Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Will A2 Milk capitalise on the US infant formula shortage?
The shortage of infant milk formula (IMF) in the United States has become the number one issue facing families. Supply had already been under pressure for the past two years from pandemic induced logistic constraints. Then Abbott Laboratories (NYSE: ABT) – which supplies 50% of the US market – shut its manufacturing facility in Sturgis, Michigan after recalling IMF products when four infants developed bacterial infections, two of whom died.
The recall caused a run on inventory, with families rushing to secure supplies not dissimilar to the pantry stocking in 2020. A survey in early May reported that 43% of retailers had no inventory.
Last week the Centers for Disease Control and Prevention concluded its investigation with no findings of a link between Abbott formulas and the infant illnesses. Subsequently, the Food and Drug Administration (FDA) has given the approval to reopen the facility with a return to production over four to six weeks.
However, the fallout from the recall will be longer-lasting. Families and more widely populations are sensitive to any negative press surrounding baby products. Abbott will be trying to contain the situation, but the shortage will only amplify the focus on other brands. Concentration is high in the US, with just four producers owning 90% market share. As a result, there is a real opportunity for international brands to gain entry into the lucrative market.
Historically, a2 Milk Company Ltd (ASX: A2m) has only sold liquid milk products in the United States via traditional retail channels like supermarkets. In the past five years, it’s recorded no IMF revenue in the region, and it’s unclear if the FDA has approved its recipes. The company could relocate inventory from other markets to the US, but this wouldn’t lead to a bump in sales, simply a reallocation. Given the company has no existing IMF operations, its unlikely to go out of its way to solve the supply issue.
On the contrary, Bubs Australia Ltd (ASX: BUB) launched its toddler formula range in the US in June 2021. The products already have FDA clearance and channel checks show available inventory on Amazon, Walmart and online retailers. Bubs remain in talks with the FDA regarding its IMF products, which may benefit from the US government’s recently relaxing of import rules.
The big hurdle Bubs faces is customer education given goat milk is still a relatively new product to families. A household that has previously used milk-based formula will first look for a similar alternative for their baby, rather than trying something completely new. To counter this, the company’s US ambassador Dr Tanya Altmann has been across various media channels increasing brand awareness.
While Bubs looks the best placed of the two Australian producers to alleviate US shortages, it’s more likely multinational brands such as Nestle solve the chokepoint. They already have a reputation for quality in addition to the manufacturing and inventory capacity to cope with a ramp-up in demand. Nonetheless, Australian producers will benefit from an increased focus on alternative brands which should aid market penetration over the medium term.
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