This is a true crisis that is a long-time coming. Thank the baby formula monopoly, its partner at the Food and Drug Administration, and the Department of Agriculture.
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on… Today I’m writing about the nightmarish baby formula shortage. I’ll try to explain what the problem is, and how to fix it. Plus, defense attorneys for poultry executives accused of price-fixing attack Antitrust Division chief Jonathan Kanter for citing the book “The Chickenshit Club.” And the random monopoly of the day, California’s mystery gasoline surcharge. And now… As anyone with an infant knows, there is a major crisis in the feeding of America’s babies right now, because parents in some areas can’t get baby formula. A few months ago, a major producer of formula – Abbott Labs – shut down its main production facilities in Sturgis, Michigan, which had been contaminated with the bacteria Cronobacter sakazakii, killing two babies and injuring two others. Abbott provides 43% of the baby formula in the United States, under the brand names Similac, Alimentum and EleCare, so removing this amount of supply from the market is the short-term cause of the problem. (Abbott and Mead Johnson produce 80% of the formula in the U.S., and if you add in Nestle, that gets to 98% of the market.) The problem is not, however, that there isn’t enough formula, so much as the consolidated distribution system creates a lot of shortages in specific states. First, it’s hard to convey what a nightmare this situation is for parents, especially those whose children require special kinds of formula because of gastrointestinal issues or food allergies. “The shortage has led us to decide to put a feeding tube in our child,” said one parent, who simply could not get the specialized formula her daughter needs. Baby formula is not just food, but the primary or sole nutrition for a vulnerable person in a stage of life in which very specific nutritional requirements are necessary for growth. Baby formula was created during the 19th century as we developed modern food preservation techniques. Before this remarkable innovation, baby starvation was common if a mother couldn’t breastfeed her infant (which happens a lot). The invention of industrialized formula was one of those creations we take for granted, but like antibiotics and other medical and scientific advances, it was one that fundamentally changed parenthood and the family. This shortage is showing just how reliant we are on industrialized formula. The causal factor behind the crisis is poor regulation and a consolidated and brittle supply chain. Imports from Europe are often prohibited, even if there were excess productive capacity elsewhere. I spent a bit of time calling around to people who work in formula, and the industry is basically on a war footing. Everyone is panicking, because the situation is, in short, a nightmare. I’m going to try and lay out the situation, and explain the market structure. There are two basic mechanisms that have created a concentrated and brittle market. The first is that regulators are tough on newcomers, but soft on incumbents. And the second is that the Federal government buys more than half of the baby formula in the market, and under the guise of competitive bidding, it in fact hands out monopoly licenses for individual states. That makes it impossible to get newcomers of any scale into the market, along with the more resiliency that such competition brings. It also makes it hard to address shortages in one state with extra formula from elsewhere. But first, let’s start by following the money. The simplest way to understand why there’s a shortage is to look at the incentives for the CEO of Abbott Labs. Here’s a Reuters report coming out of the company’s investor call in April, after the factory shutdown was underway. Keep in mind, the executives on this call are the people responsible for managing this vital resource, and here’s how seriously they took the problem. Not a single Wall Street analyst asked about the recall. Why? In some ways, it’s because it doesn’t matter that much to the bottom line. Abbott Labs is a diversified medical devices and health care company, and its nutritional segment is a relatively small part part of its business. But also, if you need baby formula, which is highly regulated by the Food and Drug Administration, and distributed by a monopoly-friendly system run by the Department of Agriculture, where else are you gonna go? And that’s the problem. Baby formula is a shared monopoly, and we are at the mercy of Abbott Labs, Read Johnson, and Nestle. And their execs know it. So how does this shared monopoly work? Let’s start with the regulators. Subscribe now
Entering the baby formula market is a difficult process, and takes years of work. For instance, Bobbie, which makes European-style formula with a contract manufacturer, is the first firm to come into the market in five years. Bobbie is also a direct to consumer niche firm, so it doesn’t have the scale to address the market dislocation at hand. It was a rough road getting started; the firm faced a recall and a shut down purely for manufacturing in Germany, and it had to go through millions of dollars of capital and a steep learning curve to get its product accepted by the FDA. The reason for regulatory hurdles seems good, on the surface. Manufacturing formula is very specific, it’s not like a snack bar, it fits in somewhere between medication and food in the regulatory spectrum. Congress put extremely detailed instructions in the Infant Formula Act of 1980. To get a product approved, an entrant needs protein efficiency studies, thousands of quality tests from raw ingredients to the end product, nutritional tests to make sure it is suitable for infants, and approvals for new suppliers. There are specialized forms of formula for babies with different conditions. Naturally, starting a new formula firm takes a massive amount of time, patience, and capital. And that’s if you just want to make a product and can even find a contract manufacturer to produce it for you. There is just one contract manufacturer of baby formula in the U.
