The competition watchdog is launching an investigation into the baby formula market after finding manufacturers raised prices by 25% in two years and managed to increase profit margins during the cost of living crisis.
There are just two dominant companies – Danone and Nestlé – accounting for 85% of sales. The Competition and Markets Authority said it was concerned there was too little choice in the market, with a very limited number of own-label products, and that very few parents were switching to cheaper alternatives where available.
If families did shop around, they could make savings of more than £500 in the first year of a child’s life, the CMA found.
The investigation was announced as the watchdog published its findings on the inflation in the grocery sector. The CMA concluded that over the past two years, about three-quarters of companies making popular brands in categories including baked beans, mayonnaise, pet food and baby milk had put up prices faster than their costs rose, allowing them to maintain big profit margins.
The findings will increase accusations that brands have made the cost of living crisis worse by raising prices unnecessarily to protect profit, a phenomenon known as “greedflation”.
Sarah Cardell, the chief executive of the CMA, said: “Food price inflation has put huge strain on household budgets, so it is vital competition issues aren’t adding to the problem. While in most cases the leading brands have raised prices more than their own cost increases, own-label products are generally providing cheaper alternatives.”
While shoppers tend to seek out cheaper options, parents are reluctant to change brands when it comes to formula. “Unlike other products examined, there is little evidence of parents switching to cheaper branded options as prices have risen and very limited availability of own-brand alternatives,” Cardell said.
“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. We will investigate this further and consider whether changes to regulations are necessary to ensure parents can get the best deal possible.”
Danone, which makes the Cow & Gate and Aptamil brands, has a 71% share of the UK baby formula market, while Nestlé, which owns SMA and Little Steps, has a 14% share. Kendamil, the only British maker of baby milk products, has a 9% share.
HiPP is the fourth biggest player in the market, with a 5% share.
The CMA said the main difference between brands was cost, because formula makers have to follow strict government rules on ingredients.
Of the 10 product categories it examined in depth, the CMA said it had the biggest concerns over baby milk. It will publish its findings on the sector next year.
A spokesperson for Danone UK & Ireland said the company’s experience of the baby formula market was that it was competitive. They added: “We recognise the challenges faced by parents due to inflation. During this difficult period, we have worked very hard to absorb the significant cost increases we have faced, make savings, and minimise any price increases. We will also continue to engage with the CMA over the coming months.”
Nestlé said it welcomed the CMA review and that it was open to “all constructive dialogue to help parents in the most effective way possible”, adding that it wanted to “keep products affordable and accessible for parents while still paying fair prices to our suppliers, including farmers”.
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HiPP and Kendamil were contacted for comment but did not immediately respond.
Food price inflation continues to run at historically high levels despite falling to 10.1% in October, well above the overall inflation rate of 4.6%, with the consumer group Which? estimating that supermarket prices have increased by more than a quarter over the last two years.
The watchdog’s latest release, like its initial investigation into retail competition in the groceries sector published in July, found that most of the food inflation since early 2021 had been caused largely by passing rising input costs on to consumers and that overall profit margins had fallen across most branded manufacturers since 2021.
However, it identified several product lines where price rises of branded goods had outstripped cost increases.
Which? said cash-strapped consumers would be shocked to learn of the profit-increasing tactics used by the big brands, and raised concerns that shoppers reliant on smaller-sized shops and convenience stores did not have the choice of budget-priced options.
“This will be shocking for many people who have been struggling to deal with food price inflation,” said Sue Davies, the head of food policy at Which?. “The evidence reinforces concerns that shoppers relying on convenience store branches of the big supermarkets, which rarely stock the cheapest own-brand ranges, may struggle to find more affordable food.”
The CMA said it also intended to launch an investigation into loyalty scheme pricing in January, where supermarkets only offer deals to customers who sign up to their scheme.
“We have seen an increase in the use of loyalty scheme pricing by supermarkets, which means that price promotions are only available to people who sign up for loyalty cards,” Cardell said. “This raises a number of questions about the impact of loyalty scheme pricing on consumers and competition.”
