The Source of Mead Johnson Nutrition’s Moat

Mead Johnson Nutrition is an extremely profitable business and generates high returns on capital and on equity. This has allowed MJN to pay and consistently grow its dividend. Mead Johnson sounds like a company operating with a large economic moat. What are the sources for their economic moat?

Switching costs and barrier to entry.

Once a Mother makes her choice of formula to feed her baby she is very unlikely to switch brands. Doctors recommend not to switch once a baby’s digestive system gets used to the formula. Also, Mother’s are very likely to remain with their initial formula choice with any future children.

The switching costs are high and it pays for Mead Johnson to be that first time Mother’s formula of choice. It makes it hard for any new baby formula entrants to scale up quickly as they have to earn the trust of both Mothers and Pediatricians and win the first use battle.

The other source of Mead Johnson’s moat is a barrier to entry courtesy of the FDA.

The FDA regulates baby formula. Formula or any breastmilk substitute has to meet extra FDA nutrition regulations because it is the sole source of food for a vulnerable population during a critical period of growth and development.

Complying with FDA guidelines isn’t as costly as bringing a new drug to market but the increased regulations and costs make it tough for any new entrant in the U.S. to take on the top two players, Abbot Labs’ Similac and Mead Johnson’s Enfamil.

The costs of regulations really only apply to marketing baby formula in the U.S. but it carries over to emerging markets where Mead Johnson is experiencing its largest rates of growth. China is MJN’s largest growing market and will get even bigger with the repeal of its one-child policy. China does have its own local baby formula brands, but they’ve recently experienced quality issues and scandals. Parents don’t want to risk their baby’s health with questionable food quality. The FDA’s approval of MJN’s formula quality goes a long way to bolstering MJN’s market position and brand around the world.