The U.S.

Food Industry
Opportunities and Challenges for Swiss Companies.
Summer 2006.
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Editor and Contributor
Table of Contents
Claudine M. Haeni
1. Introduction and Summary. 5
Contributors: 1.1. Opportunities. 5
Paul S. Anderson, Ally Gunduz, John F. Lemker, Frank Ustar, 1.2. Marketing. 5
Martin von Walterskirchen and Daniel A. Wuersch 1.3. Regulatory Environment of the Food Market. 6
1.4. Acknowledgements. 6
Swiss Business Hub (USA) uses primary, secondary sources and tertiary sources of information to produce
a variety of reports on the American market for small to medium sized Swiss enterprises. For further 2. The U.S. Food Industry. 7
information on our services, please contact: 2.1. Facts and Figures. 7
2.2. Trends in the Food Industry. 8
Martin von Walterskirchen 2.3. Eating Away From Home. 9
Director Swiss Business Hub USA 2.4. Non-Alcoholic Beverages. 9
737 N. Michigan Avenue, Suite 2301 2.5. Manufacturers of Food & Beverages. 10
Chicago, IL 60611 2.6 Mergers & Acquisitions. 11
Telephone: 1-312-915-0061
Fax: 1-312-915-0388 3. Supermarkets and the Grocery Industry. 12
e-mail: martin.walterskirchen@eda.admin.ch 3.1. Facts and Figures. 12
3.2. Store Types. 12
While this report is intended to provide an overview of this specific market and its opportunities at the 3.3. The Shopper. 12
time of its edition, each individual manufacturer, exporter or company may have to conduct their own 3.4. Facing the Competition. 14
analysis to get a better understanding of the possibilities and opportunities available to them. You are 3.5 Growth Opportunities. 15
encouraged to explore and develop your opportunities based on research and in-depth analysis.
4. The Specialty and Gourmet Food Stores. 17
Readers should take note that the Government of Switzerland does not guarantee the accuracy of any of 4.1. Facts and Figures. 17
the information contained in this report, nor does it necessarily endorse the organizations, associations, 4.2. Specialty and Gourmet Foods. 17
companies and individuals listed herein. Readers of this report should verify the accuracy and reliability 4.3. Buyers of Specialty Food. 19
of the information contained herein before making a business decision. 4.4 Specialty Food Suppliers. 19
4.5 Trendspotting. 19
© Swiss Business Hub USA 2004 - 2009 4.6 Products. 20
5. The Commercial and Institutional Food Industry. 23
5.1. General. 23
5.2. Restaurants. 23
5.3. Restaurants in Hotels and Casinos. 25
5.4 Challenges. 26
5.5 Trends 26
5.6 Distribution Channels. 26
2 The U.S. Food Industry
6. Natural and Organic Food. 27
6.1. Overview. 27
6.2. Definition of Organic. 28
6.3. The Organic Food Shopper. 29
6.4. Trends. 30
6.5 Pricing. 30
6.6 Retail Channels. 31
6.7 Distribution and Purchasing. 32
6.8 The Foodservice Segment. 32
7. The Functional Food Sector. 33
7.1. Overview. 33
7.2. Definition and Regulations. 33
7.3. Consumption Trends. 34
7.4 Price Trends. 36
7.5 Marketing Considerations. 36
7.6 Retail Channels. 36
7.7 Distribution. 37
8. Food Distribution. 38
8.1. Overview. 38
8.2. The Role of the Importer. 38
8.3. The Role of Food Brokers. 39
8.4 The Specialty Food Distribution System. 39
8.5 Distribution to Retail Outlets. 40
8.6 Some Larger National Distributors. 40
8.7 Food Service Distribution. 41
8.8 The National Distributors. 41
8.9 Co-Packing. 42
8.10 Supply Chain. 43
8.11 Food Marketing. 43
8.12 Consumption Trends. 43
8.13 Product Pricing. 44
8.14 Private Store Brands. 45
8.15 Promotion. 46
8.16 Category Management. 47
8.17 Food Packaging. 48
The U.S. Food Industry 3
9. Marketing Agreements and Strategic Partnerships.
9.1. In General.
49
49
9.2. Marketing Arrangements. 49
9.3. Contract and Tort Issues. 50
9.4. Exploring and Evaluating Market Opportunities. 50
9.5. Marketing Agreements. 51
9.6 Cooperation with U.S. Companies. 52
10. Regulation of Food by the Food and
Drug Administration (FDA). 54
10.1. Introduction. 54
10.2. Bringing a Food to Market in the U.S. I:
Categorization of a Food. 54
10.3. Bringing a Food to Market in the U.S. II:
Food Composition and Ingredients. 55
10.4. Bringing a Food to Market in the U.S. III:
Food Labelling. 55
10.5. Manufacturing Food. 57
10.6. Bioterrorism Law. 57
10.7. Enforcement. 58
11. Importing into the USA. 59
11.1. General Background. 59
11.2. Basic Customs Considerations. 60
11.3. Entering Merchandise into the U.S. 61
11.4. Food and Drug Administration (FDA)
Requirements Enforced by Customs /
The Bioterrorism Act of 2002. 62
11.5. Customs – Trade Partnership Against Terrorism (C-TPAT)
and Related SecurityCompliance Issues. 64
12. Annexes. 65
12.1. Trade Associations. 65
12.2. Periodicals. 66
12.3. Trade Fairs. 67
12.4. U.S. Government Agencies. 67
12.5. Links to Sources. 68
12.6. The Authors of the Study. 68
4 The U.S. Food Industry
1. Introduction and Summary.
Martin von Walterskirchen, Swiss Business Hub USA
The purpose of this report is to help Swiss companies seeking to en-
ter the American market for food products. These interested compa-
nies will gain insights into selected market segments and an overview
of the potential opportunities and challenges they face when entering
the American food market.
The USA is the largest and most sophisticated market in the world.
The economy of the U.S. is expanding and is likely to continue to
grow over the next years. There are, at present, no indications that
the U.S. will lose its predominant role in global issues or its economic
strength. The result is unparalleled purchasing power.
The American food market differs in many aspects from the Swiss
and European markets. The size of the USA and the American way of
life confront each producer with considerable logistic challenges and
offer opportunities for innovative manufacturers and distributors. This
study concentrates therefore on the most important interfaces bet-
ween manufacturer and consumer (supermarket and grocery indus-
try, specialty and gourmet food stores, and the restaurant and food
service industry sector) and provides information on sectors offering
windows of opportunities for Swiss food manufacturers (natural and
organic food, functional food).
1.1. Opportunities.
In 2005, sales of food-based retailing in the U.S. represented a $1,000
billion industry, and it is estimated to reach $1,200 billion by 2010.
This corresponds to 26% of total U.S. retail trade. We estimate that
food retail sales will grow at an average of 4% annually through 2013.
Over the past decade as income levels have risen in the U.S., the per-
centage of disposable income spent for food has declined to about
10%. At the same time, a growing slice of the pie has been going
to the food-away-from-home segment, which now garners 45% of
total dollars spent. Projections depict that by 2010 consumers will
spend 53% of every food dollar on meals, snacks and beverages
away from home.
The 35 to 44 age group claimed the highest overall food spending per
household. They were also the highest spenders for food-at-home.
The under age 25 group showed the lowest spending pattern for
food-at-home.
The Hispanic population is the fastest growing ethnic group in the
U.S. with an estimated aggregate disposable income of $800 billi-
on. The average Hispanic shopper is health conscious and spends
approximately $117 per week on groceries compared to $87 per
average U.S. shopper. Supermarket chains have responded and in-
troduced entire aisles of regional foods, reaping success with this
approach.
The mainstream consumer of today is looking for value, i.e. good
quality at lower prices. This fact has a strong impact on retailers’
profits. Swiss food products are generally niche, high quality, sophis-
ticated and high priced and, therefore, contrast with the mainstream
American food market. Additional burdens are created by the low
exchange rate of the U.S. Dollar. There are, however, three distinct
segments of the U.S. food market that offer significant opportunities
for Swiss food products:
• The power of quality and exclusivity versus low price: One in eve-
ry 125 Americans is a millionaire. This segment of the population
spends more than an aggregate $97 billion per year. Taste, fresh-
ness, innovation, sophistication, quality, exclusivity, design, cachet,
image, and healthiness are more important sales arguments than
price. The U.S. gourmet and specialty food market in general has
enjoyed a compound annual growth rate of 7% for several years.
In 2000 it had reached the $20 billion mark, of which 55% of sales
were made in supermarkets. Retail sales for this market topped
$34.8 billion in 2005 (please refer to Chapter 4). The same is true
for the up-scale restaurants and hotels who depend on the distri-
butors of high-end ingredients used in gourmet and healthy food
preparation.
• The Natural and organic food sector shows a booming double-
digit growth rate with estimated $14.5 billion in sales in 2005, and
it is expected to climb to $16 billion in 2006. The forecast is set
at around 18.4% of continued annual growth through 2008 (ple-
ase refer to Chapter 6). Please note that organic standards in the
U.S. are different from Swiss standards. A product may, therefore,
qualify as organic in Switzerland but not in the U.S. and vice versa.
• High quality private label: One in five products purchased in grocery
outlets is a “private brand” product. Private label has long been
considered as being of lower quality than its national brand coun-
terparts, but store brands are being recognized favourably and are
moving in upscale direction (please refer to Chapter 8.14).
1.2. Marketing.
The environment in which a shopper makes his/her food buying de-
cisions is extremely competitive. The average time a U.S. consumer
spends in a supermarket is 17 minutes. During this time the shopper
can see only 25-28% of the store’s merchandise. The average expo-
sure to each item in a store is 0.09 seconds; hence, the necessity of
a concise marketing strategy for your products in the U.S. market,
The U.S. Food Industry 5
and the importance of professional customer education through ad-
vertisement and cooperation with grocers and brokers.
• Understanding the US food distribution system (please refer to
Chapter 8) gives the Swiss food manufacturer important infor-
mation for making sound decisions, such as, whether to market
through a distributor or reseller or on his/her own.
• In addition there are numerous legal issues that can determine the
success of marketing food products in the United States. Chapter
9 Marketing Agreements and Strategic Partnerships provides infor-
mation on these important issues.
1.3. Regulatory Environment of the
1.4. Acknowledgements.
It gives the publisher pleasure to thank the authors of this study: Paul
S. Anderson (Sonnenberg & Anderson, Chicago), Ally Gunduz (Swiss
Business Hub USA, New York), Claudine Haeni, (Swiss Business
Hub USA, Chicago), John Lemker, (Bell, Boyd & Lloyd, Chicago),
Frank Ustar, (Swiss Business Hub USA, Los Angeles),and Daniel A.
Wuersch (Wuersch & Gering Attorneys, New York).
I want to extend special thanks to acknowledge the contributions of
the following people, whose help in the conceptual phase of the stu-
dy and/or in assembling this text was invaluable: Guy Emmenegger,
Secretary General of FIAL, the Swiss Association for the Food
Industries; Frank Fischer and Randy Hanken, Chicago Manufacturing
Center, Chicago; Susi Gerber, Osec Business Network Switzerland;
2. The U.S. Food Industry.
By Claudine M. Haeni, Swiss Business Hub USA
2.1. Facts and Figures.
The U.S. is the world’s largest producer of food and agricultural pro-
ducts. On one side is agribusiness, which represents farmers, ran-
chers and private and public companies that are involved in the early
to middle stages of food production. On the other side are food ma-
nufacturers and packaging companies, private and public companies
that are engaged in the later stages of consumer food production.
Consumption
The average U.S. household today allocates substantially more in-
come dollars to housing (approximately one third), transportation and
education than in the past. In contrast, the percentage of disposable
income allocated to food has steadily declined during the past five
decades. Claiming as much as 20% at some point, U.S. consumers
have spent around 10% of their disposable income on food over the
past 9 years. The break-down of expenditures between food-at-home
and food-away-from-home in 2004 was 5.5% and 4.1% respectively
and remained unchanged in 2005. (Figures for food-away-from home

Food Market. Gwen Morrison, President, The Store, WPP Global Retail Initiatives,
Chicago; Anastasia M. Jafari, Food Marketing Institute, Washington,
encompass direct spending in restaurants and other food establish-
ments and exclude food served in airlines or during hospital stays).
Grocery Stores
The U.S. legal system is complex and needs to be treated with re- DC; John Rand, Management Ventures, Inc., Cambridge, MA; Eric 11%
All Other
spect. The challenges brought forth by the regulatory environment Desbeaumes, President, Alci Contractors Technology, Geneva; Daniel $ 800‘000
19% Food At Home Food Away from Home
are surmountable, provided the company is willing to make a careful Bangser, Trade Commissioner, Swiss Business Hub USA, Chicago; $ 700‘000
Food Services
assessment and plan accordingly. and Mirjam Groeneweg, Swiss Business Hub USA, Chicago. Drinking Places $ 600‘000

• Before market entry, products need to be in conformity with FDA 6% 10%
Health & 7%
rules and regulations (please refer to Chapter 10). The manufactu- Personal Care Stores
Supercenters
rer has to determine if its product is subject to any specific rules Pharmacies &
Drug Stores
applicable to composition, ingredients, labeling or manufacturing
5% Beverage
requirements. Food is subject to complex labeling requirements. Stores
These labeling requirements include but are not limited to the General Mechandise 1%
name, net content, nutrition value per serving size, declaration of Chain & Department Stores,
ingredients, allergens, etc. Discount Stores
42%
• As a consequence of the terrorist attacks on September 11, 2001,
the Bioterrorism Act requires that any facility, domestic or inter-
national, which manufactures, processes, packs or holds food for
animal or human consumption in the U.S. must register with the Figure 1: U.S. Retail Trade 2005. Sales in Food and Beverages
FDA. The rationale behind this requirement is to ensure that the are highlighted in black. Please note that the Share of Food and
FDA can quickly locate and neutralize faulty food processors in the Beverages of “Clubs and Supercenters is 3.5%
case of delivered or accidental contamination of food (please refer (Source: Data of U.S. Census Bureau)
to Chapter 10.6 and Chapter 11.4).
• Importation of Swiss food products: The importation of products The food and beverage industry encompasses all companies that
into the U.S. is regulated by, and through, the U.S. Department manufacture or process food and beverages for human consumpti-
of Homeland Security, Bureau of Customs and Border Protection on. Based on figures published by the Census Bureau and the U.S.
(“Customs” or “CBP”). Chapter 11 describes the structure of CBP Department of Agriculture sales of food-based retailing represented
and its operations, and identifies the most common issues of inte- approximately 26% of all U.S. retail trade of $4.1 trillion in 2005 (food
rest to food importers. and beverage based sales in super centers and warehouse clubs of
3.5% inclusive). Sales of food-based retailing were estimated at around
$1 trillion ($960 billion in 2004). Projections suggest that food retail
sales will continue to rise steadily at around 4% annually through 2013.
$ 500‘000
$ 400‘000
$ 300‘000
$ 200‘000
$ 100‘000
$0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 2: Food Expenditures and Projections 2002-2013
(Source: USDA, Economic Research Service)
Increases in actual dollars spent for food consumption have been
moderate and projections through 2013 reveal a continuation of mo-
dest annual gains. The 35 to 44 age group claimed the highest overall
food spending per household. They were also the highest spenders
for food-at-home. The under age 25 group showed the lowest spen-
ding pattern for food-at-home. According to the Bureau of Labor
Statistics, figures on food spending by career reveal that professio-
nals and employees at management levels rank number one in food
expenditures. This can be tied to their higher salary ranges. Spending
by region shows highest expenditures in the Northeast with more dol-
lars going towards dining out. The West was the leader in spending
for food-at-home. The South showed the lowest spending patterns
for food. One of the significant drivers in the spending habits is the
household head’s education level. The higher the level of education,
the higher the dollars spent for food away from home dominate. This
trend has remained over the past few years and is expected to con-
tinue. When looking at spending patterns based on gender, single
males take the lead over single females. Dining out in one-person
households takes precedence in both genders.

6 The U.S. Food Industry The U.S. Food Industry 7

Retail Channels, Competition and the Consumer
Competition among retailers has been fierce over the past several ye-
ars and continues to accelerate. Supercenter leader Wal-Mart Stores
Inc., warehouse clubs Costco and BJ’s and other retail formats have
been further expanding their already large selection of food products.
Their aggressive pricing is capturing an ever larger group of consumer
food dollars. Whereas these retailers claimed a mere 1.8% of sales for
food consumed at home in 1991, their market share had exceeded
11% in 2004. Today, food sales at supercenters and warehouse clubs
claim more than 14% market share. According to the trade publica-
tion Supermarket News, Wal-Mart, the largest food retailer in the na-
tion, dominates the food market scene. Wal-Mart operates more than
2,000 supercenters with grocery departments and it is estimated that
this number may triple by 2010. Target Corporation also has plans to
enlarge the grocery section in all of its stores. In March of this year
Wal-Mart announced its plans to incorporate organic and a wide vari-
ety of upscale specialty foods into its food product selection. A newly
designed store in Plano, Texas, is part of a pilot program Wal-Mart
launched. The store opened recently and includes not only organic
and specialty foods on a grand scale, but also features an elaborate
wine department and a sushi bar.
Wal-Mart has also become the biggest customer to a fair number of
food and beverage manufacturers. Some of these big food compa-
nies realize more than 10% of their annual sales through Wal-Mart.
This development comes at a high price and severely limits product
pricing flexibility. Conventional retailers have been forced to double
up on their promotions and marketing campaigns in their struggle for
survival, and manufacturers have been hampered in their efforts to
cover higher commodity and production expenditures.
In response to these industry changes, 2005 marked the year of
“Finding Your Niche” among the nation’s traditional retailers according
to studies conducted by the Food Marketing Institute and Progressive
Grocer Magazine. To build market share and stay ahead of the com-
petition from general merchandisers, supercenters on one end and
specialty/gourmet stores on the other, the traditional food retailers
have started to expand their specialty services and departments to
attract the discriminate segment of food shoppers and to retain their
existing patrons. A fair number among them went as far as develo-
ping and establishing their own niche stores. Two thirds of these new,
generally smaller neighbourhood markets are focused on gourmet
and specialty foods (66%), natural/organic (50%) and ethnic (25%).
On the consumer side, economics, demographic shifts, and shop-
pers who are generally better educated, more discriminating and
more worldly, are further changing the landscape of the American
food business industry. Today, consumers have more choices for their
shopping trip destinations than ever. The mainstream consumer of
today is looking for value, i.e. good quality at lower prices. A great
number among them wait for sales before making a purchase. This
8 The U.S. Food Industry
trend is having a strong impact on retailers’ profits, as the consumers’
focus on price has dampened loyalty. Furthermore, easy access to
the Internet affords the consumer the ability to make price compari-
sons prior to their trip to the stores. Depending on the occasion the
consumer may purchase high quality items at a specialty/gourmet
store and make an additional stop at a supercenter to buy main-
stream goods and look for bargains. Trips to traditional food stores
have declined on average, down over 4% within the past year alone.
2.2. Trends in the Food Industry.
Health and Wellness
Nationwide concerns over rising health issues, obesity and diabetes
in particular, are paving the road to healthier eating habits. Food ma-
nufacturers and the U.S. government in partnership are promoting
health and wellness. One of the new communication tools about the
importance of nutrition and health features dietary guidelines and is
accessible to anybody at www.mypyramid.gov. The sixth report of
the U.S. Dietary Guidelines Advisory Committee on Dietary Guidelines
emphasizes fiber-rich diets, high intake of fruits and vegetables, and
monitoring of sugar intake (glycemic index) to fight the growing pro-
blem of obesity and its paramount effects on the health care system.
The effects of this proactive approach has marked the beginning of
a long term trend on the consumers’ food shopping behaviour and
promises significant growth in the categories of natural foods and
organics and various specialty and gourmet foods. The baby boomer
generation which accounts for nearly 30% of the U.S. population and
is very concerned about nutrition and weight issues, will help influ-
ence this trend greatly on a long term scale. They are being joined
by Generation Y (ages 18 to 27)and X (ages 28 to 41) who believe
in a healthy diet as a preventive measure against a wide variety of
diseases.
Taste and Convenience
Time pressured consumers are looking for prepared meals and stores
that make their shopping trips easier. Scarcity of time has the consu-
mer also looking for food-on-the-go such as repackaged portions of
salads, fruits, yogurt drinks, snack bars, and tasteful innovations offe-
ring bold flavors for moments of indulgence. “Premium” and “Limited
Edition” have become buzz words for high quality. Retailers will have
to understand the consumer’s “food psyche” and reflect that in their
product palette.
Ethnicity
One of the fastest growing ethnic groups are the Hispanics. Hispanics
will represent more than 50% of the U.S. population in the near future.
The second fastest growing ethnic group is of Asian background.
Shifts such as these make it essential for manufacturers and retailers Spring Fancy Food Show 2006
to understand and consequently focus on their target markets. Two of the latest trends that demanded the visitor’s attention were:
• Foods and food ingredients and personal care products that
Shifts in Demographics promote antiaging. Antiaging has become a buzz word, not only
The 15 to 24 year olds and the 55+ are the two largest age groups among baby boomers, but also among Generations X and Y with
in the U.S. population, with the baby boomer numbers growing fas- the connotation “prevention of disease and preservation of health”.
test. Retailers need to consider the different needs of both groups • Natural/organic and gourmet food and supplements for compa-
and target them accordingly. Moreover, Generation Marketing and nion animals. Companion animals and their well-being continue to
Behaviour-Based Segmentation1 have gained in importance throug- gain in importance. Pet nutrition represented the fastest growing
hout the industry. market segment in specialty foods in 2005.
Introduction of New Products
Introduction of new products reached nearly half a million over the 2.3. Eating Away From Home.
past four years. New products bear a significant risk of not being The U.S. foodservice industry consists of a wide range of away-from-
accepted by the consumer or experiencing a short lived existence. home eating places. It comprises all commercial eating and drinking
Taste is the main driver behind consistent demand and purchasing places, from restaurants and cafeterias to bars, with the main industry
habits by the consumer. segments being divided into full-service restaurants, limited-service
places (fast food), and food contractors and institutional food servi-
From a global perspective, Europe is the leader in new product in- ces. According to the National Restaurant Association sales of the
troductions, followed by North America (see Figure 3). A focus on foodservice industry were estimated at $486.1 billion in 2005. The
individual needs among consumers encourages innovation and a year 2006 should see further growth of approximately 5%.
wide variety in new product offerings. In 2005, 156,000 new products Rising income levels and a harried lifestyle have greatly influenced the
found their way into the market around the globe. The highest num- popularity of dining out among Americans. According to the Bureau of
ber of introductions occurred in the beverage segment with nearly Labor Statistics, more than half of all U.S. families were full-time dual-
one fifth of all launches, followed by bakery goods (12%) and con- earner households in 2005. Demographic trends such as a growing
fectionery (11%). In the U.S. alone there were 16,000 new product baby boomer generation represent an older and wealthier population
introductions. which should further sustain a steady growth pattern for some time to
come. (For more details please refer to Chapter 5.)
The restaurant industry is a highly competitive environment that has
Region 2004 2003 2002 2001 Total
been experiencing more consolidations. Historically, this industry has
Europe 52,456 44,220 40,742 40,086 177,504
been dominated by small businesses. In the past few years larger
North America 46,467 33,429 33,234 26,923 140,053
chains have started to take over the lead by introducing standardized
Asia Pacific 35,082 27,328 22,994 14,588 99,992 menus, extensive testing of consumer satisfaction and the ability to
Latin America 11,419 6,895 4,564 3,714 26,592 operate at a more cost-efficient level. Restaurant sales growth is pre-
Middle East & Africa 4,921 5,877 4,110 3,122 18,030 dominantly expected in the Pacific (California to Alaska and Hawaii)
Total 150,345 117,749 105,644 88,433 462,171 and South Atlantic (Delaware to Florida) Regions, the two economic
leaders of the nation in recent years. The mountain areas are expec-
Figure 3: Global New Product Introductions by Region ted to set the pace with 6.1% growth.
(Source: Mintel)
Food Ingredients 2.4. Non-Alcoholic Beverages.
Revolutionary change in the food industry sends Chefs traveling all The U.S. non-alcoholic beverage retail industry is dominated by four
over the world to discover local and exotic ingredients to use in new- companies: in 2005 Coca Cola Co. remained the market leader
ly created, exciting dishes. This development has also spurred the with a 43.1% market share, followed by Pepsi Cola Co. with 31.4%,
creation of Fine Casual and Family Casual Dining, a new restaurant Cadbury Schweppes PLC with 14.6% and Cott Corporation (private
segment (see Chapter 5). label) with 5.4%. Retail sales for carbonated soda drinks accounted
for $68.1 billion in 2005. According to Beverage Digest consumption
1 ACNielsen of carbonated soft drinks showed a decline for the first time in 20 ye-
The U.S. Food Industry 9
ars. Coca Cola Classic was down 2% and Pepsi 3.2%. Reasons for nonalcoholic beverages that are also low calorie/low carbohydrate, or have been concentrating on more efficiency through lowering of their Food and beverage companies continue in their efforts to optimize
this decline vary from media reports claiming a connection between feature innovative mixtures of fruits and possibly organic ingredients operating costs, introducing new technologies to track inventory, re- their management and production lines. Standard & Poor’s indica-
soft drinks and obesity to recent research data that showed high le- according to Beverage Spectrum. ducing supply chain expenditures, eliminating less profitable brands tes that the intense competition in the food industry has led the top
vels of the carcinogen benzene in soft drinks to parents fighting for Sales figures for 52 weeks ending February 19, 2006 showed double- and divesting of unprofitable operations. The trend in cost-cutting food companies to increase their domestic advertising expenditures.
better nutrition for their children, especially on school premises. digit growth and unchanged positions for the leading brands. Number and reorganization is predicted to continue to impact this mature in- Improved product mix, innovation and increased marketing cam-
Energy Drinks took the lead in the non-alcoholic beverage market one bottled water, PepsiCo’s Aquafina, remained in the leading positi- dustry. Estimates by Standard & Poor’s predict moderate growth for paigns and promotions are strategies these companies employ as
with a leap in growth of close to 70% and sports drinks experienced on. Private Label surged with a 30% growth rate. Crystal Geyser and some of the big players. More direct selling of their products to re- they strive for profitability.
a 20% increase; teas and coffee followed closely with 19.5%. Sales of Evian were two brands which experienced declining sales. staurants, institutions and schools and product innovations coupled
natural sodas grew around 15% between spring of 2004 and spring with aggressive marketing may impact profits positively.
of 2005. Carbonated beverages sweetened with fruit juice increased Regulations
13.1% and sugar and fructose sweetened natural sodas 1.6%. The Bottled water falls under a separate, very specific regulatory envi- Mars Inc. and Cargill Inc. are the biggest privately held companies.
latter are predicted to decline as consumers have become aware of ronment. Beverage manufacturers must follow multiple regulations Together they generated aggregate sales of $210 billion in 2004 (la-
their high sugar content. that include Standards of Identity, Standards of Quality, the Nutrition test figures available). Figure 5 shows the top publicly traded U.S.
Labeling Education Act and the FDA’s Good Manufacturing Practices food and beverage manufacturers in 2005 (ranked by sales).
Brand Sales % Change to % Market (GMPs).
($ Millions) previous Year Share
Among the major foreign food and beverage competitors were and
Aguafina (Pepsi) 370.6 2.2 15.3
remain Nestle SA of Switzerland, Unilever PLC, UK, Groupe Danone,
Private Label 307.7 24.7 12.7
2.5. Manufacturers of France and Cadbury Schweppes PLC, UK.
Dasani (Coca-Cola) 284.4 6.1 11.7
Poland Spring 169.4 25.8 7.0
Food & Beverages. A survey conducted by Food Processing Magazine and Grant-
(Nestle)
Over decades the top national food companies have built a solid re- Thornton LLP revealed that approximately two thirds of the food ma-
Propel 141.6 44.9 5.8
putation and established themselves with a strong brand-name re- nufacturers participating believed that health promoting foods will be
(Gatorade Company)
cognition. To insure profitability their operations focus on multi-million their major growth market in 2006.
Dannon (Danone*) 133.0 28.5 5.5
dollar products they can sell on a national basis. They tend to stay
Arrowhead (Nestle) 126.8 15.1 5.2
away from regional products and preferences on their home turf,
Deer Park (Nestle) 94.1 49.2 3.9
which is contrary to their strategy in their international markets. 2.6. Mergers & Acquisitions.
Crystal Geyer 85.2 9.3 3.5
(Crystal Geyer Co) Company 2005 2004 % Change 450
Packaging &
Evian (Danone*) 76.6 4.0 3.2 Kraft Foods Inc. 34,113 32,168 6 400 Equipment
Supplies
PepsiCo Inc. 32,562 29,261 11.3 350 Soft Drink,
Figure 4 : Bottled Water Sales for 52 weeks ending March 20, 2005 Tyson Foods Inc. 26,014 26,441 (1.6) 300 Water, Juice
Manufacturers
( Source: Information Resources, Inc). * Allianz on the U.S. Market The Coca-Cola Co. 23,104 21,962 5.2 250 Raw Products
Coca-Cola Enterprises 19,254 19,119 0.07 & Ingredient
200
Evian was the first single-serve bottled water introduced to the U.S. Supplies
ConAgra Foods 18,706 18,158 3.0 150 Wholesalers
market 25 years ago. It became the trailblazer of today’s array of
General Mills 14,566 14,081 3.4 & Distributors
carbonated and non-carbonated bottled water, sports drinks, energy 100
Restaurant
Pepsi Bottling Group Inc. 11,244 11,070 1.6 50
drinks, fruit drinks and ready-to-go teas. Fortification with vitamins, & Foodservice
calciums and antioxidants has become the “in thing” and the con- Sara Lee Corporation 11,885 10,906 9.0 0 Food
Kellogg Co. 10,177 9,613 5.9 2000 2001 2002 2003 2004 2005 Manufacturers
sumer responds positively. Research figures promise continuation of
strong growth.
Bottled water experienced a per capita consumption that rose from Figure 5: Top U.S. Food and Beverage Companies in 2005, Figure 6 : Mergers and Acquisitions in the Food Industry 2005
17.2 gallons in 2000 to 23.8 gallons in 2004. Single-serve bottled ranked by Sales in $millions. (Source: The Food Marketing Institute)
water showed continued growth at an 18% growth rate for the 52 (Source: Standard & Poor’s, Company Reports)
weeks ending February 19, 2006. The main reasons for this surge in According to the Food Marketing Institute 323 mergers, and acqui-
demand can be attributed to consumers’ concern about the safety of The packaged food and beverage industry has seen key commodity sitions came to a close in 2005 with an additional 75 announced but
municipal water supplies as well as bottled water having finally carved prices rising and then leveling off for a while. To enhance their pro- not completed. This illustrates a continued decline in M & A activi-
its niche as a “refreshment beverage” in the American market. The fit margins, some of the big food companies (H.J. Heinz Co., Kraft ty over the past five years. A high number of deals were registered
health and wellness trend promises continued growth in water and all Foods, Sara Lee Corporation, General Mills and ConAgra Foods Inc.) among multi-product food manufacturers and beverage companies.

