Yahoo Finance Baby formula shortage raises the question of whether 'Big Formula' should be broken up
The U.S. government’s response to the nation’s critically low baby formula supply has dethroned Abbott (ABT) as the country’s dominant manufacturer. And lawmakers who questioned its chief nutrition executive on Wednesday exposed the possibility that new regulation could threaten its significant edge.
The question of how much control of the formula market is too much has come to a head, as U.S. officials try to shore up store shelves and devise plans to prevent future shortages. As of the first week in May, 43% of the nation's formula supply was out of stock, according to retail data firm Datasembly.
"The baby formula industry in our country is really unique in that about 90% of the product is made right here in the United States. And the vast majority is made by your three companies," U.S. Rep. Kim Schrier (D-WA) told executives from Abbott, Gerber and Rickett at a Congressional hearing on Wednesday. "And so it should be no surprise that when something goes wrong ... it really rocks the whole industry."
So far, U.S. authorities have addressed the problem by temporarily relaxing a federal law and import restrictions that prevent more manufacturers from entering the tightly controlled market. However, legal experts disagree over whether regulators can also tap antitrust laws to generate competition and decrease supply risk that would further unravel Abbott’s dominance.
That once-dominant formula maker held 40% of the domestic infant formula market when it shuttered its Sturgis, Michigan manufacturing facility in February after a dangerous bacteria infiltrated the plant. With just four other manufacturers including Abbott controlling 90% of the domestic formula supply, parents and caregivers of infants were left scrambling to feed their children.
Should antitrust regulators step in?
The crisis has raised the question of whether the formula industry needs more competition.
“Antitrust officials must take a careful look at this issue,” Penn State Law professor Samuel Thompson Jr. told Yahoo Finance, noting that regulators should consider breaking up formula makers if it turns out the firms' dominance played a major role in the formula shortage.
University of Minnesota Law professor Tom Cotter says that, in theory, competition regulators could seek to divest Abbott of its dominant position. However, he suspects that antitrust actions would fail.
An action under Section 2 of the Sherman Act, he explains, would be a challenge for regulators even if Abbott were to restore its pre-crisis market share of 40%. Section 2 prohibits companies from using a monopoly position to keep competitors out of a market.
And Cotter says it's also unlikely that authorities would go after Abbott under Section 7 of the Clayton Act, which prohibits mergers and acquisitions that “substantially lessen” competition.
“Most companies are not usually considered monopolies unless they have 70%, so you couldn’t likely go the Section 2 route,” Cotter explains. “And it's unlikely there would be a retroactive review of past mergers and acquisitions.”
Still, Cotter points out that regulators sometimes do seek retroactive divestitures. In 2020, the Federal Trade Commission and 48 attorneys general filed separate complaints against Meta’s (FB) Facebook claiming the company, despite its FTC-approved acquisitions of Instagram and WhatsApp, was using its monopoly in social networking to keep competing companies out of the market.
Market power boosted by the U.S. government
However, the potential for antitrust action against Abbott may be further lessened given that its market dominance was made possible in part through government regulation.
Since 1989, federal law narrowed competition by requiring each U.S. state to choose a single company to supply formulas available to low-income families under the Special Supplemental Nutrition Program for Women, Infants, and Children, known as WIC. The program provides food for about half of all U.S.-born infants, and today has only three market participants, Abbott, Reckitt and Nestle.
In an interview with Yahoo Finance ahead of Wednesday’s hearing, Rep. Cathy McMorris Rodgers (R-WA) expressed concern about consolidation and FDA “red tape” limiting new manufacturers from coming to market.
“There are companies — other manufacturers that have had to wait years to come to market because of FDA delays,” McMorris Rogers said, explaining that legislation she introduced last week would put the FDA on a deadline to respond to requests from new manufacturers.
'We are a small player in the U.S. market'
Executives from smaller manufacturers, Gerber and Reckitt, who also testified at the hearing, highlighted the limitations on the current market structure to meet demand.
“We are a small player in the U.S. market and our capacity is aligned to that,” Gerber’s Scott Fitz, vice president of technical and production, told lawmakers. “We can’t fill the gap left by a much bigger competitor here in the U.S.”
Robert Cleveland, senior vice president for Enfamil maker Reckitt Benckiser (RKT.L), said the company had worked to address shortages by running its manufacturing facilities around the clock, streamlining its product line, offering unlimited overtime to staff, and cutting its time to market time in half.
After Abbott’s plant closure, Reckitt’s market share increased from 34% to 56%, while Gerber’s market share increased from 8% to 9%. However, that increase might not last. Abbott says it plans to restart production in its Sturgis facility the first week in June.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
Find live stock market quotes and the latest business and finance news
For tutorials and information on investing and trading stocks, check out Cashay
