The conditions that led to a shortage of baby formula were set in motion long before the February 2022 closure of the Similac factory tipped the U.S. into a crisis.
Retailers nationwide reported supplies of baby formula were out of stock at a rate of 43% during the week ended May 8, 2022, compared with less than 5% in the first half of 2021. In some states, such as Texas and Tennessee, shortages were over 50%, which has prompted parents to travel long distances and pay exorbitant sums of money to grab dwindling supplies of formula for their babies.
WATCH: Parents nationwide struggle with a critical baby formula shortage
News that the Food and Drug Administration and Similac-maker Abbott have reached a deal to reopen the formula factory in Sturgis, Michigan, is welcome news for desperate parents, but it will do little to alleviate the shortage anytime soon. This is in no small part because of the very nature of America’s baby formula industry.
I research and teach supply chain management, with a special focus on the health care industry. The closure of the Similac factory may have lit the fuse for the nationwide shortage, but a combination of government policy, industry market concentration and supply chain issues supplied the powder.
What prompted the baby formula shortage
On Feb. 17, Abbott initiated a voluntary recall after four infants were hospitalized with infections from the bacteria Cronobacter sakazakii – two of them died – after consuming baby formula manufactured in their Sturgis facility. The factory was also shut down.
The FDA has identified no new cases but has not yet approved reopening the Sturgis facility, which is responsible for about half of Abbott’s U.S. supply. Abbott said it entered into a consent decree with the FDA that paves the way to reopening the facility once certain conditions are met.
Shortages of baby formula have led major U.S. retailers including Target, CVS, Walgreens and Kroger to restrict the amount of formula a consumer may purchase. These shortages are disproportionately hurting low-income families and those who do not have the resources to travel long distances to find alternative sources of baby formula.
The root of the problem begins with a concentration of production.
Two companies – Abbott and Reckitt Benckiser, which makes Enfamil – dominate the industry with about 80% of the U.S. market. Nestlé, which sells baby formula in the U.S. under its Gerber brand, controls another 10%.
Part of the reason these companies are so entrenched in their position is that Abbott, Reckitt and Nestlé are the only makers approved by the U.S. government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which provides supplemental food to low-income families.
WIC, which reimburses companies at 15% of the wholesale cost, is responsible for 92% of supermarket sales of milk-based powder formula in 12-to 16-ounce containers and 51% of all sales in other sizes.
The federal government provides WIC grants to each state, which then contracts with one of the three companies. While WIC is a critical program to feed the most vulnerable, government support of this program has the unintended consequence of creating a de facto monopoly in each state.
The amount of WIC funding to these three established companies makes it difficult for any startup to make significant inroads in the baby formula industry. There is little chance they can capture the market share necessary …….