Why the Baby-Formula Market Is a Mess: Low Competition, High Regulation

The WIC program and regulations tamp down competition, resulting in Similac and Enfamil controlling the bulk of an inflexible, $4 billion U.S. formula market. It cracked when a major factory halted production.

By Jesse Newman and Annie Gasparro of The WSJ. Excerpts:

"Baby formula is one of the most tightly regulated food products in the country. That makes the barrier to new entrants high, and few brands have emerged as challengers to Similac and Enfamil, made by Abbott Laboratories ABT 0.50%▲ and Reckitt Benckiser Group, RBGLY 2.17%▲ respectively, since the two entered the market in the 1950s. Abbott and Reckitt were responsible for roughly 80% of infant and toddler formula sales in the U.S. last year, according to market-research firm Euromonitor.

Regulations also limit international brands from entering the U.S. from other countries.

The federal government is the product’s biggest buyer, via the Women, Infants and Children supplemental nutrition program, which provides formula at no cost to families. The program’s exclusive sales contract system ensures that in each state, one of the major formula brands has the majority of market share.

The result is a marketplace with little competition and little flexibility, making it vulnerable when something goes wrong."

"Baby formula first became scarce on store shelves in early 2020, as the Covid-19 pandemic and lockdowns disrupted supply chains. Reckitt has faced shipment delays, as well as longer lead times for some raw materials and packaging, according to company officials.

Then, this February, Abbott halted production at its biggest factory—responsible for one-fifth of U.S. formula—and issued a voluntary recall while food-safety regulators investigated a possible deadly contamination. The company said Monday that it reached an agreement with the FDA to reopen the Sturgis, Mich., plant. But it has said it would take two weeks to restart production, then six to eight weeks after that before new formula would hit store shelves.

On Wednesday, President Biden invoked the Defense Production Act, which will require suppliers to send ingredients to infant-formula makers before other customers.

The White House also directed government agencies to use Department of Defense commercial aircraft to pick up from overseas infant formula that meets U.S. standards."

"The Agriculture Department’s WIC program has deepened the hold that major manufacturers such as Abbott have over formula sales, in effect reducing the number of brands on offer. 

About half of the baby formula sold in the U.S. is purchased through the WIC program, according to the Biden administration. Under the program, which is federally funded but administered by states, states award exclusive sales contracts to a single formula manufacturer in exchange for discounts.

WIC program participants are required to use their vouchers for formula made by the winning manufacturer, dramatically increasing that company’s market share in a given state, while also boosting sales to non-WIC consumers because stores tend to stock and display the WIC brand."

"Due to the large portion of formula bought by WIC participants, stores offer WIC brands more shelf space and better product placement, according to the USDA. Participating stores are required to keep a minimum amount of the WIC formula brand in stock, and because smaller grocery stores have limited shelf space, those stores may stock the WIC brand exclusively.

Many hospitals have begun mirroring the federal program, contracting with just one formula manufacturer to get bulk discounts"

"While WIC’s design helps keep costs down for taxpayers, Dr. Abrams said it can exacerbate shortages in the event of supply-chain problems by offering a single WIC brand dominance in a given state."

"A 1980 law governing infant formula established high regulatory hurdles, beyond typical FDA requirements for other foods. Manufacturers seeking to create new formula brands must submit to the FDA detailed explanations for how their products are developed, studies regarding the nutrients included, details of quality-control measures in the manufacturing facility and more. The FDA then inspects the facility, observes the production process and collects samples for nutrient and microbiological analyses, the agency said."

"Regulatory hurdles also mean little formula comes into the country from abroad, although the U.S. eased some rules this week. The U.S. typically produces about 98% of formula consumed domestically, according to the FDA. Some formula is imported from Mexico, Ireland and the Netherlands, the FDA said, though some shipments are subject to strict FDA labeling and other requirements."

"U.S. Customs and Border Protection officers last year seized hundreds of cases of infant formula arriving from Germany and the Netherlands that the government said violated FDA import safety regulations."

"Because baby formula is a bulky, relatively low-price product by weight, formula makers’ bids for truck space are less competitive than producers of consumer electronics or other goods."

"Demand for baby formula has increased in recent months as U.S. birthrates ticked up slightly last year while breast-feeding rates have seemed to decline"