Australia's impact on the U.S. infant milk powder crisis

Company News

by Peter Milios

The share prices in both Bubs Australia (ASX:BUB) and a2 Milk (ASX:A2M) have been soaring on the back of news that they can provide aid to the current supply shortage in the US. However, are these companies a temporary fix to the current shortage or will this be an opportunity to disrupt an oligopoly within the US market?

Bubs Australia

Monday the 29th of May saw the share price of Bubs Australia jump 77 per cent to a 52-week intraday high of 86 cents before ending the day at 68 cents, following news that President Joe Biden will ship 27.5 million bottles, or 1.25 million tins, of safe infant formula to the United States.

This comes after Biden invoked the decades-old Defence Production Act, giving the President immediate emergency authority to control domestic industries, helping to ease the current supply shortage of infant baby formula.

The deal, which was brokered by Joe Hockey’s advisory firm, Bondi Partners, grants Bubs the immediate access to export 500,000 tins to the US and a further 750,000 in the coming months.

However, Bubs was able to capitalise on an opportunity that has been boiling since the start of the Covid-19 pandemic, and other companies are now eager to jump on board.

Demand increase and supply shortage

Since 2020, according to a study conducted by healthcare market research group FMR Global Health, hospitals in the US decreased the in-hospital support for breastfeeding, reduced the discharge times for maternity wards and increased the separation of mothers and children.

This has led to, “the share of breastfed one-year-olds [plummeting] from an estimated 34 per cent to an estimated 14 per cent this year,” Jennifer Maloney from the New York Times wrote, as mothers now seek to the alternate, infant powder formula.

This gave the four major manufacturers in the US – Abbott Laboratories (NYSE:ABT), Mead Johnson Nutrition, Nestle USA, and Perrigo, who control 90 per cent of the US infant formula market share – a chance to capitalise.

However, like many markets around the world, the infant baby formula industry in the US struggled with various supply chain difficulties over the pandemic. Logistical issues including the various lockdowns created mobility restrictions for these four big players, creating a supply shortage within the market. This shortage further intensified when Abbott Laboratories closed its Michigan factory in February due to contamination concerns.

Bubs capitalises

Over the past 18 months, Bubs Australia has been establishing their economic footprint within the US market while meeting rigorous quality and safety requirements, which has enabled them to have all six of their products FDA approved for consumption under the current relaxed rules.

Bubs also ensures that the current supply of its product to Australia will remain unaffected.

“We always make sure that our Australian home base is protected. We’re not just talking about one product here, every single one of our infant formula products … have all been approved for immediate import at once,” Bubs chief executive Kristy Carr stated.

This is because Bubs has the ability to triple their current 10 million tin annual capacity.

Their recent success within the US market has been greatly assisted by the unique advisory firm, Bondi Partners. Led by founding partner and president Joe Hockey, global chair secretary Richard Spencer and senior managing director Chelsey Martin, Bondi Partners advises Australian companies navigating through the US with its deep networking capabilities running between Washington and Sydney.

Future outlook

Seizing this opportunity meant that Bubs has now established itself as a profitable, trusted brand on an international scale.

As happened with the 2008 melamine scandal in China, the reputation of Abbott Laboratories has the potential to be stained by recent events. Americans may look to shift away from US-made baby formula, granting access for Bubs to enter the market for an extended period of time.

Capitalising on this potential shift in US markets, Ms Carr stated, “We have spoken to every single US retailer – the top 50 retailers in the US – about stocking our products,” as the company aims to obtain significant brand awareness toward their brand.

Kevin Kettels, an assistant professor at Wayne State University with a focus on global supply chain management, seems to believe that this scenario has opened the gate for many companies to enter the market, stating, “It seems that more companies will be allowed to sell because of this emergency. And it is certainly possible they will be allowed to sell in the future.”

a2 Milk Comes into the Frame

Dual-listed New Zealand group The a2 Milk Company’s share price increased by 10 per cent to $4.77 in the wake of Biden’s announcement, after it declared its preparedness to assist with the shortage in the US.

“We stand by to assist the US government, FDA and our trade partners to help parents and caregivers access high-quality a2 platinum infant milk formula from New Zealand during this difficult period subject,” a2 Milk chief executive David Bortolussi stated.

a2 has already established itself in the US, supplying various products to roughly 27,000 stores around the country. However, baby powder is not among them.

This could soon change, with the CEO revealing that the company has lodged an application with the FDA to supply infant baby powder, potentially adding another player to the highly concentrated US market.

Barrenjoey head of consumer research Tom Kierath seems to believe that a2 Milk could join Bubs in the US baby milk powder market, stating, “What is unclear is if the recent contamination events will lead to a more permanent place for global brands in the US IMF industry, which could prove to be an opportunity for The a2 Milk Company.”

WIC a potential hindrance

One potential roadblock for these Australian companies to have any long-standing effect within this consolidated market is the current Women, Infants, and Children (WIC) policy.

The WIC program allows low-income families to purchase baby formula for a discount. Roughly half of all the babies born in the US are eligible. However, only three formula brands are tied with the program – Abbott Laboratories, Mead Johnson, and Gerber.

Each of these companies can bid on the right to become the sole provider of their product by offering discounts to a state, effectively controlling the entire marketplace in that state.

If Abbott returns to its full capacity, it may be difficult for Australian companies to compete, as the program is America’s biggest consumer of infant formula, supplying it at a significant discount to low-income families compared to those not in the program.

For now, Bubs tins are scheduled to depart Melbourne Tullamarine Airport on 9 June and 11 June.

Peter Milios

Peter Milios is a recent graduate from the University of Technology - majoring in Finance and Accounting. Peter is currently working under equity research analyst Di Brookman for Corporate Connect Research.

Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.