What’s Really Behind The Baby Formula Shortage?

By Moe Tkacik, Senior Fellow at the American Economic Liberties Project
Video edited by Josh Hirschfeld-Kroen

By now you’ve heard about the shortage of baby formula wreaking havoc on the sanity of baby moms everywhere, 

Republicans have blamed Joe Biden, overzealous regulation, and illegal immigration, with Marjorie Taylor Greene accusing the president of squandering “pallets” of the stuff at border detention camps. And Democrats haven’t exactly pushed back on that narrative, with the White House this week promising they’d be “cutting red tape to get more formula on store shelves.”

The real problem, as usual, is corporate power run amok. 

More than 80% of the baby formula consumed in America is produced by 2 companies in just a handful of factories. It’s a weird state of affairs for a century-old product made mostly of evaporated milk,, but many things have always been weird about the baby formula business. Abbott Labs’ Similac and Mead Johnson’s Enfamil have dominated the market for baby formula practically since it was invented. In the 1970s a huge scandal over what activists –correctly– dubbed a corporate conspiracy to hook billions of innocent babies on lucrative liquefied junk food drove the third big player, Nestle, out of the business or decades, and in the nineties the third big baby formula player, SMA, got out of the formula business too. Not long after that is when the price of a quart of the stuff, which was 1.87 for Similac and 1.88 for Enfamil in 1986, surged so high that drugstores started stocking it behind the checkout counter with the tobacco.

There’s also one primary megabuyer of baby formula, the federal government. The USDA’s Women Infants and Children supplemental nutrition program, which distributes free formula to families under certain income thresholds, buys half the formula consumed in America. That’s  another big driver of monopolization: government business generally goes to those with the most entrenched lobbyists. And it’s no surprise that the biggest formula maker, Abbott Labs, whose Similac brand controls some 43% of the market, also became the monopoly producer of rapid Covid test kits. Never mind the fact that no one you know has ever gotten a positive result using one. (One study calculates that Abbott’s ubiquitous BinaxNow misses two thirds of asymptomatic covid cases.) 

Abbott isn’t just your run of the mill bread price filxing monopolist. Last year it joined the ranks of “Dividend Kings”, 39 members in the S&P 500 index that increased their payouts to shareholders for at least 50 consecutive years in a row. Abbott has paid shareholders nearly $10 billion in dividends since 2019, while dumping another $5.7 billion into stock buybacks. 

Staying in the lofty company of the dividend kings requires Abbott to send out bigger checks to shareholders with each passing year, which in turn requires them to generate bigger and bigger profits. That’s not easy: Abbott’s gross profit margins are 57% and its operating profit margins are 20% — more than twice as high as the average blue chip stock.

Abbott has a knack for producing products with consistently high demand and high profit margins. Twenty five dollar cans of baby formula and rapid antigen tests are not outliers: the company’s diabetes test strips, which are believed to cost less than a dime apiece to manufacture, sell for as much as a dollar apiece at retail. As the financial research powerhouse Morningstar explains in a report on the company’s stock, “In most cases, Abbott is one of three or four competitors that dominate the market. In these markets, Abbott participates in rational oligopolies and enjoys the benefits of intangible assets.” But as two recent stories that have emerged from abbott’s factory floors illustrate, maintaining those margins sometimes involves manipulating supply and demand in ways that can hurt both workers and consumers.

Over the summer, the New York Times published a detailed account of Abbott ordering temp workers at a factory in Maine to destroy more than 8.6 million perfectly good Covid tests because they didn’t want to risk an “oversupply” driving price tags down on the tests. But just months before the pandemic at Abbott’s main formula factory in Sturgis, Michigan, however, Abbott managers were so determined to meet their metrics that they refused to throw away at least one batch of formula in which multiple samples tested positive for potentially infectious microorganisms.

