Enrollment expands. WIC was created to ensure that indigent mothers could provide adequate nutrition to young children, with infant formula being
the primary offering for children under the age of one. Initially, qualification for this program was relatively stringent
and uniform across the country: New mothers had to have a household income that was less than 130 percent of the federal poverty
level. But as the program developed—and as rebates were extracted from infant formula manufacturers—the standard became more
liberal, until it reached today's level of 185 percent of the poverty level. At the same time, public health agencies, medical
providers, and new mothers learned how to take advantage of the subsidy. The result was a dramatic expansion in the subsidized
segment of the market—from approximately 20 percent in 1984 to 50 percent of the annual four million US births.
Subsidized Segment of Market Expands
Rebates rise. The executives who worked for infant formula companies in the late 1980s will tell you that WIC rebates started rather innocently
and that the initial "offers" to state WIC administrators were of no consequence. The first bids for rebates to state programs
were more or less voluntary(5 cents-10 cents per can) and, in the beginning, all three manufacturers continued to compete
within these states using traditional selling and sampling methods. As enrollments rose and use increased among the subsidized
segment, the states, starting with Tennessee and Oregon, began to solicit single-source bids. The industry did not respond
until 1988, when Florida successfully negotiated a sole-source contract from Wyeth, thus changing the rules of the game forever.
During the next five years, more than 30 states or groups of states followed suit. The rebates increased dramatically to more
than $1 for a can of concentrate that retailed for $2.25—more than 70 percent of the contribution margin. The rebate dollars
flowing back to the state agencies were used to expand enrollment. This, in turn, led to generally higher rebates, giving
rise to an increasingly vicious cycle. The infant formula executives did not realize it at the time, but they had made the
fatal mistake of "feeding the gremlins."
Price competition emerges. Aggressive price competition was a natural consequence of tightened access, high contribution margins, and the unbalanced
stakes in a zero-sum game. The destabilizing player was Wyeth. With significantly less share than either Ross or Mead Johnson,
Wyeth could easily triple its total market share (for combined cash and "rebated" segments) in any state. Winners and losers
in the game could be easily predicted.
Until Wyeth exited the business, the auctioning of access to the WIC market led to round after round of price cuts. And even
after only two competitors remained, the seemingly naked competition for share continued to drive prices down. Because WIC
contracts typically lasted for three years, it was a long and painful process before prices began to stabilize, most likely
because all profits had been bid away. Between 1990 and 1996, estimates are that the net contribution margin per can of formula
for the winning bid for a major WIC contract declined by nearly 80 percent, and in some cases vanished entirely.
New pricing models applied. As the WIC program grew, calculating the true sales and profit impact of a won or lost contract required a new level of complexity.
Especially important was the "spillover" of winning or losing a WIC bid. Spillover took two forms: Direct spillover occurred
when a WIC enrollee purchased more formula than her free allotment. Indirect spillover was measured through the contract's
effect on retail shelf space, out-of-stocks, promotional inclusion by retailers, and even physician "prescribing." (When pediatricians
did not know if a new mother was eligible for WIC, they often recommended the formula on the WIC contract at the margin.)
Ross, Mead Johnson, and Wyeth each developed their own spillover models that allowed them to calculate the direct and indirect
contribution of a three-year contract in a given state."