Formula makers facing an end to plump profits

Mainland parents' distrust of local milk has elevated foreign baby-food brands into luxury goods and allowed firms from Danone to Mead Johnson Nutrition to fatten margins. But those plump profits are now at risk.

The troubles started this month, when state media reported the central government was investigating them and other overseas competitors for possible price-fixing. Within days, Danone and Nestle cut some prices by as much as 20 per cent. Mead Johnson, the country's largest infant formula seller, announced its own cuts on Wednesday.

The central government is looking to improve the mainland industry, Wells Fargo analysts wrote this month. The government has said it will strengthen entry requirements and provide financial incentives for producers to own their raw material supply chain. It is also encouraging mergers between local producers to make them more competitive.

Morgan Stanley downgraded US-based Mead Johnson's stock to an equal-weight rating this month, similar to a hold, partly because of Beijing's push to support domestic manufacturers. The analysts reduced their 2013 earnings estimate on Mead by five US cents a share to US$3.22.

Mead Johnson, which saw its operating profit on the mainland rise 12 per cent to US$870 million last year, is cutting prices on its main products in China by up to 15 per cent. The company was looking for "potential offsets" globally and co-operating with the National Development and Reform Commission's antitrust review, it said on Wednesday.

Paris-based Danone reported first-quarter sales growth that beat estimates as Chinese food-safety worries helped drive a 17 per cent jump in baby-nutrition revenue. Switzerland's Nestle reported first-quarter infant-nutrition sales increased at least 10 per cent, faster than the company's overall growth.