One of the scientists leading the project, Professor Gerald Tannock, said bifidobacteria made up a large proportion of the gut microbiota in humans during their first year of life.
"It's a relatively simple collection of bacteria, but it's generally believed that it sets us out to be the adult we are going to be," he told the Herald.
"We don't understand the forces behind this and what makes this particular succession of bacteria occur - that's what we are interested in, and we think it's based on the nutrition of the bacteria."
There was a contrast between babies fed formula and those who were breast-fed, whose bifidobacteria appeared more advanced.
"This is because human milk is unlike any other kind of mammalian milk, and contains quite complex molecules based on lactose - the bifidobacteria seem really geared up biochemically to use these."
The research has been funded for two years. If successful, the team will apply for funding for another two years to possibly bring it to a commercial stage.
"The aim is to have an improved formula for babies, especially one that can be made in New Zealand ... - that would be our goal," Professor Tannock said.
"The gold standard we are working towards is the breast-milk-fed baby, because we assume that mother nature knows best."
A good result would have obvious commercial benefits to the country - a key theme of the Ministry of Business, Innovation and Employment's latest round of grants.
"We want to understand nature and biological processes. If there are spin-offs that can be used commercially, that's great."
Meanwhile, another project, by AgResearch, awarded $3.8 million over five years under the same funding round, seeks to provide detailed data about the health and nutritional properties of a new formula made from goat milk.
The research will investigate ingredients intrinsic to goat milk and how interactions during manufacture of goat milk formula could change the way these are digested to deliver the health and nutritional qualities inherent within the formula.
This new knowledge would be used to enhance nutrient stability within goat milk formula, improving health and nutrition for the young.