10 The U.S. Food Industry The U.S. Food Industry 11

3. Supermarkets and the Grocery Industry. Store Format

Traditional Store Formats

Store Size
(sqft)
Ann. Sales
($ million)
Number
of SKUs
SKUs (Stock-Keeping Units) Figure 8: Traditional and Non-
Traditional Store Formats.
Note: Store Size, Annual Sales
By Claudine M. Haeni, Swiss Business Hub USA Conventional Supermarket 25,800 7.8 22,000 Full line of dry groceries, canned food, meats,
produce and non-food items. Annual sales and Number of SKUs present

3.1. Facts and Figures. Superstore 40,000 20.0 25,000

reach a minimum of $2 million.
Full line of dry groceries, canned food, meats,
Averages of the respective

Over the past decade the U.S. grocery industry has experienced a 3.3. The Shopper. produce. May include in-store banking, video
rental, florist shop.
Store Formats.
(Sources: Willard Bishop
succession of consolidations leading to intensified competition among The mainstream consumer focuses on economics and is concerned
Food/Drug Combo 55,700 22.0 52,000 Combination food store and full-line drug store Consulting and ERS/USDA).
supermarkets themselves and from other retailers, foremost from about the price of a product. In general, his purchases represent a under one roof, common check-out. One third
of space is reserved for non-food items.
SKU = Stock-Keeping Units, i.e.
mass-merchandisers and warehouse clubs. According to Progressive combination of store brand and national brand products and a desire
Limited Assortment Supermarket N/A N/A <2,000 Smaller than conventional format with very items kept in stock.
Grocer Magazine, there were 34,052 supermarkets nationwide in for new innovative items. Female grocery shoppers in particular show
limited services.
2005, approximately 200 store locations less compared to 2004. Of a preference for lower-priced store brand products, as they are gene- Other (Small Grocery) Stores <5,000 <2.0 N/A Small corner grocery store with limited selection
those stores two thirds belonged to a chain; the remainder rally responsible for the household budget, whereas older and higher- of staples and other convenience foods.

consisted of independent operators. Aggregate supermarket sales paid shoppers in metropolitan areas gravitate more towards national Specialty/Gourmet Retailers N/A N/A N/A Stores specializing in a specific food category,
e.g. ethnic/international, health focused or
were estimated at $478.9 billion for 2005, representing a growth rate brands. The trend towards store brands continues to expand. Trader organic, locally grown or produced.
of around 8.6% despite the slight decline in store locations nationwi- Joe’s, Wegmans and Whole Foods are among the most successful Non-Traditional Formats
de. Chain supermarkets generated over 90% of total sales, indepen- grocery stores selling their higher quality store brands and focusing on Supercenters 170,000 51.0 N/A High volume hybrid format of a supermarket/drug-
store combination and discount store. Includes
dent supermarkets accounted for the remainder. The chains’ gain can their clients’ needs and desires and fostering store loyalty. (For more grocery products,(typically 40%; nonfood
primarily be traced to food sales at supercenters. Nationwide there details on private label see Chapter 8.) items, electronics, sporting goods. Banking, dry
cleaning, restaurants, etc.
were 2,175 supercenter stores averaging sales close to $40 million
Wholesale Club 135,000 50.0 N/A A membership retail/wholesale hybrid with
per supercenter store. Wal-Mart’s supercenters alone accounted for How $100 Is Spent a limited variety of products in a warehouse
environment. 60% to 70%general merchandise,
close to $100 billion in sales in 2005. Perishables $ 50.31 health/beauty care products. Grocery makes
This mature industry consists of an array of businesses ranging from Beverages $ 8.05 balance. Merchandise and grocery sold in bulk.
traditional supermarkets to superstores and small grocery stores to Dollar Stores N/A N/A N/A Often found in urban areas or strip malls;
Staples, Condiments, Other $ 11.39 traditionally sell staples and knickknacks. Now
non-traditional supercenters, warehouse clubs and convenience they sell 20% to 80% grocery and consumable
Non-Food Grocery $ 8.07 items at aggressively low prices.
stores with or without selling gasoline. The top 10 players have held
their positions in 2005 with the exception of H.E. Butt Grocery Co. Snack Foods $ 4.28 Convenience Stores 3,000 N/A N/A Compact, drive-to store offering a limited line
of high convenience items, dry groceries, small
which moved up to eighth position and pushed Winn-Dixie to tenth Main Meal Items $ 7.09 selection of perishables (dairy and prepared
position. foods) and nonfood items. >50% sell gasoline
Health & Beauty Care $ 3.66 and fast food. Long opening hours, easy
access.
3.2. Store Types. General Merchandise $ 4.09
Drug Stores N/A N/A N/A Prescription-based drug store with at least
Pharmacy $ 3.06 20% of total sales from consumables, general
A supermarket is a retail business with a minimum of 5,000 square merchandise and seasonal items.
feet selling space and annual sales of $2 million plus. At least half
of this space is dedicated to grocery items. Supermarkets are divi- Figure 9: How the American Average Shopper spends $100 at a
ded into two main categories, traditional and non-traditional grocery Grocer (Source: Progressive Grocer – 73rd Annual Report of the
stores. Traditional store formats sell at least 65% grocery and consu- Grocery Industry, April 2006) Company Sales $ Number Number Top Banner Names Figure 7: The top 10
Million Stores Stores Supermarket Chains in 2005
mable items, non-traditional stores carry less than 65% food items.
2005 2005 2004
Convenience stores operate on a higher margin with a limited selec- (Source: The Super 50,
Who Shops Wal-Mart Stores 98,745 2,089 1800 Wal-Mart Supercenter,
tion of staple groceries, ready-to-eat and heat foods, and non-foods. Progressive Grocer, Feb 2006)
Wal-Mart Neighbourhood Market
Female Head of Household 69%
More than 50% of them operate a gas station. Independent operators Kroger Co. 58,745 2,501 2,534 Kroger, Ralphs Grocery, Smith’s Food & Drug
generally own less than 11 retail stores; chain operators account for Male Head of Household 19% Albertson’s, Inc. 36,288 1,765 1,797 Albertson’s, Jewel-Osco, Shaw’s
11 or more retail stores. Both 11% Safeway, Inc. 32,733 1,540 1,572 Safeway, Vons Market, Dominick’s Finer Food
Other 1% Ahold USA, Inc. 23,848 824 826 Stop & Shop, Giant Food Store, Tops
Publix Supermarkets, Inc. 18,532 876, 853 Publix Super Market
Figure 10: Who is the Shopper? (Source: Progressive Grocer) Delhaize America, Inc. 16,480 1,544 1,528 Food Lion, Hannaford Food & Drugs,
Kash n’ Karry,
H. E. Butt Grocery Co. 10,422 272 276 H.E. Butt Food Store, H.E.Butt Central Market
The survey conducted by Progressive Grocer revealed that the prefer-
Super Valu, Inc. 8,633 619 617 Save A Lot, Cub Foods,
red days to shop were unanimously the weekends starting Friday. The Shoppers Food Warehouse
majority of the shoppers prefer to do their shopping during the day; Winn-Dixie Stores, Inc. 7,092 563 943 Winn-Dixie, Save Rite

12 The U.S. Food Industry The U.S. Food Industry 13

approximately 19% prefer evening hours between 5pm and 9pm and
a 4% take advantage of night hours, between 9pm and 6am.
3.4. Facing the Competition.
100.0%
89.6% Traditional Non-Traditional
79.0% Convenience Linear
80.0% 73.4% (Traditional)
56.3%
60.0%
49.0%
40.0%
31.3%
20.0% 15.7%
12.4%
8.8% 10.2% 10.9%
2.5%
7.9%
0.0%
1988 1993 1998 2003
Figure 11: Traditional and Non-Traditional Store Formats’ Share of
Grocery and Consumables with Projections until 2008
(Source: Willard Bishop Consulting)
As the selection of food sellers expands, consumers are taking ad-
vantage of it. Marketing studies reveal that the average consumer
frequents three to four different stores carrying groceries to fulfill the
different needs. With more shopping options to choose from, the tra-
ditional grocery stores have seen their customers’ loyalty slowly erode.
Today, neighbourhood supermarkets, online grocers, specialty stores
and gourmet markets, as well as warehouse clubs and supercenters
are competing for market share and trying to win the consumer’s dol-
lars. As traditional stores continue to lose ground and see their market
share drop, non-traditional channels led by supercenters, will continue
to expand.
Willard Bishop Consulting predicts that traditional grocery store for-
mats will decline below 50% by 2008. The consulting firm forecasts
a market share of close to 40% for non-traditional stores within the
same time frame. Their increased market penetration through aggres-
sive store openings combined with price advantage will continue to
contribute to consumers making more trips to non-traditional stores.
The strongest sales growth will be claimed by supercenters. Total sa-
les of supermarket items at supercenters captured a market share of
14% of the grocery industry in 2005. Projections suggest a market
share of more than 17% by 2009. Despite the fact that profit margins
on grocery items are not high, supercenters compensate by attracting
large numbers of consumers who also buy general merchandise at
higher margins.
Wal-Mart Stores Inc., the world’s largest company, is the undeniable
market leader in this segment. According to estimates by Standard
and Poor’s Wal-Mart generated sales from its supercenters and
neighbourhood stores close to $100 billion in 2005.
14 The U.S. Food Industry
Wal-Mart’s dominant position threatens the traditional chain food and
drug retail industry. As of end of May 2004 Wal-Mart owned and ope-
rated 1808 supercenters and 89 neighbourhood markets in the U.S.
Additionally, they owned 554 Sam’s Clubs. Expansion plans included
240 to 250 new supercenters (160 relocations/expansions), 25 to 30
neighbourhood markets and 30 to 40 Sam’s Clubs, all to be comple-
ted by 2006.
Wal-Mart is also the industry’s price leader. Its focus on lowest possi-
ble cost includes leverage with food manufacturers through its sheer
size, investments in the newest and most efficient technologies and
39.0% keeping employee costs in check (Wal-Mart employees are non-uni-
onized). With its recent opening of a supercenter in McKinney, Texas,
Wal-Mart has embarked on yet another trail. The McKinney supercen-
12.0%
ter is experimenting with materials, processes and technologies
that should reduce the amount of natural resources required to opera-
2008
te and maintain a store, the amount of materials in the construction of
a facility and wherever possible substitute renewable materials in the
construction and maintenance of a store location. Wal-Mart
has been closely working with Oak Ridge National Laboratory for tes-
ting and analysis of systems and materials. The idea is to open the
door to low volume and rare technologies and pave the way to turn
them into industry standards. At present, Wal-Mart preserves one
acre of wildlife habitat for every acre developed and wants to expand
its best management practices in environmental conservation.
Wal-Mart’s latest major announcement revealed its plans to capture
the interest of the more sophisticated consumer by substantially ad-
ding organic foods to its product assortments and going upscale with
new store openings, starting in Texas. The new supercenters will fea-
ture specialty foods and upscale services and include a sushi bar and
a wine department offering bottles at a price of up to $500 as well.
Success through Differentiation
Because of the fierce competitive environment, traditional retail food
stores are continuously looking for new avenues to attract and retain
customers. Differentiation from lower cost retailers on one end (Wal-
Mart, Costco, etc) and specialty stores on the other (Whole Foods,
Wild Oats and Trader Joe’s; see also Chapter 3and 4) is one of the
most important components for supermarkets to concentrate on in
order to move out of the unfavorable “middle position” in the industry.
Historically, retailing used to thrive by focusing on the environment of
a store’s particular location. Product palettes and promotions would
specifically appeal to local demographics. Progressive Grocer
points to the fact that there is a clear trend among the supermarkets
to return to local roots.
Various avenues are embarked on. Supermarkets concentrate and
cater more to the consumer’s changes in taste, develop and improve
prepared foods, promote health and wellness by offering a wide array
of fresh produce and stock up on natural and organic foods. Products
that are used together by the consumer are being rearranged and
featured in the same aisles, for example breakfast foods such as ce-
reals, syrups and pancake mixes are grouped together. More than two
thirds of supermarkets hold cooking demonstrations in their stores for
their patrons to be able to taste various foods and expand their coo-
king talents. Natural and organic foods may be placed in the center of
the store instead of locating them around the periphery of the store. It
should be noted though that such rearranging of products may affect
the manufacturers and the cost for slotting fees. More self-scanning
stations address the customer’s time issues.
Traditional supermarkets have also begun to look at new concepts
and experiment. “Finding One’s Niche” has become most important
in their search for their identity. New store formats and concepts are
their latest approach to migrate away from the “middle position” to
strengthen their position and keep a competitive edge.
• Safeway of Pleasanton, California changed its identity and rebran-
ded itself in 2004 by launching its new Lifestyle concept. Safeway
embarked on a year long marketing campaign that highlighted its
new Lifestyle stores which feature a large selection of natural and
organic foods, an impressive selection of perishables, a full-service
meat counter, bakery, floral design center and a sushi and olive bar.
142 Lifestyle stores opened their doors in 2004 and plans for ano-
ther 300 were ready to open closely thereafter. Lifestyle stores allow
for flexibility to give the individual store locations room to tailor their
assortments to their particular location. Safeway also launched its
own private label brand to create a proprietary experience nowhere
else found. Safeway’s Lifestyle stores are able to compete with
upscale and supercenters as well.
• Supervalu built new stores that offer low-price natural/organic
product and represent direct competition to the high priced natu-
ral/organic stores of Whole Foods and Wild Oats Markets. These
new stores operate under the name Sunflower Market. The first
Sunflower Market opened its doors in January 2006.
• Delhaize America’s newly launched stores Sweetbay highlight
specialty foods offered at competitive prices and feature their sig-
nature produce department “Harvest Market”.
• Publix developed a store format for the health-conscious consu-
mer under the name Green Wise Market. The first store is sche-
duled to open its doors in 2006 and will be in direct competition
with super natural Whole Foods stores.
• Save-a-Lot grocery stores focus on a limited number of stock-
keeping units and have expanded their private label assortment.
Private label brands are known to increase customer’s loyalty.
• Kroger has been improving their product palette and is focusing
on superior customer service. Remodeling and expansion of exis-
ting stores is another strategy Kroger believes will help it to remain
competitive.
All these measures taken should help food retailers to preserve their
competitive edge. Successes and failures will manifest themselves
over time. At this point, it is too early to make predictions.
3.5. Growth Opportunities.
• Natural and organic foods have been the fastest growing seg-
ment in food retail totaling $14.5 billion in 2005 and estimated at
$16 billion by the end of 2006. Nearly 40% of the consumers regu-
larly buy natural and organic foods and the majority among them
make their purchases at their primary supermarkets versus a spe-
cialty food store (see also Chapters 4, 6 and 7 for more details).
• The U.S. Government’s latest Dietary Guidelines have been shif-
ting the consumers’ focus to a healthier lifestyle and are creating
sales opportunities. Authoritative government and self discovery
primarily through internet information sources (e.g. www.mypyra-
mid.gov) have been visibly dictating consumer behaviour recently
and are important indicators for the serious trend spotters.
• A. Elizabeth Sloan, a contributing editor to the Institute of Food
Technology’s publication states that by 2004 65% of grocery shop-
pers had redirected their diets to manage health conditions natu-
rally, ranging from high blood pressure and high cholesterol, weight
issues to preventive measures against heart disease and cancer.
The number of consumers following this trend keeps growing.
FDA’s official approval of heart-health claims for whole grains, ome-
ga-3 fatty acids, monounsaturated oils among others have noti-
ceably resulted in higher demand and consumption of fresh fruits,
vegetables, salads, grains, nuts and yogurt.
• New lines of ready-to-eat natural and organic baby food have en-
tered the market and are changing the U.S. baby food landscape.
• Private label products are gaining in recognition. Private label pro-
ducts also offer economic advantages to both the consumer as well
as the merchant. Generally, product prices are 20% to 40% lower
than national brands and a retailer’s margin is around 35% to 40%
versus a 27% average margin on national brands (see Chapter 8 for
additional details). Store-branding fosters customer loyalty.
• Ethnic food is another fast growing segment with immigrant fami-
lies introducing their surroundings to a whole new taste palette. The
Hispanic population is the fastest growing ethnic group in the U.S.
with an estimated aggregate disposable income of $800 billion. The
The U.S. Food Industry 15
 average Hispanic shopper is health conscious and spends approxi-
mately $117 per week on groceries compared to $87 per average
U.S. shopper. Supermarket chains have responded and introduced
entire aisles of regional foods, reaping success with this approach.
• Convenience becomes center stage. Easy-to-prepare meals, re-
sealable packaging, freshness dating, easy-to-clean-up, easy-to-
open and pre-cleaned, pre-cut and precooked food items are in
high demand and sales have been skyrocketing.
• Supermarkets which add a pharmacy and operate as a one-stop-
shop emphasizing convenience, generally see their health and
beauty care products soar 15% to 20% in their first year of opera-
tion. Larger format drugstores show a trend of adding convenience
• foods, drinks and greeting cards, merchandise traditionally not part
of a drugstore’s product selection. This, in turn, not only improves
store traffic, but also helps improve their margin.
4. The Specialty and Gourmet Food Stores.
By Claudine M. Haeni, Swiss Business Hub USA
4.1. Facts and Figures. defined as being made with high-quality ingredients, having great tas-
te and possessing unique qualities. These products are also offered
The specialty foods and gourmet market in the U.S. has experienced in a variety not available otherwise in the market and feature superior
a steady compound annual growth of 7% over the past several years. packaging.
Between 2003 and 2005 alone specialty food sales rose by 17.7%
versus a 5.3% rise for all foods combined. In 2005 sales reached Four segments define specialty and gourmet foods: Ethnic, Regional,
$34.8 billion and claimed a total market share of 8%. This trend is Imports (80% from Europe) and Artisan. Together these segments
expected to continue as the changing demographics, the prevailing comprise 30 product categories. Handmade items (artisan), produ-
tendency to view mass-market products as bland and the “mainstre- ced in small quantities, rich in texture and featuring innovative ingre-
aming” of gourmet foods dictate the American consumer’s demand dients and unusual flavors and shapes underline the exclusiveness
for highquality upscale products and unique tastes (Specialty Food expected in this sector.
Magazine).
Specialty food and gourmet stores range from small mom-and From 2003 to 2005, a two year span, specialty food sales have re-
pop operations to mass markets. Currently there are an estimated gistered record sales. As shown in above figure, there are 26 special-
14,000+ specialty foods and gourmet stores in the U.S. Competition ty food categories that accounted for substantially higher sales than
for specialty food market share among the various retail channels their mainstream equivalents. The five largest specialty food catego-
continues at an accelerated pace. For food retailers specialty foods ries comprise Condiments, Juices & Functional Beverages, Cheese,
are an important segment, as they are generally sold at regular retail Coffee & Cocoa, and Chips, Pretzels & Snacks. Condiments account
prices and typically generate a higher margin. Close to one quarter of for over one-fifth of all specialty food sales.
all sales can be attributed to this segment.
Segment 2003 2005 % Change
Sales of specialty and gourmet foods showed growth at all three sa-
les channels with specialty and natural food stores gaining ground. Condiments 4,622 4,651 0.6
Main retail channels such as traditional supermarkets, supercenters Juices & Functional Beverages 889 1,343 51.1
and warehouse clubs held their stake in this food segment with an- Cheese 907 1,160 37.0
nual sales of specialty food exceeding 70%. Specialty food stores Coffee & Cocoa 776 1,063 37.0
claimed around 20% of sales. Chips, Pretzels & Snacks 820 991 20.9

4.2. Specialty and Gourmet Foods.
In the 1980’s Americans began to introduce high-quality goods in
every supermarket category, stretching the definition of gourmet
standing for refined, sophisticated, exclusive, unique. According to
Gourmet Retailer Magazine, specialty food and gourmet products are
Figure 14: The Five Largest Specialty Food Categories
(Source: Mintel/SPINSACNielsen)
There were five specialty food categories substantiating each more
than 50% sales growth between 2003 and 2005.

2003-2005 2005 2004 2003

% Change $ Million % Share $ Million % Share $ Million % Share
Main Retail Channels 13 15.92 72 14.78 73 14.05 75
Specialty Food Stores 29 4.24 19 3.72 18 3.27 17
Natural Food Stores 33 2.02 9 1.74 9 1.51 8
Total 18 22.18 100 20.23 100 18.84 100

Figure 12: Sales of Specialty Food by Retail Channel.

