The Infant Formula Market: Consequences of a Change in the WIC Contract Brand
by Victor Oliveira
, Elizabeth Frazao
, and David Smallwood
Economic Research Report No. (ERR-124) 44 pp, August 2011
What Is the Issue?
USDA's Special Supplemental Nutrition Program for Women,
Infants, and Children (WIC) is the major purchaser of infant
formula in the United States. In addition to other benefits, the
program provides participants with a food instrument, typically a
voucher or electronic benefits transfer (EBT) card, that
participants redeem for food-formula, in the case of infants-in
authorized retail stores. To reduce the cost of infant formula to
WIC, Federal law requires that WIC State agencies enter into
cost-containment contracts with manufacturers of infant formula.
Typically, WIC State agencies obtain substantial discounts in the
form of rebates from infant formula manufacturers for each can of
formula purchased through the program. In exchange for rebates, a
manufacturer is given the exclusive right to provide its product to
WIC participants in the State. These sole-source contracts are
awarded on the basis of competitive bids. The brand of formula
provided by WIC varies by State depending on which manufacturer
holds the contract for that State.
What is the impact of WIC and its sole-source infant formula
rebate program on market share? Does the program and its use of
sole-source contracts have economic implications that extend beyond
WIC? In this report, we examine the effect of the program on the
infant formula market in supermarkets. We explore situations in
which the holder of the WIC contract in a State switched from one
manufacturer to another.
What Were the Study Findings?
The effect of WIC and its sole-source infant formula contracts
on market share was significant.
Following are some key findings among the 30 States that saw a
shift in WIC contract brand from 2004 to 2009:
• The manufacturer of the WIC contract brand accounted for 84
percent of all milk-based formula (the predominant type of formula)
sold by the three major formula manufacturers in supermarkets.
• The market share of the manufacturer of the new WIC contract
brand increased by an average 74 percentage points after the
contract change. This increase was almost completely offset by the
loss in market share of the manufacturer that lost the
- Most of the shift in market share was a direct effect of WIC
recipients switching to the new WIC contract brand.
- Some of the shift in market share was due to spillover effects
whereby sales of the contract manufacturer's formula purchased
outside the WIC program also increased.
• The change in market shares was not explained by changes in
the retail prices of the new WIC contract brand relative to the
former WIC contract brand.
How Was the Study Conducted?
Our study is based on 2004-09 data from the Nielsen Company
comprising weekly observations from store-based (point of sale)
scanner data from over 7,000 supermarkets in 30 States that
experienced a switch in the manufacturer that held the WIC
contract. Supermarkets are a key component of the infant formula
market, accounting for nearly two-thirds of all infant formula
sales. We used a pre/post methodology to determine the overall
effect on market share when the holder of the WIC contract changed.
We compared each manufacturer's market share in a State in the 52
weeks prior to the contract change to its market share in weeks 13
to 52 after the contract change (weeks 0-12 were excluded to
account for the potential lag in converting WIC participants to the
new contract brand of formula during the transition period).