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Vulnerabilities in the US Baby Formula Market Post-2022

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In 2022, bacterial infections linked to powder baby formula halted production in Abbott’s Sturgis facility. This triggered a wave of formula shortages across the US, forcing the market to reckon with costly weaknesses. Three key weaknesses highlighted were the exclusionary nature of the market, the impact of uncertainty in the WIC programme (which provides resources, education and food to low-income women and children), and declining consumer trust. While these issues are pre-existing markers of broader industry trends, 2022’s shortages served to accelerate their effect on the erosion of market growth. Given the critical nature of baby formula, continued inaction in the highlighted weaknesses will hinder the category’s ability to recover profit margins and consumer trust.

Lessons unlearned: A return to exclusionary markets

Following temporarily loosened allowances expediting approvals for imported baby formula, the US has, as of January 2023, returned to previous strict regulations. Analysis of the temporary casting of the net for foreign suppliers shows little diversification of the US market. According to the FDA (Enforcement Discretion to Manufacturers to Increase Infant Formula Supplies, January 2023), eight companies received letters approving specific standard formula brands for import. Three of those companies were already major shareholders (Abbott Nutrition, Danone, and Reckitt/Mead Johnson). Letters of enforcement discretion for speciality formulas displayed an even more exclusive list of stakeholders, comprised entirely of key players Reckitt/Mead Johnson, Abbott, Danone, and Nestlé.

Ultimately, while there was some influx of new brands in 2022, there was very little done to diversify producers. Additionally, flattening growth in retail sales and volume created little incentive for new players to consider the process for approval in the US market worthwhile. For example, Euromonitor International estimates milk formula in the US to have seen 5% growth in retail sales (2021). However, liquid and powder formula saw -4% and -3% volume growth, respectively, indicating price-driven growth in sales. Volumes for 2022 are expected to have seen even stronger dips. As the market now seeks to stabilise production and profit, a return to previous regulations on imports marks more of a return to a “normal” that was already destabilising the industry. Producers that were previously already struggling to meet demand amidst rising supply prices now have the added pressure of market recovery.Vulnerabilities in the US Baby Formula Market Chart 1.svg

Reticent government action: Impacts of WIC on efficient formula production

Traditionally, bids for WIC state contracts have predominantly favoured Abbott. Currently, the USDA notes Abbott as the majority contract holder with contracts for 37 states (Infant Formula Contracts in WIC, USDA May 2023). However, due to waivers in 2022 WIC contracts, allowing consumers to purchase outside of approved product lists, Reckitt considers it supplied 40% of WIC infants during the shortage. As of February 2023, waivers for provisions and approved formula lists remained extended, devaluating credence given to state contracts. Deadlines currently range from April 2023 to June 2023.

Uncertainty of timelines for companies to bid for, and expect adherence to, WIC contracts will limit how efficiently production and distribution lines can be adjusted to gaining/losing WIC access. Unclear timelines also create distrust in government communication, weakening producers’ efforts to avoid critical shortages in the baby formula market.

Manoeuvring consumer distrust

Returns to pre-2022 production levels also signify a return to the impact of consumer preferences on formula. From the consumer perspective, 2022 exacerbated fears of negligent sanitation conditions and slow government action to protect consumers. In the US, 24% of consumers in 2023 stated they seek out all natural labels in baby food (Euromonitor International’s Voice of the Consumer: Health and Nutrition Survey). Furthermore, food safety concerns remain one of the top five considerations influencing consumer preferences for all natural labels.Vulnerabilities in the US Baby Formula Market Chart 2.svg

In response to waning consumer trust, the government has proposed two ideas up for discussion.

First, the US expects to vote this year on the addition of Cronobacter to the list of nationally notifiable diseases. However, this tool will depend on consistent tracking and updates from states that choose to opt into the standardised process. Second, the FDA’s guidance for lead levels in baby food is, as of January 2023, still only a draft. The draft also generally avoids legal enforcement. While both suggestions offer promise to consumers, they lack a solid guarantee of enforceable changes to protections for consumers. Additionally, the optional and unclear nature of suggestions will weaken companies’ ability to respond to crisis in the market in a timely manner, further endangering consumer trust.

Adapting to normalcy amidst lingering uncertainties

2022 shortages forced abrupt changes to production lines as companies scrambled to replenish supplies in powder formula and bolster liquid formula production. Now that production is returning to pre-2022 levels, market players must decipher how to readjust production lines to regain profit margins impacted by inflated production costs. However, while the 2022 shortages highlighted critical weaknesses in the market, little decisive action has since been taken to establish stronger safeguards against future threats. Notably, exacerbated consumer distrust of the market and unclear government standards will place further strains on an already recovering market.

Read our blog Three Trends to Watch in Baby Food for more analysis on the trends impacting growth in baby food.

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