Food Fight : Gerber and Rivals Struggle for Growth in Baby Food Industry

The company that invented baby food is having a harder time selling it these days.

Gerber Products Co., the company that brought the first strained peas onto the market in 1927, has lost market share to second- and third-place competitors since implementing a price increase last September that wasn’t initially matched.

Meanwhile, facing slowed population growth in the United States, Gerber and its major rivals must target new consumers--such as children of different ages and the growing Latino and international markets--to keep profit improving in the nearly $1-billion-a-year industry, analysts said.

Under pressure from the competition, Gerber earlier this month forecast lower earnings for the current fiscal year, shocking Wall Street enough to tumble Gerber’s stock to $29.875 a share, down $5.25, or 15%, on a single day in mid-December.

Gerber’s 5.5% September price hike wasn’t initially matched by either of its main competitors--Ralston Purina Co.’s Beech-Nut brand oJ. Heinz Co.’s baby food line. In some regions of the nation, those rivals also offered coupons and other promotional deals that lowered their prices, stealing cost-conscious buyers away from Gerber.

“Beech-Nut had an incentive not to raise prices and to promote a little bit to clear out the excess because it’s converting its bottle size from 4.5 ounces to 4 ounces,” said industry analyst Michael Mauboussin of First Boston.

Gerber’s rivals have since announced or implemented comparable price hikes, so Gerber will probably regain its former customers, Mauboussin said.

Gerber is also optimistic. “We anticipate our market share will come right back,” Gerber spokesman Steve Poole said. “It’s hardly a three-horse race when we have 70% of the market.”

Gerber had 72% of the market before its latest price increase, Poole said. A distant second to Gerber’s $655 million in annual sales is Beech-Nut with $129 million, or a 14.2% share. Heinz follows with $96 million, a 10.6% share.

Stephen Carnes, an analyst for Piper Jaffray, questions the wisdom of further price increases in a slow-growing market.

“Strained peas are strained peas. I don’t care whose label is on it, it’s the same on the inside,” Carnes said. “It still comes down to being a price-sensitive product.

“Food price inflation is not ready to happen yet because the consumer is not ready to take price increases right now.”

Analysts say these manufacturers will have to find new kinds of customers to increase profit and revenue.

Although all three of the big manufacturers already offer products for different stages in a baby’s growth, Gerber and Beech-Nut have launched new lines aimed at slightly older children.

Gerber calls its products Gerber Graduates, for children 10 to 30 months old.

“We introduced Gerber Graduates (because) parents tell us they don’t know what to do when the toddlers have gained a little independence in what they eat,” Gerber spokesman Poole said.

The Graduates line, and Beech-Nut’s Table Time, eliminate the guesswork for parents about which foods are appropriate for a child’s first solid food.

By dicing carrots and other vegetables into larger pieces, and creating such things as turkey products that look like cocktail frankfurters, older children are encouraged to handle food themselves.

“These are finger foods because part of the child’s developmental process is to learn to use their fingers,” Poole said.

Beech-Nut has also developed new products for babies still on formula.

Baby’s First Water With Fluoride is billed as a convenient way to give infants the fluoride needed to develop strong teeth, even before the teeth are visible. The product can also be used to prepare infant formula.

Another new approach by both Gerber and Beech-Nut is to use unusual fruits in their jarred foods and combination juices. Gerber said its tropical juices with papaya and mango are meant to appeal to the nation’s growing Latino population.

Besides juices, Gerber has also added the exotic fruits to rice cereal and other products, and the new lines seem to be catching on, Poole said.

Poole said Gerber intends to add products to these new lines to reach even more of the 4% of American households that have young children.

Analyst Mauboussin stresses that companies such as Gerber will also have to expand into overseas markets. Gerber already sells “rice with young sardines” in Japan, “strained mango” in the Philippines and “lamb stock stew” in Australia.

And while the company has sold products overseas for more than 30 years, it had only about a 15% market share in Japan until renewing an aggressive international campaign two years ago.