Note: Cheese, Prepared Foods, Meat/Seafood, Bread account for approximately 38% of
Specialty Food Sales and are not included in above Figures. (Source: Specialty Food Magazine)

16 The U.S. Food Industry The U.S. Food Industry 17

 Segment % Growth
Product Category Percent
Specialty
Percent
Mainstream
2003-2005 • Flavor Magic Gourmet Seasoning Sheets, a new way to season 4.4. Specialty Food Suppliers.
Foods Foods Bread & Baked Goods 147.8 meat and fish, all natural, no preservatives, available in eight flavors; This diverse group of specialty food distributors encompasses small
(frozen & non-frozen) • Artisan Artichoke & Mixed Olive Mini Quiches and Lobster Newburg domestic entrepreneurial manufacturers with just a few products as
Baking Mixes, Supplies & Flours 8 3
Water 61.0 Puffs, ready to bake hors’d’oeuvres made from finest ingredients; well as billion dollar distributors with tens of thousands of specialty
Beans, Grains & Rice 26 18
Carbonated, Functional & 65.7
Beverages (Carbonated, Functional, 66 6 • Apothecary Jars filled with Chocolate Fruits (chocolate covered food products. Distributors and brokers generally represent several
Ready-to-Drink Tea & Coffees
Ready-to-Drink Tea/Coffees) sun-dried plums, peaches, apricots and nectarines); Chocolatour manufacturers. Importers of specialty foods range from individuals
Yogurt & Kefir 53.3
Beverages (Juices & Functional) 51 1 single origin chocolate bars offering a world tour of chocolate con- focusing on a limited number of traditional products to large com-
Juices & Functional Beverages 51.1
Beverages (Water) 61 16 taining cocoa from Java, Grenada, Tanzania, etc. Vintages are panies handling major brands of various countries around the globe.
Bread and Baked Goods (Frozen/ 148 3
clearly indicated on the front of each wrapper along with tasting Approximately 50% among them generate annual sales of $500,000
Non-Frozen)
Candy & Individual Snacks 24 1
Figure 15: The Top Five Specialty Food Categories between 2003 notes on the back; to $4 million, 4.2% reach annuals sales in excess of $10 million. Four
Cereals (Cold & Hot) 12 1 and 2005 ranked by Sales (Percentages) • Classic dessert sauces and syrups upgraded with premium in- out of five importers specialize in specialty foods from Europe, reflec-
Chips, Pretzels & Snacks 21 8 (Source: Mintel/SPINSACNielsen) gredients to intensify flavors, e.g. syrup infused with lavender or a ting the long standing tradition in this industry. Imports from all other
Coffee & Cocoa 37 -1 combination of ginger and vodka. continents are on the rise, a direct result of the growing ethnicity in
Condiments 0.6 2 New Products the U.S.
Conserves, Jams & Nut Butters 12 1 The discriminate specialty food consumer is on a perpetual hunt for The majority of retail stores discover new specialty foods at trade
Distributors 51.6%
Cookies & Snack Bars 4 -10 new products of high quality that appeal to his senses and taste real. shows (foremost at the Fancy Food Shows, followed by other trade
Cooking Oils 22 13 Retailers 32.5%
He is drawn to ethnic foods and regional cuisines across the globe. shows), and in trade magazines. Retailers also take into account
Crackers, Crispbreads & Rice Cakes 10 5 Other (not specified) 15.9%
Fitness and healthy eating habits direct his focus toward on “Better- recommendations from customers. According to Specialty Food
Dairy: Cheese 28 16 for-You” foods and beverages that are low in fat and sugar and provi- Magazine approximately 60% of retailers follow their customers’
Dairy: Milk and other Dairy 48 10 de nutritional benefits (added vitamins and minerals). input. Figure 16: Annual Sales of Specialty Food Importers by Channel
Dairy: Yogurt & Kefir 53 31 Despite a failure rate of 50% to 90%, introduction of new products (Source:Mintel/Market Tools)
Desserts & Puddings (Frozen &
Shelf-Stable)
4 1
is at a high rate and generally enhances a store’s sales performance. 4.3. Buyers of Specialty Food.
Eggs 33 9
According to Mintel, more than 5,100 specialty food products were Household income, education and geographical location are the pri- According to Specialty Food Magazine, distributors are the preferred
Entrees, Mixes, Shelf-Stable Meat, 17 2 launched in 2005,. Although this is a slight decrease from 2004 mary aspects of the specialty food buyer. Specialty foods can make sales channel of importers. More than 50% of all imported specialty
Poultry, Seafood (5,319) and 2003 (5,314), it is nevertheless still considerably abo- up a large percentage of a household’s spending. Moreover, consu- food products go to market through a network of distributors; one
Frozen Entrees, Pizzas, Convenience 6 -1 ve the previous years’ number of new products. Beverages took the mers who purchase specialty foods tend to be more loyal and spend third is shipped directly to retailers.
Foods lead with 1,007 new product launches. Other product categories that more on average per grocery trip.
Fruits & Vegetables (Frozen &
Shelf-Stable)
23 5
registered a significant amount of novelties included confectionery, • The specialty food buyer in the U.S. is likely to earn $100,000 or 4.5. Trendspotting.
sauces and seasonings, bakery goods and pet foods. more annually than the average population and over 50% have a Across America the leading and most successful Chefs are focusing
Nuts, Seeds, Dried Fruits & Trail Mixes 31 22
Pastas (Shelf-Stable) 7 -0.3 college degree. on their customers, what they order, what they eat and what they dis-
Sauces, Salsas, Dips 4 5 Spring Fancy Food Show 2006 Exhibit Showcase • Baby Boomers are the leading purchasers in this market segment. like on a daily basis. Aside from their talents, their closeness to their
(Refrigerated & Shelf-Stable) As consumer tastes become increasingly sophisticated, manufactur- They are generally the wealthiest among the various consumer clientele is the key to their success and their being the indiscriminate
Seasonings 14 4 ers take classic recipes and turn them into new, adventurous and un- groups, are health conscious and willing to pay for high quality and trend spotters in the U.S. food scene.
Soups 10 4 conventional creations. They are handmade, often produced in small uniqueness. They, the empty nesters among them in particular, are Food trends that will establish themselves often start on the West
Sweeteners 9 15 batches (limited editions) and feature the most unusual and exquisite also into gourmet cooking themselves and into the ingredients that Coast and move eastwards according to food marketers’ observa-
Teas 8 9 combinations of texture and flavors. The packaging of these products go along with it. tions. Seattle, Portland and San Francisco are the leaders in disco-
is of highest quality and exceptional (eye-catchers). • People living in or near cities are more likely to purchase specialty vering what may be next on the restaurant scene. Well-known food
Figure 13: Percent Sales Growth for Specialty Foods and
The newest products introduced at this year’s Fancy Food Show foods. journalist, culinary expert and chef Nick Zukin, is one of the trend
Mainstream Foods by Product Category for 2003-2005.
included • People with children are as likely to purchase specialty foods as spotters who is at home in the world of gourmet dining, where a
Percentages do not include Sales through Wal-Mart, Trader Joe‘s.
• Artisan Croutons, handcrafted with the finest all-natural ingredients people without children. strong demand in fine food paired with the highest level of service
(Source: Mintel/SPINSACNielsen).
in three extraordinary flavors to be added to soups or salads; • The Hispanic and Asian populations tend to be above average buy- has been manifesting itself for some time. He talks about the newest
• Basil Hors d’Oeuvres Crackers and Summer Citrus Shortbreads, ers in this segment of the food industry. observations and developments in the Northwest corner of the U.S.,
in limited edition flavors, for the summer months, and Walnut Hors • The purchase of specialty foods is highest in the Pacific and which also happens to be the birth place of Starbucks and James
d’Oeuvres Crackers and Orange Cranberry Shortbreads, in limited Northeast regions of the U.S., followed by the Mountain and Middle Beard2.
edition flavors, for the winter holiday season; Atlantic regions. (Source: NASFT) Chef Zukin mentions that Portland is adopting Chef Alice Walker’s
• California Roasted Pecan Oil and Roasted Pistachio Artisan Oils
2 The James Beard Foundation is a national not-for-profit organization based in
(small batch productions); New York City. The organization is dedicated to fostering and furthering the practi-
ce and appreciation of the culinary arts in America. The James Beard Foundation
Awards are the nation’s preeminent honors for culinary professionals.

