Forget Baidu ... that's old hat. The next greatest investment for your portfolio might just be baby formula. It's become such a hot commodity that more people have been arrested for smuggling baby formula out of Hong Kong than cocaine and heroin, combined. And yes, I'm completely serious. Here's what investors need to know.
By Preston Smalley from San Francisco Bay Area, United States (Enfamil Formula Uploaded by LongLiveRock) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons
Supply and demand
China doesn't have the greatest reputation when it comes to safe consumer products, and Chinese baby formula is no exception. For example, in 2008, 300,000 Chinese babies got sick after consuming baby formula laced with the toxic chemical melamine -- and six babies died as a result. In March of this year, Xile Lier, Hero Group's Chinese distributor, admitted to "adulterating" its baby formula with "various mixed sources," even though the label read, "100 percent imported dairy from the Netherlands."
Not surprisingly, these scandals, along with myriad others, have caused parents to completely lose faith in Chinese baby formula companies, and now there's massive demand for formula from anywhere but a Chinese company. Consequently, grocery store shelves have been stripped of foreign baby formula, and online demand is even higher, as parents are even wary of formula that's not purchased outside of China. Taoboa, an online Chinese retailer, sells formula for $43 a can. In America or the U.K., that same can would sell for aproxamately $23.
There's been such a run on baby formula, that retailers in the U.K., Holland, and Australia have put limits on the amount of cans a consumer can buy in one day, because they can't keep up with demand. This has resulted in Chinese parents asking friends living abroad to buy formula in bulk, and ship it to awaiting parents. That, in turn, has caused a 50% spike in retail sales, compared to the last 2012 quarter.
Who's benefiting
The safety concerns surrounding infant formula in China are grim, and parents have real reason to be wary. Additionally, because the demand for foreign baby food has reached such epic proportions, countries outside of China are seeing a shortage. This has lead to rationing in countries like Germany, even though baby food companies are trying to increase production.
So, while baby food safety concerns aren't great for Chinese parents or their babies, it's a golden opportunity for foreign baby food companies with domestic producers, like Mead Johnson Nutrition (MJN), Nestle (NSRGY 0.02%), and Danone's (DANOY 0.63%) Dumex, to increase market share. This is because in China, unlike in the U.S., there are approximately 15 major baby food companies competing for business. Because of the scandals, domestic companies are taking a major hit.
With their domestic producers in China, the above three companies are in an enviable position. Dumex, in particular, seems especially poised to prosper, as it's the leading formula brand in China. Additionally, even though Dumex's formula is made in China, it's taken an active role in assuring Chinese parents that it's Chinese factories have even higher safety standards than it's factories in Europe. This approach has gone a long way in assuring scared parents that Dumex's formula is particularly safe.
