis of Nielsen data, volumes generally don’t react to increases in price. Premiumisation is widespread, with parents willing to pay more for brands like Nestle’s Nutrilearn, which promises to boost myelination that’s crucial for cognitive development. Brands know that parents who want to give their children the best possible start in life are a soft touch for marketing campaigns.
Declining Birth Rates and Their Effects on Baby Food
Declining birth rates have inevitably led to a drop in volume growth for the baby food industry. A case in point is Reckitt Benckiser, which suffered a £5 billion writedown on its acquisition of Mead Johnson baby food in 2020 due to lower-than-expected birth rates in China. In developed countries, birth rates are also declining, making it more difficult for companies to grow.
The Future of Baby Food
Despite declining birth rates, the baby food market is set to remain a lucrative industry to invest in. While nominal growth rates may slow in some regions, the premiumisation trend shows no signs of slowing down. Brands that produce high-quality baby food are likely to maintain customer loyalty and profitability in the years to come.
In summary, baby food is a lucrative market despite declining birth rates because of its high margins, subject to price inelasticity, brand loyalty, and a premiumization trend. Even as birth rates decline, baby food production remains a profitable venture.
Additional Piece
One factor that has contributed to the success of the baby food industry is the rise of e-commerce. With COVID-19 ushering in a new era of online shopping, parents have begun turning to online retailers for all their baby food needs. Brands that want to succeed in the modern era must have a strong online presence. The rise of social media and influencer marketing has also made it easier for companies to reach out to potential customers.
Another key factor is sustainability. With more parents becoming aware of the impact that their choices have on the environment, companies that use environmentally-friendly practices are likely to be more successful. Additionally, companies that provide nutritional information, dietary recommendations, or offer specialized diets, such as vegan, gluten-free, or halal options, are more attractive to health-conscious parents.
Finally, the baby food market is likely to continue to evolve in response to changing needs and innovations. As artificial intelligence and other technologies improve, companies are finding new and innovative ways to develop baby food products that are tailored to the specific needs of individual infants. Overall, the baby food industry is likely to remain a lucrative investment opportunity for years to come.
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The more something costs, the less people buy. This is true for most consumer goods and is why inflation is such a bugbear for companies like Nestle and Danone. But parents will skimp on most things before giving up on baby food. That makes infant nutrition a good place to be when price hikes bite.
Making money on baby food isn’t child’s play, of course. Declining birth rates lead to stunted volume growth, as Reckitt Benckiser discovered the hard way. The British group suffered a £5 billion writedown on its acquisition of Mead Johnson baby food in 2020, due to lower-than-expected birth rates in China.
Rules and regulations also abound. In the United States, which experienced a disastrous supply shortage in 2022, nearly half of all newborns receive formula through contractors selected by a state-funded program.
But while baby food may not be a turnover, its margins are the cream of the crop.
Volumes generally don’t react to price increases, according to a Bernstein analysis of Nielsen data. Premiumisation is widespread. Parents who want to give their kids the best possible start in life are a soft touch to — say — Nestle’s Nutrilearn, which promises to boost myelination that’s crucial for cognitive development.
Meanwhile, own-brand products are struggling to break into the category. They accounted for just 6% of US sales in 2022, according to Jefferies. The figure for the swamp standard toilet paper roll is over 25%.
All of this makes baby food a healthy place to be. Danone’s infant nutrition business has seen average organic sales growth of 7 percent since 2008, Redburn calculates. Operating margins gradually increased to over 20%. Over the same period, EBIT margins in the rest of the dairy group’s business nearly halved to 8%.
The baby food business isn’t all about milk and honey. Margins need to be managed. Indeed, the high prices are starting to attract a political backlash in the UK. But when consumers feel the pinch, the brands that sit close to people’s hearts are the last to be squeezed.
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