18 The U.S. Food Industry The U.S. Food Industry 19

simple dishes that often feature organic, locally grown ingredients of
highest quality, and also that Caribou Coffee Company, recently ra-
ted number one for its Columbian coffee, has created a culinary R &
D facility. Its current Chef Kurt Stiles, together with food scientists,
manufacturers and technologists, has the task to create aseptically
packaged (shelf-stable) products for its mass retail and upscale gour-
met stores. Chef Stiles predicts that shelf-stable products are the
future and consumers will learn to accept aseptically packaged pro-
ducts (source: Prepared Foods).
Chef Zukin also points to the trend of artisan foods. A growing num-
ber of individuals turn their passion for gourmet food into a business.
Across America, artisan shops open their doors and offer their cli-
entele products that range from the finest handmade bakery goods
and confectionery to savouring pates and gourmet cheeses with ex-
citing new tastes. For example, Harvest Moon is a domestic washed-
rind cow’s milk cheese which tastes like Pont L’Eveque, and Cocoa
Cardona is a semi-soft goat’s milk cheese rubbed with cocoa. Only
ingredients of impeccable quality are being used.
Alice Walker, executive chef and owner of famous Chez Panisse in
Berkeley, California, uses only the purest and freshest ingredients for
her menus at her top restaurant. She has been a strong supporter of
farmers’ markets and sustainable agriculture. In 1996 she established
Chez Panisse Foundation to help support cultural and educational
programs to foster a deeper connection to growing, cooking and sha-
ring food. (Walker was one of the founders of the Edible Schoolyard
program to establish healthy eating habits at schools). Walker is also
the author and co-author of several cookbooks including a children’s
story and cookbook, and was the recipient of the James Beard
Humanitarian Award in 1997.
Jean-Georges Vongerichten, the “Enfant Terrible” of modern
French cooking was born and raised near Strasbourg, France, and is
one of the leading chefs on an international scale. His culinary vision
and bold approaches to innovation have consistently set new stan-
dards and turned him into a superb trendspotter. The opening of his
restaurant Jean-Georges in the Trump International Hotel & Tower
in New York earned him an immediate four-star review and several
of the most prestigious awards. In one single year he received three
James Beard Awards.
Chef Thomas Keller originally from Southern California has been
known for his innovation and dedication to the culinary scene. His
restaurant acquisitions included one of the top restaurants in the
U.S., the French Laundry in Yountville in the heart of Napa Valley,
in 1994. Recently he opened Bouchon (Artisan) Bakery, also in
Yountville, California. Keller has also moved closer to the world of
wines. Modicum, a Napa Valley Cabernet wine, was developed with
20 The U.S. Food Industry
The French Laundry’s influence. His French Laundry Cookbook has
brought him national and international recognition and many awards.
Chef Norman Van Aken has been following America’s evolution in
its eating habits and cooking methods for decades. He is the crea-
tor of Nuevo Latino cuisine, a blending of European “haute cuisine”
with South American and Caribbean Islands elements. He was also
a recipient of the James Beard Award. Van Aken owns Norman’s
Restaurant in Coral Gables, Florida. His observations confirm a con-
tinuing and growing interest and demand in ethnic foods and innova-
tive cuisine with exotic flavors.
4.6. Products.
Alternative/Energy Drinks
This category of mostly carbonated drinks contains a combination
of caffeine, sugar and specific ingredients such as ginseng, guarana,
inositol, vitamins B6 and B12 to provide quick bursts of energy. It dif-
fers from sports drinks that are meant for recovery after a strenuous
workout. Energy Drinks have been readily adopted by the “on-the-
go” consumer and Generation Y. They are also very popular as a
mixer in alcoholic beverages at home parties as well as in night clubs.
The company that launched this type of beverage was Red Bull; it has
remained the market leader. Pepsi offers two brands in this category,
so does Cadbury Schweppes. This market is expected to reach $2
billion in the not too far distance (ACNielsen– Trends).
Cheese
Artisan and farmstead cheeses are and remain a favorite food of the
American consumer. In 2004 per capita consumption was 31.2 lbs,
an all-time high, and sales climbed to $11.9 billion. Cheese is an all-
time favorite food and growth is expected to continue. Unusual tasty
ready-touse grated cheeses and ethnic-style cheese blends find their
way into the kitchen to add pizzazz to a bland menu. Americans di-
ning out upscale have become accustomed to the cheese course
as a unique ending of a meal. This trend has been rapidly expanding
into home entertaining and casual dining. Cheeses are perceived as
a natural and healthful food item and the latest introduction has come
in the form of organic cheeses and cheeses that feature exciting new
flavors. Artisan cheeses are enjoying steady growth, further supported
by chefs creating menus with the finest foods available and a rise in
regional cuisines. Consumers have also discovered the use and con-
venience of natural cheese spreads and uniquely flavored cheeses in
sandwiches or served as a snack. Their choice ranges from Brie to
smoked Cheddar, aged Gruyere, to piquant aged Provolone and Tete
de Moines. New variations feature rinds rubbed with smoked paprika,
cumin, coriander, cocoa or cinnamon.
Yogurt
Yogurt is in great demand. It is sold in multipacks, individual cups,
liquid form and squeeze tubes for spoon-free eating. While most top
brands of various dairy products have been experiencing a healthy
growth rate, yogurt has experienced dynamic sales showing a 7.7%
growth rate within the past year and a continued upward trend is
expected. Promotions are based on better-for-you, probiotic bac-
teria, fiber, vitamins and minerals. Products are made appealing to
adults in general, to baby boomers and kids in particular. Cultured
dairy products are staples in the daily diet and in meal preparation of
the Hispanic population. Organic Stonyfield Farm has been moving
towards the top faster than any other brand. One of their new pro-
ducts is YoBaby, a spoonable yogurt line for small children, as well as
a drinkable variation for infants and toddlers (Mintel). Yoplait Original
is the market leader, while private label yogurts take second positi-
on. Yogurt and yogurt drinks have established themselves as healthy
snacks for the wellness conscious consumer and manufacturers are
making sure that all demographics are taken into account. Growth for
2006 is expected in the 5% to 7% range.
Chocolate and Non-Chocolate Confectionery
Premium & Gourmet chocolate represents approximately 10% of the
confectionery segment and typically contains as much as 80% cocoa
solids compared to low-cost chocolate generally consisting of 50%
to 70% sugar. The savvy consumer has discovered premium and
gourmet treats for special moments of indulgence, be it organic, non-
organic or natural. Dark chocolate has become the favorite after the
publication of studies pointing to its health benefits such as its antioxi-
dant and heart-healthy vasolidation effects. According to Packaged
Facts, chocolate confectionery sales accounted for $15.1 billion in
2004. Organic chocolate sales took the lead and are estimated at a
growth rate of 30% on an annual basis. Non-chocolate confections
reached $7.8 billion, up 1.6%. Non-traditional shapes, smaller, bite-
size, and taste are key market drivers together with attractive “on-
the-go” packaging. Products specifically for kids have been gaining
market share. It should be noted however that the non-chocolate
segment showed diminishing sales in 2004 compared to previous
years and further decline is expected due to consumers’ mounting
dietary concerns.
Super Premium and Premium Ice Cream, Frozen
Desserts and Frozen Novelties
The U.S. is the world leader in the production of ice cream and fro-
zen desserts. The USDA’s published figures show an annual produc-
tion of 1.6 billion gallons in 2004. Despite health consciousness, the
American consumer has continued to associate ice cream with indul-
gence and has shown little interest in light (50% less fat) ice cream.
Dreyer, one of the four top domestic ice cream manufacturers, has
been the only success story with their technological breakthrough
of “slow churned”, making light ice cream that rivals in taste any
full fat premium or super premium ice cream. According to Mintel
International, over 90% of U.S. households purchase at least 4 quarts
of ice cream per month on average.
Ice cream and frozen desserts constitute a $21+ billion market; this
includes retail (approximately one third of total sales) as well as food
service channels. Frozen novelties were purchased at a 20% higher
rate by households with children. Growth in this mature market de-
mands constant innovation. Private label has been gaining market
share with supermarkets and mass merchandisers discovering the
value of ice cream sales. Private label sales projections suggest a
growth rate of 7% through 2008.
Natural/Organic/Vegetarian
Organic and natural foods have expanded phenomenally and are joi-
ning the upscale world of gourmet with unique products and new tas-
tes. They are as well gaining market share in school vending machines
thanks to Stonyfield Farm partnering with distributor United Natural
Foods Inc. and school and university communities. Organic products
offered in the vending machines range from yogurt to smoothies, soy-
milk, chocolate and string cheese. Natural products include pita and
soy chips, nuts and an assortment of snacks. Functional foods come
in with fortified yogurt and yogurt drinks, cereals with heart-health
claims and products specifically formulated for women to name a few.
With more retailers having adopted vegetarian foods into their seg-
ments, sales have risen sharply. Growing variety, interesting tastes
and a welcome menu change for the healthconscious consumer en-
sure this trend to continue.
Condiments
As there are no clear guidelines what condiments encompass, Mintel
came up with their own definition (in order of market share): condi-
ments comprise sauces, mustards and horseradish, jams, jellies and
spreads, salad dressings and (olive) oils. The time-pressured two-
income households have been integrating the use of condiments in
their daily meals and in entertaining. The higher educated consumer
shows an eagerness to expand his culinary knowledge and exhibits a
passion for handmade unusual products. Convenience and creative
applications have been winning forces. Mintel’s research revealed an
18% increase in sales between 1998 and 2003 alone. The $3.2 billion
market holds promise for further robust growth through innovation,
bold flavors and attractive packaging. Global and regional influences
are guiding this segment and organic and artisanal products have
been rapidly gaining market share.
The U.S. Food Industry 21
Snacks
Snack foods are the daily companion of the U.S. consumer and their
purchase parameter ranges from gas stations to food stores, movie
theaters all the way to the most upscale specialty and gourmet stores.
Snacks can consist of a healthy energy bar, dried fruits, a handful of
nuts and raisins, but it can also include a range of other foods such
as a small serving of cheese, chips, pretzels, patés or a small frozen
item such as pizza. Sales of sweet and salty snacks grew at a 4% rate
in the past two years and reached sales of approximately $27 billion
according to Packaged Facts.
Among the consumers’ favorites are healthy (low in sodium and ab-
sence of saturated fats) high-protein and fiber-rich nuts including the
more expensive almonds. Conventional snacks are experiencing a
transformation away from containing unhealthful ingredients, espe-
cially transfats. Snack producing companies are accentuating posi-
tives in nutritional labeling and are experimenting with variety, adding
ethnic components and new flavors. Small-batch, conveniently pa-
ckaged gourmet snacks featuring new unusual flavors are a winner
and are driving growth.
Whole Grains
New studies have revealed the benefits of lowering the risk of heart
disease and reducing weight by intake of whole grains. The consumer
including health-conscious parents are looking for high quality, tasty
whole grain crackers with zero partially hydrogenated oils content
(transfats linked to heart disease). Whole grain and organic cookies
are climbing the list of favorites at a fast rate. According to Mintel/
SPINS, sales for natural and organic cookies have shown a 51%
increase within the past year. Products in this category range from
the traditional whole grain breads and buns to innovative whole grain
cookies, waffles, brownies, pizza dough and tortillas. Whole grain
product sales accounted for $4.79 billion in 2004 and are predicted
to reach approximately $7.5 billion by 2009.
22 The U.S. Food Industry
5. The Commercial and Institutional Food Industry.
By Claudine M. Haeni, Swiss Business Hub USA
5.1. General. at $1.7 billion (Source: Standard & Poor’s). Institutions comprise all
The commercial and institutional food industry in the U.S. is com- noncommercial establishments such as schools, colleges, hospi-
monly referred to as the foodservice industry. In 2005 the foodservice tals and extended care facilities, vending areas, plants and offices,
industry as a whole accounted for an estimated $486.1 billion in sa- correctional facilities and transportation (trains, cruise ships, and air-
les. According to the U.S. Department of Agriculture food away from planes) and others. Of those, clubs, sporting and recreational camps
home as a percentage of total food expenditures has steadily risen, and transportation were estimated to show the highest growth rate
from an estimated 26% in 1960 to nearly 50% in 2004. Forecasts with 5.2% and 9.5% respectively.
predict that by 2010 more than 53% of every food dollar will go to-
wards food consumed away from home. This figure is supported by This report will concentrate on the commercial side and focus on
economic trends and mounting time pressure resulting from a rise in high-end restaurants.
single-parent and dual-income households.
Estimated projections for the U.S. foodservice industry show a growth
rate of 5% for the industry as a whole as well as for the commercial
Category 2005) 2006)
sector in particular.
Full-service Restaurants 164.9 173.4
Limited-service Restaurants 135.6 142.4
Commercial Cafeterias 5.1 5.2 5.2. Restaurants.
Social Caterers 5.3 5.7 Continued rising household income and the convenience of eating
Ice Cream, Frozen Custard, Yogurt Stands 15.5 16.9 out with a large number of reasonably priced restaurants to choose
from is solidifying the fact that eating out remains an integral part of
Bars/Taverns 15.1 15.7
daily life in the U.S. According to the National Restaurant Association
Total Commercial Eating & Drinking Places 343.0 360.9
the restaurant industry experienced solid revenue growth in 2004.
Food Contractors 31.9 34.0
Operators of high-end restaurants in tourist areas also profited from
Lodging Places 23.7 25.0 a favorable currency exchange, as the weak dollar made vacationing
Other Commercial Sales 45.1 47.7 in the U.S. more desirable. Nevertheless, supply shortages caused
Total Commercial Foodservice 443.7 467.6 by diseases (BSE) and severe weather spurred wholesale food price
Institutional Foodservice 40.6 41.6 increases by 5%. This price hike was much higher than in preceding
Military Foodservice (Continental U.S. only) 1.7 1.8 years and, together with rising energy costs, severely impacted pro-
Total U.S. Foodservice 486.1 511.1 fits. As a consequence many restaurants were forced to raise their
menu prices to ease margin pressure.
The restaurant industry defines two main segments: full-service re-
Figure 17: Projected U.S. Foodservice Industry Sales (in Billion staurants and limited service (fast food) restaurants which again
Dollars; 2005 = Estimates; 2006 = Projections) are divided into chains and independents (the Nation’s Restaurant
(Source: National Restaurant Association) News, an industry trade magazine). Currently there are an estima-
ted 294,000 independent restaurants and 234,000 chains in the U.S.
The commercial segment is the largest and constitutes all types of re- Together, they represent approximately 72% of all restaurants nation-
staurants including cafeterias, bars and ice cream parlors. The com- wide and they also claim approximately 58% of revenues and half of
mercial segment reached estimated sales of $443.7 billion in 2005. all patrons’ visits. Independent restaurants have the most locations in
The institutional foodservice segment includes all sales to institutio- the Northeast. The Southeast U.S. is predominantly chain-oriented,
nal organizations and businesses operating their own foodservice. and the West favors Asian and Mexican cuisine.
In 2005 institutional services were estimated at total sales of $40.6 The publicly traded companies dominating the restaurant industry
billion, 8% of the industry, with the sub segment of military service range from fast-food operators (McDonald’s Corporation, Wendy’s
The U.S. Food Industry 23
International Inc.) to full-service chains (Darden Restaurants Inc., Luxury Fine Dining Food Courts
Applebee’s International Inc, Outback Steakhouse Inc.). The first luxury food court was opened in the Time Warner Center
in New York City in February 2004. This food court, situated in a $2
Fine Dining and High-Price Fine Dining billion high-rise, is managed by a culinary dream team and includes
High-price fine dining restaurants are generally run by individuals and some of the most recognized chefs. Unusual and sophisticated re-
families or limited partnerships. They are typically located in larger, staurant concepts feature major players such as Charlie Trotter of
cosmopolitan areas and cater to a small but growing number of aff- Chicago, Jean-Georges Vongerichten of New York’s Jean Georges
luent Americans. Fine dining restaurants claim approximately 12% and JoJo, and as Thomas Keller of the French Laundry in Yountville.
of U.S. restaurant industry sales according to Raymond James & Since its opening other famous chefs have joined and opened their
Associates. Fine dining restaurants that feature a quality wine list ge- own establishments, notably Gray Kunz, former executive chef of
nerate 20% to 40% of their food and beverage sales from their wine Lespinasse in New York.
programs and some restaurants achieve an impressive result of up
to 50%. For example, to encourage sales the New York Restaurant Full Service
Group dedicates one week every half year to a special wine and dine Full service restaurants offer sit-down service for dinner. They have
program, offering a prix fixe menu with unlimited tasting of top quality significantly higher per unit sales volumes than fast food restaurants
wines. The ongoing program generates crowds every year and has and their prices range from low to high. The National Restaurant
proven to be a successful avenue to create repeat customers. Association estimates sales at full service restaurants at $164.8 billion
Within the past year some luxury restaurants have reached new in 2005, an increase of 5% over 2004.
heights in their menu pricing. At Norma’s in Le Park Meridien in
Manhattan, the menu includes a “Zillion Dollar Lobster Frittata” at a
Type Atmosphere Top Chains
price tag of $1’000. At Ducasse in the Essex House in New York City,
Dinner House Casual and fine dining. Darden Restaurants,
the tasting menu features foie gras, lobster, caviar, and milk-fed veal, Average check ex- Brinker International
newly priced at $225. Masa’s, located in the new Time Warner Center ceeds $10 for entrée. Inc., Outback
Steakhouse, Inc.,
offers menus at $300 to $500 that included ingredients such as white-
Applebee’s International
truffles and fugu (blowfish), and the French Laundry in San Francisco Inc.
offers the most expensive vegetable tastings anywhere at $125. Grill/Buffet Casual dining with Golden Corral
The Mobil Travel Guide has been a reliable source for select restau- specialization in grilled (Division of Investors
items and self-service Management Corp.),
rants, hotels, motels, inns and resorts in over 3’000 locations within
bars offering salads Ryan’s Family Steak
the U.S. and Canada. Their star rating has been a helpful guideline and desserts. House Inc.
to the quality of the various establishments and has been viewed as Family Restaurants Midscale restaurants Denny’s Restaurants,
one of the best in the country. Some of the top restaurants that have with relaxed atmos- International house of
phere, cater to all Pancakes (Division of
received a five star rating (five stars = one of the best in the country,
ages. IHOP International),
four stars = outstanding, three stars = excellent) within the past 20 Cracker Barrel
months are:
• The Dining Room, San Francisco Figure 18: Full Service Restaurant Categories
• The French Laundry, Yountville (Napa Valley) (Swiss Business Hub USA 2006)
• Chez Panisse, Berkeley
• Seeger’s, Atlanta Limited Service Restaurants
• Charlie Trotter’s, Chicago Limited service or fast food restaurants offer quick counter service,
• Trio, Evanston low prices and plain décor. Meals can be eaten on location or taken
• Alain Ducasse, Manhattan out. Menus encompass such items as sandwiches, hamburgers, chi-
• Jean Georges, Manhattan cken and pizza. Sales at limited service restaurants accounted for
• Le Bec-Fin, Philadelphia $135.6 billion or 27.8% of total foodservice industry sales in 2005.
• Aujourd’hui in the Four Seasons, Boston This constituted an increase in sales of 4.7%.
• Le Cirque in the Bellagio, Las Vegas
• L’Escalier in the Breakers, Palm Beach The fast food industry has recovered from low sales in the past few ye-
• The Herbfarm Restaurant, Woodinville, Washington, D.C. ars which were impacted by a rapid gain of market share through high
• The Mansion on Turtle Creek, Dallas quality and service from quick casual operators, foremost Panera.
24 The U.S. Food Industry
Shifting their focus from low pricing to product innovation encoura- based on their annual U.S. system wide food and beverage revenues
ged sales growth in the past two years. Mc Donald’s Corporation has (ranked by estimated sales per unit) are, according to Restaurant &
remained number one in the fast food industry, with $25.6 billion in Institutions, as follows:
U.S. sales in 2005. • Marriott Hotels/Resorts/Suites $1.09 billion
• Hilton Hotels $ 979 million
• Sheraton Hotels $ 885 million
Type Atmosphere Top Chains
Fast Food Quick counter service, McDonald’s
Restaurants in Hotel Operations
low prices and plain Corporation, Burger
décor. Meals can be King, Hotel restaurants have the primary function of providing a comfor-
eaten on location or Wendy’s, Jack in the table dining experience to the hotel guests. A well managed restau-
taken out. Box
rant that can distinguish itself and meet the expectations of guests
Specialty Chains that do not fit Starbucks Corporation
is important to further the establishment’s revenues. A fair number
any category in the re-
staurant business due of hotel restaurants have made a name for themselves and received
to their type of product awards. Jean Georges Restaurant in the Trump International Hotel
sold or their mode of
& Tower in New York, the Dining Room at the Ritz-Carlton Hotel in
serving.
Naples, Florida, and the Belvedere in the Peninsula Hotel in Beverly
Quick Casual Limited or self service Panera Bread Co.,
restaurants that Chipotle Mexican Grill Hills, California are among them.
feature upscale menus (recently spun off from There are also partnerships between restaurant operators and resort
with items such as McDonald’s), Baja
owners. These joint ventures enhance the image and quality of the
gourmet soups, salads Fresh (owned by
and sandwiches. Wendy’s International) resort’s food operations and the reputation of the restaurants. The
following are examples of hotel/restaurant partnerships:
Figure 19: Limited Service Restaurant Categories • Famous Chef/Restaurateurs Jean-Georges Vongerichten, Nobu
(Swiss Business Hub USA 2006) Matsuhisa and Bobby Flay are scheduled to open Carmine’s (Italian
cuisine) at the Atlantis, a resort consisting of three hotels with 2’300
The baby boomers, those born between 1946 and 1964, were the rooms located in the Bahamas.
first generation growing up on fast food. Now at a stage of maturity • Chef Matsuhisa will open Nobu Restaurant at the all-suite Royal
and affluence, this group is being targeted with a new restaurant con- Towers, one of the hotels at the Atlantis resort, and Bobby Flay will
cept that has been gaining ground quickly. “Quick casual” are limi- follow suit and open Mesa Grill on the same premises by the end
ted or self service restaurants that feature upscale menus with items of 2006.
such as gourmet soups, gourmet salads and gourmet sandwiches.
Checks average $7 to $10, higher than in traditional limited service Casino Hotel Restaurants
units and lower than in full service casual dining restaurants. These On an annual basis, casino hotel restaurants generate more revenues
establishments have become serious competitors to fast food chains. from food and beverage sales than the typical high-class hotel res-
Panera Bread Co. reached sales of $1.6 billion in 2005. This bakery/ taurant (around $18+ million annually on average). In order to accom-
cafe operator was one of the fastest growing quick casual restaurant modate a wide range of patrons of varied ages and budgets, many
chains over the past four years. Other notable quick casual places casinos incorporate several restaurants, ranging from fine dining to
include Chipotle Mexican Grill (recently spun off from McDonald’s casual, to bars and lounges, and catering and banquet facilities. A
Corporation) and Quiznos Subs. The success of these eating places regular hotel typically has just one to two restaurants on the premises.
depends heavily on their advertising strength and in luring customers
with new innovative menus focusing on health. It is a segment that The mainstream casino visitor is on a tight budget and typically fre-
has started to show signs of maturation. quents the buffet style restaurants. Then there are the highrollers who
enjoy fine dining in the high priced restaurants. This category of visi-
tors represents the backbone of the gambling industry.
5.3. Restaurants in Hotels and Casinos.
The National Restaurant Association estimates that food and drink The Palm Restaurant, known as the ultimate hang-out for celebri-
sales at hotels reached $24.8 billion in 2005, a 5.4% increase com- ties, is a perfect example. It opened its 30th location at the Tropicana
pared to 2004. At present, there are approximately 82 restaurant Casino and Resort in Atlantic City, New Jersey, about 18 months ago.
companies operating in hotels and motels. The top three hotel chains It is part of a new dining, entertainment, retail and spa complex within
The U.S. Food Industry 25
the resort, valued at $245 million. The Tropicana complex is the lar-
gest complex within a resort in Atlantic City, featuring amenities such
as indoor dining, entertainment, retail shops and a spa.
The restaurant itself seats 250 people and includes a private dining
space for 100 guests. The resort premises feature over 2’100 hotel
rooms (350 plus suites) and include 21 restaurants.
Las Vegas and Atlantic City
Las Vegas, Nevada keeps its number one rank as the location with
the largest casino business. It has a highly developed infrastructure
and offers more than 134,000 hotel rooms in the city and vicinity.
Approximately half of Nevada’s winnings are generated in the Las
Vegas Strip area. The casinos in Las Vegas attract many highrollers,
while Atlantic City is a convention center and its 12 casinos are more
typically frequented by low-stakes day trip visitors.
According to Standard & Poor’s overall profitability for this industry
should be positive and, favorable demographic trends such as the
baby boomers who have the discretionary income to elaborate on ex-
pensive vacations and, retirees traveling should support this forecast.
Business travel is expected to continue its upward trend.
5.4. Challenges.
Aside from fierce competition, the restaurant industry has been incre-
asingly faced with the following issues:
• Food Safety Concerns: Incidents of mad cow disease and avian
flu have been responsible for sharp rises in food prices and have
greatly affected the restaurant industry.
• Obesity: A growing health concern of the nation has resulted in
some lawsuits.
• New Federal, State and Local Regulations: New regulations such
as an expanded ban on smoking in various states, and increases in
the current federal minimum wage to more than $7 (from $5.15) are
threatening to curtail the profits of eating establishments.
Almost all segments in the restaurant business have experienced
obesity-related lawsuits in the last two years. Fast food places have
countered the rising health consciousness of the American consu-
mer by introducing new low-fat and low-carbohydrates food and by
adding a wide range of fruits and salads to their menus. Restaurant
owners have added a variety of new innovative menus that address
the consumer’s health and insatiable search for variety and adven-
tures in taste. McDonald’s Corporation developed a menu series
which includes vegetables, fruit, milk and yogurt. The company went
26 The U.S. Food Industry
as far as founding the Global Advisory Council on Healthy Lifestyles.
The mounting concern over the explosive surge in healthcare costs
has also prompted the company to team up with the World Health
Organization and the U.S. Department of Health and Human Services
to educate the public on a long term basis and promote the impor-
tance of healthy nutrition and fitness.
5.5. Trends.
• Independent of economics time-pressured Americans love to eat
out. The quick-casual segment sees growing sales with upscale
products that focus on fresh ingredients and unusual flavors.
• Differentiation through innovation, sophistication and cutting edge
menus, supported by the highest level of service, paves the way to
success in a fiercely competitive environment.
• High fine dining and luxury restaurant establishments live by their
chef’s ability to evaluate their patron’s feedback and to spot trends.
Gourmet dining embracing high quality ingredients and simplicity
has become a favorite. Ingredients are often local and include orga-
nics. Smaller plates and sophisticated wine programs paired with
great hospitality are in.
5.6. Distribution Channels.
Food service establishments buy over 20% of wholesalers’ grocery
and related products. Distribution channels to restaurants and other
food service establishments are classified as broadliners, systems
distributors and specialty distributors. Broadliners carry a wide range
of food, equipment and supplies and are, therefore, geared to offer
one-stop shopping. SYSCO is the leading company in this category.
The strong growth pattern in eating out has captured the interest
of many food companies, like H.J. Heinz, Campbell Soup Co. and
ConAgra. In order to increase their business and participate directly
in this trend, these companies have created their own distribution
divisions. This also provides them with a relatively low-cost avenue to
test market new products. (For more details on distribution channels,
please refer to Chapter 8.)
6. Natural and Organic Foods.
By Frank Ustar and Claudine M. Haeni, Swiss Business Hub USA
6.1. Overview.
The interest in organic and natural foods has turned a once minor
market niche into a booming double-digit growth sector with aggre-
gate sales of $45.8 billion in 2004 (includes foods, products, supple-
ments), a 6.9% increase over the preceding year. Organic foods and
beverages alone reached an estimated $14.5 billion in sales in 2005
and are expected to climb to $16 billion by end 2006. The forecast
for annual growth through 2008 is set at around 18.4% according
to the Organic Trade Association. It should be noted that organic
standards in the U.S. are different from Swiss standards. A product
may, therefore, qualify as organic in Switzerland but not in the U.S.
and vice versa.
Organic and natural foods are key elements of a trend which may be
called whole health solutions. At this point in time, they claim approxi-
mately 2.5% of the nation’s aggregate food and beverage sales. They
are finding their way into mainstream retailing and onto the menus of
restaurants, university and school cafeterias, and increasingly in the
cafeterias of hospitals and other institutions.
The recurrence of zoonotic diseases has resulted in rising concerns
among consumers and interest groups on food safety. Additionally,
the indiscriminate use of pesticides, insecticides, antibiotics in live-
stock and genetically modified crops has been fueling a strong inte-
rest for “better-for-you” foods to the point where demand for organic
supplies is starting to outpace supply and the need and possibilities
of locating and using foreign suppliers has become reality. This situ-
ation offers a window of opportunity for Swiss food manufacturers.
Today’s chemical-intensive farming faces increased opposition.
Alliances among consumers, food producers, business communities
and government are steadily forming and help organic and sustai-
2000 2001 2002
Total Food Sales ($ Million) 498,379 521,831 538,033
Organic Food Sales ($ Million) 6,104 7,359 8,624
Organic Food Penetration (%) 1.2 1.4 1.6
Organic Food Growth (%) 21 20.6 17.2
Figure 20: Sales and Growth of Market Share of Organic Food in the U.S.
(Source: Nutrition Business Journal Estimates based on OTA 2004
Manufacturer Survey and Plunkett Research Ltd.)
nable agriculture enjoy growing acceptance. According to the U.S.
Department of Agriculture’s Economic Research Service, there were
2.2 million acres farmed under management of 8,035 certified orga-
nic farms depicting a growth rate of 15.6% within a two year
span (2001-2003). Within the same time span, organically raised
milk cows increased by 52.9% to 74,435 heads, and beef cattle
increased by 79.5% to 27,285 heads, thus confirming a growing de-
mand for organic dairy and meat. This development has continued
with campaigns and programs such as the launch of a $13 million
Land Stewardship by Horizon Organic, the nation’s largest USDA
certified organic dairy producer. Horizon Organic provides financial,
educational and technical support to approximately 300 certified or-
ganic family dairy farms who supply around 75% of the company’s
organic milk. Horizon also supports another 130 dairy farmers who
are in transition to organic management. Organic Valley Family of
Farms launched their own co-op “Generation Organic”. Within three
years, Organic Valley doubled the number of farmers joining them. In
2005 their co-op counted 723 farmers in 22 states. Another alliance
formed between Stonyfield Farm in Londonderry, New Hampshire
and the University of New Hampshire, which granted a $200,000
leadership gift to build an organic dairy farm for education and re-
search. This research farm is the first such establishment and is
scheduled to produce certified organic milk by the end of 2006.
With a growing number of consumers focusing on their well-being,
more retail channels are concentrating on this line of business and
are introducing a substantial assortment of organic products under
their private label. Small-chain and independent grocers as well as
conventional food stores like Albertson’s, Ahold, Food Lion and
Kroger all stock on average up to 20% in organic items. To profit
from the boom in organics, Safeway, the nation’s third largest super-
2003 2004 2005
554,830 572,727 595,600
10,381 12,200 14,500
1.9 2 2.4
20.4 17.5 18.9
The U.S. Food Industry 27
market chain, took one step further in 2005 by launching its own pri-
vate label brand “O Organics”. SuperValu Inc., which announced its
acquisition of Albertson’s to become the nation’s second largest su-
permarket chain introduced Nature’s Best with 50 organic products
