Formula for Profit: The High Cost of
Baby Formula
Why is the price of infant formula in
supermarkets so high? A one-week supply often costs upward of $25.00
per can of powdered formula, so it’s no surprise that Little
Kitchen Food Shelf rarely receives donations of formula. Nor is
infant formula generally available from the food banks where food
shelves typically purchase basic foods, indicating that formula
manufacturers rarely make donations. We receive calls each week from
mothers who need to visit the food shelf and are specifically looking
for formula of a certain brand. Often we are unable to meet these
requests.
And yet, more than
half the formula sold in the United States is actually given away for
free to mothers enrolled in the federal government’s Special
Supplemental Nutrition Program for Women, Infants and Children –
commonly known as WIC. Infants and children participating in WIC come
from families with limited resources. Only families with incomes at
or below 185% of federal poverty level are eligible for WIC services.
All children participating in WIC are considered at nutritional risk.
In 2010 Minnesota had over 192,000 children living in poverty. The
poverty rate for children under five years old is 17.2%. In 2011 an
average of 131,300 low-income women, infants and children
participated each month in MN WIC. National data indicates that (in
2005) only 43% infants were breastfeeding at 6 months of age. Parents
know how important access to baby formula often becomes, particularly
when mothers must work, and when children or mothers have difficulty
breastfeeding.
In
1990 the Federal Trade Commission (FTC) responded to complaints from
welfare officials and consumer groups that three formula
manufacturers had been engaging in substantial, parallel price
increases for more than a decade – an increase of more than 200%,
six times higher than increases in the price of cow’s milk,
formula’s basic ingredient. FTC
observed that the companies were dealing with a “captive market,”
women who chose not to or could not breastfeed their infants.
In 2008, three
manufacturers accounted for almost 98 percent of all U.S. formula
sales: Abbott Labs, the manufacturer of Similac, had a 43-percent
share of the market; Mead Johnson, maker of Enfamil, 40 percent; and
Nestlé (now Gerber), maker of Good Start, 15 percent. Since the
mid-1990s, these three firms (two of which were accused of
price-fixing) have been the sole infant formula manufacturers awarded
WIC contracts. Each state negotiates to determine what one
brand of formula will be distributed for free through WIC.
WIC is not an
entitlement program – any increase in formula prices decreases the
number of women any state WIC agency can serve. In the 1980’s WIC
administrators were required to pay retail prices for the formula
they gave away as part of the program. As formula prices rose they
began demanding a competitive bid system for formula purchases, in
order to serve more of the eligible women and infants. While formula
companies strongly resisted this effort, and lobbied legislators with
a variety of profit-related concerns, industry analysts felt the
“captive market” for formula would always remain strong. In 1996,
Abbott Labs paid $32.5 million to settle price-fixing lawsuits in 17
states, and shortly thereafter all states legislated competitive
bidding for WIC contracts. As a result, formula manufacturers began
actively competing for WIC contracts, trading lowest bid on net price
for exclusive WIC distribution rights state by state. (Each WIC State
agency, or group of agencies, awards a contract to the manufacturer
offering the lowest net wholesale price, defined as the difference
between the manufacturer’s wholesale price and the State agency’s
rebate.)
Mead Johnson, Abbott Labs and another
manufacturer, Wyeth, are pharmaceutical companies. Standard marketing
practice was (and is) to encourage physicians and hospitals to
recommend certain brands of formula, and to give away free samples to
new mothers. In other words, parents are generally encouraged to
choose a specific brand of formula for their child – either
tacitly, when they bring home the “gift bag” including formula
from the hospital where they birthed their child; or actively, either
by pediatrician recommendation or because they must use WIC services,
which only provide one brand of formula (without a doctor’s
prescription.) Further, parents are often strongly discouraged from
switching formula brands if their current brand causes no distress
for the infant. Once a brand is chosen, the “captive market” is
locked in.
WIC clients get the formula free. WIC, and thus the US Treasury, pays for it. WIC negotiates contracts with the formula companies under which WIC gets rebates from the manufacturers. The rebates are quite large: they vary across states and range from 85 to 98 percent of the manufacturer's wholesale price (in fiscal 2000.) As a result, the highest net price a manufacturer received for WIC-provided infant formula was only 15 percent of the wholesale price. Net prices in September 2000 ranged from 76.5 cents (per can of milk-based liquid concentrate) in Florida to 44.7 cents in Nebraska and South Dakota. For the US as a whole, net prices averaged 18 cents per can in fiscal 2000. As a result, with rebates from the formula manufacturers, the cost of the formula to taxpayers is a small fraction of its wholesale price. This sounds good. But then who pays for WIC's formula? If it’s not the clients who are paying, and the taxpayers cover only a small portion of the price (mainly distribution costs), who provides the profits?
