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There’s a Good Economic Reason Why Formula Milk Powder Prices Are Soaring

There’s a good Economic reason why companies can jack up the price of milk powder and get away with it.

 

It was widely reported recently that over the past 10 years, the price of milk powder for infants have increased by 120%. Compared to a similar product like fresh milk, which increased in price by only 6.8%, what accounted for this massive disparity?

That was exactly what the Competition Commission of Singapore (CCS) set out to discover. It outlined its findings in a 87 page report. It identified the main contributor to this huge increase in prices as the “increase in markup of wholesale prices”. In other words, prices went up because manufacturers and distributors raised the prices.

When Competition Fail to Keep Prices Down

There are multiple brands and companies in the market, so why hasn’t anyone come in to sell milk powder at a cheaper price, or worked to innovate and bring prices down? If anything, all the “innovation” seem to be driving prices up, with each new iteration of the product touting new benefits and with prices subsequently being bumped upwards.

In fact, there are cheaper alternatives in the market, but according to the CCS report, these account for only 5 percent of sales. In other words, Singaporeans willingly choose to buy the more expensive milk powder. You could say, Singaporeans prefer the more expensive, “premium” infant milk powder.

For parents, nothing is more precious to them than their beloved babies. And this leads parents to be extremely price insensitive. This means their purchase decision is not influenced by the price of a product, but rather, by factors like quality, brand recognition, and safety.

Brand Loyalty

Unlike other products and services, parents are reluctant to change what already works.

Babies can be fussy eaters, and when one finds a comfortable, familiar brand, parents are likely to stick with it. This gives brands a strong first-mover advantage. They achieve this through hospital tie-ups, good marketing and packaging to entice parents making their first purchase, or perhaps because its a brand that friends, family members or even the parents themselves consumed when growing up.

These factors make it hard to for new companies to enter the market and challenge the big incumbent brands.

Placing a Premium on Premium

A parent’s love know no bounds. Manufacturers and distributors have gone all out to take advantage of this. Never mind that no one has ever attributed their good grades or success in life to having consumed DHA, Prebiotics, Probiotics, Lutein, Taurine, and Choline as an infant. Manufacturers spend an outrageous amount of money to paint their product as offering a superior product.

In fact, based on some annual reports, it seems that it is not uncommon for companies to spend 12 times the amount of money for advertising and marketing compared to spending on research and development. Naturally, some of these costs are passed on to the customer.

Moral Obligation

What do diamonds, funerals and milk powder have in common? We all know they are overpriced, but we don’t really have a choice put to cough up the cash, or else we will risk looking like we’re heartless and stingy.

Read Also: Are Diamonds Worth Overpaying For?

Also, because infant milk powder is something the baby will eventually grow out of, parents sort of accept this reality and pay up. Until the next baby, that is.

Perhaps this would be a good time to get into investing, and start accumulating money to feed hungry junior.

Read Also: Step-By-Step Guide On Getting Started On Investing In Singapore

Top Image by Kang Heong

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