Baby Formula Shortage Has an Aggravating Factor: Few Producers

In the early 1990s, the largest domestic manufacturer of infant formula was attacked.

The three major manufacturers that dominated 90% of the U.S. market at the time were hit by a wave of state, federal and corporate proceedings for trying to limit competition and using industry dominance to fix prices. .. Most of the proceedings have been settled or, in some cases, the companies have won.

Thirty years later, the $ 2.1 billion industry is still dominated by a small number of manufacturers, who are once again competing for their huge market share.

Abbott Laboratories disrupts infant formula market Spontaneously recall In February, we closed our factory in Sturgis, Michigan, using some of the most popular powdered milk formulas. After 4 babies People who have consumed some of Abbott’s products have become ill with a bacterial infection.

Abbott, who controls 48% of the market, There is no evidence that the prescription caused a known baby illness Also, none of the tests conducted by the regulatory agency directly linked the can of infant formula consumed by the baby to the strain of bacteria found at the factory, Cronobacter Sakazaki.

However, the spillover effect of the closure of a single factory is widespread, lacking market power of a single manufacturer and meaningful competition in the industry to comply with rules and regulations designed to protect existing companies. Is embossed.

Stores limit the purchase of infant formula, and many market shelves are completely exposed. The newborn’s panicked parents are calling on friends and family to help them find food for their baby.And the Abbott factory I was given a green light this week There are increasing calls from lawmakers for major changes in the way the industry operates — to resume production — a move that still takes weeks to rebuild store shelf inventories.

Connecticut Democrat Rosa DeLauro has released a 34-page whistleblower report detailing safety and cleanliness issues from a former Abbott employee. Sturges plant. She argued that the industry should be dismantled and efforts should be made to promote competition to avoid future shortages.

Senator Tammy Duckworth of the Illinois Democratic Party, Prompted to the Federal Trade Commission Last week, we conducted an extensive survey of the infant formula industry to see if market integration led to a serious shortage.

Biden’s top executives have also lamented the power of several players. On Sunday, Secretary of Transportation Pete Butigeg said the Biden administration should do more to deal with the industry’s “huge market concentration.”

“In this country, four companies make about 90% of the officials, so we need to consider this,” Butigeg said in CBS’s “Face the Nation.”

Abbott is the biggest player today. Mead Johnson, owned by conglomerate Reckitt Benquiser, and Perigo, which produces common formulas for retailers, dominate an additional 31 percent. Nestlé manages less than 8%.

In part, the lack of competition is due to simple mathematics. Few companies or investors are eager to enter the infant formula because the growth of the infant formula is linked to the growth of the country. birthrateWas stable for decades Started dropping in 2007..

However, the factors that led to the creation of an industry dominated by a handful of manufacturers were primarily trade rules and regulations that protected the largest producers and made it difficult for others to enter the market. It is rooted in the intertwined net of.

The United States, which produces 98% of domestically consumed formulas, imposes as high as 17.5% restrictions and tariffs on foreign formulas. The Food and Drug Administration maintains an international prescription “Red List” that includes several European brands that, when imported, are detained for not meeting US requirements. These shortcomings can include labels that are not written in English or that do not contain all the nutrients you need.This week, the FDA said it Relax some regulations To allow more imports into the United States.

Also the trade rules contained in the US-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement Significantly discourage Canadian companies do not export infant formula to the United States.Agreement Established low quota If you exceed it, you will be charged an export fee. The American dairy lobbying group urged authorities to swiftly pass the agreement, Supported quota at the time.

But perhaps the biggest barrier for new entrants is the structure of the program aimed at helping low-income households get their prescriptions. A special supplemental nutrition program for women, toddlers and children, well known as WIC, provides state subsidies to make food available to low-income pregnant and postnatal women and their children. A federal-funded program provided.

The program, run by a state agency, purchases more than half of the US infant formula supply, and approximately 1.2 million babies receive milk powder through WIC.

The state WIC agency cannot buy infant formula from any manufacturer. They are required by law to bid competitively on contracts and select one company that will be the official exclusive provider for all WIC recipients in the state. In exchange for those exclusive rights, the manufacturer must offer the state a significant discount on the prescriptions purchased.

David E. Davis, a professor of economics at South Dakota State University, said an exclusive system could make it more difficult for small businesses to break through. Manufacturers may sell their products to states below cost, Dr. Davis’s research Brands that have WIC contracts have been found to become more prominent on store shelves, create spillover effects, and generate more sales among families who are not WIC recipients. According to his research, doctors may also prefer these brands to their mothers.

“If you don’t have a WIC contract, you’re a pretty small player,” said Dr. Davis. “It keeps you out of the WIC market, because it keeps you out of the non-WIC market. That’s why companies bid very aggressively to get a WIC contract.”

Only three companies have contracts to supply infant formula through the program. Abbott has the largest share and provides infant formula to about 47% of babies who benefit from WIC. Mead Johnson, on the other hand, offers 40% and Nestlé’s Gerber offers 12%. , According to the National WIC Association.

In the early 1990s, the Federal Trade Commission Proceedings Abbott and other major manufacturers of the time, Mead Johnson and American Home Products, have been accused of price-fixing and rigging during the bidding process for the state’s WIC contract. Mead Johnson and American Home Products settled before FTC filed a proceeding against Abbott.Abbott won the case by the judge Conclusion The company is not plotting at auction or participating in unfair competition.

To alleviate the shortage, the Ministry of Agriculture has granted a state exemption. This gives WIC recipients more flexibility in choosing alternative milk brands and sizes. Adopted all exemptions.

The bidding process can limit competition, but the federal government saves about $ 1.7 billion each year and the state is negotiating rebates. Tiare Sanna, director of the Oregon WIC program, said the state’s contract with Abbott makes it difficult for state mothers to find officials now, but bidding systems usually do. More formulas at a discounted rate that can serve more participants because the state can be purchased.

“If you need to use the WIC Food Dollar to buy a formula at a shelf price, you need to significantly reduce the number of participants offering the service,” says Sanna. “So this is a way to allow us to serve as many babies as possible, but I admit that it can cause some problems.”

The Biden administration has announced a series of steps to address the shortfall, including enacting the Defense Production Act to strengthen production and deploy Pentagon planes to speed up shipments to the United States. .. White House officials said Friday night that the first flight, which the Biden administration called Operation Fly Formula, would depart Germany’s Ramstein Air Force Base over the weekend and head for Indianapolis. Officials said the flight will provide a formula for Alfamino Infant and Alfamino Junior.

Still, officials confirmed Thursday that the shortage was expected to continue until next month, mainly because the Abbott plant has not yet resumed production.

Many Republicans, including Senator Mitch McConnell, a minority leader, Blame President Biden Due to the shortage, the government said it should have moved faster to limit fallout from factory closures.

Those who have tried to enter the infant formula market say that the current situation indicates a need for more competition and a change in rules that appears to be intended to thwart new entrants. say.

“What I have discovered is that this is a very complex, complex and slightly spoiled industry,” said European-style organic infant formula after the birth of the first child in 2016. Laura Modi, an entrepreneur who decided to set up a company, said. She believed that she would offer better options than those available in the United States.

After a series of conformances and launches, including voluntary recall of initial products for infants manufactured in Germany and sold in the United States, her company, Bobbie, received regulatory approval and last year gave infants to US consumers. We have started selling milk powder for preparation online.

“It’s not a growing market. There are incumbents who have a strong foothold in the market,” he said.

“Without competition, incumbents are never motivated to evolve,” Modi said.