That account comes from a 34-page whistleblower report mailed to the FDA in October that ultimately led to the February closure that touched off the formula-pocalypse. It’s not clear why it took so long for the FDA to investigate the report, which describes a toxic culture that turned a blind eye toward “severe breaches of the most basic regulatory requirements” that represented “major and serious breakdown in the controls designed to ensure that the product met specification.” But the report could also be renamed “How to be a Dividend King,” because for the most part these breakdowns occurred because following the rules would have cost money.

There are accepted processes for testing the seams in the cans to make sure bad stuff stays out of baby bottles; management games those tests by testing the cans before they’re filled with formula powder. There are protocols for reporting the results of tests for microorganisms; but the whistleblower finds multiple reports that are straight up missing any test results at all. And when management detected micros in a batch of formula in 2019, they devised a BS workaround to the normal protocols so they didn’t have to dump more than a tiny fraction of the batch — salvaging thousands of potentially toxic cans of formula — and fudging  the books so that FDA inspectors wouldn’t catch on.

The source of the micros was old equipment that has needed repairing since 2012, but the “incentive structure” doesn’t permit such extravagances; in fact the whistleblower discovered a pattern of supervisors blaming individual operators when reporting “root cause” explanations for quality control issues caused by mechanical failures. This tracks with Abbott’s apparent unwillingness, shared by many modern monopolists, to invest in modernizing its plants; like most S&P 500 companies, Abbott more on stock buybacks than capital expenditures last year. Employees make do with failing equipment all the time, especially in places like Sturgis, Michigan, where the primary other job options are Walmart and Dollar General. Says the whistleblower, “It must be kept in mind that Abbott’s Sturgis site is, in general, the highest paying and largest employer in the immediate area. In an environment where whistleblowers are not protected, raising concerns could put the well-being of families at risk.

The bitter irony of course is that now the well being of an exponentially greater number of families is at risk. 

Over the weekend an Abbott spokesperson had the gall to proclaim that the company had been vindicated by CDC tests that had failed to find conclusive evidence linking the cronobacter strains that sickened four Similac-fed infants (and killed two) to cronobacter strains found in the Sturgis plant. That’s not because inspectors didn’t find cronobacter at the site — no, they found five strains of it, just none that was an exact match to the strains believed to have infected the infants. But this is not a malpractice trial. The infant deaths were certainly a factor in the agency’s decision to temporarily shut down the plant, but inspectors’ exposure to the what the whistleblower repeatedly described as a “total breakdown” of quality assurance protocols was likely a more serious one. 

Sadly, because Abbott is such a dominant force in the market for infant formula, the closure triggered an extreme supply shock that Abbott seems determined not to go out of its 

 Similac’s main competitor Enfamil, whose parent company was that very month announcing it was putting the formula business up for sale, was in no way prepared to help mitigate. That’s the thing about dividend kings and the spreadsheet wizards that engineer their stock market success: the idea of “rising to a challenge” even if there’s plenty of money in it for them simply does not compute. All they know is how to slash costs, jack up prices, strike fear into the hearts of workers, and rain cash down on shareholders. 

One thing upon which the whistleblower, who’s identified as a male, in question does not comment is whether the moms of Similac plants feed its formula to their own babies. In theory, federal law protects moms’ rights to take breaks to pump breast milk, but having breastfed through three waitressing jobs, I can safely pronounce “breastfeeding while blue collar” to be a sick joke. You leak through uniform shirts all day but when you finally find “five minutes” you’re so hungry and dehydrated it takes 20 minutes to squeeze an ounce. Younger otherwise genial and supportive coworkers look upon you with a mix of revulsion, pity, and resentment. People discover your bottles wherever you stashed them and literally act like they’ve found radioactive waste. Inevitably, you switch to Similac. But if I’d had to drive 35 miles for a single can like the Target website currently informs me I’d need to do to obtain a can right now, I’m not sure what I would have done. What an appropriate “damned if you do or don’t” dilemma for the post Roe paradigm. Heads we lose, tails the Dividend Kings win.