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Bellamy’s share price could still soar from here

Credit: Bellamy's

Bellamy’s Australia Ltd (ASX: BAL) has raised the prices of its baby formula for the first time since 2011, with a number of supermarkets and other retailers now selling tins at $28.

Woolworths Limited (ASX: WOW) has been blamed by customers for raising the price, especially as ongoing shortages of baby formula around Australia continue. At its online store, Woolworths is charging $28 for Bellamy’s Organic Infant formula- from birth to 12 months at $28.00 a 900g tin.

Bellamys Woolworths

Source: Woolworths online

 

Coles – owned by Wesfarmers Ltd (ASX: WES) – has yet to put prices up, offering the same product as Woolies for $22.95.

Bellamys Coles

Source: Coles online

 

It’s not known how long Coles will be able to wear the lower prices and will eventually have to put its prices up too.

Woolworths has also come under fire for allowing shoppers to purchase trolley loads of formula, despite imposing a 4 tin limit. Coles has a 2 tin limit on its online store. Many shoppers are buying from stores in Australia and shipping them to China where demand is insatiable, and charging prices as much as three or four times what they retail for in Australia.

As news.com.au reports, some shoppers have threatened to defect to competitor Coles.

One customer wrote, “Shame on you Woolworths for increasing your price on Bellamy’s Infant (Step 1) formula from $23 per tin to $28 per tin. Just because the item is currently in short supply does not mean you should use this as a means to increase your profit margin. This may be the incentive I need to exclusively shop at Coles from now on.”

News.com.au says Woolworths has defended the price increase, citing an ‘increased cost of supply from the manufacturer and not any increase in Woolworths margin’.

Bellamy’s is charging $28 a tin on its own website too and announced the price rises on its website on November 27. The company says the price rises reflect increasing prices for organic milk – which is three times the price of conventional milk, and brings its products into line with premium non-organic baby formula available on Australian supermarket and pharmacy shelves.

The company also went as far as to say that it was not due to recent demand. Prices for Bellamy’s baby formula had not changed since 2011, suggesting it was long overdue.

Bellamy’s has struggled to keep up with demand, and recently signed a manufacturing agreement with Fonterra, or as Google refers to the company FONTERRA ORD UNIT (ASX: FSF). Bellamy’s already has a long-term manufacturing contract with Tatura – a subsidiary of Bega Cheese Limited (ASX: BGA).

Foolish takeaway

Demand for organic baby formula is unlikely to slow, with Bellamy’s products one of the highest in demand. Raising prices is likely to offset some of the costs for organic milk that Bellamy’s may have been wearing over the past 4 years since the last price rise. That could see revenues more than double again in 2016. With the share price already up near 700% in the past 12 months, more gains could be on the cards.

Motley Fool contributor Mike King owns shares of Wesfarmers Limited and Woolworths Limited. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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