and plans to add 100 more organic products under private label by
the end of June 2006. SuperValu Inc. also established a natural food
line store under the name Sunflower Market, a more economical al-
ternative to supernatural food stores Whole Foods and Wild Oats.
The first Sunflower store opened in Indianapolis in January of 2006.
More recently, Wal-Mart Stores Inc. affirmed its decision to join the
organic food business movement by introducing organic foods under
their Member’s Mark line.
Among food manufacturers, some of the biggest companies have es-
tablished their own extensions into organics by acquiring well-known
organic brands over the past five years.
Food Manufacturer Organic Brand Acquired
Coca-Cola Odwalla
General Mills Muir Glen, Cascadian Farm
Kraft Boca Foods, Back to Nature
Kellogg Kashi, Morningstar Farms/Natural
Touch
Dean Foods Horizon Organics
H.J. Heinz Co. Hain Celestial Group Inc.
(Partial Equity/Strategic Alliance)
Cadbury & Schweppes Green & Black’s
Groupe Danone (France) Stonyfield Farm (Partial Equity)
Figure 21: Corporate Ownership of Organic Food Companies
(Canadian Organic Growers and the Certified Organic Association of
BC, 2006)
With corporate ownership expanding and organics moving main-
stream, consumers who up to this point refrained from purchasing
organic products due to pricing and scarcity will have a better op-
portunity of choice. At the same time, however, interest groups and
consumers alike are voicing growing concerns about large scale or-
ganics. Certified organic labeling through the USDA has become the
center of hot debate, as have Federal organic rules, which require
only “access to pasture” for livestock, but not actual grazing time
on the pastures. A survey conducted by the Center for Food Safety,
an advocacy group based in San Francisco and Washington, D.C.,
revealed that consumers do care about how animals are treated and
how organic products are produced and where they originate. As a
consequence the USDA is considering tightening the rules to ensure
high standards for certified organic food.
28 The U.S. Food Industry
Food Processor Organic Brand Established
Unilever Ben & Jerry’s Organic, Ragu Organic
General Mills Gold Medal Organic, Sunrise Organic
H.J. Heinz Co. Heinz Organic
Cadbury Schweppes Nantucket Nectars Organic
Dole Dole Organic
PepsiCo Tostito’s Organic
ConAgra Hunt’s Organic,
Orville Redenbacher’s Organic
Campbell Soup Campbell’s Organic
Tyson Nature’s Farm
Figure 22: A fair Number of Food Manufacturers have created their
own Organic Brands (Source: Canadian Organic Growers and the
Certified Organic Association of BC, 2006)
6.2. Definition of Organic.
In 2002 the U.S. Department of Agriculture established the National
Organic Program (NOP). With NOP, strict standards for the produc-
tion and sale of organic foods were implemented. Despite growing
demand for natural and organic food, confusion prevails about the
definition of organic, natural, and functional foods and nutraceuticals,
as consumers call for exact clarification and education.
Organic refers not only to the food itself but also to how it was pro-
duced. According to the NOP, foods that fall under the Organic
Standard must be grown and processed using organic farming me-
thods that recycle resources and promote biodiversity. Crops must
be grown without synthetic pesticides, bioengineered genes or pe-
troleum- and sewage sludge-based fertilizer. Organic livestock must
have access to the outdoors and be given no antibiotic or growth
hormones. Such foods may not be irradiated.
The term Natural applies to all foods (except meat and poultry) that
are minimally processed and free of synthetic preservatives, artifi-
cial sweeteners, colors, flavors and other artificial additives, growth
hormones, antibiotics, hydrogenated oils, stabilizers and emulsifiers.
There are no specific governmental regulations beyond the health
codes that apply to all foods except for “truth in labeling.” By this
definition all organic foods are natural but not all natural foods are
organic.
Organic Labeling and Certification3
Organic production and handling operations are required to be certi-
fied by a third party accredited by the USDA. All producers are sub-
ject to these guidelines, except producers who sell less than $5,000
annually in organic products. However, these small companies do
have to follow NOP’s strict standards and confirm that they indeed do
so through documentation.
3 Please refer to Chapter 10.4 “Organic Claims”
Regulations for product labeling are as follows: volved in environmental, health and life style issues. The greater the
involvement, the less concerned the consumer is about price, the
• “100% Organic” contains only organic ingredients. more frequent the purchases and the more specific the reasons for
purchasing. As organics go mainstream, this profile will experience
• “Organic” contains at least 95% organic materials. Products in this
or the aforementioned category can (but are not required to) dis- some modification.
play the USDA Organic seals. Less “committed” shoppers tend to be more affected in their buying
• “Made with Organic Ingredients” contains 70-95% organic ingre- decisions by price, convenience and appearance. These shoppers
dients and may list up to three of them. also tend to be less knowledgeable about what “organic” means and
the role that the organic sector plays in the overall scheme of the U.S.
Products that contain less than 70% organic ingredients may not food business. The annual Earth Day campaign “Go Organic” and a
use the term organic other than to list specific organic ingredients. general consensus on the importance of a healthy population will help
Complete information on NOP and its regulations can be found on bridge the gaps in awareness and knowledge among a wider spread
their website www.ams.usda.gov/nop/. consumer pool.
Major conditions for certification include: Figures 14 and 15 reveal who is buying organic food and what they
shop regularly.
• The applicant must establish, implement and update annually a
production and handling system plan to be submitted to the cer-
Generation Age Group Percent
tifying agency.
Generation Y 18 -27 51
• On-site inspection must be permitted.
Generation X 28 – 41 55
• Proper records must be maintained for at least five years and ins-
Younger Baby Boomers 42 – 51 57
pection of such records by the certifying agency must be permitted. Older Baby Boomers 52 – 60 50
Matures 61+ 46
Foreign suppliers must meet the same requirements as their U.S.
counterparts and must be certified by a USDA approved certifying Figure 23: Regular Buyers of Organic Food (Source: Shopping for
agency, unless an agreement exists between the two countries re- Health 2005 Survey conducted by the Food Marketing Institute,
cognizing foreign certification agencies. Most countries do not have Washington, D.C.
such an agreement in place.
Segment Percent
6.3. The Organic Food Shopper. Fruit / Vegetables 37
A key factor driving consumer demand for organics is the perception Cereals, Breads, Pastas 25
Milk, Yogurt / Other Dairy Products 23
that organic foods promote health and well-being, prevent disease,
Packaged Foods – Snacks, Beverages, Frozen Food 21
help cure illnesses and simultaneously are protective of the envi-
Eggs 18
ronment. Generally, organics are also rated safer and better tasting
Meats and Poultry 17
than “regular” foods. According to a survey by the Natural Marketing
Soups / Sauces 12
Institute, 76.3% of purchasers opted for meats without antibiotics
and hormones, 69.6% for foods grown without pesticides, 55.7%
for non-bleached grains and 47.2% for foods which have not been Figure 24: Organic Food - What the Shopper is Buying (Source:
irradiated. Shopping for Health 2005 Survey conducted by the Food Marketing
According to the Organic Consumer Association an estimated 12% Institute, Washington, D.C.)
of America’s 106 million American households purchase primarily
organic products and approximately 50% of all consumers claim to Initially, dairy products, produce and grain opened the door for organic
buy organics occasionally. Up to now the profile of the typical or- food to become prominent. Increasingly, convenience foods such as
ganic shopper has been a highly educated, affluent consumer who frozen foods, beverages, confectioneries and condiments, herbal teas,
lives in a high income area. On average he/she spends $26 more on cheeses, and even wines have made headway, especially in the special-
a trip to the grocery store than the consumer of conventional food. ty stores Whole Foods and Wild Oats that dominate the retail market.
The profile also depicts a consumer who is knowledgeable and in-
The U.S. Food Industry 29
6.4. Trends.
“Better For You Foods” have become a preferred choice. A fair number
of Americans are changing their spending patterns, placing a higher
value on food expenditures and spending less in other areas. With
this shift in spending pattern, a European-style attitude about food is
slowly evolving. The concern about a healthy lifestyle is also no longer
a preoccupation of the baby boomer generation. Generations Y and
X are quickly adopting a behavioural pattern that fosters good eating
habits and allows for preventative measures that address disease and
the decline in health in their golden years. They would rather spend
more now and be healthier later.
Pregnancy and parenthood often serve as a catalyst for consumers to
switch to organic products. Numerous reports published by various
organizations over the past decade have fostered a growing concern
about the usage of chemicals in the food chain, especially the appli
cation of pesticides and their effect on a child’s body. Demand for or-
ganic baby food and products for children of all ages is on the rise.
Baby boomers are perpetually searching for antiaging foods and
products. Yogurt is a product that has enjoyed a stupendous de-
mand. The yogurt’s probiotic bacteria helps the digestive system and
its prebiotic counterpart helps the body absorb much needed calci-
um which aids in the prevention of osteporosis. Several brands have
launched new products. They range from Stonyfield Farm’s new na-
turally sweetened light yogurt and the new YoBaby Plus Fruit & Cereal
with DHA yogurt all the way to Weight Watcher’ line of yogurts and
smoothies (offered in nine flavors).
As with traditional foods, consumers of organics are looking for easy-
to-prepare and convenience products. Popular trends are overstuf-
fed sandwiches, car-friendly cups and drinkable lunches, and one-
dish dining. One in ten meals now is eaten “on the go”, and one
quarter of all restaurants offer take-out food which can be eaten in the
car. As a consequence, organic food suppliers need to refocus and
consider convenience without jeopardizing the organic ideal.
For Whole Foods, the largest national specialty chain of organic
foods with 184 retail stores, perishable products make up 67% of
total sales, up from 57% ten years ago. Other categories carried in-
clude seafood, grocery, meat and poultry, baked goods, prepared
foods, cheese, organic chocolates, beer, organic wine, herbal teas
and more. Special items for children are also emphasized and include
organic apple sauce, peanut butter, pasta and string cheese.
6.5. Pricing
Mass marketing of organic food has an upside for the consumer.
Across the board, from fresh produce to dairy products, beverages,
30 The U.S. Food Industry
snacks, desserts and confectionery, and prepared and grain-based
foods, all organic segments experienced strong growth within the past
two years. With the obvious move to “mainstream”, pricing will become
more competitive, further influenced by store branding. Private label
products are on average 27% less expensive than national brands.
While organic foods have commanded a price premium from 35-55%
on average, the broadening interest in organic products encourages a
trend of narrowing the differential. One can generalize that price diffe-
rentials are the smallest in those areas where organic versions entered
the market early and captured the greatest share, especially in every-
day categories such as milk and dairy, produce, soymilk and coffee.
Where organic options came in at a later stage with smaller production
volume, the price differential remain higher.
Produce. Initially the price of organically grown produce was double
that of its “regular” counterpart, but a combination of increased pro-
duction of scale and the development of secondary markets has led to
more competitive pricing. Prices for apples, carrots, potatoes, onions
and bagged salads have fallen due to the economies of scale.
Coffee represents a commodity which entered the market early and
was able to be positioned as a specialty item, with organic coffee
being a subset within that category. Most specialty stores now carry
100% organic coffees.
Tea and Chocolate have been less commoditized and are more
brand oriented. Here also the brand has commanded a higher price
and the organic equivalent has followed that trend.
Soy-and Rice-based Beverages. Here the price gap between orga-
nic and conventional versions has been closing. Both the rapid growth
of production and wide availability of raw materials have contribut-
ed to the narrowing of the gap. While 10 years ago the prices may
have been double for organic versions, the differential now is closer
to 15-20%.
The joining of large manufacturers, e.g. Kellogg’s or Kraft, have also
had the effect of narrowing the price gap. The price premium of cereal
from Kellogg’s newly acquired division Sunrise dropped to 15-20%
from the over 50% it enjoyed prior to the acquisition. The same holds
for organic ketchup and other commodities produced by large food
producers that are able to take advantage of economies of scale more
so than smaller producers. Campbell Soup is marketing its organic
tomato juice, and Frito-Lay introduced a new line of organic tortilla
chips, organic salsa, potato chips. In less than one year this natural
line has grown to make up four of the top five natural organic snack
products sold in supermarkets. With many items, the price premium
has dropped to 20% or less and as production continues to grow
other products will have to follow that trend as well.
6.6. Retail Channels.
With competition among different types of retail channels being the
norm today, supermarkets have been expanding their assortment of
organic products by applying a mix of conventional and organic pro-
duct displays, by moving them to the center aisles, or using the con-
cept of “store-within-store” (e.g. Nature’s Marketplace of Wegman’s).
Over the past five years sales of organic and natural foods have been
steadily increasing through all major retail channels including mass
merchandisers. Supermarkets, followed by natural food stores ac-
counted for the majority of the sales.
In 2005 the Organic Trade Association (OTA), together with Earth Day
Network (based in Washington, D.C.) and a Minneapolis based mar-
keting agency launched a nationwide educational and promotional
campaign. The first campaign took place in spring under the name
“Go Organic” and reaped great success. It was followed by a se-
cond campaign in spring of this year. Participants included 58 grocers
in 43 states who were backed by leading organic brands. Retailers
included Whole Foods, Wild Oats Market, Kroger, Giant Eagle and
H.E. Butt Grocery. Organic brands were represented by Earthbound
Farm, Hain Celestial, Horizon, Nature’s Path, and others. The 2005
campaign generated sales increases of 5% and more for participating
retailers with established organic programs and reached up to 100%
for retailers just entering this market segment. The survey done by the
Natural Marketing Institute (NMI) also showed that, as a result of the
campaign, national awareness of organics increased by 8% and more
than 60% of customers chose organics over conventional products.
Whole Foods Markets and Wild Oats Markets are the two natural
food markets that offer the largest assortment of organic specialty
foods with the highest margins. They are the preferred channels for
foreign food suppliers.
Whole Foods Market
This chain consists of 184 stores and is represented in most states.
Second quarter 2006 financials revealed double digit sales increases
for the 10th consecutive quarter, totaling $1.3 billion. The company’s
goal is to reach $12 billion in sales by 2010. For 2006, Whole Foods
plans include the development of 78 additional stores.
Whole Foods carries primarily natural foods with a limited selection of
conventional national brands according to specific quality criteria. The
chain has developed a trend-setting policy in regard to treatment of
animals and the meat which is sold in its stores:
• No antibiotics
• Each producer must provide annually an affidavit which outlines
the raising and handling of animals including feed, facility design,
environmental conditions, employee training, medical practices
and animal welfare at the farm, in transportation and throughout
processing
• Annual inspection of each producer
• Successful completion of a third-party food safety audit of each
processing plant and a humane slaughter audit
Whole Foods offers nearly 1,000 organic products under its priva-
te label to take advantage of the still relative shortage of nationally
known organic food brands. Four are corporate brands sold in each
store nationwide. In addition, Whole Foods also offers regional and
storecentered products, specialty and organic coffees and teas are
sold through the Allegro Coffee Company subsidiary.
Marketing activities at Whole Foods are focused less on advertising
than those of conventional supermarkets, instead, word-of-mouth re-
commendations are the main vehicle by which the chain promotes
itself. In addition to national brand awareness campaigns, in-store
promotions predominate such as signage, taste fairs, classes, tours
and product samplings.
Wild Oats Markets
This is the main competitor of Whole Foods with 113 stores nati-
onwide and sales exceeding $1 billion as per second quarter 2006
financials. The stores are organized into five geographic regions each
with its own regional director who is responsible for store operations
within his/her region. At the corporate level, there are specialists for
the different product categories of natural living, food service, pro-
duce and floral, meat/poultry/ seafood and grocery merchandising
who manage centralized buying programs and formulate store-level
merchandising.
Wild Oats Markets advertise in traditional media outlets such as radio,
newspapers, TV, outdoor and direct mail to gain new customers as
well as repeat business while promotional activities are also directed
to more targeted consumers based on demographic characteristics.
Food promotions in these major chains tend to stress the health and
wholesomeness of the product offerings and so far have failed to link
those factors with the prevailing brand image of the foreign supplier.
In-store displays tend not to feature country branding but highlight the
country of origin only as a secondary factor. Successfully linking coun-
try brand image with the wholesomeness of its organic foods would
appear to be a strategy that foreign suppliers and their promotion
organizations should consider prior to entering the U.S. market and
to choosing the large natural food chains as their retail sales vehicle.
The U.S. Food Industry 31
6.7. Distribution and Purchasing.
The prevailing distribution channels for organic foods are
• Natural food distributors
• Specialty food distributors
• Grocery distributors
• Produce distributors
All of the above handle natural and organic foods but only the first
category of distributor handles such items exclusively.
Natural foods distributors offer the best opportunities and pro-
grams for producers of natural and organic foods. They coordinate
marketing programs, deliver products, provide information on retail
purchasing policy and merchandising, but most importantly they
purchase the products from the manufacturer and, therefore, have
the responsibility for payment of invoices. This relieves the manufac-
turer from handling multiple accounts receivable including the verifi-
cation of credit or assuming the risk for various retailers. Such distri-
butors operate on margins of between 28% and 35%.
The two largest natural food distributors are United Natural Foods
and Tree of Life. Both Whole Foods and Wild Oats Markets have
been using United Natural Foods as their primary distributor. United
Natural Foods also operates Hershey Import Company as a subsidiary.
The majority of items carried by Tree of Life consist of nationally
recognized brands such as Horizon Organic, Hain Pure Food, Annie’s
Homegrown, Blue Diamond, Manischewitz, Kraft, McCormick,
Naturade, Nestle and others.
Whole Foods does most of its purchasing now on a regional and
national level so as to enable the chain to negotiate better discounts
with producers and distributors. Local store buyers tend to focus on
local products and the proper product mix necessary to maintain a
neighborhood feel for the stores. This chain owns two produce pro-
curement centers which facilitate the procurement and distribution
of the produce, three seafood processing and distribution facilities
as well as a specialty coffee roaster and distributor. Products are ty-
pically procured through a combination of specialty wholesalers and
direct distributors.
Increasingly, the two large national distributors manage a complete
product category as well as the product mix within each category as
opposed to the more traditional approach of the retail store tracking
the sales of each item and adjusting the product mix accordingly. The
distributor tries to optimize the product category and intra-category
mix at both its own facilities level and those of the retail store.
32 The U.S. Food Industry
Specialty food distributors do not focus on natural and organic
foods but specialize in foods like foreign goods, ethnic foods, hard-
to-find gourmet items, kosher and various organic foods that may not
be available in the major supermarkets. The margin of these distribu-
tors averages about 32%.
6.8. The Foodservice Segment.
The food service segment currently accounts for approximately 4% of
total organic sales. Predictions call for an annual growth rate of 20%.
Organic menu offerings enjoyed an increase of 9% in 2005 and the
use of organic ingredients increased by 12% with meat, poultry, salad
greens, vegetables, legumes and breads being the most popular.
A survey conducted by Restaurants & Institutions in 2005 re-
vealed that 50% of the establishments have registered an increase in
orders for organic menu items within the past two years. In the fine
dining segment, almost two thirds offer organic menus. A fair number
of these restaurants make their purchases through local farmers and
co-ops to obtain the highest quality of products possible and simulta-
neously support local organic produce, dairy and meat farmers. The
restaurants’ patrons are willing to pay a premium for organic menus
and enjoy the frequent changes of the menus that come with the
seasonal availability of the various products.
In the institutional food service segment a certain number of opera-
tors for universities and colleges aim at offering 100 percent orga-
nic menus. Restaurant chains like O’Naturals and Panera have been
following suit, but their menu schedules are challenged by frequent
shortages of supplies.
According to a survey conducted by Natural Food Network the gene-
ral industry consensus is that organic products are going to be sold
everywhere within the next two decades and that the average U.S.
household will not only buy organic food, but also reach for organic/
natural personal care products, household cleaning agents and or-
ganic clothing.
7. The Functional Food Sector.
By Frank Ustar and Claudine M. Haeni, Swiss Business Hub USA
7.1. Overview.
Among the cultures in the Orient, food has been associated with pre-
ventive and therapeutic benefits for centuries. Chinese medicine has
documented claims of health benefiting ingredients in food that date
back as far as 1000 B.C. Over time, Western cultures have begun to
recognize and accept the view that the intake of certain food ingre-
dients is health promoting. Moreover, a rise in serious health issues
among the general population and health care costs threatening to
spin out of control have certainly helped to influence this redirection
in thinking. Demographics, broader knowledge in nutrition and a
change in attitude in general towards food have also modified con-
sumer demand. In response, food and drug companies are using the
results from scientific research and technological advances to their
benefit in developing and bringing new products offering medicinal
value to market.
This market, called functional foods, has been experiencing rapid
growth. Business Communications Company, Inc. a research firm
forecasts continued growth at an average annual growth rate of 14%
until 2010. The U.S. market is estimated to reach around $37.7 billion
by 2007 which represents a market share of more than 5% of total
food sales. It should be noted that the lack of a formal definition for
functional foods makes it difficult to estimate the true size of this mar-
ket segment and that figures may vary by information sources.
2005
Natural Food Merchandiser mentioned the top three functional food
Soft Drinksin(Bottled
categories the U.S.Water, Soda,
in 2005 Gatorade)
as follows: $5.3
Dry Breakfast Foods $4.2
Snacks and Nutrition Bars $2.3
Figure 25: Top Three Functional Food Categories in the U.S. in 2005
in U.S. Dollar Billion (Source: Natural Food Merchandiser July 2005)
7.2. Definition and Regulations.
Functional Foods are foods or dietary components that may provi-
de a health benefit beyond basic nutrition. They usually exceed the
minimum daily nutritional requirements of an individual. They can be
a conventional whole food in its natural state or a novel food where
a specific ingredient was increased, or in some instances decrea-
sed, or removed. Examples of whole foods are fruits and vegetables
and grains which are naturally high in content of phytochemicals and
common examples of fortified or enhanced foods include
• Cereal and bread with added isoflavones
• Fruit juices with herbs that have alleged immuno-enhancing pro-
perties such as Echinacea
• Margarine with added phytosterols to reduce cholesterol
• Salad dressing with omega-3 polyunsaturated fatty acids.
The eating habits of two thirds of American consumers are affected
by concerns about weight as well as health issues foremost heart di-
sease, diabetes and osteoporosis. Fortified products promote health
benefits such as “Calcium helps build strong bones”. They do not
claim to prevent disease.
The term “functional food” is often used synonymously with the term
nutraceutical. For the purposes of this report, both shall be used here
to mean the same, although nutraceuticals are more correctly defined
as parts isolated or purified from foods and sold in medicinal forms
(powders, tablets or capsules). Examples are seaweed as a purified
marine source or ginseng powder derived from pressed plants. While
the U.S. Food and Drug Administration (FDA) has defined any spe-
cific food used for the prevention or treatment of disease as drugs,
the 1999 Nutraceutical Research and Education Act has defined nu-
traceuticals as a separate regulatory category which permits health
claims previously reserved for drugs only. As a rule, however, no
claims may be made without adequate scientific evidence.
The most well established and scientifically sound approach to la-
beling and marketing a functional food is through the use of FDA
approved health claims delineated by law under the Nutrition Labeling
and Education Act (NLEA) of 1990. The health claims authorized un-
der the NLEA are statements that describe a relationship between a
food substance and a disease or other health-related condition, i.e. a
“risk reduction” relationship. The law mandates that a health claim be
authorized in the labeling of FDA regulated products only if significant
scientific agreement among qualified experts exists about the validity
of the relationship described in that claim. Under the NLEA, compa-
nies petition the FDA to consider new health claims. Thirteen NLEA
health claims authorized by the FDA currently exist. Substantial clini-
cal efficacy and documentation are an important part of a company
petition submission to the FDA.
A provision in the FDA Modernization Act of 1997 (FDAMA) provi-
des an additional expedited process for manufacturers to use health
The U.S. Food Industry 33
claims if such claims are based on current published authoritative Since heart disease and maintenance of proper cholesterol level Additional functional food elements are lutein and zeaxanthan offe- Energy Drinks
statements from pre-defined federal scientific bodies. These bodies rank among the most pressing health concerns in the U.S., choles- red by Roche, glucosamine and condroitin in ready-to-drink teas by Despite strong gains for the past several years, the energy drinks
include only those “with official responsibility for public health pro- terol lowering foods and beverages are appearing on retail shelves. various suppliers and various teas fortified with peppermint, licorice, category shows no signs of slowing down. Targeted marketing pri-
tection or research relating to human nutrition” such as the national Coca Cola’s Heart Smart juice contains plant sterols while PepsiCo’s or chamomile. marily addresses the young party-going crowd with these stimulant
Institutes of Health, the Centers for Disease Control and Prevention, Tropicana Essentials Healthy Heart orange juice is based on a nu- drinks. The majority of these energy drinks contain more than 100
and the National Academy of Sciences. trient bundling of potassium, vitamins B-6, B-12, C, E and foliate. Functional Ingredients in Drinks milligrams caffeine per 12 ounce container plus herbal extracts and
Especially geared toward women are soymilk products fortified with Since 2003 Americans may have bought more bottled water than dietary supplements which makes them more potent than a 12 ounce
vitamin A, C, E and omega-3s plus extra calcium. beer or coffee. An especially fast-growing category of water is “ener- cup of coffee that contains on average 200 milligrams caffeine. This
7.3. Consumption Trends. gy water”, such as Hansen’s Energy Water containing ginseng, tau- has sparked some controversy and discussion among physicians.
Food Business News Magazine released the results of an on-line sur- Health claims for fish, plants and nut-based omega-3s have sparked rine, vitamin B, electrolytes and glucose are a fast-growing catego-
vey conducted by The International Food Information Council (IFIC) an upsurge in products containing Omega-3 such as Anchor’s Heart ry of water. Figure 27 shows the consumer preferences for various Sales for 2005 topped $390 million according to Information
in November 2005 to gain insight into consumers’ attitudes toward Wise Omega-3 milk. Other heart-healthy drinks include White Wave beverages. Resources, Inc. (IRI). Adding in sales at convenience stores and gas
food for health. Of the 1,060 participants (age 18 up), 83% confirmed Silk’s Omega-3 fortified cholesterol-lowering soy milk. Healthy oils are Ajinomoto launched Amino Vital Ready-to-Drink as a single-serve stations, the two major sales channels for the young crowd, as well
their interest in expanding their knowledge and only 5% showed no marketed by Heart Beat Foods’ Smart Balance Natural blend of ca- sports water and, a powder mix. Fruit water and soy water are being as other outlets not tracked by IRI, and the category well surpasses
interest. nola, soy and olive oil fortified with vitamin E and Omega-3. marketed as well. Single-serve sparkling fruit juices are also showing this figure.
strength in the market.
Below figures show the results of ACNielsen’s twice-yearly global Calpis Company’s AmealPeptide™, designed to lower blood pres- Sales of non-aseptic energy drinks in food, drug and mass merchan-
online consumer survey, the largest with over 21,100 participants sure, addresses prehypertension which afflicts about 45 million dise outlets jumped a whopping 69.4% in 2005, while sales of non-
worldwide. The survey conducted in November 2005 gives insight Americans. AMP-Activated Protein Kinase, by ABIC International Beverage Percent aseptic sports drinks surged 20.9% (IRI, 2006). A major reason for
into consumers’ choices of certain regularly bought functional foods Consultants, is an enzyme believed to have a role in regulating appe- Juice fortified with Vitamins & Minerals 56 this growth is that the energy drink category has expanded to include
in the U.S. and globally. tite and body weight. Water fortified with Vitamins & Minerals 39 all demographics, not just young males. A segment of the populati-
Flavored Water 36 on catching the attention of energy drink marketers is women. Coca
Tea fortified with Herbals 34
Functional Food Purchased Regularly % U.S. % Global Diabetics are likely to see an increasing variety of low-carb and Cola’s sugar-free Tab Energy will be offered in midsized 10.5 ounce
Tea fortified with Vitamins & Minerals 32
Average sugar-free products. South West Co. has added a low-carb dairy cans, available both individually and in four-packs.
Juice fortified with Herbals 27
Whole Grain, high Fiber Products 50 40 milk drink to its line of health drinks which is ultra-filtered to remo-
Drinkable Yogurt 26
Cholesterol reducing Oils and Margarines 36 31 ve lactose. Chromium Picolinate as food additive has recently been Coca Cola’s flagship energy drink Full Throttle, which has been on the
Bottles/Canned Smoothies 26
Fruit Juices with added Supplements/ 29 29 petitioned with the U.S. Food and Drug Administration (FDA) to be market less than one year but already holds the category’s number
Vitamins Soy Beverages 25
recognized as, among other claims, reducing insulin resistance and 7 spot, is also expanding its reach among women as well as calorie-
Yogurts with Acidophilus Cultures/ 21 25 Water fortified with Herbals 22
Type 2 diabetes. conscious men with the launch of a sugar free version in later 2006.
Probiotics Organic Beverages of any type 21
Milk with added Supplements/Vitamins 25 18
Significance of Ingredients A survey conducted by IRI for the 52 weeks between October 2004
Bread with added Supplements/Vitamins 24 17
Consumers are increasingly interested in learning about health- Figure 27: Consumer Preferences for various Beverages and October 2005 provided the following results on sales of the top
Fermented Drinks containing good 4 16
Bacteria enhancing food ingredients. The U.S. dairy industry has embarked (Source: The Hartmann Group 2003)
Soy Milk 8 14 on ambitious programs to raise the awareness of consumers of the
Cereal with added Folate 14 11 health-enhancing effects of dairy products in reducing osteoporosis,
obesity and diabetes.
Figure 26: Percentage of Consumers who regularly buy Functional
Brand Dollar Sales % Change to Market % Change to Figure 28: Top Energy Drinks by Brand (52
Foods; by Key Category (Source: ACNielsen) Other ingredients which are being promoted are marine-based
(thousands) prior Year Share prior Year Weeks October 2, 2005) (Source: IRI,
Omega-3 fatty acids, docosahexaenoic acid (DHA), and essential fat-
Red Bull 213,249 53.4 54.4 (5.7) Inc. 2006)
Disease-specific foods ty acids (EFA) from nuts, flaxseed and cranberries. Omega-3 and EFA Rockstar 37,391 89.5 9.5 1.0
According to the Food Marketing Institute, 40% of shoppers sought top the list of most-asked-for ingredients in the specialty supplement Monster Energy 36,999 192.6 9.4 4.0
out health and nutrition information in 2003 and frequently turned to category. Infant formulas fortified with DHA and Omega-3 make up a Sobe Adrenaline Rush 20,298 40 5.2 (1.1)
health professionals for advice on diets for specific health problems. rapidly growing segment of the functional ingredient market. AMP 18,851 40.4 4.8 (1.0)
This trend has continued. SoBe No Fear 17,347 93.8 4.4 0.6
Full Throttle 16,956 N/A 4.3 4.3
Rip It 2,652 860.8 0.7 0.6
Hansen’s Lost Energy 2’454 156.9 0.6 0.2
SoBe Lean 2,383 N/A 0.6 0.6

