Baby food doesn’t come cheap, at least for Nestle. The Switzerland-based global food company shelled out quite a pretty penny to outbid competitor Danone for Pfizer’s baby nutrition business – a cool $11.85 billion, to be exact. But it’s not for nothing. Nestle is hoping that this move will position the company at the vanguard of the global baby food market.
According to reports, Nestle’s hopes for the deal are not unjustified – Pfizer’s powdered baby formula could prove itself to be a serious money-making product for the company over the next few years, especially in key emerging markets:
For Nestle, this isn't a transformative deal: the Pfizer unit's sales last year were $2.2 billion, equivalent to 2% of Nestle's overall 2011 total. But the powdered baby milk market is forecast to be the fastest-growing consumer staples category over the next five years, growing 10% annually, according to Euromonitor. Crucially, Nestle will now leap to second place from eighth by market share in China, where sales are growing 19% each year.
These sales jumps in China are not coincidental, and neither is a bidding war between two major corporations for control over baby formula – The Chicago Tribune reports that more middle-class women in China are choosing to stay in the workforce after having children. With so many food safety scandals amid domestically produced products in the country, the demand for imported baby formula is huge, and both Nestle and Danone know a lucrative opportunity when they see one:
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."
But while Nestle’s big payout effectively ended its bid for the baby food business, Danone shouldn’t feel too bad about its end of the deal – according to Reuters, Danone shares rose 1.5 percent after Nestle sealed the deal with Pfizer. Why? Shareholders were reportedly relieved that Danone “would not have to leverage up its balance sheet” to pay what Nestle did. Only time will tell which of the two food empires will truly come out ahead from this competition, but for now it seems that both are doing quite all right.