(Reuters) - The rise of the middle-class Chinese
working mother helps explain why Nestle paid nearly $12 billion for Pfizer's
baby food business and could leave rivals scrambling to catch up.
Across emerging markets, nowhere more than in China,
women are increasingly keeping jobs after having children -- a big driving
force behind 10 percent annual growth in the $30 billion a year baby food
industry.
Foreign labels such as SMA, Promil and S-26 Gold,
which Nestle will get with the Pfizer deal, have a definite edge. Nestle's
products include Nan, Gerber, Lactogen and Nestogen, but are less well known in
China.
"I have no choice but to buy foreign
brands," said Liu Shuo, 30, who works for a foreign company in Beijing and
has a two-year-old. "Chinese milk powder brands always have food safety
scandals, I don't trust them."
Baby milk was the foundation of the world's biggest
food company, established in 1866 when German pharmacist Henri Nestle
introduced a substitute for mothers who could not breast-feed.
Nestle's history of promoting baby milk in emerging
countries has not always been a happy one and it was targeted by campaigners
for selling milk to African mothers in the 1970s.
But such growth markets are ever more important for
brands dependent on changing lifestyles and rising incomes.
Paying more for the Pfizer unit than the $10 billion
that analysts had expected, Nestle trumped a bid from Danone and Mead Johnson.
The Pfizer nutrition business has 85 percent of its
sales in emerging markets, and a quarter of sales in China.
Fuelled by 16 million new births a year, annual
growth rates for China's baby formula market have been as high as 20 percent
over the last five years. The market is forecast to double to $16 billion by
2016.
"The key strategic attraction of the deal in
our view is Pfizer's No. 5 position in the Chinese infant formula market where
despite being global No. 1 player in infant formula, Nestle has a relatively
weak presence," said analyst Robert Dickinson at brokers Citi.
The Swiss giant is already market leader in milk
formula in Latin America, Africa and the Middle East. This brings it the No. 1
spot in Asia with its presence outside China counted too.
Globally, Nestle's baby food market share will rise
to 25 percent from 19 percent - although this is likely to fall slightly after
sell-offs to ensure regulatory clearance. Mead has 16 percent, Danone 14
percent and Abbott Laboratories 12 percent.
FEW OPTIONS FOR COMPETITORS
The focus will now shift to Mead and Danone and how
they try to catch up with Nestle.
They will certainly look at Pfizer's businesses in
Latin America, South East Asia, Australia and South Africa, which
Nestle could well have to sell for anti-trust reasons.
They may also look at No 4 player Abbott
Laboratories, planning to split into a pure-play drugs group and another group
which would include infant nutrition.
Danone has said it does not have the firepower for
very big deals right now and that could rule out any bid for Mead, which is
currently valued at $17 billion.
"We would expect Danone to be interested in any
potential disposals for anti-trust issues, particularly in Latin America,"
said Citi's Dickinson.
The Nestle-Pfizer business in China would only have
a combined 12 percent market share behind Mead's leading 16 percent and Danone
on 14 percent, but that would still be a rise from 10th place and there may be
room for expansion.
Analysts looking at China expect the number of
middle class households to double to 100 million by 2015.
As Chinese mothers tend to take less maternity leave
than Western counterparts, the market growth rates for baby food are higher
than those seen with the rise in the number of European and North American
working mothers in the 1960s.
The market for locally made products in China
suffered from a 2008 scandal over milk products tainted with melamine, allowing
groups such as Mead and Danone to take their lead.
Campaigners who have dogged Nestle for decades,
accusing it of promoting baby powder to mothers they say would be better off
breast feeding, voiced concern at Nestle having an even bigger presence in
emerging markets after the deal with Pfizer.
"This renewed focus on growing the market for
infant formula products is troubling," said Wenonah Hauter at
Washington-based Food & Water Watch.
One of the big worries for campaigners has been that
mothers might prepare baby formula with unsafe water, although rising incomes
in emerging countries mean the market for bottled water is growing fast - and
Nestle is global leader there too.
Per capita consumption of baby food remains low in
emerging markets so fast growth should continue, said Morgan Stanley analyst
Michael Steib, adding that foreign firms will benefit as markets move more
towards higher-priced quality products.
And while the expansion of China's middle class will
eventually slow in line with the demographics of a stable birth rate and more
prosperous society, coming up behind are other giants such as India and Africa.
David
Jones and Sabrina Mao
Business & Investment Opportunities
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