34 The U.S. Food Industry The U.S. Food Industry 35

energy brands in the U.S. the price differential will narrow as the acceptance of functional foods
Natural energy sodas are rapidly growing in popularity as well. by consumers increases. The arrival of mainstream manufacturers in
Examples are Blue Sky’s Blue Energy Soda fortified with ginseng, a particular category can also have a large impact on organic price
caffeine, guarana and all-natural colors and flavorings. American points. A good example of this trend is the organic cereal market.
National’s Ginseng Rush, also a sparkling soda, is geared especially When Kellogg’s decided to come out with its Sunrise organic cereal,
to athletes. Fitonat USA’s Phosphor is an instant energy drink pa- it wanted the price differential to be in the 15 to 20 percent range, not
ckaged in single-shot-sized bottles. The active ingredients are added the 50 to 100 percent range typically found between organic and na-
with the twist of the cap for instant maximum energy. tural up to that point. This helped significantly to reduce prices overall.
Similar considerations apply to the functional food segment.
The following figures project sales of functional (fortified) beverages
within a six year time span:
7.5. Marketing Considerations.
2001 2002 2007 % Increase What can companies do to gain acceptance in the market place?
Chilled Juices 2,800 3,028 4,200 50.0 Brand owners, for one, can adopt the wellness-oriented strategies
Sports Drinks 1,900 2,000 2,600 36.8 of the most successful companies, using only healthy ingredients
New Age Beverages 3,300 3,500 4,200 27.3
and positive wellness messages, or they can choose the ultra-niche
Energy Drinks 168 200 497 295.8
disease risk reduction message. They must also consider carefully
Total 8,168 8,728 11,497 40.8
before they add a new ingredient whether their target consumers will
really accept it and understand its health benefits. If the consumer
Figure 29: U.S. Dollar (thousands) Sales Projections of Functional does not understand the health benefit, that means that time and
Beverages (Source: Business Communications Company) money needs to be invested in a consumer education program to get
the message across.
Power Bars
Power bars can be cereal-based or may have another base such Brand establishment is critical and a major factor in the success of
as soy which is high in protein and offers all essential amino acids. well-known food producers. Since a fair amount of confusion and
Protein and its sources has become of major concern to food produ- uncertainty remains among consumers as to the efficacy of the in-
cers; demand for soy as a source of protein has surged. Cereal and gredients, confidence in the company producing the product and its
snack/power bars have enjoyed overall strong growth, and a continu- health claims for the product are important factors in gaining consu-
ed upward trend at an estimated 7.6% AAGR for the next three years mer acceptance. In cases where the producer’s brand is less well
is expected according to Mintel. known, that of the retailer may make up some of this deficiency; for
example, consumers have come to place trust in the product lines
Intrinsic health or high protein bars are one segment in the cereal bar carried by chains such as Whole Foods or Wild Oats.
food category which, together with high protein powders are slowly
moving beyond their sports niche. Clif Bar offers a baked energy bar Some products benefit from an established image of being healthy
made with whole grains and fruit while Probar’s High Performance without having specific claims attached; cranberry juice is a good ex-
Whole Food nutrition bar is made from 15 blended natural foods. ample. The producer Ocean Spray never went much beyond a simple
PowerBar’s ProteinPlus Carb Select and Promax’s CarbConscious claim of its juice being healthy and refreshing although consumers
bars are fast sellers in the low-carb high-energy category. Soy pro- have used it in the belief that it is effective against urinary tract infec-
tein-based bars are entering the market targeting teens and young tion. An added benefit of this restrained approach to marketing is that
adults. the product avoids the pitfall of being “pigeonholed” into a narrow
niche, but retains its appeal to a broad base of customers.
for “natural foods” which encompass organic and functional foods.
Usually those shelves carry the lesser-known brand products while
big name producers such as Kellogg’s reserve space in their allotted
area in the store.
Whole Foods and Wild Oats specialty chains tend to not differenti-
ate functional foods from other organic or natural items within the
store. These chains are the main outlets although there are a variety
of smaller independent health food stores whose owners pride them-
selves on individual customer service and consulting. Consequently,
the pricing structure at these stores is higher than that of the chains.
The large vitamin/supplements chains such as General Nutrition
Centers (GNC) have begun to add fortified drinks, power bars and
other ready to eat or drink items. We may see more being added if
the trend to convenient small portion drinks or foods takes hold. GNC
also offers individualized consulting.
The consumer’s perception that his/her needs are unique requiring
some advice from the retailer is likely to sustain the niche covered
by smaller health food stores and may prevent functional foods from
becoming a significant factor in the supermarket assortment. On the
other hand, low-carb foods are likely to be available in most super-
markets since this has become a mass phenomenon on which the
large chains as well as the big food producers can capitalize.
7.7. Distribution.
The wholesale distribution of functional foods is not substantially
different from that of other organic foods as the retail channels are
largely identical. Large chains such as GNC have their own regional
warehouses to which distributors deliver. The role of food brokers is
of some importance due to the many small health food stores which
rely on new product introductions by brokers.

