Formula Bidding Wars: Competing to Feed America’s Babies
When you think of companies in fierce bidding wars to win lucrative government contracts, you’re probably not thinking of infant formula companies. However, the purchase of infant formula by the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) accounts for between half and two thirds of the infant formula sold in the United States according to an article by Marion Nestle in The Atlantic.
Nestle’s article stemmed from a United States Department of Agriculture study on Rising Infant Formula Costs to the WIC Program: Recent Trends in Rebates and Wholesale Prices by Victor Oliveira, Elizabeth Frazao and David Smallwood. The report had two particularly interesting findings — one on the price of formula purchased by WIC and another on the impact of WIC contracts on the larger market share of formula companies.
WIC grants contracts to the company that bids the lowest price, or, in other words, the one that gives the deepest discount. Despite fierce bidding, the price of infant formula to WIC has increased recently. Infant formula is sold to WIC at a percentage of the retail cost. In the past, WIC paid on average 9 percent of the wholesale price. In 2008, however, WIC was paying, on average, 15 percent of the wholesale price.
In addition to the discount being cut, the wholesale price of infant formula also increased as WIC switched to the more expensive formulas that are supplemented with DHA/ARA fatty acids (a move that is controversial because it is more expensive despite the health benefits being questioned). Overall, the increases resulted in WIC agencies spending around $127 million more on infant formula in 2008 than they did in the previous year (after accounting for inflation).
The other interesting finding, highlighted in Marion Nestle’s article in The Atlantic, is that the infant formula manufacturer that holds the contract with WIC within a particular jurisdiction also accounts for around 84% of formula sold by the top three manufacturers. Ultimately, when WIC switches manufacturers, the new brand contracted by WIC experiences an average 74% increase in its market share. The study further demonstrated that the increased brand equity extends beyond the WIC program to increased sales outside of the WIC contract. This demonstrates that holding the WIC contract is an effective marketing tool for formula companies.
Infant formula companies often talk about the research they are doing to try to improve infant formula. Despite those claims, most infant formulas are still made with questionable ingredients (corn syrup, genetically modified ingredients, milk from cows injected with rbGH, etc.) while formula companies provide deep discounts to the government for its purchases of formula and send out boxes of free formula to any mom who asks for it (and even those who don’t).
The findings in the WIC study call into question whether the government should be investing in purchasing the most inexpensive formula possible, especially if it props up those brands. Should the government instead be looking for new ways of helping low income families without directly benefiting specific formula companies? In Canada, for example, tax credits are given to low income families and in some jurisdictions financial assistance is also provided to both breastfeeding mothers and to those who need to purchase formula, without dictating which brand will benefit.
Image credit: bradeyolin on flickr