WIC Appropriations Woes Threaten Branded Formula Supremacy
This article was originally published in The Tan Sheet
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Proposed appropriations cuts could threaten branded infant formulas’ strong competitive advantages. The Women, Infant and Children Nutrition Program reimburses participating manufacturers for the full shelf price of formula purchased by mothers in the program. Participants who would be forced to purchase lower-cost private label options now have a wider choice, Morningstar analysts Damien Conover and Erin Lash note in the May 2011 Healthcare Observer. Private labelers often do not participate in WIC because of the scale necessary to leverage cost to win the contracts which are awarded state by state, they add. Mead Johnson, Abbott and Nestle control about 40%, 40% and 20% of the U.S. WIC market respectively. Benefits from the WIC program, however, are at risk as congressional appropriators slash funding throughout the federal budget. House Republicans proposed cutting federal WIC funding from $6.73 billion in fiscal 2011 to $5.9 billion in fiscal 2012, a move the Center on Budget and Policy Priorities estimated would force the program to turn away 325,000 to 475,000 children. An amendment from Rep. Rosa DeLauro, D-Conn., restored $147 million to the program, but it still faces cuts from last year ( (Also see "In Brief" - Pink Sheet, 6 Jun, 2011.), In Brief). Brands create strong “moats” or competitive advantages for infant formula makers, the analysts write. “Most of the infant brands have been around for decades, solidifying the trust of generations of users,” they write. In a vulnerable group like infants, parents feel safer trusting branded products, they say. The research and development necessary to innovate in the market, plus higher levels of regulation than adult nutritionals, also discourage private label expansion, the analysts write. The nutritionals business at Pfizer is among the most likely candidates for spin-off or sale as big pharmas begin shedding their consumer businesses to better realize value (Also see "Consumer Division Divestments Would Spotlight Firms’ Value – Analysts" - Pink Sheet, 6 Jun, 2011.). Among adult nutritionals, however, there is less of an advantage for branded products. Lower barriers to entry allow for many competitors, which increases options for consumers, the analysts note. Abbott’s infant nutritionals business would be quite profitable on its own, particularly without the weight from adult nutritionals, they say (Also see "Estimated Spin-Off Values For Consumer Divisions" - Pink Sheet, 6 Jun, 2011.). |