7.4. Price Trends.

7.6. Retail Channels.
The cost to develop, produce, test and register functional food in-
gredients is reflected in the retail price which tends to be higher than Sales of functional foods were originally confined to health food
that for non-fortified or even organic foods. It is likely, however, that stores, but even supermarkets are increasingly opening shelf space

36 The U.S. Food Industry The U.S. Food Industry 37

8. Food Distribution.
By Frank Ustar and Ally Gunduz, Swiss Business Hub USA
8.1. Overview.
Choosing the right distributor is one of the critical decisions that an
exporter has to make and that decision encompasses the role that
the distributor has to play, the know-how in the targeted product
segment, the types of retailers on which the distributor concentrates
his efforts, and the marketing assistance that he can provide to the
producer.
Several distribution networks exist that assist the food suppliers in
reaching the end consumer. Some channels operate on a national,
others on a regional basis. The type of channel that is optimal for a
particular supplier depends on the type of product and the targeted
retail outlets. In certain markets such as that for organic foods, a
national distributor may be the best vehicle by which to reach the na-
tionally operating organic food chains. In the case of some specialty
foods, however, regional specialty distributors may be the preferred
choice for reaching regional high-end markets.
The U.S. food distribution structure is complex due to the geographi-
cal size of the market and the great variety of retail outlets available to
the consumer.
For a Swiss food manufacturer, the importer is the starting point in the
distribution chain. He has both the knowledge of the needs in the mar-
ket and the experience to handle the regulatory and logistical require-
ments that underline the import process. This is especially important in
light of the new bioterrorism regulations of the U.S. government which
place an additional burden on both the exporter and the importer.
Generally speaking there are three types of middlemen in the food
industry:
Merchant wholesalers typically buy and resell from a variety of sup-
pliers, consolidate the items and deliver them to the retailers, food ser-
vice establishments, governmental entities, schools. They may also
purchase grocery items from or deliver to other wholesalers. Merchant
wholesalers account for over one half (56%) of all grocery items and
related product sales.
Manufacturer’s sales branches account for 25% of all grocery
items distributed. Branches are maintained by manufacturers in diffe-
rent parts of the country or within a region depending upon the geo-
graphical scope of sales. Branches carry inventory while sales offices
do not.
38 The U.S. Food Industry
Agents and brokers are responsible for 19% of all grocery item and
related product sales. They buy and sell goods owned by others on
commission. Brokers serve an important role in the distribution chain
and act as lynchpin of the entire system. The broker functions as an
agent of the manufacturer and establishes close relations with both
distributors and retailers for the benefit of the manufacturer which he
represents. His role is vital for the functioning of the system and will
be reviewed in more detail later.
Merchant wholesalers are also classified according to the type of pro-
ducts that they handle.
Specialty distributors tend to concentrate their activities on higher-
priced foods or items which are targeted to specific consumer groups
in more upscale retail outlets. General-line distributors sell a broad
range of dry groceries, perishable foods and non-food products sold
in grocery stores.
Brokers serve an important role in the distribution chain and act as
lynchpin of the entire system. The broker functions as an agent of the
manufacturer and establishes close relations with both distributors
and retailers for the benefit of the manufacturer which he represents.
His role is vital for the functioning of the system and will be reviewed
in more detail later.
8.2. The Role of the Importer.
Importers in most cases also function as distributors so that there is
usually no clear distinction between the two functions. Importers are
more readily distinguishable by the breadth of their product range.
Large importers handle a broad assortment of items and tend to be
very selective in the products they carry. The logistics of moving the
products through the distribution channels in the most efficient man-
ner is the main business objective of these types of firms.
Small distributors on the other hand tend to specialize in handling
more limited types of products and moving them through more spe-
cialized channels all the way to specialty retail stores. In many cases
they do not require a minimum import volume. Some focus on pro-
ducts from a limited number of countries, others on a narrow range of
items such as pastries, chocolate or frozen foods.
For a foreign exporter, the latter usually is the preferred choice of
partner since especially small-to-medium size exporters find it dif-
ficult to get consideration from large importers Smaller specialty
importers are more likely to work with the exporter in establishing a
market entry strategy, assist in designing packaging and labeling, ad-
vise the exporter on the needs of the specialty retailers to which they
and solicit purchase of the items from the distributor. The broker often
is able to offer incentives to the retailer for the purchase of certain
sell or handle arrangements with food brokers. Many small importers product quantities. If the retailer meets the required purchase quantity
started out as wholesalers and as such maintain close relations with he receives a discount from the distributor who in turn “charges back”
the retailers they serve which represents an important advantage for the cost to the manufacturer. The broker maintains the records for
an exporter since specialty foods are “pushed” through the channels those transactions as well as for various promotional activities offered
of distribution rather than “pulled” by heavy promotion and branding by the manufacturer.
outlays which are often unaffordable to smaller exporters.
8.4. The Specialty Food
8.3. The Role of Food Brokers. Distribution System.
The food broker functions as a lynchpin for the entire distribution net-
Service % of Respondents
work. He does not take title to the goods but functions as an agent of
Category Experience 82
the manufacturer. His relationship with the various participants in the
Ordering 64
network is a significant factor in achieving successful market penet-
Guaranteed Sales 36
ration. Most often, brokers sell food products to distributors although
In-Store Promotions 36
some larger retailers also buy directly from food brokers if the retailer
Implementation of Merchandising 27
maintains his own warehouse. The commission payable to the broker Programs
ranges usually from 2-7%. Following is an outline of typical broker Split Case Buying 74
relationships with the other channel members and their significance. Individual Store Marketing 36
Variety Image Enhancement 36
Broker - Manufacturer Controlling Inventory Costs 27
As mentioned, the broker acts as an agent of the manufacturer. This
arrangement often is exclusive based on product category, territory or Figure 30: Most Valued Specialty Food Distributor Services
targeted retail channel. The broker stays on top of product and mar- (Source: Specialty Food Distributors and Manufacturers
keting trends in the industry, sales and promotional tools that have Associations www.specialtyfoods.org)
proven successful, consumer buying trends, and price and delivery
considerations. These elements enable him to assist the manufactu- The specialty food distribution channel accounts for 2-5% of retail
rer in formulating a strategy for launching a new product or expanding store sales. Traditionally retailers evaluate their distribution options
the principal’s market share. by “gut feel/experience” or by substituting average dry grocery dis-
tribution costs to estimate the costs of distributing specialty items.
Broker - Distributor However, these evaluative techniques don’t always tell the whole
The broker usually makes product presentations to the distributor. He story and can lead to “high-cost” decisions. Specialty food distribu-
negotiates the terms of sale subject to the final approval of his prin- tors can identify trends in the food market and work with the retailer
cipal. Arranging promotional opportunities with the retailer makes up to identify product mix/shelf set changes that will take advantage of
a significant part of the broker’s activities, and may involve merchan- these new trends and opportunities. They know which new items
dising flyers, newspaper and direct mailer inserts as well as demons- will have the biggest impact. Certain chains such as Tree of Life or
tration and tasting programs. Most of these activities are charged to United Natural Foods, which are well-known for their broad coverage
the manufacturer. He also oversees any discount arrangements that of organic foods, also offer other types of specialty foods including
the manufacturer makes with the distributor to be passed through to ethnic items.
the retailer for special promotional purposes.
Figure 30 lists the benefits that retail buyers derive from their relation-
Broker – Retailer ship with specialty distributors.
The broker takes an active role in the merchandising at the retail level
including product display, shelf space arrangements including reset- There are a number of reasons why a small to medium size Swiss
ting store shelves, marketing, taste testing and demonstrations. The food company should consider using a specialty food distributor.
most important function is to introduce new products to the retailer Such distributors play an important role between the manufacturer
The U.S. Food Industry 39
and the retailer. The following lists4 illustrates this role and provides an
understanding of the scope of their services.
• Make sales and product introduction calls to chain buyers
• Obtain authorization from the buyers to place products in stores.
• Demographic analysis, store by store “niche” marketing.
• Prepare and provide planograms and shelf diagrams for maximi-
zing sales and exposure.
• Provide sales and profit reports to the retailer.
• Provide central billing or store by store billing.
• Take position and maintain an inventory of products.
• Write orders in store.
• Deliver to each store.
• Provide less-than-case quantities of products, as needed.
• Stock the shelves of each store, manage in-store inventory.
• Rotate and freshen stock in the stores.
• Price the product in store for each store.
• Provide shelf tags (tags with a code and description of the product).
• Cross merchandise in several sections of the store.
• Train store personnel on the handling and selling points of products.
• Provide and place point of purchase materials in store.
• Set up and conduct in-store demonstrations and tasting.
• Create in-store programs, special events and promotions.
• Ethnic merchandising.
• Provide co-op advertising programs to share or lower the cost of
advertising.
• Remove damaged, dented, spoiled, out of code, and other pro-
ducts that can not be sold.
• Remove unsold product and provide full credit to the store.
• Ensure technology link-ups and data sharing.
• Category management of specialty food and sections (please refer
to Chapter 8.16 Category Management).
• Handling of lower volume brands.
• Third party logistics partnering.
• Set up and manage special displays, “Store-within-the-Store”
8.5. Distribution to Retail Outlets.
Wholesalers sell to the following outlets:
• Retailers 40%
• Other Wholesalers 25%
• Food Service 22%
• Exports 3%
• Government 2%
• Others 8%
4 Specialty Food Distributor and Manufacturers Association
40 The U.S. Food Industry
Sales to retail stores are showing a declining tendency which may be
due to increasing integration of wholesale functions by large retailers,
especially the supercenters such as Wal-Mart and Costco.
Distribution to retail food stores may be categorized as merchant
wholesaling (Supervalu, Fleming, Nash Finch), direct-store delivery
and integrated retail-wholesale. Especially the latter type is beco-
ming more prevalent with large retailers such as Kroger, Albertson,
Safeway, Ahold, and the supercenters noted above which have the
product delivered directly to their distribution centers. Nearly 34% of
all food distribution centers are operated by such integrated retail-
wholesale establishments. This arrangement reduces both labor and
operating costs.
While integrated retail-wholesale operations may show improved
operating efficiencies, traditional independent distributors, usually
classified as specialty distributors, remain significant players accoun-
ting for 38% of total distribution. They service a broad spectrum of
stores and offer excellent opportunities for quality natural, organic
and imported foods which may not be available in the traditional su-
permarkets. Upscale regional food chains as well as local specialty
stores are the primary target markets for this type of distributor.
8.6. Some Larger National Distributors.
The larger national distributors do not consider new-product intro-
duction as one of their primary functions which makes them an un-
desirable entry point to the U.S. market for foreign suppliers, espe-
cially smaller suppliers. Their advantage vis-a-vis their competitors
is their ability to continually improve operating results by maximizing
economies of scale in purchasing, warehousing, transportation and
general and administrative functions.
Large distributors often purchase on conditions not attractive to
smaller suppliers in terms of volume, price and return. The latter refers
to the ability of the distributor to return items to the supplier if they do
not sell within an agreed upon period of time.
On the other hand, some distributors such as United Natural Foods,
employ buyers who specialize in searching for overseas products.
These companies may also provide regional test marketing services
before committing to a national distribution strategy. This approach is
advantageous to a smaller producer because it does not require sig-
nificant resources and can provide a high level of customer feedback.
United Natural Foods
United Natural Foods also distributes monthly regional customer-
specific flyer programs featuring the logo of the participating retailer
with about 200 sale items offered by the retailer. Each flyer includes
detailed information on selected suppliers, recipes and product fea-
tures. Producer discounts and advertising allowances negotiated with
the distributor are thus passed through to the retailer. Partnership
programs with suppliers are another marketing tool offered by this
distributor. Other retailer-oriented promotional activities are
• In store signage and promotional material including shopping bags
and end cap displays
• Assistance with planning and setting up product displays
• Assistance with store layout
• Provide product data information such as best seller lists, store
usage reports and easy to use product catalogues
• Maintain website domain for retailers
Hain Celestial Group
Hain Celestial products are sold in all 50 states and in approximately
50 countries. Certain product lines have seasonal fluctuations (e.g.,
hot tea products, baking and cereal products and soup sales are
stronger in cold months while sales of snack food products are stron-
ger in warm months).
A majority of Hain Celestial products are sold through independent
food distributors. Over half of these sales orders are received from
third party food brokers. Hain utilizes a direct sales force for sales
into natural food stores that has allowed the company reliance on
food brokers. Food brokers act as agents for Hain within designated
territories, usually on a non-exclusive basis, and receive commission
for their services. Food distributors purchase products from Hain for
resale to retailers. Because food distributors take title to the products
upon purchase, pricing decisions are under their discretion, although
Hain does participate in pricing in connection with promotional ac-
tivities. Hain’s customer base consists principally of mass-market
merchandisers, natural food distributors, supermarkets, drug store
chains, club stores and grocery wholesalers. Recently, growth of na-
tural and organic foods has shifted from the natural food channel to
the grocery channels as mainstream grocery distributors and retailers
offer these products to meet consumer demand and awareness.
Hain uses a mix of trade and consumer promotions as well as me-
dia advertising to market its products such as trade advertising and
promotion, including placement fees, cooperative ad vertising and
advertising in distribution catalogs. The company also utilizes adverti-
sing and sales promotion expenditures via national and regional con-
sumer promotion through TV and magazine advertising, coupons and
other trial use programs.
8.7. Food Service Distribution.
In the foodservice industry especially chain restaurants are serviced
by large distributors such as Sysco Corporation, the largest U.S.
distributor of food products for this industry segment with a market
share of about 14%.
The food service or food-prepared-away-from-home, market repre-
sents approximately one half of total food purchases made at the
consumer level. This share has grown from about 37% in 1972, since
food purchases in the foodservice industry have grown more rapidly
than food purchases in the retail grocery industry over most of that
time period. Factors influencing this trend include increases in dual-
worker and single-parent families; busier lifestyles; the general aging
of the population; growing affluence; and the increasing demand for
the variety, convenience and entertainment afforded by the proliferati-
on of restaurants and other foodservice operations.
8.8. The National Distributors.
Products distributed by Sysco Corporation include a full line of frozen
foods, such as meats, fully prepared entrees, fruits, vegetables and des-
serts, and a full line of canned and dry foods, fresh meats, imported spe-
cialties and fresh produce. The company also supplies a wide variety of
non-food items, including paper products such as disposable napkins,
plates and cups; tableware such as china and silverware, restaurant and
kitchen equipment and cleaning supplies.
Sysco‘s operating companies distribute both nationally branded mer-
chandise and products packaged under Sysco‘s private brands.
As a rule, the prompt and accurate delivery of orders, close contact with
customers and the ability to provide a full array of products and servi-
ces to assist customers in the foodservice operations are of primary im-
portance in the marketing and distribution of products to the traditional
customer segment. Sysco‘s operating companies offer daily delivery to
certain locations and have the capability of delivering special orders on
short notice. Sysco‘s operating companies also provide ancillary services
relating to foodservice distribution such as providing customers with pro-
duct usage reports and other data, menu planning advice, food safety
training and assistance in inventory control as well as access to various
third-party services.
Sysco estimates that it purchases from thousands of independent
sources, none of which individually accounts for more than 10% of the
company‘s purchases. These suppliers consist generally of large corpora-
tions selling brand name and private label merchandise and independent
private label processors and packers. Purchasing is usually carried out
The U.S. Food Industry 41
through centrally developed purchasing programs and direct purchasing
programs established by the company’s various operating companies.
While Sysco continually develops relationships with suppliers, it has no
material long-term purchase commitments with any of them.
Aramark is another foodservice distributor who provides a range
of business dining services, including on-site restaurants, catering,
convenience stores, executive dining rooms and conference center
management. In addition, Aramark provides certain of its food ser-
vice clients with facilities management services, vending and coffee
services to thousands of business and industry clients, concessions,
banquet and catering service, retail, merchandise and novelty sales,
and recreational and lodging services. Aramark is the largest supplier
of catering services to sports facilities in the U.S..
8.9. Co-Packing.
Co-packing refers to the processing of a food product by a manufacturer
other than the original processor. Examples of co-packing are outside
contracting and private label. There are several reasons why a company
would arrange to have their product produced by a second company.
They include
• space and equipment limitations
• consolidation of resources
• reduced labor and administration costs
• quality and safety assurance
Outside contracting is an arrangement between a company that is pro-
cessing a product and a second company that is already processing
a similar product or has the appropriate equipment to prepare the end
product. In this case, the original company continues to sell the product
under its own name. Sometimes the co-packer may ask for some credit
on the label such as a statement saying, „packaged by...”
There are 3 basic types of „co-packing“:
• The client uses the manufacturer’s recipe and slightly ‚tweaks‘ it to give
it a twist and to make it „proprietary“. An example would be to take a
basic mayonnaise and adding roasted garlic and cayenne and, change
the name to „ roasted garlic & pepper aioli“
• The client asks the manufacturer to develop an exclusive recipe for them.
In this case the client normally knows what he wants, he just does not
have a recipe. He may feel that both „ginger“ & „chili“ flavored products
sell well in their region and he would like private label mustard. Therefore,
the manufacturer would go to work on developing a recipe for a „chili-
ginger mustard“
• The client already has his own recipe and he would like the manufacturer to
duplicate it as closely as possible using commercially available ingredients.
42 The U.S. Food Industry
Co-Packing Contract Considerations
Many factors need to be considered when signing a contract with
a co-packer. For example, projected product volumes will influence
how good a match a foreign producer and a U.S. manufacturer will
be. If a producer has very low volumes or a single product to sell,
many manufacturers may not want to bother. On rare occasions, co-
packers turn away large volumes that would cause them to exceed
their capacity or make them too dependent on one customer.
The manufacturer‘s equipment needs to be compatible with the pro-
posed foreign products, or new equipment will have to be purchased.
Who pays for and owns the equipment depends on the situation.
Ingredient-management practices also need to be specified. Some
foreign producers choose to closely control their ingredients by
purchasing and managing their inventories directly. Others allow the
co-packer‘s purchasing agent to handle this responsibility. Depending
on the wishes of the foreign producer, a manufacturer may use the
ingredients originally specified, or substitute in-house ingredients to
streamline inventories.
Manufacturers offer varying levels of assistance to those who want
to put a formula into production. Some co-packers simply blend and
package products, and have no technical department at all, which re-
quires the foreign producer to stay abreast of all technical matters. In
other cases, co-packers can offer the gamut of quality assurance and
R&D services, and may even help formulate or refine the products.
It goes without saying that the co-packer and foreign producer should
have similar standards of quality and sanitation, or the relationship will
not be successful.
One of the biggest challenges for a manufacturer is taking the foreign
producer’s existing formula and adapting it for in-house equipment.
Oftentimes, formulas are developed on a test scale, and have never
been run at a production level; or, they may have been designed for
different equipment. Also, some products scale up more easily than
others. For example, a dry soup mix may be upsized with minimal
difficulties, whereas a formula for a beverage or a sauce may require
considerable adjustment to achieve the correct solids level.
In true co-packing arrangements the marketer will almost always set
product and ingredient specifications.
Contracts should also include detailed exit agreements that spell out
how remaining product and ingredient inventories will be handled if
the contract is terminated or a product is discontinued.
Co-packing is inherently a low-margin, high-volume business.
Manufacturers typically charge 5% to 15% over production costs.
Some manufacturers make no money at all, but use copacking as
a means to build their business up to capacity. These tight margins
leave little room for error.
How will the product be distributed? If it is to be shipped to a central
warehouse, what requirements will be imposed on the manufacturer?
Will the product be shipped in boxes or over wrapped trays and on
which kind of pallets? Will there be need for storage of ingredients,
supplies or finished products? Will the retailer require compliance with
quality and safety standards as certified by a third-party audit?
The services of an attorney who is well versed in such agreements
must be consulted to avoid unpleasant surprises and lay the ground-
work for a profitable partnership.
8.10. Supply Chain.
Primary functional areas targeted for IT investment include trade pro-
motions and supply chain planning, Other supply chain areas such
as manufacturing, distribution and transportation are all reported to
be high on company priority lists, according to a study conducted for
GMA by Computer Sciences Corporation (CSC).
At same time, GMA companies are making significant progress to-
ward global data synchronization, radio frequency identification (RFID)
and the electronic product code (EPC). Two-thirds of GMA member
companies report that they are actively synchronizing base item data
with trading partners. Nearly as many (64%) report that they are in the
information-gathering stage with RFID, while 38% are designing RFID
programs, and 19% are actively testing RFID. Five % report they are
piloting RFID with customers, while 2% are implementing RFID.
Priority areas in 2005 ran the gamut from demand planning and in-
ventory management to collaboration oriented IT systems such as
e-procurement (electronic procurement and PIM (product informati-
on management). Over the next couple of years more retailers will
also emphasize both demand planning and inventory management
systems. Increasingly, demand planning is being performed collabo-
ratively, too.
Food companies are using increased delivery frequencies, smaller
orders and faster order cycle times to keep costs low while meeting
their customers‘ and consumers‘ increasing demand for fresh food.
Some of the latest trends in the fresh fruit supply chain:
• Increased focus on freshness. This requires that fruits, vegetables
and semi processed (ready to eat) salads must be presented to
consumers in immaculate condition while maximizing shelf life to
avoid costly waste.
• Proliferation in fruit and vegetable product variety. Along with mee-
ting increased demand for organic and imported specialty fruits
and vegetables, retailers must be able to secure high quality local
and imported products all year round. This requires wholesalers
to act as both local agent and a value added sourcing specialists.
• Increased attention to maintaining the „cold chain“.
8.11. Food Marketing.
Food marketing strategies must take into account all levels of the
supply chain, the manufacturer, the broker, distributor, retailer and
end consumer. The activities as well as materials used in the mar-
keting process must be coordinated at all these levels and provide a
consistent and coherent picture of the product to be marketed. Any
marketing program must be based first and foremost on the eating
habits of the consumer and research on consumption trends is the
critical for developing an effective marketing strategy. All other ele-
ments of the strategy such as pricing, packaging and promotion will
then need to be aligned with the results of the research.
8.12. Consumption Trends.
Convenience, freshness, cook at home are important trends
which may at times even be contradictory and present marketing
challenges to both domestic and foreign producers. Food that is easy
to prepare, comes in resalable packaging, with freshness dating, easy
to clean, easy to open and precooked are features most desired by
consumers (survey by Yankelovich, 2004).
Fresh, healthy and convenient products are likely to show then
greatest success in the marketplace such as Morey’s Marinated Asian
Sesame Ginger Shrimp, Chili Lime Tilapia and Teriyaki Salmon or
Smithfiled foods’ refrigerated Flavors’ Brand Southwestern Meatloaf
in Chipotl Sauce or Healthy Choice’ Grilled Basil and Tuscany
Chicken. Super quick foods in aseptic microwavable pouches are
being offered by major brand-name producers such as Tyson Foods
and Rice-A-Roni.
The U.S. Food Industry 43
Premium food has been the category most sought after by food Allergies are another concern that food producers are addressing market by mass merchandisers proves that price and choice are im-
marketers. Fish plays a major role in that market segment which has (19% of consumers are allergic to milk, 16% to seafood or tree nuts, portant for the food shoppers who increasingly view super centers 8.14. Private Store Brands.
penetrated also the traditional fast-food segment with some of the 15% to peanuts, 14% to wheat, 8% to eggs). New regulations co- and warehouse clubs as their primary level of supermarkets in terms
major chains offering seafood sandwiches, burritos, burgers. Fish- vering allergen labeling provide further impetus to the targeting of of quality and freshness of food selection. According to the Private Label Manufacturing Association, one in five
specific condiments appear to be making strong inroads as well. foods to these consumer segments. products purchased in grocery outlets is a “private brand” product.
The intense competition among food retailers is demonstrated by Such items have long been considered as being of lower quality
Low-fat foods across all retail channels are a major trend with man- profit margins which continue to hover around 1 cent on each dollar than their national brand counterparts. More recently however, the
datory transfat labeling. The new Dietary Guidelines for Americans 8.13. Product Pricing. of sales. In 2003 the industry’s after-tax net profit was 0.88 cents perception of store brands has changed significantly. According to
address the strong concern about heart disease and marketers are The index of retail food prices which had risen significantly in 2004 (FMI Annual Financial Review, 2003-2004). Return on total assets, the AC Nielsen Homescan Consumer Insights „Retailers are increasin-
moving rapidly to develop transfat free foods. Major brands such due to a combination of unexpected shocks in the supply system, return generated by the firm’s asset base, was 3.20 percent in 2003 gly using private label not just as a way to boost margins, but also
as Frito-Lay, Kraft Foods JM Smuckers are removing transfats from pressures from a recovering economy and higher energy prices did and the return on owner’s equity was 9.38 in the same year. to differentiate themselves in the market when it comes to consu-
all snack foods. Unilever is offering trans fat free margarine, Wilbur level off and even decline in 2005. The outlook for 2006 remains unc- mer shopping patterns“. Retailers’ efforts to improve quality and
Candy Company has launched zero transfat cinnamon drops. lear due to the worldwide rise in commodity prices. Traditional supermarkets are losing market share on the one end to packaging of their own brands has been rewarded with incremental
the super centers and warehouse clubs and on the other end to spe- sales and profits and has become a major factor in customer loyalty.
Whole-grain baking products are another important trend embraced Traditional retailers compete with discount superstores, club cialty retailers in the organic food sector such as Whole foods and In some cases (like Trader Joe‘s), the store‘s own brands have led to
by major brand-name producers such as General Mills with its whole- warehouse stores, supercenters and convenience stores that incre- Wild Oats or regional upscale specialty stores such as d’Agostinos their consumers‘ perception of a higher quality store overall. From the
grain Big G cereal, Sara Lee’s premium breads, Pepperidge Farm’s asingly offer a broader array of food products to their price sensitive on the East Coast or Gelson’s and Bristol Farms on the West Coast. manufacturer’s viewpoint the product image, promotion and pricing
Whole Wheat English Muffins, Brownberry’s Natural Oatmeal and and time pressured customers. These non-traditional outlets have must meet the image of the retailer for the product to be successful.
12-Grain Breads. Pasta lines made from whole wheat are showing increased their share of food-at-home expenditures from 17.7% in
up on shelves as well. 1998 to 32.9% in 2004. At the same time, traditional retailers decre- U.S. retail sales of private label food and beverages amounted to
ased their share from 73.4% to below 60%. Figure 32: Sales and Growth of Private Label Categories, Sales $118 billion in 2003 as estimated by Packaged Facts and are expec-
Low-calorie entrees are marketed by Heinz, Lean Cuisine, and in U.S. Dollar million, Unit Sales in million, December 2004 – ted to grow to $150 billion by end 2006.
Hershey is adding more fiber to its line of sugar-free products. Light Grocery expenditures vary by region. Households on the East Coast December 2005
cheeses such as Laughing Cow’s Light and Creamy Swiss Bites fol- averaged the most ($100 per week), followed by shoppers in the (Sources: IRI, Inc., Private Label Buyer, February 2006)
low the same trend. West ($95), South ($88) and the Midwest ($85) (FMI 2003), with no
major shifts in that pattern in 2004 and 2005. Price remains a high Private Label Category Sales in US $ Share of total Sales in Units Average price
Sales % change over product Unit sales % change over per unit In $
priority in the selection of retail outlets. Increased penetration of the
prior year category in % previous year
Beverages (carbonated) 852 -2 6 835 -3 1.02
Item Consumer Price Indexes Relative im- 2003 2004 2005 Forecast
portance in % 2006 Beverages (refrig. Juice & drinks) 471 0 12 250 -1.74 1.88
All foods 100.0 2.2 3.4 2.4 2.0 to 3.0 Candy (Chocolate) 70 32 2 36 25 1.93
Food away from home 42.7 2.1 3.0 3.1 2.5 to 3.5 Candy (non-chocolate) 141 -2 6 118 2 1.19
Food at home 57.3 2.2 3.8 1.9 2.0 to 3.0 Coffee 252 19 9 77 2 3.25
Meat, poultry, fish 14.7 4.0 7.4 2.4 0.0 to 1.0 Dairy (Milk) 6,504 -1.6 59 2,659 -1.5 2.45
Meats 9.5 5.4 8.4 2.3 (0.5) to 0.5 Dairy (natural cheese) 2,116 0.2 36 878 0.5 2.41
Beef, veal 4.6 9.0 11.6 2.6 0.0 to 1.0 Dairy (processed cheese) 426 -7 19 190 -6.5 2.24
Pork 3.0 1.9 5.6 2.0 (2.0) to (1.0) Dried Fruit 78 20 15 37 11 2.13
Other meats 1.9 2.5 4.5 2.4 0.0 to 1.0 Frozen Appetizers/Snack rolls 57 31 6 22 21 2.58
Poultry 2.7 1.3 7.5 2.0 (1.0) to 0.0 Frozen Dinner/Entrees 142 8 2 50 2 2.86
Fish and seafood 2.4 1.0 2.3 3.0 3.0 to 4.0 Frozen Pizza 188 5 7 544 2 1.79
Eggs 0.6 13.8 6.2 (13.7) 2.5 to 3.5 Frozen Plain Vegetables 687 3 47 541 2 1.26
Dairy products 6.1 (0.1) 7.3 1.2 0.0 to 1.0 Frozen Seafood 637 4 39 106 4 6.04
Fats and oils 1.7 1.3 6.6 (0.1) 1.5 to 2.5 Pasta 238 4 20 271 0.9 0.88
Fresh fruits and vegetables 7.0 2.7 3.5 3.9 4.0 to 5.0 Pickels, Olives, Relish 403 -0.7 29 284 -1.2 1.42
Processed fruits and vegetables 1.8 0.9 1.3 3.3 3.5 to 4.5 Figure 31: Retail Food Price Changes from Rice 134 -4 13 92 -5 1.46
Sugar sweets 2.2 1.9 0.7 1.2 2.5 to 3.5 2003 through 2006 (estimated); Source: Salad dressings (shelf-stable) 130 69 86 14 1.52
Cereals and bakery products 7.9 2.4 1.6 1.5 2.0 to 3.0 Bureau of Labor Statistics; Forecasts by Snack (Bars, granola bars) 89 28 5 43 30 2.08
Nonalcoholic beverages 6.5 0.4 0.4 0.4 2.0 to 3.0 Economic Research Service of the U.S. Snacks (nuts, seeds) 468 3 30 158 -2 2.96
Other foods 8.9 1.0 0.5 0.5 2.0 to 3.0 Department of Agriculture Snacks, salty 354 3 5 261 0 1.36

