Understanding the Baby Formula Shortage
The hugely profitable industry of baby formula is dominated by a handful of manufacturers that control the majority of production (about 90%). The issue of the baby formula shortage began earlier this year in February when Abbott Nutrition shut down a plant in Michigan after four babies became sick from their powdered formulas, two of which passed away. Abbott’s recall of many of its brands due to strains of the bacteria, Cronobacter sakazakii, found at the plant meant that one of the main manufacturers that control about 48% of the entire market hurt the entire industry in a big way.
Since there is very limited competition in the baby formula industry, one plant closure at the biggest firm is devastating to the supply of product. Government regulation plays a big part in this situation as the federal nutrition program limits each state to just one manufacturer to contract with and provide for low-income families.
The shortage of formula also stems from other sources of disruption in the market. Firstly, the beginning of the pandemic caused immense chaos as shelves were cleared rapidly and families stocked up on formula for the period of lengthened stay-at-home orders. Furthermore, 2022 has seen a baby boom. These factors paired with unwavering laws and regulations that limit any new arrivals in the baby formula market were a recipe for disaster, leading to a huge dip in inventory and stores limiting purchases.
This issue is raising major concerns especially since many people aren’t able to produce milk, not to mention breastfeeding is a huge cost – both in terms of money and physical/mental toll. Additionally, Abbott is set to reopen and restart production on its site within 2 weeks, which means stores will see their shelves restocked in about 2 months. The strict foreign regulations on baby formula from European manufacturers have also been a source of restriction on supply. However, the FDA announced that it is increasing flexibility and anticipates that “those products [will] quickly meet safety and nutrition standards [and] could hit U.S. stores in a matter of weeks.”
The shortage demonstrates the vulnerability of the baby formula industry structured as an oligopoly and showcases the need for competition in a market that many individuals rely on. It is expected that there will be increased scrutiny on such limited markets in the future.