China's mums key to Nestle baby milk deal

LONDON/BEIJING - The rise of the middle-class Chinese working mothers helps explain why Nestle paid nearly $12 billion for Pfizer's baby food business and could leave rivals scrambling to catch up.

Across emerging markets, nowhere more than in China, women are increasingly keeping jobs after having children -- a big driving force behind 10 percent annual growth in the $30 billion a year baby food industry.

Foreign labels such as SMA, Promil and S-26 Gold, which Nestle will get with the Pfizer deal, have a definite edge. Nestle's products include Nan, Gerber, Lactogen and Nestogen, but are less well known in China.

Baby milk was the foundation of the world's biggest food company, established in 1866 when German pharmacist Henri Nestle introduced a substitute for mothers who could not breast-feed.

Paying more for the Pfizer unit than the $10 billion that analysts had expected, Nestle trumped a bid from Danone and Mead Johnson.

The Pfizer nutrition business has 85 percent of its sales in emerging markets, and a quarter of sales in China.

Fuelled by 16 million new births a year, annual growth rates for China's baby formula market have been as high as 20 percent over the last five years. The market is forecast to double to $16 billion by 2016.

"The key strategic attraction of the deal in our view is Pfizer's No 5 position in the Chinese infant formula market where despite being global No 1 player in infant formula, Nestle has a relatively weak presence," said analyst Robert Dickinson at brokers Citi.

The Swiss giant is already market leader in milk formula in Latin America, Africa and the Middle East. This brings it the No 1 spot in Asia with its presence outside China counted too.

Globally, Nestle's baby food market share will rise to 25 percent from 19 percent - although this is likely to fall slightly after sell-offs to ensure regulatory clearance. Mead has 16 percent, Danone 14 percent and Abbott Laboratories 12 percent.

Few options for competitors

The Nestle-Pfizer business in China would only have a combined 12 percent market share behind Mead's leading 16 percent and Danone on 14 percent, but that would still be a rise from 10th place and there may be room for expansion.

Analysts looking at China expect the number of middle class households to double to 100 million by 2015.