For Mead Johnson, the maker of Enfamil, $13.5 million is a small price to pay to halt the slide towards store brand formula.
Some companies just have a knack for rubbing the federal courts the wrong way.
Case in point: Baby formula brand Enfamil and its maker, Mead Johnson Nutrition.
Last week, a federal court ruled Mead Johnson must pay $13.5 million in damages to its store-brand rival PBM Products for misleading advertising. At issue was a series of comparative advertisements illustrating Enfamil’s implicit claim that its product contains "a specific set of ingredients" that its competitor does not have. Those deficiencies – so the ads imply – would lead to poor eye and brain development.
It should go without saying (even for the non-jury-selection specialist) that allowing a suit to go to jury when the claims involve lying to new mothers about their baby’s health is more than just bone-headed.
And that’s not the first time Mead Johnson’s ruffled PBM’s feathers. AdAge details a history of squabbles over misleading advertising involving the baby formula giant. You can read all about it here.
The whole situation begs the question: If Mead Johnson keeps losing in court, why does it keep pushing the limits with its advertising?
The judge in the most recent case remarked that Mead Johnson engaged in this campaign under pressure from lagging sales. Apparently, the generic "store brands" were gaining ground (recession-driven, no doubt), and Mead Johnson felt it needed to up the ante to halt the decline.
Perhaps the better question is: Does the strategy work?
I decided to do a little math to try to find out.
It’s been almost a decade since I’ve been an active baby formula buyer, but I remember how expensive the dry stuff could get. Boy, things haven’t changed. For my experiment, I chose the Enfamil Lipil Milk-Based Infant Formula with Iron, powdered, in the 12.9 oz can. Very similar to what my wife and I used to buy. The average price per container was $14.99. Some more, some less. Cheaper if you buy it in bulk. You get the idea.
In the industry, baby formula is lovingly referred to as "liquid gold". At a 40 percent profit margin, it’s easy to see why. Obviously, the liquid (and therefore more-quickly perishable) versions sport a lower margin. Powder margins are higher. But just for fun, let’s stick with the conservative 40 percent number for our calculations.
So, using quick "street math", we can deduce that Mead Johnson makes $6.00 per 12.9 oz. can of formula.
Now let’s divide the settlement amount (the original $13.5 million plus perhaps an additional $1 million in legal fees for a total of $14.5 million) by the average profit per can of $6.00. Of course, that assumes Mead Johnson sells nothing else, but you get the idea. When you do that, you get just over 2.4 million.
2.4 million is the number of additional cans of formula the company would need to sell to break even from the settlement.
Does that seem difficult?
I don’t think so.
Mead Johnson controls about 50 percent of the market for baby formula, or better than a $1.4 billion market in the US each year. That’s over 90 million cans of formula each year. An extra 2.4 million cans? Not so tough.
So we come back to the first question. Does the misleading advertising make business sense? If the judge’s comments are accurate, Mead Johnson was likely more concerned with preventing the loss of the sales for those 2.4 million cans. Is pushing the boundaries of advertising law worth the brand positioning risk in this case?
Put another way: Will mothers look at a court ruling (essentially saying the company was wrong, and its formula is no better than a generic) or will they believe the powerful pathos advertising appeals imploring them to look after the child’s health?
Tough questions all.
But sadly, I think the math answers them.