More trouble? The FTC is investigating baby formula makers' state bidding practices.
The baby formula market has had a tumultuous year.
An Abbott (ABT) plant closure last year created widespread shortage and knocked the company off its perch as the top producer. Now, Abbott, as well as other major market players, are back in the crosshairs again as the FTC conducts an investigation into how three of four big brands participate in a federally-funded program to provide formula to low-income families.
The contracts are awarded every three to four years, depending on the state, for the Special Supplemental Nutrition Program for Women, Infants, and Children, known as WIC. The FTC is looking into whether or not state baby formula makers benefit from a "spillover effect," meaning it allows them to dominate in the non-government markets in each state as well.
"Although the boost in non-WIC sales motivates manufacturers to win WIC contracts, it may also create incentives to engage in collusive or coordinated market allocation, whereby incumbent WIC contract holders agree not to bid against each other so that they can continue enjoying dominant positions in non-WIC markets in their respective state," the FTC wrote in response to Abbott's request to limit the scope of the investigation.
The brands who participate in state contract bidding include Abbott, Reckitt Benckiser's Mead Johnson brands, Nestlé's (NSRGY) Gerber brands and Perrigo (PRGO), which makes in house brands for Walmart (WMT), Target (TGT) and Kroger (KR).
The FTC is requesting details as far back as 2016, according to filings on the agency's website. It said it is using information from a 2015 U.S. Department of Agriculture study that showed "patterns potentially indicative of non-competitive bidding for WIC formula contracts."
Abbott said in its response to FTC, which it is asking for a halt to information requests until the agency provides factual basis to identify collusion, that it is cooperating with the investigation.
"Abbott is unaware of any factual basis to support the WIC-related investigation, and staff have not identified any reason to believe that Abbott or any of its competitors have coordinated or colluded regarding any WIC contract. Abbott has nevertheless agreed to respond...despite the significant burden and cost to the company, in order to reassure the FTC that the company’s bids for WIC contracts are free of coordination or collusion," Abbott said.
Reckitt declined to comment on the investigation, but told Yahoo Finance it does "cooperate and comply with any regulatory and enforcement agency requests that we receive."
Nestlé similarly said it, like other companies, received the civil investigative demand (CID) and has responded to the FTC.
Why it matters
The WIC program, which gets high marks from experts because it helps reduce government spending, is funded by federal grants and supports access to nutritional food for pregnant women, new mothers and children up to age 5. The winning bidder gets to be the sole provider for the WIC program in the state. But WIC purchases account for more than half of formula consumption in the country overall, and services more than 40% of U.S. infants, according to the USDA.
The Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based, left-leaning, think tank, issued a report last year analyzing the WIC program and its benefits.
It said the companies aggressively bid for the state contracts, offering deep rebates in exchange for being the sole provider in a state. That, according to the CBPP, has resulted in savings of up to $2 billion annually for states. The rebates offered by companies help to fill the gap the state pays retailers to cover their markup.
But it also addressed the spillover effect. "Estimates suggest that sales to non-WIC participants in a state might double or triple when a manufacturer wins a WIC contract in that state," CBPP policy analysts wrote. That's the focus of the FTC's investigation.
Fear of shortages still exist
The market came under regulatory scrutiny last year after Abbott's plant closure created a months-long shortage of specialty baby formula options—and reshuffled the share attributed to four major brands.
The Biden administration launched Operation Fly Formula to fill grocery store shelves with formula from abroad. This also spurred action by FDA, which allowed more imports of global brands and triggered a 300% increase in imports year over year in 2022.
It also reshuffled market players. Reckitt Benckiser found itself overtaking Abbott as the market lead during the period of shortages. Separately, at the end of 2022, Perrigo acquired rights to Nestlé's baby formula brand Good Start in the U.S. and Canada, as well as and the U.S. plant in Wisconsin. But Nestle retained it's obligation to fulfill state contracts for WIC.
"In making this decision, we prioritized ensuring parents and caregivers have continuity of a safe, high-quality supply of infant formula. To that end, we continue to fulfill our existing WIC contracts to ensure that there is uninterrupted supply. Perrigo handles all non-WIC product," Nestlé said in a statement to Yahoo Finance Wednesday, which means it is the only major brand not to be affected by the FTC inquiry.
Despite the changes, there is still a fear of potential shortages, according to former FDA officials in March.
At a U.S. House Oversight committee hearing, officials said that the FDA still doesn't require self-reporting if a company detects certain types of bacteria at their plants, leaving the supply chain vulnerable.
Follow Anjalee on Twitter @AnjKhem
Read the latest financial and business news from Yahoo Finance
