The recent shortage of infant formula in the United States has caught many parents by surprise, as they anxiously tap into whatever resources available to scramble for this basic necessity for their babies. As much as 45% of regular American infant formula supply is out of stock.
Widely criticized for being too slow to react, the Biden Administration has ordered military jets to fly vast quantities of infant formula from Europe and other parts of the world into America. The U.S. congress in Washington D.C. has also rushed to PSDD legislative measures to address this urgent concern.
What has caused the sharp shortage at this time? Although the COVID-19 pandemic and the war in Ukraine have been blamed for most of the problems in the world, both actually have nothing to do with this abrupt absence of infant formula on American retail shelves.
Abbot Nutrition lit the fuse that prompted this shortage on Feb. 17 when it initiated a voluntary recall after four infants were hospitalized with infections from the bacteria Cronobacter sakazakii – two of them died – after consuming infant formula manufactured in their Sturgis, Michigan facility. The factory was also shut down.
Gross oversight from the Food and Drug Administration (FDA) also played a part in the delayed reaction to this manufacturing malpractice. A whistleblower notified the FDA of food safety violations in this factory back in October 2021 and no meaningful actions had been taken by the regulator.
That said, any disruption caused by the shutdown of one facility will quickly be smoothed out by the dynamics of a free market, right? Well, there we have the issue.
The infant formula market in the U.S. is not a free market, very far from it.
First, the American infant formula market is heavily protected by tariffs and import quotas. Overseas producers face an insurmountable hill trying to penetrate into this market. Right now, 98% of infant formula purchased in the U.S. is made by facilities locally based in the country.
Second, the four major players, boasting over 90% of the U.S. infant formula market, enjoy a close to monopoly status in each of the American states, thanks to the practices of the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) of the U.S. government.
WIC is a federal assistance program under the Unites States Department of Agriculture (USDA) to provide healthcare and nutrition for low-income pregnant women, breastfeeding women and children under the age of five. Currently, WIC serves 53% of all infants born in the United States.
In the 1980s, the price for infant formula increased at a much faster pace than the overall inflation. In order to bring down the cost, administrators of the WIC program began to ask for rebates from manufacturers; in return, they would be given sole source contracts from individual states.
A bidding process has been designed to select the manufacturer providing the biggest discount in each state. Given that about half of infant formula in the U.S. is purchased with WIC benefits, a WIC contract leads to dominant shelf space and as a spillover effect, non-WIC households become its natural customers. In short, the WIC contract provider is the dominant supplier in each state.
According to data released by USDA, Abbott is the sole provider of infant formula for 34 states in the U.S. as well as 14 territories and tribal organizations. Right now, as the market leader, Abbott has more than 40% of the U.S. infant formula market share.
The lack of competitive dynamics in each state creates huge supply chain issues once its WIC contract provider encounters a major disruption. There are many logistical and manufacturing challenges to timely stem this nationwide shortage.
As an update, Abbott has clinched a deal with the FDA to get its Michigan factory up and running again. But impatient parents will not see products from this facility on retail shelves until 6 to 8 weeks later.
Consumer behavior is another factor contributing to this shortage. Panic buying and hoarding are contagious human flaws we have seen too often since the onset of the COVID-19 pandemic.
This infant formula shortage will be over in one to two months, but that is far too long for many worrying parents.
Preventing this kind of situation from happening again requires changes to U.S. government policies and business practices.
Opening up the U.S. infant formula market for more competitive dynamics is the ultimate solution, yet how much progress will be made out of this supply chain failure remains to be seen.
(The author is an independent financial investor.)