In short, the difference between realized profits from WIC sales and the profit desired by the manufacturers is made up for by retail consumers. The retail price of formula is higher in states where WIC is more active. In Minnesota, Abbott Labs holds the sole distribution contract for Similac and Isomil formulas through the state’s WIC program. After adjusting for inflation, net wholesale prices increased nationwide by an average 73% for 26 fluid ounces of reconstituted formula between 2007 and 2008. New ingredients have made cans of infant formula cost roughly 1 cent per ounce more than they did in 2008, despite a resounding lack of medical evidence to support the claims of formula manufacturers that these new ingredients represent an improvement in infant nutrition. When Mead Johnson introduced its first probiotic infant formula (Enfamil Premium) in 2010, the product came in a can that was 0.4 ounces smaller than its non-probiotic formula and cost 29 cents more. Senior policy analysts at Center on Budget and Policy Priorities calculate that it now costs $95 more per year to feed the same amount of Enfamil Premium to a baby than it did prior to 2010.
Ironically, U.S. Dept. of Agriculture speculated in its 2010 report that WIC might have caused the demise of unsupplemented infant formula. In 2004, a legislative change enabled the companies to determine which of their infant formulas that they would provide if they won a WIC bid. Naturally, they all listed their more costly supplemented labels. Because so much of the infant formula that’s purchased in this country is purchased through WIC, grocery stores devote extra shelf space to the WIC-backed brand. By locking up the market for supplemented infant formulas, the big-three companies were able to quash demand for standard infant formulas, Agriculture speculated.
As a result of the increase in real net wholesale prices, WIC paid about $127 million more for infant formula over the course of a year, as of 2008. Seventy-two percent of the increase in real net wholesale price was due to an increase in the real wholesale price of infant formula.
The increasing participation of infants in the WIC program has resulted in a less “price sensitive” demand for formula. Consequently formula manufactures have been able to increase the real wholesale price, which drives up retail prices paid by non-WIC consumers. By itself, the effort to contain the formula costs of the WIC program has resulted in lower wholesale prices, not higher wholesale prices as was expected by policymakers in the early 1990s. The impact of the rebate should be welcomed news not only by taxpayers but also by those eligible for WIC whose participation is made possible by the savings in formula cost from the rebates -- but the “less price sensitive” consumers make up for unrealized profits out of pocket. The manufacturing costs of infant formula are proprietary and aren’t made public. But economist David Davis of South Dakota State University developed an economic model to infer production costs. Although his study hasn’t been published, he tells us that infant-formula-makers are selling to WIC at a price that’s above their manufacturing costs. That would mean that the mark-ups are, on average, more than enough to make up the amount that’s rebated.
In plain language, formula manufacturers compensate for a decrease in profits (based on WIC sales) by raising the wholesale price of infant formula, consistently and frequently. The “price sensitive market” is represented by state WIC programs; the “less price sensitive market” is represented by parents who do not seek WIC support or require it, who are obligated to pay the local retail cost of the formula. 1 At Little Kitchen Food Shelf, we frequently meet parents who are looking for formula, and we believe many of those consumers are in fact the working poor – families that do not meet federal poverty guidelines (and so would not qualify for WIC) but who are still struggling to make ends meet. Because formula manufacturers exert tremendous marketing-based influence, parents are afraid to try less expensive store-brand formulas, preferring instead to stick with brand-name products. Yet high retail prices effectively limit our ability to provide those brands at the food shelf.
While we encourage our supporters and partners to donate baby formula to meet a real need, we also encourage you to help us raise awareness of this incredible price inequity. Only substantial pressure from so-called “less price sensitive” consumers can attract the attention of pharmaceutical companies. Consider always the hungry children in our communities, and demand food justice.
WIC clients get the formula free. WIC, and thus the US Treasury, pays for it. WIC negotiates contracts with the formula companies under which WIC gets rebates from the manufacturers. The rebates are quite large: they vary across states and range from 85 to 98 percent of the manufacturer's wholesale price (in fiscal 2000.) As a result, the highest net price a manufacturer received for WIC-provided infant formula was only 15 percent of the wholesale price. Net prices in September 2000 ranged from 76.5 cents (per can of milk-based liquid concentrate) in Florida to 44.7 cents in Nebraska and South Dakota. For the US as a whole, net prices averaged 18 cents per can in fiscal 2000. As a result, with rebates from the formula manufacturers, the cost of the formula to taxpayers is a small fraction of its wholesale price. This sounds good. But then who pays for WIC's formula? If it’s not the clients who are paying, and the taxpayers cover only a small portion of the price (mainly distribution costs), who provides the profits?
