Beyond the Supermarket Shelf
For millions of families around the world, commercial milk formula (CMF) is a familiar, often essential, product lining supermarket shelves. It’s a staple of modern parenting, providing a critical source of nutrition when breastfeeding is not an option. But behind this everyday item lies a multi-billion dollar global industry with a financial structure that has profound and often surprising consequences for global wealth.
The economics of baby formula reveal a system where profits flow in unexpected directions and corporate priorities can have far-reaching impacts on inequality. Here we explore the most impactful takeaways from a recent deep-dive report on the CMF industry’s financial architecture, revealing how the money behind this essential product is made, where it goes, and what it tells us about the modern global economy. Our report uncovers a system built on four key economic realities that are as surprising as they are impactful.
Four Surprising Truths About the $54 Billion Baby Formula Business
The money flows from developing nations to wealthy ones.
The central paradox of the commercial milk formula industry is this: while the market is growing fastest in lower and middle-income countries, the financial benefits are overwhelmingly concentrated in high-income countries.
The data reveals a stark imbalance. The global CMF market grew to US$53.6 billion in 2020, with much of that growth occurring in the Asia-Pacific region. This region accounted for 68% of all global sales in 2020, a significant increase from 56% in 2010. China’s CMF market is so large that it alone represented 48% of the entire global market in 2020.
Yet, the wealth generated from these sales does not stay in the regions where it is spent. As of mid-2021, nearly 97% of the industry’s traded share value was held by investors based in high-income countries (HICs). By contrast, less than 1% of the industry’s share value was held in all low- and middle-income countries (LMICs) combined, excluding China. This dynamic represents a massive and ongoing wealth transfer from the nations buying the product to the nations owning the companies that sell it.
A handful of giants control what’s on the shelf.
The global baby formula market is what economists call “highly concentrated,” meaning it is dominated by a very small number of powerful companies. This lack of competition has significant consequences for consumers and governments alike.
According to the report, in 2020, more than 80% of national CMF markets were classified as either ‘highly’ or ‘very highly’ concentrated. A few key players dominate the global stage. Four market leaders—Nestlé, Danone, Reckitt, and Abbott—controlled a combined global market share of nearly 50% in 2020.
This concentration gives these corporations immense “structural and relational power over workers, suppliers, distributors, and consumers.” According to the report’s analysis, this power allows them to both “drive down business costs and to aggressively market cheap-to-produce products with high profit margins.” In short, their market dominance is a key reason they can generate such vast profits while also wielding the political influence to weaken regulations.
The industry prioritizes shareholder payouts over long-term investment.
In recent decades, the CMF industry has increasingly adopted a strategy of “financialization,” where maximizing shareholder returns becomes the primary corporate goal, often at the expense of other priorities.
The numbers from 2020 are striking. The industry transferred an estimated US$32.7 billion to its shareholders through dividends and share repurchases (a practice where companies buy back their own stock to boost its price). This amount is a staggering 83% higher than the US$17.9 billion spent on capital expenditure—a key metric the report uses as a proxy for long-term investments that benefit workers, innovation, and productivity. This trend, particularly the use of share repurchases, surged in the mid-2000s, led by industry giant Nestlé.
The highly inequitable manner by which the CMF industry generates and distributes wealth and income likely contributes to widening social and economic inequalities. This so-called maldistribution of wealth and income strongly undermines the global CMF industry’s claims about its role in creating economic value and contributing to sustainable development, especially for LMICs.
The price you pay is often dictated by ‘brand power,’ not production cost.
A key way the CMF industry generates such high profits is through “value extraction,” using sophisticated marketing to build powerful brands that allow companies to charge premium prices. These prices are often completely disconnected from the actual cost of producing the formula.
Our report found that CMF products are highly profitable, with the nutrition divisions of the major companies consistently reporting higher profit margins than their other product categories. The strategy behind this involves “market segmentation” and “product differentiation,” techniques used to “extract maximum profits” for what is “effectively a relatively standard product.” By creating a wide range of standard, premium, and specialized formulas, companies can tailor prices to what different segments of the market are willing and able to pay.
The real-world cost to consumers can be shocking. In China, feeding a baby with premium CMF products can consume up to 40% of the average monthly salary. In Indonesia, a specific premium brand can cost a parent on an average salary up to 75% of their monthly income. This turns an essential food source into a luxury item for many, placing a heavy financial burden on households.
A System in Need of Scrutiny
The economic structure of the commercial milk formula industry tells a larger story about the global economy. We conclude that the “highly inequitable manner by which the CMF industry generates and distributes wealth and income likely contributes to widening social and economic inequalities.” This reality stands in stark contrast to the industry’s public claims of contributing to economic prosperity and sustainable development.
This raises a difficult question for us all. As consumers and citizens, how do we balance the need for these essential products with the economic system that produces them—a system that seems to take far more from the global community than it gives back?
Access our full report here.