Demand Aggregation and the Long Tail: Why Online Markets Sustain Premium Baby Formula

The online marketplace for high-quality baby formula produced in Europe or from organic sources initially appears puzzling. Only a small share of U.S. households require infant formula at any given time, and imported or organic varieties appeal to an even narrower segment—perhaps 5% of consumers. Standard retail logic would suggest that such products should struggle to remain viable in the long run. Yet online retailers specializing in best organic baby formula are not only surviving but often thriving. This phenomenon is explained by long-tail economics, a concept popularized by Chris Anderson and now widely taught in undergraduate and graduate courses on digital markets and industrial organization.

The Core Principle: Long-Tail Economics

Long-tail economics refers to markets in which a significant number of niche products create significant overall demand for them, albeit each individual product has a low sales volume. The phenomenon occurs because the combination of greatly reduced distribution and inventory costs allow sellers to profitably sell to "thin" demand segments that traditional retailers would typically not serve.

The limited shelving space available for displaying products, the turnover ratio required for maintaining the product's inventory, and the density of consumer demand all limit what products sellers can provide in physical retailing. Online retail provides sellers with greater flexibility to determine what products they can offer for sale, by removing or relaxing many of the limitations placed on them when selling items through physical retail locations.

Why Online Retail Works for Niche Infant Formula

European or organic baby formula has three characteristics that align with long-tail theory

Demand is geographically dispersed
Parents seeking specialty baby formulas are located across cities, suburbs, and rural areas nationwide, meaning local stores face insufficient demand for these products. As a result, brick-and-mortar retailers cannot justify stocking slow-moving, high-liability infant food items. Online retail platforms, however, can aggregate geographically dispersed demand into a single marketplace.

Demand is highly motivated
Purchasing infant formula is not a casual decision but a critical one. Parents are concerned with ingredient sourcing, manufacturing standards, allergies, and product suitability for their child’s digestion. Economic research shows that as perceived risk increases, consumers devote more time and effort to information search and are more likely to engage with specialized retailers.

Demand is relatively price inelastic
When families believe a baby formula is safer or higher quality than alternatives, price differences between comparable brands ($10–$30 per can) become less significant. Consequently, online retailers can remain competitive while absorbing higher shipping, compliance, and sourcing costs.

Aggregation Turns Small Markets into One Large Market

A key insight in the economics of online retail is the ability to aggregate geographically dispersed niche demand into a single, accessible marketplace. Online retailers combine numerous small consumer segments—each insufficient to sustain local distribution—into a national or even international market. For example, if only 5% of U.S. families are interested in purchasing premium imported infant formula, and only 20% of those consumers prefer a specific European brand, a local grocery store would likely experience only one sale per month—insufficient to justify carrying inventory. By contrast, an online retailer can aggregate demand across the entire country, generating sufficient volume to sustain ongoing operations.

Empirical research on the growth of e-commerce supports this logic. Studies examining product assortments offered by online retailers indicate that approximately 30–40% of total revenue on major e-commerce platforms is generated by niche products, despite these items individually selling in lower volumes than mainstream goods. More specifically, within the infant nutrition category, sales of organic and specialty baby formula have grown by more than 200% over the past decade relative to traditional formula, with a disproportionately large share of this growth occurring through online retail channels.

Why Physical Stores Opt Out

Most physical retailers do not carry these products not because the market is failing, but because doing so reflects rational cost-based decision-making. When a brick-and-mortar store allocates shelf space to a product, the opportunity cost is high. As a result, such retailers tend to focus on fast-moving goods with predictable turnover rates. In addition, the regulatory and liability risks associated with selling imported infant formula further discourage generalist retailers from stocking these products. By contrast, online retailers tend to operate as specialists.

They invest in reducing perceived risk by providing detailed information—such as ingredient disclosures, sourcing transparency, and consumer education—that helps establish credibility with buyers. This information increases the likelihood that potential customers convert into purchasers, allowing retailers to profitably aggregate sales from a small but valuable long-tail consumer base.

Economic Forces Behind the Trend

Multiple forces are helping make the long-term prospects for premium baby formula sold online more favorable. Decreasing logistics rates and greater access to cross-border delivery have decreased delivery costs on a per-unit basis. Online search capabilities allow parents to easily locate specialized products, which has reduced search costs. In addition, the increase in income disparity and differences in preferences between individuals are creating additional high-willingness-to-pay segments.

Consequences

While the long tail model increases consumer options, and improves allocative efficiency, it also creates a reliance on specialised online supply-chains. Access to products will increasingly rely on knowledge & skills for both accessing and conducting IT transactions, rather than on the product being physically located nearby. Lawmakers must grapple with the effects this model will have on food security issues, regulatory hurdles and equity concerns.

The Closing Statement

The online market for premium infant formula is a classic case of demand aggregation through the application of a long tail strategy. By bringing together consumers with dispersed locations, high motivation and inelastic demand (i.e. they will purchase regardless of price), online retailers are able to convert what was previously viewed as an indistinguishable "local" product into a viable "global" product. At the retail level this may seem illogical, but when examined through the lens of long tail economic principles, it makes complete sense.