In short, the difference between realized profits from WIC sales and the profit desired by the manufacturers is made up for by retail consumers. The retail price of formula is higher in states where WIC is more active. In Minnesota, Abbott Labs holds the sole distribution contract for Similac and Isomil formulas through the state’s WIC program. After adjusting for inflation, net wholesale prices increased nationwide by an average 73% for 26 fluid ounces of reconstituted formula between 2007 and 2008. New ingredients have made cans of infant formula cost roughly 1 cent per ounce more than they did in 2008, despite a resounding lack of medical evidence to support the claims of formula manufacturers that these new ingredients represent an improvement in infant nutrition. When Mead Johnson introduced its first probiotic infant formula (Enfamil Premium) in 2010, the product came in a can that was 0.4 ounces smaller than its non-probiotic formula and cost 29 cents more. Senior policy analysts at Center on Budget and Policy Priorities calculate that it now costs $95 more per year to feed the same amount of Enfamil Premium to a baby than it did prior to 2010.
Ironically, U.S. Dept. of Agriculture speculated in its 2010 report that WIC might have caused the demise of unsupplemented infant formula. In 2004, a legislative change enabled the companies to determine which of their infant formulas that they would provide if they won a WIC bid. Naturally, they all listed their more costly supplemented labels. Because so much of the infant formula that’s purchased in this country is purchased through WIC, grocery stores devote extra shelf space to the WIC-backed brand. By locking up the market for supplemented infant formulas, the big-three companies were able to quash demand for standard infant formulas, Agriculture speculated.
As a result of the increase in real net wholesale prices, WIC paid about $127 million more for infant formula over the course of a year, as of 2008. Seventy-two percent of the increase in real net wholesale price was due to an increase in the real wholesale price of infant formula.
The increasing participation of infants in the WIC program has resulted in a less “price sensitive” demand for formula. Consequently formula manufactures have been able to increase the real wholesale price, which drives up retail prices paid by non-WIC consumers. By itself, the effort to contain the formula costs of the WIC program has resulted in lower wholesale prices, not higher wholesale prices as was expected by policymakers in the early 1990s. The impact of the rebate should be welcomed news not only by taxpayers but also by those eligible for WIC whose participation is made possible by the savings in formula cost from the rebates -- but the “less price sensitive” consumers make up for unrealized profits out of pocket. The manufacturing costs of infant formula are proprietary and aren’t made public. But economist David Davis of South Dakota State University developed an economic model to infer production costs. Although his study hasn’t been published, he tells us that infant-formula-makers are selling to WIC at a price that’s above their manufacturing costs. That would mean that the mark-ups are, on average, more than enough to make up the amount that’s rebated.
In plain language, formula manufacturers compensate for a decrease in profits (based on WIC sales) by raising the wholesale price of infant formula, consistently and frequently. The “price sensitive market” is represented by state WIC programs; the “less price sensitive market” is represented by parents who do not seek WIC support or require it, who are obligated to pay the local retail cost of the formula. 1 At Little Kitchen Food Shelf, we frequently meet parents who are looking for formula, and we believe many of those consumers are in fact the working poor – families that do not meet federal poverty guidelines (and so would not qualify for WIC) but who are still struggling to make ends meet. Because formula manufacturers exert tremendous marketing-based influence, parents are afraid to try less expensive store-brand formulas, preferring instead to stick with brand-name products. Yet high retail prices effectively limit our ability to provide those brands at the food shelf.
While we encourage our supporters and partners to donate baby formula to meet a real need, we also encourage you to help us raise awareness of this incredible price inequity. Only substantial pressure from so-called “less price sensitive” consumers can attract the attention of pharmaceutical companies. Consider always the hungry children in our communities, and demand food justice.
1
Store-brand infant formulas cost 30 percent to 50 percent less than
do brand-name infant formulas, and they are required by law to
contain the same nutrients as do the brand-name products.
Bibliography:
Bibliography:
- Nestle, Marion. (2007) “Food
Politics: How the Food Industry Influences Nutrition and Health,”
University of California Press.
- Kent, George. (2006) “The high price
of infant formula in the United States,” University of Hawaii
Department of Political Science.
- Oliveira,
Victor; Frazao, Elizabeth; and Smallwood, David. (2010) “Rising
Infant Formula Costs to the WIC Program: Recent Trends in Rebates and
Wholesale Prices,” USDA Economic Research Service.
- Betson,
David. (2009) “Impact of WIC Program on the Infant Formula Market,”
University of Notre Dame, Department of Economics and Policy Studies.
- Child
Welfare League of America. (2012) “Minnesota's Children 2012,”
www.cwla.org
- Minnesota Department of Health. (2012)
“Minnesota WIC Facts,” WIC Program and CSFP, St. Paul MN.
- Elton, Catherine. (2011) “Hard to
Swallow: The Truth About Infant Formula,” Consumers Digest Special
Reports.
- Minnesota Department of Health. (2010) “Health Status: Minnesota
children enrolled in WIC 2000 to 2010.” - Oliveira, Victor. (2011) “Winner Takes (Almost) All: How WIC
Affects the Infant Formula Market” www.ers.usda.gov/amber-waves
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