China’s Infant Formula Market Loses Allure for Reckitt Benckiser

(Bloomberg) -- The promise of surging baby-formula sales in China fueled Reckitt Benckiser Group Plc’s $18 billion acquisition of Enfamil maker Mead Johnson. Only four years later, the U.K. company is considering whether to get out of that market.

Reckitt put its infant-nutrition business in Greater China under strategic review Wednesday as part of Laxman Narasimhan’s biggest portfolio revamp since becoming chief executive officer in late 2019. While Reckitt’s overall sales grew a record 12% in 2020, fueled by surging demand for Lysol and hygiene products, the China baby-formula business has been a drag.

What had been a boom market has turned to bust due to falling birthrates in the world’s most populous country. Local competition has also increased, putting pressure on Reckitt and its rivals Nestle SA and Danone, which plowed into the market since China eased its stringent one-child policy in 2013 and allowed each family to have two children in 2016.

Registered births slumped 15% in China last year, and the country is studying whether to fully lift restrictions on the number of children families can have in some regions to address the declining birth rate.

Previously, safety scandals led many mothers in China to order baby formula from abroad, which also helped such multinational producers. However, Covid-19 restrictions posed obstacles to these imports, cutting Danone’s in half.

Last year, Reckitt took an impairment of 5 billion pounds ($7 billion) on the business, and Wednesday the company added a further 985 million-pound charge, reflecting the effect of Covid-19. Higher costs including inventory writedowns following the Hong Kong border closure during the pandemic hit the unit’s margins, the company said.

Inflection Point

“This is a very good business with very good brands,” CEO Narasimhan said in a phone interview. The review is aimed at addressing Reckitt Benckiser’s lack of a wide presence in mother- and baby-focused stores, he said.

At the time of the Mead Johnson acquisition, former CEO Rakesh Kapoor said the takeover marked an “inflection point” for Reckitt Benckiser, citing urbanization, changes to China’s one-child policy and increasing rates of women entering the workforce as reasons for entering the infant nutrition market. The company had estimated growth in the segment at 3% to 5% a year over the mid-term.

In previous years, infant and child nutrition in China made up 6% of Reckitt Benckiser’s total annual sales of about 14 billion pounds.

The U.K. company also said Wednesday it agreed to sell Scholl footcare to Yellow Wood Partners and bought the Biofreeze topical pain relief brand from Performance Health, which is owned by Madison Dearborn Partners.

The sale of Scholl will reunite that label with the Dr. Scholl’s brand, which Yellow Wood previously acquired from Bayer AG.

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