Consumers have had a crash course in the U.S. infant formula market, which slumped this year after the country’s largest maker closed its Michigan plant.
Understanding the infant formula market is one thing. Repairing it will be much more difficult. The modern market was largely created in the 1960s and 1970s by the two manufacturers that still dominate it today.
Almost all infant formula consumed in the United States is made by four companies; the vast majority made by just two. As Americans wrestle with images of parents desperate to feed their babies, experts have offered explanations for why the industry is so concentrated: regulations, tariffs and government contracts.
That’s only part of the story.
While these factors clearly played a role in excluding other companies from the industry, they cannot explain why the same two manufacturers have controlled the majority of the infant formula market in the United States since at least 1980, when most of these factors were not yet in play.
Lawmakers have offered short-term policy solutions, including a bill that would suspend infant formula tariffs and allow certain foreign infant formula not regulated by the Food and Drug Administration to be temporarily sold in the United States. United, even as the FDA announced a range of measures to mitigate the short-term crisis. However, finding a long-term solution requires a deeper understanding of the dynamics that have dominated the market for decades.
Abbott, meanwhile, says it has taken steps to ease the supply shortage, including shipping formula from its plant in Ireland and ramping up production at other facilities. “Our goal now is to restart production at Sturgis and get the formula to those who need it,” the company said. Barrons.
Just before the current crisis,
(ABT) supplied around 44% of the market, while the UK-based consumer goods company
Reckitt Benckiser Group
(RBGLY) provided about a third, according to Reuters. Two other large companies,
(NSRGY), does pretty much everything else.
It’s not such a different split than in 1980, when Abbott already controlled between 50% and 55% of the market, according to a New York Times report at the time. Mead Johnson, then a subsidiary of
Bristol Myers Squibb
(BMY) and now Reckitt’s infant formula division, held 40% of the market. And American Home Products, whose infant formula division is now owned by Nestlé, held 8%.
Government purchases for the federally funded food aid program known as WIC, which accounts for the majority of infant formula sold in the United States, have been widely blamed for industry concentration. As Bloomberg and other outlets have shown in reports this month, the federal government requires state WIC programs to purchase all of their infant formula from a single supplier who can offer the lowest price. low, providing a huge advantage to large domestic manufacturers. The USDA has shown that obtaining a WIC contract in a given state has a substantial ripple effect on the private market in that state.
Yet sole-source contracts only became widespread in 1989, when Abbott and the subsidiary that is now part of Reckitt were already dominating the market. The strict regulations the Food and Drug Administration enforces on the labeling and ingredients of infant formula allowed on the market also date back only to 1986, when Congress amended legislation establishing nutritional standards for infant formula. Although the law was first passed in 1980, the regulations were relatively lax until the amendment was passed.
Customs duties of up to 17.5% on the importation of infant formula have also been cited as an explanation for the oligopoly. The history of these tariffs is more difficult to trace, although they are not new. A recent report by the Congressional Research Service argues that foreign producers may be more discouraged by non-tariff barriers to the sale of infant formula in the United States, including FDA restrictions, than by the tariffs themselves.
What these explanations miss is that today’s commercial infant formula industry was actually created by these same brands, at the time owned by large pharmaceutical companies who used their size and industry ties medicine to create demand for commercial infant formula.
Commercial infant formula has only been a popular choice for parents in the United States who choose not to breastfeed their children since the 1960s. Although it has been around since the late 19th century, most parents who have chosen non-breastfeeders gave their babies condensed milk rather than formula until the 1960s, according to an article written for the USDA by a professor at the University of Notre Dame. David Betson. Infant formula did not completely replace condensed milk in the United States until the mid-1970s.
This was after the pharmaceutical companies that owned the infant formula brands at the time began distributing their product for free to hospitals. This tactic, known as medical detailing, eventually included sending home formula samples and coupons to new parents when they were discharged, and was key to creating demand for the formula.
Data on the relative market share of the major manufacturer in the 1970s in the United States is difficult to obtain. But a 1990 report by the Government Accountability Office suggested medical details were a major reason why new entrants struggled to break into the industry. Medical details “serve as an implied endorsement of a particular brand of formula by the hospital; this makes it more difficult for new brands that are unfamiliar to the mother to enter,” the report authors wrote. “Medical details may limit the ability of non-pharmaceutical companies to compete in the domestic infant formula industry.”
Today, wider changes in the pharmaceutical industry mean that none of the major infant formula brands are owned by pharmaceutical companies. Abbott, after a spin-off in 2011, is no longer a pharmaceutical company. Despite some mergers and acquisitions, the two main manufacturers remain the same as in 1980.
This is an indication that industry concentration is deep-rooted and may not be resolved by a single policy change.
Write to Josh Nathan-Kazis at [email protected]