The national crisis of unavailability of infant formula — accelerated after the Food and Drug Administration’s February closure of Abbott Nutrition’s Similac factory in Sturgis, Michigan, because of bacterial contamination at the facility — has brought a renewed focus on this $4 billion-a-year industry.
Allied Market Research, a business and market research firm, reports that four companies control 90% (by sales revenue) of this highly concentrated U.S. infant formula industry: Abbott Nutrition, Reckitt Benckiser Group, Nestle USA and Perrigo Nutritionals. According to market research firm Euromonitor, in 2021, the two largest (pre-infant formula shortage) market shareholders — Abbott Nutrition (42%) and Reckitt Benckiser (38%) — control 80% of the market share. Moreover, 98% of infant formula is manufactured domestically, either by a U.S. or international company.
On May 24, the Federal Trade Commission — one of the nation’s two antitrust authorities — announced an inquiry into the shortage of infant formula. The FTC staff inquiry will be twofold: First, it will seek information about the nature and prevalence of any “deceptive, fraudulent, or otherwise unfair business practices aimed at taking advantage of families during the shortage”; second, it will attempt to “shed light on the factors that have led to concentration in the infant formula industry and the fragility of the supply chains.”
Marc Scheineson, an antitrust attorney with the law firm of Alston & Bird who has represented infant formula startup firms, notes that such startups are “often immediately taken over by one of the bigger companies. This form of market domination has created an industry where “entry barriers are too high” and “competition is too great” for new entrant infant formula manufacturers to compete successfully.
A major contributing factor to why three major players — Abbott Nutrition, Reckitt Benckiser and Nestle USA — remain dominant in the industry is that they are the only infant formula manufacturers approved by the U.S. government to provide baby formula to low-income families eligible through the Special Supplemental Nutrition Program for Women, Infant and Children program.
As of 2018, 45% of all American infants were eligible for WIC assistance, and that WIC program accounts for more than half the nation’s formula market. These sole-source WIC contracts play a major role in how an infant formula manufacturer competes in a specific state. For example, in a 2011 study by the Department of Agriculture’s Economic Research Service found that when an infant formula manufacturer holds a WIC contract, the “spillover” effect to non-WIC infant formula consumer purchases makes it so that the company captures nearly the entire infant formula market in the state.
The government also regulates the infant formula industry, as the FDA is charged with maintaining stringent (and different) safety and product labeling standards. Consequently, existing infant formula manufacturers have concentrated their operations in a limited number of facilities to maximize production efficiency and maintain federal regulatory requirements (the strictest infant food safety guidelines in the world).
Unsurprisingly, these regulatory barriers to entry have made it nearly impossible (only 2% of industry market share) for foreign infant formula manufacturers to compete in the U.S. marketplace. In addition, a 17.5% tariff is applied against most infant formula imported into the United States — another major entry barrier to expanding available supply.
Potential policy solutions could include:
First, encourage new competitors into the infant formula industry by relaxing the premerger notification filing criteria (as to minimum value and size) employed by the FTC and the Department of Justice to discourage mergers and acquisitions in this highly concentrated industry.
Second, state-level bidding for long-term WIC contracts often results in the formation of multistate alliances that effectively “lock out” smaller company bidders that lack the manufacturing capacity. Public policy should actively discourage such multi-state alliances, allowing for the “nurturing” of new competitors who have the potential to “scale up” to meet individual, state-level formula product demands.
Third, it is time to reassess whether to continue the 17.5% tariff protecting the U.S. domestic infant formula industry from foreign competition. This tariff is a barrier to increasing supply (and competition) domestically and imports from Canada and the European Union, two U.S. allies that manufacture infant formula in high-quality, sanitary manufacturing facilities.
Given reasonable policy solutions, America need never repeat this infant formula supply disaster.
• Thomas A. Hemphill is the David M. French Distinguished professor of strategy, innovation and public policy in the School of Management, University of Michigan-Flint.
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