Nestle Plans to Push Into Lucrative U.S. Market for Infant Formulas

WASHINGTON — The $1.5-billion U.S. market for infant formulas may never be the same.

Last week, Swiss conglomerate Nestle S.A. announced plans to shoulder its way into that business with two new baby formulas and a multimillion-dollar marketing budget.

The move ended nearly 10 years of speculation about when and how Nestle would attempt to capture the fancy of American mothers.

Now the question is: Can Nestle, which dominates the infant formula market outside the United States, make a dent in this country?

Its planned entry, according to analysts and marketing observers, has set the stage for a battle that pits the Swiss giant, through its Carnation Co. subsidiary, against two American pharmaceutical concerns that together account for more than 90% of all baby formula sold in the United States. Moreover, according to some analysts, Nestle will have to fight an image problem resulting from its controversial marketing of an infant formula in developing countries.

The competition will be “extraordinarily tough,” said Robert Benezra, director of pharmaceutical research at H.C. Wainwright & Co., a Boston investment banking firm. Benezra likens the contest to the Tyson-Spinks heavyweight boxing match but adds, “I don’t think the result will be a knockout.”

Unconventional Strategy

The fight, in the minds of some, may ultimately hinge on the success of Carnation’s rather unconventional marketing strategy.

The company has developed what it claims are two technologically advanced baby formula products aimed at a very specific group of babies. Good Start H.A., which Carnation calls a “medical breakthrough,” is designed for babies who are allergic to standard cow’s milk or soy-based formulas. The other product, Good Nature, is a follow-up formula for older babies already eating solid food.

Company officials and pediatricians differ on the number of infants who may need a hypoallergenic formula. But they do agree that it is a relatively small slice of the overall market.

That isn’t the only factor that makes Carnation’s marketing strategy stand out.

Unlike the other companies in the business, Abbott Laboratories and Bristol-Myers Co., Carnation plans to market its products directly to consumers. That is a rather radical departure from the traditional approach of only targeting physicians and other health-care professionals. In fact, the move already has drawn criticism from pediatricians who are fearful that such marketing will glamorize bottle feeding at the expense of breast feeding, by far the most beneficial way to feed newborns and infants, according to most doctors.

“They have a very novel marketing approach,” said Ronald Nordmann, a pharmaceutical analyst with Paine Webber Inc. in New York. “To my knowledge, it (the direct appeal to the consumer) has never been tried before in the infant-nutrition market.”

For a newcomer in the market, that kind of appeal may be the right one, according to Al Ries, a marketing strategist with Trout & Ries in New York. “From a purely strategic point of view, it’s always better to do just the opposite in spite of the fact that on the surface it might not be right,” he said.

Extensive Research

Officials at Carnation said their decision to market not only to doctors but also directly to consumers was dictated, in part, by extensive market research.

“Today’s mother, in general, tends to be somewhat older and tends to be better-educated,” said Ernie Strapazon, an executive in Carnation’s nutrition division who has played a key role in researching and developing the products. “They are very concerned about doing the best for their children, and are very aggressive in seeking information.” Carnation officials are quick to point out that advertisements for Good Start, the hypoallergenic product, will not use the product’s name.

They will make clear that Carnation is the sponsor, Strapazon said, but the ads will refer only to the symptoms associated with milk allergy and direct consumers to their doctors.

Nestle also downplays the effect Nestle’s controversial infant formula marketing in the Third World will have on its new U.S. products.

During the late 1970s and early 1980s, criticism over Nestle’s marketing of infant formula in developing countries led to a 6 1/2-year worldwide boycott against its products. Nestle had promoted the sale of powdered infant formula in countries where mothers unknowingly mixed it with contaminated water or diluted it beyond recommended levels, causing severe malnutrition and death.

Although the boycott ended in 1984, consumer groups that led the boycott last week threatened to revive it, accusing the food conglomerate of breaking promises it had made regarding the promotion of baby formula in the Third World.

Nestle denies the charges.

“My trust in the consumer is much bigger than that,” said Nestle spokesman Francois Peroud in a telephone interview from Nestle’s headquarters in Vevey, Switzerland..

Different Views

Analysts differ over how the past controversy will affect U.S. products, which are expected to go on sale by the end of the year. They point out that most American consumers don’t realize that Carnation is owned by Nestle. When Carnation did its market research, it found that consumers had a strong and positive association with Carnation that outweighed “an extremely small” negative association with Nestle, Strapazon said.

“Carnation has an image of a producer of quality foods. I don’t know if (Nestle’s) reputation from the Third World will spill into the United States,” said Eugene Melnitchenko, an analyst with Eppler, Guerin & Turner Inc. in Dallas.

Gene Gargiulo, an analyst with First Boston Corp., disagreed. The new hypoallergenic baby formula, he said, will only be available in powder, not liquid, like other formulas currently on the market. “You’ll get the whole issue of contamination with tap water. As much as Nestle is trying to distance itself from the whole issue of over-promotion, the stigma is very much (apt) to stay with them,” he said.