How the Government Props Up Infant Formula Companies

A look at a different kind of government contractor: the formula manufacturers who compete to feed America's babies

The USDA has just analyzed the effect of WIC (the Special Supplemental Program for Women, Infants, and Children) purchases of infant formulas on the companies that produce them.

WIC provides coupons or vouchers for infant formula for women who are not breastfeeding. Many people believe that WIC support of infant formulas discourages breastfeeding, but that's not what this post is about.

WIC buys about half (57 to 68 percent) of all of the infant formula sold in the United States. WIC is not an entitlement program. It has only so much money; once that money is spent, the program has to turn away eligible clients.

The USDA delegates WIC management to states. As the USDA report explains,

To reduce cost to the WIC program, each State awards a sole-source contract to a formula manufacturer to provide its product to WIC participants in the State. As part of the contract, the WIC State agency receives rebates from the manufacturers.

Translation: States grant WIC contracts to the manufacturer who sells infant formula to it at the lowest price. The winning prices may be as low as 10 percent of retail cost.

Why would companies want to do this?

In this study, we use 2004-09 Nielsen scanner-based retail sales data from over 7,000 stores in 30 States to examine the effect of winning a WIC sole-source contract on infant formula manufacturers' market share in supermarkets.

We find that the manufacturer holding the WIC contract brand accounted for the vast majority--84 percent--of all formula sold by the top three manufacturers.

The impact of a switch in the manufacturer that holds the WIC contract was considerable. The market share of the manufacturer of the new WIC contract brand increased by an average 74 percentage points after winning the contract.

Most of this increase was a direct effect of WIC recipients switching to the new WIC contract brand. However, manufacturers also realized a spillover effect from winning the WIC contract whereby sales of formula purchased outside of the program also increased.

Mind-boggling, no?

This post also appears on Food Politics.
Image: nerissa's ring/flickr