Baby Formula Shortage Has an Aggravating Factor: Few Producers

The nation's biggest makers of baby formula were under fire.

The three largest manufacturers were accused of trying to limit competition in the space and using their control of the industry to fix prices. Some of the lawsuits were won by the companies.

Three decades later, the industry is still controlled by a small number of manufacturers who are in the cross hairs over their outsized market share.

Abbott Laboratories voluntarily recalled some of its most popular powdered formulas in February and shut down its plant in Michigan after four babies became sick from consuming some of its products.

Abbott, which controls 48 percent of the market, said there was no evidence that its formula caused any illnesses and that regulators have not linked the cans of formula the babies consume to the strains ofbacteria.

The lack of meaningful competition in an industry governed by rules and regulations designed to protect the incumbents has been highlighted by the effects of the single plant closing.

Stores are limiting the amount of baby formula that can be purchased. Some parents of newborn babies are resorting to making their own formula at home after calling on friends and family to find food for their babies. While the Abbott plant was given the green light this week to start manufacturing again, there are growing calls for major changes to how the industry operates.

When something goes wrong, like it has here, you then have a major, serious crisis. She said that the industry should be broken up and that efforts should be made to promote competition.

The Federal Trade Commission was urged to conduct a broad study of the infant formula industry by Senator Tammy Duckworth, an Illinois Democrat.

The power of a few players has been lamented by top Biden administration officials. Pete Buttigieg said the Biden administration should do more to address the industry's market concentration.

Four companies make about 90 percent of the formula in this country, and we should probably take a look at that, Mr. Buttigieg said on CBS.

Abbott is the biggest player. Perrigo, which makes generic formula for retailers, is owned by the conglomerate Reckitt Benckiser. Nestl controls less than 8 percent.

The lack of competition is due to the fact that infant formula's growth is tied to the nation's birth rate, which began dropping in 2007.

A tangled web of trade rules and regulations has made it difficult for others to enter the market, which is one of the factors that led to the creation of an industry controlled by a few manufacturers.

The United States, which produces 98 percent of formula consumed in the country, has strict regulations and high tariffs on foreign formula. The FDA has a red list of international formulas that are not in line with U.S. requirements. The labels that are not written in English could be a shortcoming. The F.D.A. said this week that it would relax some regulations to allow more imports into the United States.

The United States Mexico Canada Agreement discourages Canadian companies from exporting infant formula to the United States. If the quota is exceeded, export charges will be triggered. The American dairy lobbying groups supported the quota at the time.

The structure of the program that helps low-income families obtain formula is the biggest barrier to new entrants. The Special Supplemental Nutrition Program for Women, Infants, and Children is a federal program that provides grants to states to ensure that low-income pregnant or postpartum women and their children have access to food.

More than half of all infant formula supply in the United States is purchased by the program, which is administered by state agencies.

State agencies can't just buy formula from a manufacturer. They are required by law to competitively bid for contracts and select one company, which is the exclusive provider of formula for all women in the state. In order to get exclusive rights, manufacturers must give states significant discounts for the formula they purchase.

David E. Davis, an economics professor at South Dakota State University, said that exclusive system could make it more difficult for smaller companies to break through. Although manufacturers may sell products to states below cost, Dr. Davis's research found that brands that are secured for the program gain greater prominence on store shelves, creating a spillover effect and resulting in larger sales among families that are not recipients of the program. His research found that doctors may recommend those brands to mothers.

If you don't have the contract, you are a small player in the market. Firms bid very aggressively to get the contract.

Only three companies have contracts to supply formula through the program: Abbott makes up the largest share, providing formula to about 47 percent of infants that receive WIC benefits, while Mead Johnson provides 40 percent and Gerber provides 12 percent.

In the early 1990s, the Federal Trade Commission filed a lawsuit against Abbott and other large manufacturers, accusing them of price-fixing and bid-rigging in the process of bidding for state WIC contracts. The F.T.C. brought its case against Abbott. Abbott won the case when the judge concluded that the company did not engage in unfair competition in the auctions.

Some states have been granted waivers by the Agriculture Department to allow for more flexibility in choosing alternative formula brands and sizes.

The bidding process could be limiting competition, but the federal government saves about $1.7 billion each year. The director of Oregon's WIC program said that mothers in the state are having difficulty finding formula because the state contracts with Abbott, but the bidding system allows the state to serve a greater number of participants.

If we had to use our food dollars to purchase formula at shelf price, we would have to decrease the amount of participants that we serve.

The Biden administration has announced a number of steps to address the shortages, including using the Defense Production Act to ramp up manufacturing and using Defense Department planes to speed shipments to the United States. The Abbott plant has yet to restart production, which is one of the reasons why the shortage is expected to persist into next month.

Many Republicans, including SenatorMitch McConnell, the minority leader, blame President Biden for the shortages, saying the administration should have moved more quickly to limit the effects of the plant closing.

The current situation shows the need for more competition and changes to the rules that appear to be trying to prevent new entrants from entering the market.

Laura Modi, an entrepreneur who after the birth of her first child decided to create a European-style, organic infant formula company, said that she discovered that the industry was very convoluted and corrupted.

After a series of fits and starts, including a voluntary recall of an initial product for toddlers manufactured in Germany and sold in the United States, her company, Bobbie, received regulatory approval and started selling its infant formula online to American consumers last year.

It isn't a growing market. She said that it has incumbents who have strong footholds in the market.

Ms. Modi said that the incumbents are not incentivized to evolve.