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发帖数: 29846 | 1 The conditions that led to a shortage of baby formula were set in motion
long before the February 2022 closure of the Similac factory tipped the U.S.
into a crisis.
Retailers nationwide reported supplies of baby formula were out of stock at
a rate of 43% during the week ended May 8, 2022, compared with less than 5%
in the first half of 2021. In some states, such as Texas and Tennessee,
shortages were over 50%, which has prompted parents to travel long distances
and pay exorbitant sums of money to grab dwindling supplies of formula for
their babies.
News that the Food and Drug Administration and Similac-maker Abbott have
reached a deal to reopen the formula factory in Sturgis, Michigan, is
welcome news for desperate parents, but it will do little to alleviate the
shortage anytime soon. This is in no small part because of the very nature
of America’s baby formula industry.
I research and teach supply chain management, with a special focus on the
health care industry. The closure of the Similac factory may have lit the
fuse for the nationwide shortage, but a combination of government policy,
industry market concentration and supply chain issues supplied the powder.
What prompted the baby formula shortage
On Feb. 17, Abbott initiated a voluntary recall after four infants were
hospitalized with infections from the bacteria Cronobacter sakazakii – two
of them died – after consuming baby formula manufactured in their Sturgis
facility. The factory was also shut down.
The FDA has identified no new cases but has not yet approved reopening the
Sturgis facility, which is responsible for about half of Abbott’s U.S.
supply. Abbott said it entered into a consent decree with the FDA that paves
the way to reopening the facility once certain conditions are met.
Shortages of baby formula have led major U.S. retailers including Target,
CVS, Walgreens and Kroger to restrict the amount of formula a consumer may
purchase. These shortages are disproportionately hurting low-income families
and those who do not have the resources to travel long distances to find
alternative sources of baby formula.
Government-created monopolies
The root of the problem begins with a concentration of production.
Two companies – Abbott and Reckitt Benckiser, which makes Enfamil –
dominate the industry with about 80% of the U.S. market. Nestlé, which
sells baby formula in the U.S. 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 makers approved by the U.S.
government to provide baby formula through the Special Supplemental
Nutrition Program for Women, Infants and Children, known as WIC, which
provides supplemental food to low-income families.
WIC, which reimburses companies at 15% of the wholesale cost, is responsible
for 92% of supermarket sales of milk-based powder 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 a critical program
to feed the most vulnerable, government support of this program has the
unintended consequence of creating a de facto monopoly in each state.
The amount of WIC funding to these three established companies makes it
difficult for any startup to make significant inroads in the baby formula
industry. There is little chance they can capture the market share necessary
to justify a significant investment. Since only a handful of manufacturing
facilities are approved for production of baby formula in the U.S., startups
don’t have the volume required to produce in these facilities.
Import restrictions
Another reason for the intense concentration is import controls.
About 98% of the formula consumed in the U.S. is produced domestically,
whether by a U.S. or international company. While facilities abroad such as
those in Mexico, Chile, Ireland and the Netherlands meet the FDA’s
nutrition standards, a failure to meet its labeling guidelines prevents them
from exporting to the U.S. As a result, some consumers order unapproved
formula over the internet from Europe and elsewhere, which may then be
confiscated at the border.
International manufactures also face high tariffs, which can be as high as
17.5% depending on volume. That’s one reason Canadian producers, which are
subsidized by their government, have mostly steered clear of the U.S. market
. And the United States Mexico Canada Agreement, which came into force in
2020, included a provision that made it even harder for Canada to ship baby
formula south in an effort to protect domestic producers.
‘Lean’ supply chains
The pandemic-related problems that have beleaguered global supply chains
have also played a role.
Like in other industries, baby formula makers have long tried to make their
supply chains as “lean” and efficient as possible. That means they aimed
to minimize the amount of time baby formula spent sitting – unprofitably –
on warehouse shelves and send the goods from factory to retailer as quickly
as possible. The problem is that when there’s a surge in demand or a drop
in supply, shortages can result. The leaner the supply chain, the larger the
potential disruption.
The WIC program also encourages a lean supply chain because it reimburses
just 15% of the wholesale price. The huge volume means the companies can
still be profitable, but the lower margins per sale encourage them to keep a
very efficient supply chain.
In March 2020, formula sales surged as people stockpiled pretty much
everything. But that led sales to drop as parents worked through all that
extra formula. That prompted makers to reduce production. And now in 2022,
demand jumped again, especially after reports spread of the Similac recall.
And with demand soaring and supply down significantly because of the Sturgis
plant’s closure, shortages were inevitable.
Shortage is far from over
Both the Biden administration and companies have announced a variety of
measures to end the shortage.
Some companies, such as Reckitt, say they have stepped up production and are
running factories seven days a week to get more formula to stores.
The FDA is expected to soon announce the loosening of import rules for baby
formula, and some states are allowing WIC recipients to use their rebates to
buy formula from companies other than the one on the contract. Abbott has
already agreed to honor rebates for competitor products in states where they
have WIC contracts.
Abbott and Nestlé are also speeding up shipments from their FDA-approved
facilities overseas.
The best way to end the shortage – getting 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 to government policy and business practices. I believe the
government’s de facto 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 doing business – and as a way to ensure
families won’t again be faced with the loss of a product so vital to their
babies’ survival. |
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