Baby formula oligopoly draws the attention of regulators

One of the most striking findings in the UK competition watchdog’s review of consumer price inflation last month was that Danone and Nestlé have between them cornered 85 per cent of the market for infant formula.

While midwives are not permitted to recommend formulas because they vary little in nutritional value, the majority of parents pick which one to feed their child pre-birth or while in NHS hospitals. Once a parent has chosen a formula, 65 per cent will stick to it, according to the watchdog. 

The highly consolidated nature of the global infant formula industry has drawn increased scrutiny in recent years following chronic shortages in the US, recalls of potentially unsafe products and soaring prices during the cost of living crisis.

“We do undercut these brands on [NHS] tenders, but we are up against these hospitals who like muscle memory work with certain brands,” said Will McMahon, commercial director of Kendamil maker Kendal Nutricare, a manufacturer that has a 9 per cent share of the UK market.

“The multinationals spend millions of pounds each year to reinforce this belief . . . that their product is closest to breast milk and give them the best start in life.”

The Competition and Markets Authority says concentration in the category has left parents with limited choice and enabled companies to raise prices higher than their input costs.

“We’re concerned that parents may not always have the right information to make informed choices and that suppliers may not have strong incentives to offer infant formula at competitive prices,” said CMA chief executive Sarah Cardell, adding that the watchdog would investigate further and consider whether changes to regulations were necessary.

Public health experts warn that dominant players use misleading marketing to justify higher prices. 

“There’s a problem of those brands being in the hospital — because it’s still an endorsement,” said Dr Rana Conway, senior research fellow at University College London.

During her research into how formula is marketed to parents in the UK, Conway found that women were reassured by the high price or premium packaging of a product, because in the absence of clear guidance on which to choose, it helped them feel they were doing the best for their child.

In the UK, infant formula prices have risen 25 per cent over the past two years, according to the CMA. Alongside pet food, which is also dominated by two players, Mars and Nestlé, baby-related consumer goods are among the highest-margin products on shelves.  

“In general the higher gross margin categories tend to be categories where people feel real emotional attachment,” said Iain Simpson, Barclays analyst. These also include cosmetics, as consumers care a lot more about which products they put on their face than which dishwasher tablets they use, he said. 

The UK watchdog identified weak competition in the category as consumers tended not to trade down to cheaper or white-label products, giving the dominant companies more breathing room when it came to pricing.

“There’s no reason why there shouldn’t be a private-label formula in the UK,” said Simpson. “My question would be — would parents buy it?” 

Even as consumer goods giants have reported slowing sales volumes in other categories, infant formula sales have held up, despite repeated price increases and a global slowdown in birth rates. 

Nestlé’s global infant formula sales grew 9.2 per cent on a like-for-like basis in the nine months to October, compared with 5.3 per cent growth in prepared dishes and cooking aids and 6.6 per cent growth in milk products and ice cream. Danone does not report specific figures for formula.

A spokesperson for Nestlé said the company welcomed the CMA review and that its goal was to keep products affordable and accessible for parents while still paying fair prices to its suppliers, increasing prices only “as a last resort”.

Concentration in the market has previously led to dire consequences for parents. In the US last year, a safety scandal forced Abbott Laboratories to shutter a plant in Michigan that supplied 15 per cent of US formula. Shortages were exacerbated by supply chain strains linked to Covid-19 and the war in Ukraine, as well as a wave of panic buying after retailers started rationing sales.

“The shortage of baby formula is due in part to a lack of competition,” said US Senator Elizabeth Warren at the time. Last year the Federal Trade Commission launched a probe into possible collusion of the formula makers in their bids for government contracts. 

In the US, the Department of Agriculture offers free infant formula to low-income families with children through the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which accounts for more than half of formula sales in the US, and is dominated by Abbott and UK consumer giant Reckitt.

Bernstein analyst Henry Dennis said that compared with groceries, consumer health categories tended to be more concentrated because the hurdles to entry are higher. “Regulation makes it harder for smaller companies to get involved.” 

While in the US the WIC programme offers regulatory support to the two dominant players, Europe has more smaller players, which lowers the risk of supply constraints, added Dennis. 

Alongside the regulatory scrutiny, public health bodies have made repeated warnings that companies are exploiting the fears of parents to sell products that are “nutritionally equivalent” — often at a range of different prices.

The CMA found that the price per 100ml of cow’s milk infant formula this August varied from 13p for Danone’s cheapest product, Cow & Gate First Infant Milk, to 35p for its most expensive, Aptamil 1 First Milk Tabs.

A spokesperson for Danone UK and Ireland said the company had launched larger formats to help parents and that it offered the best value milk pack on the market.

“In Danone’s experience the formula milk market is competitive,” the spokesperson said, adding that the company would “continue to deliver value and innovation to parents”.

Neither Danone nor Nestlé commented directly on their marketing.

A series of studies on breastfeeding published in the Lancet this year found that baby formula marketing presents normal baby behaviours as abnormal in order to encourage parents to switch to formula, thereby “offering products as solutions”.

“It’s unfair and exploits all the aspirations and emotions of new parents, and there’s something fundamentally troubling about their readiness to do that,” said WHO scientist Nigel Rollins, who led the series. 

Another international survey of 757 infant formula products in the British Medical Journal this year found that most health and nutrition claims made were not supported by “robust clinical trial evidence”.

UCL’s Conway said that unless promotional activity by brands was controlled and enforced, competition would still be lacking and parents would not get the information they need to make an informed choice.

“It wouldn’t be in the interest of big companies for the message to be spread that they are all nutritionally similar.”