Why demand for Bellamy’s Australia Ltd’s infant formula is rocketing

Credit: Bellamy's

Australian-made baby formula products have been in hot demand in recent months – not just locally, but around the world.

In fact, it seems that many of the tins being purchased from Australian stores are actually intended for overseas use, whereby shoppers purchase the items here and then sell them online for a hefty premium.

Bellamy’s Australia Ltd (ASX: BAL), one of the most popular brands (if not the most popular brand), has itself reported that 40% of Australian sales are then shipped overseas by customers. The Australian Financial Review this morning reported a much higher figure than that, saying that as many as half the locally purchased goods are potentially shipped overseas.

This has caused an enormous shortage on our supermarket and pharmacy shelves. There has also been a huge consumer backlash with Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) – both being forced to implement limits on infant formula per transaction to better ensure parents get their fair share.

At Woolworths, there is a four-tin limit per customer while Coles maintains a two-tin per transaction limit.

While Coles has reportedly introduced new technology at the checkout to ensure customers do not exceed that limit; The Australian Financial Review revealed that Woolworths has admitted to being slack in enforcing its own. This is largely due to the enormous sales generated by the infant formula products, with the AFR quoting one executive as saying “we know more than half the sales are grey market and turn a blind eye.”

Thirsty for Australian and New Zealand produced baby formula products

In recent years, there have been a number of health scares sparked by contaminated food products produced in countries like China, some of which have even resulted in the deaths of infants. Parents would prefer to pay much more for products they can be almost certain are safer, especially when they’re certified organic like Bellamy’s.

Other popular brands include a2 Platinum from A2 MILK FPO NZ (ASX: A2M) and Karicare, while Blackmores Limited (AASX: BKL) is also exploring a push into the industry.

Indeed, such strong demand for their products is a very good problem to have and it has resulted in soaring sales for both Bellamy’s and a2 Milk. Bellamy’s has even pumped up its prices recently which should result in an even greater top-line (revenue) figure.

As good as it may be however, excess demand is still a problem that needs to be resolved. Bellamy’s has taken a number of actions in order to increase supply, including its recent manufacturing deal with FONTERRA ORD UNIT (ASX: FSF) (“Fonterra”), but with China abandoning its one-child policy recently, there’s a good chance it will still need to do more in order to properly supply the market over the coming years.

Foolish takeaway

There is something of a boom in baby products right now and the supermarkets and infant formula producers are all benefiting. However, investors need to be prepared to pay top dollar to gain exposure to the sector with share prices soaring over the recent past.

Indeed, shares of companies like Bellamy’s are by no means ‘cheap’ anymore, having surged 644% year-to-date, and some investors may prefer to look elsewhere for new investment ideas. In saying that however, there could still be further gains to be recognised, especially if Bellamy’s earnings figures come back as high as the market seems to be expecting.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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