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Australia’s impact on the US infant formula crisis

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Share prices of Bubs Australia (ASX:BUB) and a2 Milk (ASX:A2M) have soared on news that they can help with the current supply shortage in the United States. However, are these companies a temporary solution to the current shortage or will they be an opportunity to disrupt an oligopoly in the American market?

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On Monday May 29, Bubs Australia’s share price jumped 77% to a 52-week intraday high of 86c before ending the day at 68c, following news that President Joe Biden will ship 27, 5 million bottles, or 1.25 million boxes, of infant formula safe in the United States.

It comes after Biden invoked the decades-old Defense Production Act, giving the president immediate emergency power to control domestic industries, helping to ease the current baby formula shortage.

The deal, which was brokered by Joe Hockey’s consulting firm, Bondi Partners, grants Bubs immediate access to export 500,000 boxes to the United States and another 750,000 in the coming months.

However, Bubs was able to capitalize on an opportunity that had been bubbling since the start of the COVID-19 pandemic, and other companies are now eager to jump on board.

Increase in demand and shortage of supply

Since 2020, according to a study by healthcare market research group FMR Global Health, US hospitals have reduced inpatient breastfeeding support, reduced maternity discharge times and increased separation from mothers. and children.

This led to “the proportion of one-year-old breastfed children [plummeting] from around 34% to around 14% this year,” wrote Jennifer Maloney of The New York Times, as mothers now seek an alternative, powdered infant formula.

This gave the four major manufacturers in the United States – Abbott Laboratories (NYSE:ABT), Mead Johnson Nutrition, Nestlé USA and Perrigo, which control 90% of the US infant formula market – a chance to capitalize.

However, like many markets around the world, the U.S. infant formula industry has faced various supply chain challenges during the pandemic. Logistical issues, including various blockages, have created mobility restrictions for these four big players, creating a shortage of supply in the market. This shortage intensified further when Abbott Laboratories closed its Michigan plant in February due to contamination concerns.

Bubs capitalizes

Over the past 18 months, Bubs Australia has established its economic footprint in the US market while meeting rigorous quality and safety requirements, resulting in its six products being FDA approved for consumption in the under the current relaxed rules.

Bubs also assures that the current supply of its product in Australia will not be affected.

“We always make sure our Australian home base is protected. We’re not just talking about one product here, each of our infant formula products…have all been approved for immediate importation at the same time,” said Bubs Managing Director Kristy Carr.

Indeed, Bubs has the capacity to triple its current annual capacity of 10 million tin.

Their recent success in the US market has been greatly aided by one-stop consultancy, Bondi Partners. Led by Founding Partner and Chairman Joe Hockey, Secretary to Global President Richard Spencer and Senior Managing Director Chelsey Martin, Bondi Partners advises Australian companies navigating across the United States with its deep networking capabilities between Washington and Sydney.

Future prospects

Seizing this opportunity has allowed Bubs to establish itself as a profitable and trusted brand internationally.

As happened with the melamine scandal in China in 2008, the reputation of Abbott Laboratories could be tarnished by recent events. Americans may seek to move away from US-made infant formula, allowing Bubs to enter the market for an extended period.

Capitalizing on this potential shift in US markets, Ms Carr said: “We have spoken to every US retailer – the top 50 retailers in the US – about stocking our products” as the company aims to achieve a significant brand awareness.

Kevin Kettels, an assistant professor at Wayne State University who specializes in global supply chain management, seems to believe that this scenario has opened the door for many companies to enter the market, saying, “It seems like more companies will be allowed to sell because of this emergency. And it is certainly possible that they will be allowed to sell in the future.

a2 The milk enters the frame

The share price of dual-listed New Zealand group The a2 Milk Company rose 10% to $4.77 following Biden’s announcement, after he said he was ready to face a shortage in the United States.

“We stand ready to support the US government, FDA and our commercial partners in helping parents and caregivers access high quality a2 Platinum baby formula from New Zealand during this difficult time,” said the director. General Manager of a2 Milk, David Bortolussi.

a2 has already established itself in the United States, supplying various products to approximately 27,000 stores across the country. However, baby powder is not one of them.

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

Barrenjoey’s head of consumer research, Tom Kierath, seems to believe that a2 Milk could join Bubs in the US baby milk powder market, saying: “What’s not clear is whether the Recent contamination events will lead to a more permanent place for global brands in the United States. IMF industry, which could turn out to be an opportunity for The a2 Milk Company.

WIC a potential obstacle

A potential barrier to these Australian companies having a lasting effect in this consolidated market is the current Women, Infants and Children (WIC) policy.

The WIC program allows low-income families to purchase infant formula at a reduced price. About half of all babies born in the United States are eligible. However, only three formula brands are linked to the program – Abbott Laboratories, Mead Johnson and Gerber.

Each of these companies can bid for the right to become the sole supplier of their product by offering rebates to a state, thereby controlling the entire market in that state.

If Abbott returns to full capacity, it could be difficult for Australian companies to compete, as the scheme is the largest US consumer of infant formula, providing it at a significant discount to low-income families compared to those not participating. not on the program.

For now, the Bubs boxes are due to leave Melbourne Tullamarine Airport on June 9 and 11.