Infant formula industry poised for disaster long before key factory closes

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The conditions that led to an infant formula shortage were triggered long before the February 2022 closure of the Similac plant tipped the United States into crisis.

Retailers nationwide reported that infant formula supplies were out of stock at a rate of 43% in the week ended May 8, 2022, compared to less than 5% in the first half of 2021. In some States, like Texas and Tennessee, had shortages of more than 50%, prompting parents to travel long distances and pay exorbitant amounts to stock up on formula for their babies.

The news that the Food and Drug Administration and Similac maker Abbott have reached an agreement to reopen the formula factory in Sturgis, Michigan is good news for desperate parents, but it won’t do much for alleviate the shortage any time soon. This is largely due to the very nature of the American infant formula industry.

The closure of the Similac plant may have lit the fuse for the national shortage, but a combination of government policy, industry market concentration and supply chain issues provided the powder.

What caused the formula shortage?

On February 17, Abbott issued a voluntary recall after four infants were hospitalized with infections caused by the bacteria Cronobacter sakazakii – two of them died – after consuming formula made at their Sturgis factory. The factory was also closed.

The FDA has not identified any new cases but has not yet approved the reopening of the Sturgis plant, which is responsible for about half of Abbott’s US supply. Abbott said it has entered into a consent decree with the FDA that clears the way for the facility to reopen once certain conditions are met.

Infant formula shortages have led major US retailers, including Target, CVS, Walgreens and Kroger, to restrict the amount of infant formula a consumer can purchase. These shortages disproportionately affect low-income families and those who lack the resources to travel long distances to find other sources of formula.

Formula milk is rare in the United States AP Photo/Michael Conroy

Monopolies created by the government

The root of the problem begins with a concentration of production.

Two companies – Abbott and Reckitt Benckiser, which manufactures Enfamil – dominate the industry with about 80% of the US market. Nestlé, which sells infant formula in the United States 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 manufacturers approved by the US government to provide infant formula through the Special Supplemental Nutrition Program for Women. , Infants and Children, known as WIC, which provides food supplements to low-income families.

WIC, which reimburses companies 15% of the wholesale cost, is responsible for 92% of supermarket sales of powdered milk 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 an essential program to feed the most vulnerable, government support for this program has the unintended consequence of creating a de facto monopoly in every state.

The amount of WIC funding to these three established companies makes it difficult for any startup to make significant inroads into the infant formula industry. They are unlikely to capture the market share necessary to justify a large investment. Since only a handful of manufacturing facilities are approved for formula production in the United States, startups don’t have the volume required to produce in those facilities.

Import restrictions

Another reason for the intense concentration is import controls.

About 98% of the formula consumed in the United States is produced domestically, whether by an American or international company. While overseas facilities such as those in Mexico, Chile, Ireland and the Netherlands meet FDA nutritional standards, failure to meet its labeling guidelines prevents them from exporting to United States. As a result, some consumers order unapproved preparations over the Internet from Europe and elsewhere, which can then be confiscated at the border.

International manufacturers also face high tariffs, which can reach 17.5% depending on volume. This is one of the reasons why Canadian producers, who are subsidized by their government, have for the most part avoided the US market. And the U.S.-Canada deal, which took effect in 2020, included a provision that made it even harder for Canada to ship infant formula south in a bid to protect domestic producers. .

“Lean” supply chains

Pandemic-related issues that beleaguered global supply chains also played a role.

As in other industries, infant formula manufacturers have long tried to make their supply chains as “lean” and efficient as possible. This means that they aimed to minimize the time infant formula spent sitting – without profit – on warehouse shelves and to get the goods from the factory to the retailer as quickly as possible. The problem is that when there is an increase in demand or a decrease in supply, shortages can result. The leaner the supply chain, the greater the potential disruption.

The WIC program also encourages a lean supply chain as it only reimburses 15% of the wholesale price. The huge volume means businesses can still be profitable, but the lower margins per sale encourage them to maintain a highly efficient supply chain.

In March 2020, formula sales surged as people stocked up on just about everything. But that led to a drop in sales as parents worked on all that extra formula. This prompted manufacturers to cut production. And now, in 2022, demand has surged again, especially after news of the Similac recall spread. And with demand skyrocketing and supply dropping significantly due to the closure of the Sturgis plant, shortages were inevitable.

A woman in a white coat and wearing a black mask holds a bottle of frozen breast milk in a large transparent bottle
Milk banks are trying to alleviate the shortage of infant formula by distributing frozen milk donated by nursing mothers. AP Photo/David Zalubowski

The shortage is far from over

The Biden administration and companies have announced a variety of measures to end the shortage.

Some companies, like Reckitt, say they have ramped up production and are operating factories seven days a week to get more formula to stores.

The FDA is expected to announce easing infant formula import rules soon, and some states are allowing WIC recipients to use their rebates to purchase formula from companies other than the one on the contract. Abbott has already agreed to honor rebates for competing products in states where they have WIC contracts.

Abbott and Nestlé are also expediting shipments from their FDA-approved facilities overseas.

The best way to end the shortage – to get the Sturgis plant online and its formula on retail shelves – will take two months.

Ultimately, preventing this kind of situation from happening again will require changes in government policies and business practices. I believe that de facto government monopolies should be opened up to more competition. And formula makers may just have to accept a little less profit from supply chain efficiencies as a cost of operation – and as a way to ensure that families no longer face the loss of a product so vital to the survival of their babies.The conversation

Kevin Ketels is an assistant professor teaching global supply chain management at Wayne State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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