44 The U.S. Food Industry The U.S. Food Industry 45

Reasons for the growth in private label sales are
• increased price consciousness of the consumer
• greater push of store brands due to bigger profit margins
• less brand loyalty among younger shoppers
• increase in own manufacturing by big-box retail chains
One clear trend on the part of retailers is to move store brands in an
upscale direction. For example, the Safeway Select Line now features
1,260 items, Kroger’s Private Selection nearly 500 items, Albertson’s
launched its own brands in 2003 with 35 items and has been expan-
ding that line rapidly throughout 2004 and beyond. Such premium
store brands provide the gourmet buyer with additional choices at a
better price than company brands.
Supermarket retailers are tracking potential store-brand categories as
new opportunities and introducing products under their own banner
that threaten categories that have been dominated by other brands.
A few categories showed special strength in 2005. While private label
barely had a presence, if at all, in baby food, IRI reports that the total
category was essentially flat at $878.9 million, while private label grew
17.5% to capture $4 million in sales and about a half percent of cate-
gory share. Bottled water generated almost 12% to capture $800.4
million of sales. Private label has earned more than 20% of the bottled
water category already. The segment is likely to flourish as innovation
(flavored varieties) drive the industry. Figure 32 shows the sales and
growth rate of certain private label categories from December 2004 to
December 2005 for all supermarket, drug stores and mass merchan-
disers (except Wal-Mart).
Households with children are the most frequent buyers of private
label products followed by blue-collar households which stands to
reason due to the lower cost per item compared to national branded
items. Figure 33 gives a breakdown of the buyer categories.
Private Label Purchase % of total
Households with Children 40
Blue Collar Households 27
Female Heads of 23
Household (age 45-55)
Female Heads of 19
Household (age 33-44)
Household of 5+ Members 15
Low Income Household 9
Figure 33: Purchases of Private Label excluding Bread, Milk, Eggs
(Source: ACNielsen)
46 The U.S. Food Industry
According to the publication Private Label, Wal-Mart’s Great Value
brand is the best selling store brand in the U.S. grocery market.
Trader Joe’s relies almost exclusively on its own store label. The top
three U.S. supermarket chains with PL brands are Kroger, Albertson’s
and Safeway. Walgreens, CVS and RiteAid are the top drugstore
chains offering private label items. Costco is a trendsetter for its “co-
branding” strategy which involves linking private label brands and
national brands.
Retailer Percent Private Label
Save-a-Lot 51
Kroger 28
Safeway 25
CostCo 21
Walgreen’s 21
Wal-Mart 17
Sam,’s Club 10
Target 8
Figure 34: Private Label - Importance by Retailer
(Source: ACNielsen Homescan Store Brands)
8.15. Promotion.
Promotional spending is on the increase both as a percentage of
gross sales (17.3% in 2003 up from 14% in 1999) and as a percenta-
ge of total marketing spending (54% in 2003 up from 49% in 1996).
Procter & Gamble and Kraft Foods were the leaders among manufac-
turers, Wal-Mart Stores Inc. on the part of retailers.
“Slotting allowance“typically refers to a lump-sum, up-front payment
by a food manufacturer to have its products placed on supermar-
ket shelves. This payment by manufacturers to persuade channel
members to stock, display and support „new“ products may also be
spread out in a series of installments, and in some instances, manu-
facturers provide free cases of new products to help gauge consu-
mer demand. Although common, slotting fees are neither uniformly
requested nor offered.
The most common allowances are for new products - so-called new
product introduction fees. Others that are sometimes also referred to
as slotting allowances may include fees for premium product place-
ments, such as on eye-level shelves or special displays; fees to have
products remain on shelves - pay-to-stay allowances; or fees to be
paid if a product fails.
The slotting fee cost varies depending on numerous factors, such
as whether the supplier has a proven track record, whether consu-
mer testing has been carried out, whether the product is carried by
competitors in the same market, and whether the supplier has a well-
thought-out advertising program. The amount can be as small as se-
veral hundred dollars to have a product introduced in a single store to
many thousands of dollars for a chain-wide promotion.
Frozen foods, together with dry grocery, beverages, household main-
tenance products, and snacks are especially the subject of slotting
allowances. On the other hand, fresh meat and seafood, produce,
and deli were only subject to „light“ usage of slotting allowances. In
addition, direct store delivery bypassing the retailer’s warehouse may
entitle the manufacturer to a reduced or entirely waved slotting fee
as the retailer thereby avoids the cost of warehousing, distribution
and stocking. This points to the importance of close supply chain
management.
In many cases slotting allowances are commingled with other pro-
motional allowances for product displays and demonstrations, cou-
pons, introductory discounts per unit. With many retailers receipt of a
slotting fee does not guarantee any particular shelf placement except
that the product is given an opportunity to gain exposure.
The amount of slotting fee varies by region, retail type and product.
While retailers are hesitant to disclose both the existence and amount
of such fees, they can be assumed to range from a low of $50 for
fresh bakery products due in part to direct-store delivery and $10,000
per grocery item.
Loyalty Programs
Food retailers use loyalty marketing program, also known as frequent
shopper programs, savings clubs or reward-card discounts to identify
their best customers and reward them with discounts on groceries.
About 40% of food retailers offer loyalty programs. Most of these pro-
grams are free although some retailers charge a one-time fee to be-
come a member. Retailers without such programs include supercen-
ters, warehouse clubs outlets, limited assortment and other stores,
which offer every-day low prices. Many successful programs enable
retailers to customize their offering to the interest and preferences of
individual customers.
Stores use the data gathered through these programs to
• Identify the promotions that appeal most to various customer
groups, e.g. discounts or rebates for price conscious shoppers;
convenience food and delivery services for busy shoppers;
• Reduce the shelf space devoted to slow moving items in order to
stock the products that customers prefer;
• Keep popular items from selling out;
• Reveal when products were sold and whether they were sold on or
off promotion and the profit margin on each sale;
• Improve speed-to-shelf and decrease out-of-stocks;
• Determine how product deletions affect their best customers, and
take steps to keep those customers from taking their business
elsewhere.
Although food retailers send targeted offers to individuals, they typi-
cally analyze data at an aggregate level, i.e. data from groups, not
individuals. Some stores track total purchase amounts and shopping
frequency but not individual items.
It has been estimated that a program’s first year cost can be as high
as $30 million when used by large stores with annual maintenance
and marketing costs reaching $5 million and more. Smaller operators
may be able to mitigate some of the costs by buying off-the-shelf
software. Alternatively, they can enlist an application service provider.
8.16. Category Management.
Category management as opposed to single-product management is
widely practiced by the major retailers although critics have charged
that it leads to a sameness in the product selection which can prevent
the retailer from differentiating itself from the competition. Category
management involves5.
• a joint retailer/supplier process for evaluating and managing
categories
• as separate business units
• on an item by item basis by ...
• focusing on delivering consumer value
It is driven by the retailers’ requirement to develop their categories
and satisfy customers profitably. This makes it essential for manu-
facturers to be category rather than brand focused and retailer rather
than internally focused. The aim is to grow retailers’ categories reve-
nue and profits through their brands by focusing on the consumer in
developing and monitoring targeted strategies for profitable growth.
The basic prerequisites for a category management system are
• Information and technology (the data necessary to fuel the cate-
gory management process include retailer scanning data, in-store
audits data, market data, consumer and shopper research).
• Collaborative trading partnerships
• company structure that aligns best practices across all channels
• category management benchmarks oriented toward the best
practices of the industry as a whole
5 ACNielsen
The U.S. Food Industry 47
From the standpoint of promotions, a category management per-
spective strives to achieve the following:
• attract new users to the category increasing penetration for the
category
• encourage existing users of the category to buy more and thus
increase their weight of purchase
• encourage all users to buy more often increasing their frequency
of purchase
Safeway, one of the largest grocery retail chains, provides instructions
to suppliers in its Supplier Handbook as to the process of presenting
new products to the company which make it clear that the category
managers have prime responsibility for acceptance or rejection of the
product. In order to be considered as a supplier a new applicant
must purchase the ACNielsen New Item Information Package which
allows Safeway to make decisions quickly about the product’s “fit”
with other items in the category under which it is classified based on
the Safeway Merchandising Identification Code (SMIC).
Safeway reviews the categories on a specific schedule which involves
item placement and selection. Space allocation (percent of cubic feet)
is paid for by the vendor (see slotting fees).
8.17. Food Packaging.
Retail trends indicate that perishable foods comprise over 50 per cent
of all foods and, therefore, must be packaged in either gas permea-
ble or re-closable packaging to avoid spoilage, so the food will last
from the manufacturer to the table. Even non-perishable, dry foods
need to have an extended shelf life. Retailers prefer at least a year‘s
storage on shelves to meet their requirements for non-perishable dry
food packaging.
The growth in hi-tech packaging is a significant development for the
food and drink industry. It appears that about 99.8% of all food and
beverage items are at one time encased in some sort of packaging,
and that food and beverage packaging is accountable for two-thirds
of the $120-billion U.S. packaging industry.
A relatively new concept in food packaging is active packaging. This
sector includes oxygen scavengers, moisture controllers and ethylene
absorbers to help reduce the pathogens and gases that contribute to
food spoilage. The food and drink market represented $2.4 billion of
the total $5.9 billion dollar active packaging market in 2003.
Controlled packaging includes aseptic and retort packages, modi-
fied air packaging (MAP) and biodegradable packaging. Annual sales
48 The U.S. Food Industry
of this sector reached $13 billion last year, or approximately 17 per
cent of the entire U.S. food packaging industry. MAP/CAP packaging
is the fastest growing sector with an average annual growth rate of
13.6% over the next five years.
The reason for this seems to be that flexible packaging is 75% to 90%
lighter than rigid packaging, easier to compact, and take less room in
landfills. Aseptic juice boxes for example make up approximately 9%
of the juice market but comprise only 3% of the waste.
There has been a significant change in the canned food market. Metal
cans are declining and being outperformed by flexible packets or car-
tons, such as Saupiquet’s diced tuna in a Doypack, manufactured by
Thimonier.
A major growth sector is packaging that caters to consumers with
limited time for food preparation. One innovation on display at the
show is the Plastobreiz tray, a transparent sealable microwaveable
tray for omelet’s or fresh ready-made food.
Environmentally friendly biodegradable packaging is another growth
area, reflecting consumer and retailer awareness of the issue of waste
disposal. A large number of packaging firms are launching products
made of 100% recycled materials, and their biodegradable inks are
also increasingly evident on the market.
And finally, new packaging ideas have been developed in response
to growing food manufacturer fears about food safety and tampering.
Packaging is likely to perform a key role in establishing and maintai-
ning consumer confidence.
9. Marketing Agreements and
Strategic Partnerships.
By Daniel A. Wuersch, Wuersch & Gering LLP
9.1. In General.
In addition to understanding the regulations of the Food and Drug
Administration (FDA) discussed in Chapter 10 and the import regula-
tions discussed in Chapter 11, when entering the U.S. markets Swiss
food manufacturers need to consider other legal issues that can de-
termine the success of marketing food products in the U.S. and limit
the risks associated with a failure of these efforts. These issues in-
clude the risks associated with tort liability for health risks posed by
food products, commercial risks, the high cost of litigation and the
tax implications of doing business in the U.S. To reduce these risks to
a manageable level, respect for the complex legal environment and
careful planning is required.
Like Switzerland, the U.S. constitution established a federal system
in which the 50 states (and the District of Columbia) maintain consi-
derable autonomy. Certain areas of the law fall both within the scope
of authority and jurisdiction of the federal and the state governments,
including income tax laws, unfair trade laws and anti-trust laws,
trademark law. Other areas are exclusively governed by federal law
(e.g. patent or copyright law) or state law (e.g., contracts and general
tort law). Thus, 52 legal systems can govern the marketing of food
products in the U.S., each with a multitude of potentially applicable
statutes, regulations, and court decisions.
Because food products are targeted to reach a large group of con-
sumers, companies may be subjected to lawsuits in several states. If
a food product poses a health risk to consumers, a company can be
sued in a so-called class action in which a plaintiff can sue on behalf
of all members of the class of consumers harmed by the defective
product. These class actions are a powerful tool in the hands of a
lawyer who represents the class on a contingency basis. Through
the multiplication effect of the class, even relatively modest damages
inflicted on a single consumer can become a multi-million dollar pro-
blem for the manufacturer of the defective product. Recently, federal
legislation restricted the ability of lawyers to shop for a sympathetic
forum in state courts in class actions on behalf of consumers located
in different states.
9.2. Marketing Arrangements.
Swiss companies can either actively market their products in the U.S.
on their own, or through intermediaries, including agents, distributors
or resellers. These intermediaries can either be independent third par-
ties or related parties, such as joint ventures or subsidiaries. Agents
are independent contractors who solicit sales of products or services
of a domestic or foreign company for a commission, typically calcu-
lated as a percentage of gross or net sales. Distributors and resellers
purchase goods or services from a manufacturer or service provider,
and then resell them at a mark-up to other distributors, wholesalers
or retail customers.
Sometimes there are several legally significant relationships between
a manufacturer and its intermediaries. E.g., a distribution agreement
can include elements of an agency relationship for certain products,
and an agreement to provide services for the manufacturer (e.g., trai-
ning customers, or organizing promotions at trade shows or in retail
outlets).
Marketing through a U.S. Subsidiary or Branch
In certain circumstances, it can be beneficial to establish a physi-
cal presence in the U.S. to more effectively market products. Often,
this decision is made once a certain market penetration threshold
has been achieved. If a foreign company is marketing its products
through employees in the U.S., a subsidiary is generally necessary
to avoid income tax consequences for the foreign parent in the U.S.
For Swiss companies, a subsidiary in the form of a corporation, rather
than a branch (or a subsidiary in the form of a transparent entity for
tax purposes), typically is the desirable form for a physical presence in
the U.S. Otherwise, the Swiss parent company may directly become
subject to taxation in the U.S. Prior to forming a U.S. subsidiary and
structuring its relationship with the Swiss parent, the impact of rules
of international taxation contained in the Internal Revenue Code of
1986 (including the transfer pricing regime pursuant to Section 482),
and the Swiss-U.S. Income Tax Treaty of October 2, 1996 should first
be understood.
The U.S. Food Industry 49
9.3. Contract and Tort Issues.
Contract and Tort Law in the U.S.
The law on contracts and torts is state law. Except for Louisiana, all
states and the District of Columbia follow the English common law
tradition, in which case law (court decisions), rather than statutes,
traditionally determined the law. Despite its roots in the English com-
mon law, the case law is often supplemented (but not replaced) by
statutes (e.g., New York General Obligations Law of April 23, 1963
(“GOL”); California Commercial Code, effective as of January 1, 1965;
Chapter 106 of the General Laws of Massachusetts). An important
statute, which has been adopted by all states (with certain excep-
tions and modifications) is the Uniform Commercial Code (UCC), a
uniform statute drafted by the National Conference of Commissioners
on Uniform State Laws in partnership with the American Law Institute
(see www.nccusl.org). In its Article § 2 (which was not adopted by
Louisiana), the UCC establishes the rules applicable to contracts for
the sale of goods. The U.S. is also a party to several treaties that
can apply to a contract between a Swiss and a U.S company (e.g.
the Vienna Convention on the International Sale of Goods (“CISG”) of
1980). Tort law is still mostly governed by case law.
The conflict of law rules of states determines which state law applies
to a contract or a tort matter between residents of different states
(or foreign countries). These rules generally permit the parties to a
contract to select the law that shall govern their relationship. In the
absence of a choice of law by the parties, courts will decide which law
has the “most significant relationship” with the contract in question.
In the case of a tort claim, the most significant relationship is typically
with the state in which the tort has been committed.
In a contract, the parties may also choose the courts or arbitration fo-
rum that have jurisdiction over any disputes arising in connection with
their contract. Otherwise, the jurisdiction of the various state courts
is determined by the so called “long-arm” statutes of the states, and
by the jurisdictional provisions of the Rules of Civil Procedure for the
federal courts. According to these rules, the federal courts have juris-
diction in contract disputes between a U.S. and a foreign company
if the amount in dispute exceeds $75,000. In contract disputes, al-
ternative dispute resolution (such as arbitration or mediation) is often
used to resolve contract disputes. Arbitration rules that are well es-
tablished include those of the American Arbitration Association (AAA)
and, for international contracts, the rules of the International Chamber
of Commerce (ICC).
Contractual Risk Allocation
Because there is no uniform statutory law that regulates all aspects of
contract law, and contracts are interpreted strictly based on the lan-
50 The U.S. Food Industry
guage in a written agreement (parole evidence rule), American con-
tracts tend to be longer and more comprehensive than their European
counterparts. Despite the understandable desire to keep contracts
“short and simple,” Swiss companies should be aware of the risks
that can result from an incomprehensive contract with a U.S. busi-
ness partner.
Most commercial risks can be freely allocated to either party to a con-
tract. However, there are limitations. For example, common law does
not permit a party to deny responsibility for willful misconduct or gross
negligence. In addition, while liability for statutory or tort liability can
be limited vis-à-vis a contract party, these limitations are not effective
vis-à-vis third parties.
Implied Covenants and Warranties
A contract party may not only be liable for commitments and re-
presentations expressly made in a contract, but also for implied
covenants and warranties. UCC Art. 2 in particular provides that in
every contract for the sale of goods there is an implied warranty that
title to the goods is transferred to the buyer. In a contract for the
sale of goods by a merchant, implied warranties of merchantability
and fitness for a particular purpose are deemed to be given, except
where these warranties are conspicuously disclaimed with language
prescribed in UCC Art. 2.
Tort Claims
A tort claim can be brought against a food manufacturer if it can
be shown that a food manufacturer negligently caused damages to
resellers or consumers in the U.S. (e.g., because it permitted a food
product to be contaminated in an unsanitary environment). In addi-
tion, a tort claim can also be brought against the manufacturer of
a food product without proving negligence (strict liability) if the ma-
nufacturer brought the food product into circulation despite known
health risks and without adequate warnings (e.g., carcinogenic food
additives). Compliance with the requirements promulgated by the
FDA or the USDA does not protect a manufacturer from this type of
liability. If many consumers are (potentially) harmed, a manufacturer
may, under certain circumstances, be sued in a so called class action
by one consumer on behalf of the entire class of affected consumers.
9.4. Exploring and Evaluating
Market Opportunities.
Confidentiality Agreements
Entering into a confidentiality agreement with a potential business
partner in the U.S. is a necessity before any serious discussions are
held on a future cooperation. Otherwise, the potential partner is not
restricted from publishing any confidential information (e.g., recipes,
marketing plans, financial projections) or from using the confidential
information for its own purposes. To ensure the enforceability of a
confidentiality agreement, the information covered must be descri-
bed as precisely as possible and may not include non-confidential
information. Because damages resulting from the violation of a confi-
dentiality agreement are difficult to prove, confidentiality agreements
should specify that injunctive relief is available to remedy any violation
of the agreement.
Under U.S. rules of civil or criminal procedure and certain laws and
regulations, confidential information may, however, be required to be
disclosed to third parties or governmental authorities. In order to avo-
id a violation of a confidentiality agreement, confidentiality agreements
typically permit the disclosure of confidential information in these
circumstances.
Consulting Agreements
During the evaluation and market development phase, it may become
necessary to hire consultants in the U.S. Consultants typically perform
services for a time-based flat fee, performance based compensation
or a combination of the foregoing. Generally, the terms of consulting
agreements should permit an easy termination of the relationship and
clear milestones that define the expected results. Consultants should
be bound by a confidentiality agreement (which can either be part
of the consulting agreement or a stand-alone agreement), and the
consulting agreement should specify that any work product created
by the consultant belongs to the client. Depending on the circum-
stances, an exclusivity and possibly a non-compete clause may be
appropriate elements of a consulting agreement.
9.5. Marketing Agreements.
Purchase and Sale Agreements
Agreements for the sale or delivery of food products to U.S. resellers
or customers are generally governed by UCC Art. § 2. Therefore, limi-
tations of implied warranties must follow the UCC Art. 2 rules as men-
tioned before. UCC Art. 2 also contains a special rule, Rule § 2-207,
for “battle of the forms,” i.e., situations where the general terms of a
seller and those of a buyer contradict each other. Under the common
law “mirror image” rule, a valid contract can only be formed if offer
and acceptance are identical (i.e. the mirror image of each other).
Under the UCC rule, an acceptance which contains terms that are
different from those contained in the offer can lead to a valid contract
if the new terms do not materially alter the offer and the offer did not
expressly limit the acceptance to the terms of the offer. To avoid being
bound by unexpected terms, general terms and conditions should
contain such a limitation. Large U.S. companies typically require strict
adherence to their terms of purchase or sales. Delivery and price
terms are essential elements of any purchase and sale. When using
trade terms, such as INCOTERMS, food exporters should be aware
of the fact that certain of these terms may have a slightly different
meaning in domestic U.S. law.
Agency Agreements
As briefly described earlier, an agent is retained to solicit offers from
U.S. buyers (or licensees) in consideration of a commission. The
amount and type of commission varies greatly, depending on the pro-
duct, the expected volume, exclusivity and other factors. When struc-
turing agency agreements, it is important to create incentives for the
agent to maximize the sales for the principal. This can be achieved by
a tiered commission-structure, based on sales volume and including
penalties for an agent’s failure to reach a minimum sales level (e.g.,
loss of exclusivity in a particular territory, reduced commissions, etc.)
Because the agency relationship may not be clear to a customer (or
the general public), the agreement should clearly define the role of the
agent and specify that the agent is not authorized to commit the prin-
cipal or make unauthorized representations on its behalf. Otherwise,
the principal could become liable for unauthorized promises or war-
ranties made by the agent to third parties. The agent, on the other
hand, risks that it will likely be first in the line of fire, if problems with
a product result in liability claims in the U.S. Agents therefore have a
legitimate interest in limiting their liability to acts for which they can
reasonably be held responsible and in securing the support of the
principal in defending such claims (including indemnification for its
costs and damages).
Distribution Agreements
The issues arising in connection with distribution agreements are in
many respects similar to those discussed with respect to the agent.
As in an agency agreement, a distribution agreement should contain
restrictions on the representations and warranties that a distributor
is authorized to make vis-à-vis its customers. On the other hand, a
distributor will have liability concerns similar to those aforementioned.
However, distribution agreements can create additional issues under
applicable intellectual property law and federal anti-trust law. Because
a distributor will use the intellectual property rights of a Swiss manu-
facturer (including its trade marks and patent rights), the issues dis-
cussed should be considered when structuring the relationship with
a U.S. distributor. Antitrust issues raised include possible prohibited
price fixing, and exclusion of third parties from competition.
The U.S. Food Industry 51
Licensing of Intellectual Property
There are different types of licensing agreements, depending on
the type of intellectual property being licensed (patents, copyrights,
trade- or service marks, or trade secrets). Because patent and copy-
right license are rarely of interest to food manufacturers, the following
discussion is limited to licenses of trade marks and trade secrets.
Licensing of Trademarks
Trademarks can be created under federal or state law. Under the fe-
deral Lanham Act, trademarks used to distinguish products can be
registered in the U.S. Patent and Trademark Office. Through regis-
tration, the owner of the mark is permitted to use the ® symbol in
connection with the registered mark. Use of the ® symbol without a
valid registration is prohibited in the U.S. (the “TM” symbol - ™ may
be used with unregistered marks). A trademark registration is prima
facie evidence of the exclusive ownership of a mark. However, both
under the Lanham Act and under state law, rights in trademarks or
service marks can also be created through the simple use of a mark
in commerce.
A trademark license should define (1) the territory within which the
licensee has the right to use the trademark, (2) the scope of the
licensee‘s rights (exclusive/non-exclusive use), and (3) the time period
during which the licensee may exercise these rights. Although the life
of a trademark is not limited, the owner of a trade or service mark can
lose its right (or the value of its mark) if the registration is not renewed,
the mark is no longer used in commerce or the owner of the mark
permits the use of the mark by unauthorized persons or in a manner
that diminishes the value of the mark. Therefore, a license agreement
must permit the licensor to monitor the quality of the goods that the
licensee sells under the licensor’s mark, and the licensor must in fact
exercise its control rights. The licensor can also lose the protection of
its mark if the license does not provide that all goodwill created in the
mark by the licensee inures to the benefit of the licensor.
A trademark license can either be a separate agreement or be inclu-
ded in another agreement (e.g., agency or distribution agreement).
Licensing of Know-How and Trade Secrets
The issues that must be addressed in licenses of know-how or trade
secrets are similar to those previously discussed. It is important to re-
member that the protected know-how is secret at all times during the
term of the license. Moreover, the nature of the protected information
needs to be carefully defined in the license agreement. Because the
confidential information is revealed to the licensee for the purpose of
a commercial activity, the transfer of the knowhow or trade secrets,
the scope of authorized users, the duty to maintain the information
confidential, and the return of the confidential information at the end
52 The U.S. Food Industry
of the license term should be clearly regulated in the agreement. A
know-how license does not need to have a time limitation. However,
the publication of confidential information or the loss of its value may
make a know-how license unenforceable.
Legal Aspects of Marketing to Retailers
A particularity of marketing food products to retailers, in particular
supermarkets, is the so called slotting fees. Slotting fees are product
placement fees that manufacturers are to pay to retailers, and some-
times to wholesalers, for shelf-space (“slots”). These fees can be tied
to performance or flat fees (see Chapter 8). While there is controversy
regarding the influence that these fees may have on competition, they
are not illegal. Slotting fees can take the form of an upfront cash fee, a
service fee for stocking or promoting the goods, a discount or a rent
for floor space (in particular where a supermarket vendor is permitted
to put its own display into a store).
Supermarket chains also typically have guidelines or handbooks that
vendors are expected to follow. These guidelines are incorporated
into the purchase contract by the supermarket‘s purchase order and
can cover shipping and delivery requirements, safety requirements,
coding, shelf-life and penalties for non-compliance.
9.6. Cooperation with U.S. Companies.
Manufacturing Agreements
Rather than exporting a food product that is manufactured in
Switzerland, a food manufacturer may manufacture the product lo-
cally in the U.S. (if this does not diminish the value of the „Swiss
made“ product) either in a subsidiary or through a third-party manu-
facturer under a manufacturing agreement. Because the Swiss ma-
nufacturer makes valuable intellectual property and know-how availa-
ble to the U.S. toll manufacturer, manufacturing agreements raise
many of the issues previously discussed. In addition, maintaining the
quality of the manufactured products, adherence to manufacturing
guidelines, timely delivery (and payment), compliance with regulatory
requirements and a fair allocation of the liability are primary concerns
that need to be addressed in these agreements. Allocating the risk
associated with product liability can become tricky in manufacturing
agreements. Depending on the nature of the cause of liability, both
the principal and the manufacturer can be liable for damages resulting
from defective products.
Supply Agreements
In a supply agreement, the customer is primarily concerned with se-
curing the timely supply of raw material or product components at
the desired quality and the allocation of liability to the supplier for
damages resulting from defective or inadequate material supplied.
The supplier, on the other hand, is interested in being excused from
performing its obligations in the event it becomes unable or com-
mercially unreasonable to adhere to the terms of the contract and in
limiting its liability for the use of the supplied material or components
to the maximum extent possible.
Packaging Agreements
An agreement regarding the outsourcing of the packaging of its
food products for the U.S. market (whether to a U.S. or non-U.S.
packaging company) should specify the labeling requirements and
contain unambiguous instructions for handling and packaging the
product. If any contamination occurs during the packaging process,
it is important that the manufacturer can show that the contamination
would not have occurred, had the packaging company followed the
manufacturer‘s guidelines.
Joint Ventures
Joint ventures can be formed for purposes of developing, manufac-
turing, or marketing food products. Contrary to the agreements dis-
cussed so far, the common denominator of all types of joint ventures
is the achievement of a common purpose by two or more parties
through a joint decision making process. Joint ventures can be mere
contractual arrangements among parties or take the form of legal en-
tities operated for the common purpose of the joint venture. The deci-
sion making process, supervision and monitoring of the joint venture’s
activities, ownership and protection of intellectual property and the
rights and obligations of the parties in the event of a break-up or sale
of the joint venture (or interests therein) are key issues that should be
addressed in a joint venture arrangement. Because unincorporated
joint ventures are generally treated as partnerships for tax purposes,
Swiss companies should consider that, absent a proper structure,
their participation could subject them to U.S. taxation.
The U.S. Food Industry 53
10. Regulation of Food by the Food
and Drug Administration (FDA).
By John Lemker, Bell, Boyd & Lloyd, LLC, Chicago
10.1. Introduction.
Regulatory Jurisdiction
The authority to regulate food in the U.S. falls within the jurisdiction of
various federal, state and local agencies. The principal federal agen-
cies are the Food and Drug Administration (FDA) which is a com-
ponent of the Department of Health and Human Services and the
Food Safety and Inspection Service (FSIS) and Animal Plant Health
Inspection Service (APHIS), both of which are in the Department of
Agriculture6.
FSIS regulates meat, poultry and egg products and APHIS is res-
ponsible to ensure that imported products do not introduce pests
or other threats to domestic plants and animals. The focus of this
summary is with FDA regulatory authority which extends to all foods
except for the authority given to FSIS over meat, poultry and egg
products. FDA has some jurisdiction over these foods but they are
primarily regulated by FSIS.
FDA Organization
The Center for Food Safety and Applied Nutrition (CFSAN) is the
organization within FDA which is responsible for implementing the
FDA’s authority over foods. It regulates substances used in foods,
implements compliance programs for enforcement and develops re-
gulations for virtually all aspects of FDA’s responsibilities for ensuring
foods are safe and properly labeled.
The FDA’s district offices are the primary enforcement arm of the FDA.
The import officers who review all imported foods are assigned to
the district offices. There are many other components of the FDA but
CFSAN and the districts are the ones most involved in the implemen-
tation of FDA’s jurisdiction over foods.
The Definition of Food under the Federal Food Drug
and Cosmetic Act (FFDCA)
Basically, the term food includes all articles which are used as food by
man or animals and includes the components of food. This appears
straightforward but the interpretation of the definition by FDA and the
courts has expanded this meaning beyond the usual understanding.
6 The Department of Treasury has jurisdiction over the
labeling of most alcoholic beverages
54 The U.S. Food Industry
The scope of term food includes food contact articles if any subs-
tance migrates from the contact article to the food. This would in-
clude food packaging materials and even such items as pottery and
eating utensils. All ingredients of foods and their components are
“foods” and subject to the same legal requirements.
The following section will discuss briefly the basic considerations
which are involved in developing, packaging, manufacturing, labeling
and importing a food for distribution in the U.S.. It is an overview of
the matters which need to be considered in manufacturing and labe-
ling foods which are in compliance with the laws of the U.S.
10.2. Bringing a Food to Market in
the U.S. I: Categorization of a Food.
The initial determination is to identify the category of food into which
the product belongs. This is basic and may be self-evident but ac-
curately identifying the category or type of food is important. One
major reason is that for many, but not all, foods FDA has established
pursuant to its statutory authority, standards of identity for various
foods. For example, many cheeses have standards of identity. Also,
chocolate products have standards.
A standard of identity generally describes the food, prescribes as-
pects of its composition and ingredients and also includes some la-
beling requirements.
If a manufacturer wants to produce and distribute a food for which
a standard of identity exists, the manufacturer must comply with the
standard. In addition, there are other regulations which apply to spe-
cific types of foods, such as quality standards and special food cate-
gories, as example, infant formula and dietary supplements.
An important first step is to determine if the product is subject to
any specific rules applicable to composition, ingredients, labeling or
manufacturing requirements in addition to the generally applicable
regulations.
10.3. Bringing a Food to Market in
the U.S. II: Food Composition and
Ingredients.
All of the ingredients of a food must either be generally recognized
as safe under the law or otherwise specifically approved for use by
the responsible governmental agency, usually FDA. FDA has issued
many regulations listing ingredients which may be used in foods and,
in some instances, has placed restrictions on their use. These restric-
tions could be on the foods in which the ingredients may be used
and/or their levels of use in a particular food.
Unfortunately, not all ingredients permitted in foods are covered by a
regulation. Many ingredients which are recognized as safe may not
have a specific rule identifying them.
However, every color added to a food must be used in accordance
with a specific regulation. If there is no regulation for the color, it may
not be used in a food.
Pesticides present in foods are also specifically regulated. The U.S.
Environmental Protection Agency establishes the tolerances for pesti-
cide residues in or on food and FDA enforces those residue limita-
tions. If an unapproved pesticide is used on a food, it causes the food
to be adulterated.
Chemical contaminants in an ingredient can cause a product to be
in violation of the law. Purity of ingredients is important. For example,
excess levels of lead or mercury in foods have resulted in enforce-
ment actions against the food or company.
Even though a food substance, color additive or pesticide residue
may be authorized in other countries, they may not be legal in the
U.S. A thorough review of each ingredient is required to ensure it
is permitted. An example is herbal products. While many herbs are
widely used, FDA has objected to the use in traditional foods of some
herbs, although their use in dietary supplements has been tolerated.
Reasoning being that there is a different regulatory standard used for
determining the acceptability of ingredients used in traditional foods
compared to the dietary ingredients used in dietary supplements.
In addition to actual ingredients, some processing procedures such
as irradiation are also subject to regulatory limits under food additive
regulations.
Each ingredient needs to be evaluated for its acceptability in a parti-
cular food.
10.4. Bringing a Food to Market in
the U.S. III: Food Labelling.
The labeling of foods while appearing relatively straightforward can be
quite complex depending on the food, its ingredients, and any repre-
sentations made about the food. All of the nuances to food labeling
cannot be covered in this summary. The basic labeling components
will be covered in this review. Note that there are a number of excep-
tions and exemptions which may apply under given circumstances.
Statement of Identity
The food label on the principal display panel must bear a statement
of the food’s identity, i.e., name. The name could be one established
by regulation, the common or usual name for the food or a descriptive
term which accurately describes the food’s basic character. Flavor
labeling may also be required as part of the food’s name should the
nature of the food’s ingredients so require.
Net Contents
The principal display panel must also have a declaration of the net
contents by weight, count or volume, or a combination of these de-
pending on the nature of the food: solid, viscous or liquid. There are
detailed regulations on the placement and type-size of the declaration.
Nutrition Labeling
Virtually all packaged foods for retail sale must have nutrition labeling.
The format and content are spelled out in the regulations. The key to
determining the content of the nutrition panel is the serving size. FDA
regulations have extensive rules regarding how a food’s serving size
is to be determined.
Ingredient Declaration
The general requirement is that each ingredient must be listed in its
descending order of predominance by weight by its common or usu-
al name. Many exceptions exist so the regulations need to be refe-
renced for specific requirements.
Health, Nutrient Content and Structure/Function
Claims
Generally, there are three types of health related claims permitted for
foods under the FFDCA, FDA’s regulations and enforcement policies.
These are health, nutrient content and structure/function claims.
Following is a discussion of these claims.
Health claims
Health claims describe a relationship between a food, food compo-
nent, or dietary supplement ingredient, and reducing the risk of a
disease or health-related condition. There are three ways by which
The U.S. Food Industry 55
health claims may become eligible to be used on a label or in labe-
ling for a food or dietary supplement: 1) FDA may issue regulations
authorizing health claims for foods and dietary supplements after re-
view of the scientific evidence submitted in health claim petitions if
it meets the rigorous criteria for authorization; 2) health claims can
be based on an authoritative statement of a scientific body of the
U.S. government or the National Academy of Sciences, a health claim
notification to FDA is required prior to use; and 3) FDA, in response
to court decisions has provided for qualified health claims where the
level of the scientific evidence is not sufficient enough for FDA to issue
a regulation.
• Authorized Health Claims. The FFDCA provides for health claims
used on labels that characterize a relationship between a food, a
food component, dietary ingredient, or dietary supplement and risk
of a disease (for example, “diets low in saturated fat, total fat and
cholesterol may reduce risk of heart disease”), provided the claims
are authorized by an FDA regulation and meet the requirements of
that rule.
• Health Claims Based on Authoritative Statements. Another
way to obtain approval for the use of a health claim on foods is
through a successful notification to FDA of a health claim based
on an “authoritative statement” from a scientific body of the U.S.
Government or the National Academy of Sciences.
• Qualified Health Claims. Under FDA’s enforcement discretion, it
permits the use of qualified health claims when there is evidence
for a relationship between a food, food component, or dietary sup-
plement and reduced risk of a disease or health-related condition.
In these cases, the evidence is not sufficient to meet the standard
required for FDA to issue a health claim regulation. Qualifying lan-
guage is included as part of the claim to indicate that the evidence
supporting the claim is limited. The qualified claims are available for
use on any food or dietary supplement product meeting the condi-
tions specified in the authorization letter.
Nutrient Content Claims
The FFDCA and FDA’s regulations permit the use of label statements
that characterize the level of a nutrient in a food (i.e., “fat free,” “low
cholesterol”) if they are made in accordance with the requirements of
the regulations. Nutrient content claims describe the level of a nutrient
in the product, (i.e., high in vitamin C) or they compare the level of a
nutrient in a food to that of another food, (i.e., 30% fewer calories
than our regular chocolate).
Structure/Function Claims
Structure/function claims describe the role of a nutrient or dietary in-
gredient intended to affect normal structure or function in humans, for
example, “calcium builds strong bones.” In addition, they may cha-
56 The U.S. Food Industry
racterize the means by which a nutrient or dietary ingredient acts to
maintain such structure or function, or they may describe general well-
being from consumption of a nutrient or dietary ingredient. The manu-
facturer is responsible for ensuring the accuracy and truthfulness of
these claims; they are not pre-approved by FDA, although for dietary
supplements they must be submitted to FDA. They must be truthful
and not misleading and supported by adequate substantiation.
Organic Claims
The National Organic Program (NOP) is administered by the U.S.
Department of Agriculture (USDA) and is intended to assure that
organic foods are produced, processed, and certified to consistent
national organic standards. The labeling requirements of the program
apply to raw, fresh products and processed foods that contain orga-
nic ingredients. Foods that are sold, labeled, or represented as orga-
nic have to be produced and processed in accordance with the NOP
standards.
Except for very small operations, farm and processing operations
that grow and process organic foods must be certified by USDA-
accredited certifying agents. A certified operation may label its pro-
ducts or ingredients as organic and may use the “USDA Organic”
seal.
Labeling requirements are based on the percentage of organic ingre-
dients in a product.
Products labeled as “100 percent organic” must contain (excluding
water and salt) only organically produced ingredients.
Products labeled “organic” must consist of at least 95 percent orga-
nically produced ingredients (excluding water and salt). Any remaining
product ingredients must consist of nonagricultural substances ap-
proved on the National List or non-organically produced agricultural
products that are not commercially available in organic form.
Products meeting the requirements for “100 percent organic” and
“organic” may display these terms and the percentage of organic
content on their principal display panel.
The USDA seal and the seal or mark of involved certifying agents may
appear on product packages and in advertisements.
Processed products that contain at least 70 percent organic ingre-
dients can use the phrase “made with organic ingredients” and list
up to three of the organic ingredients or food groups on the principal
display panel.
The percentage of organic content and the certifying agent seal or
mark may be used on the principal display panel.
Products with less than 70 percent organic ingredients cannot use
the term “organic” anywhere on the principal display panel. They may
identify the specific ingredients that are organically produced on the
ingredients statement.
Any product labeled as organic must identify each organically produ-
ced ingredient in the ingredient statement.
The name and address of the certifying agent of the final product
must be displayed on the information panel of the label.
Allergens
The “Food Allergen Labeling and Consumer Protection Act of 2004”
(the “Amendments”) amended the FFDCA to address specifically the
labeling of certain allergens present in foods.
Generally, the new amendments defined the term “major food aller-
gens,” required their labeling, provided procedures for exemptions
and eliminated some labeling exemptions which existed in the FFDCA
that manufacturers relied upon to avoid labeling certain ingredients. A
major food allergen is defined in the law as follows:
‘(qq) The term ‘major food allergen’ means any of the following:
‘(1) Milk, egg, fish (e.g., bass, flounder, or cod), Crustacean shellfish
(e.g., crab, lobster or shrimp), tree nuts (e.g., almonds, pecans, or
walnuts), wheat, peanuts, and soybeans.
‘(2) A food ingredient that contains protein derived from a food speci-
fied in paragraph (1), except the following:
‘(A) Any highly refined oil derived from a food specified in paragraph
(1) and any ingredient derived from such highly refined oil.
‘(B) A food ingredient that is exempt under paragraph (6) or (7) of
section 403 (w).’.
An important provision of the amendments which assist in understan-
ding their scope is Section 203(a)(4), which provides:
Notwithstanding subsection (g), (i), or (k), or any other law, a flavoring,
coloring, or incidental additive that is, or that bears or contains, a
major food allergen shall be subject to the labeling requirements of
this subsection.
The exemptions for flavor, colorings and incidental additives were re-
scinded by the amendments with respect to those which are, bear or
contain a major food allergen. Only highly refined oils from the listed
foods have been exempted under the amendments.
Basically, if a food bears or contains a major food allergen at any level
from direct or indirect addition, it needs to be noted on the label.
10.5. Manufacturing Food.
The law, as implemented by FDA, requires that food be made in ac-
cordance with “Good Manufacturing Practices” (GMPs). FDA has
regulations which describe in a general manner GMPs for food.
However, certain foods which are deemed to present a higher risk to
health if not properly processed have specific regulations that apply
to some or all aspects of their manufacture.
For example, specific regulations exist for low-acid foods, acidified
foods, seafood products, vegetable and fruit juices, infant formula
and bottled water. Regulations for other foods are proposed or under
consideration.
Also, FDA has issued guidance documents regarding the production
and processing of certain foods, such as fresh produce. Although
they are not regulations, they influence the interpretation of what fac-
tors are important in processing these foods.
The HACCP (Hazard Analysis Critical Control Point) concept is impor-
tant in the manufacturing of foods in the U.S. The hazards in manu-
facturing a food are identified and specific controls are developed to
prevent their occurrence.
10.6. Bioterrorism Law.
In response to concerns about a potential terrorist attack on the food
supply, Congress amended the FFDCA to increase the FDA’s ability
to obtain information regarding persons engaged in the food business
and products imported into the U.S., and to take prompt enforcement
action if products may present a serious health threat. Major aspects
of the new authorities include establishment registration, prior notice
for imported foods, administrative detention and recordkeeping.
These new authorities will be briefly reviewed. Each is the subject of
detailed regulations. Prior Notice is covered in the section concerning
imported food and customs requirements.
The U.S. Food Industry 57
Registration
Domestic and foreign facilities that manufacture, pack, or hold food
for human or animal consumption in the U.S. are required to register
with the FDA. A domestic facility must register whether or not food
from the facility enters interstate commerce. A foreign facility must de-
signate a U.S. agent (for example a facility’s importer or broker), who
must live or maintain a place of business in the U.S. and be physically
present in the U.S., for purposes of registration.
There are a number of exceptions listed in the regulations. Registration
is not required if a foreign facility manufactures/processes, packs, or
holds food and sends it to another foreign facility for further manu-
facturing/processing or packaging before the food is exported to the
U.S., only the second foreign facility is required to register. However,
if the second foreign facility performs only a minor activity, such as a
putting on a label, both facilities would be required to register. Also,
any foreign facility that packs or holds food after the last foreign ma-
nufacturer/processor of the foods must register.
Administrative Detention
FDA may detain an article of food it if poses a serious hazard.
Detained product may be held for up to 30 days pending the resolu-
tion of the allegations upon which the detention order was issued or
further enforcement action.
Recordkeeping
FDA has issued a rule requiring the establishment of records which
will permit it to track the distribution of foods for the purpose of re-
moving them form sale or use in the event they pose a risk of serious
adverse health consequences to humans or animals. The records
that must be kept are those that are needed to permit the FDA to
identify the immediate previous sources and immediate subsequent
recipients of food, including its packaging. Generally, the people and
companies subject to the requirement are those domestic persons
that manufacturer, process, pack, transport, distribute, receive, hold
or import food and persons that transport food in the U.S. Except for
those foreign persons who transport food in the U.S., foreign estab-
lishments are exempt.
10.7. Enforcement.
FDA has a wide range of enforcement action’s it can use to prevent
violations or remove violative product from distribution. These include
administrative and formal measures.
For imports, if a product appears to be in violation of the law, FDA can
detain it and require the importer to demonstrate the food complies
58 The U.S. Food Industry
with the law, correct the violation, re-export the product, or destroy
it. If a product is admitted into the country prior to FDA detecting a
violation, FDA can issue regulatory correspondence, usually entitled
as a “Warning Letter,” seeking voluntary corrective action including a
recall. If the response is not satisfactory, FDA could seek to seize the
product, enjoin the manufacturer or criminally prosecute the respon-
sible company and individuals.
Voluntary corrective action, including recalls, is the most frequently
used form of enforcement action. Also, for imports, FDA may place
product on the automatic detention list which can prevent or substan-
tially disrupt a person’s ability to import the food.
11. Importing into the USA.
By Paul S. Anderson, Partner, Sonnenberg & Anderson
11.1. General Background.
The importation of products into the U.S. is regulated by, and through,
the U.S. Department of Homeland Security, Bureau of Customs and
Border Protection (“Customs” or “CBP”). The purpose of this chapter
is to briefly describe the structure of CBP and its operations, and to
identify the most common issues of interest to food importers. The
following comprises a brief synopsis only and is designed to provide
a basic knowledge of importing requirements. Many issues may arise
which require fine technical distinctions or fall within grey areas of
the law. It is highly recommended that an importer take the time to
obtain expert advice prior to the importation of any product so as to
minimize potential problems and to make its importation program as
cost effective as possible.
Informed Compliance and Reasonable Care
The Customs Modernization and Informed Compliance Act (“Mod”
Act) was signed into law in 1993 and introduced the concept of “in-
formed compliance” whereby Customs and the importing communi-
ty would share the responsibility of administering the U.S. Customs
laws. This “informed compliance” concept places an affirmative bur-
den on importers to exercise reasonable care in the discharge of their
responsibilities relating to the importation of merchandise. An impor-
ter must exercise reasonable care in all facets of the importing pro-
cess, including the manner in which it describes, classifies and values
imported merchandise. “Reasonable care” means that an importer
will act reasonably, and with knowledge of the facts and its legal ob-
ligations. The concepts of informed compliance and reasonable care
permeate all aspects of Customs administration and enforcement.
Customs and Border Protection Structure
Customs’ basic structure involves CBP Headquarters in Washington
DC; the National Import Specialist Division (NIS) in New York; and the
numerous local ports throughout the country where the merchandise
actually is presented to Customs for clearance. Headquarters sets
policy, has oversight of security procedures, and issues rulings and
decisions through the Office of Regulations and Rulings (OR&R). Port
Directors are in charge of the local ports and this is where the day-to-
day importing activity occurs. The NIS’s in New York provide supervi-
sory guidance with respect to classification decisions at the outlying
local ports so as to ensure consistency throughout the country.
CBP has several levels of personnel with which an importer should be
familiar. The most frequent point of contact will be the local import
specialists who are Customs officials responsible for monitoring
merchandise imported into the U.S. Import specialists request infor-
mation so that they can properly examine the classification and value
of imported merchandise. In addition, import specialists administer
quotas, make determinations on country of origin markings, check
documents for accuracy and completeness, and perform many other
similar day-to-day tasks.
Oral advice from an import specialist is not binding on Customs and
generally can be changed at any time. Importers may obtain a binding
ruling from Customs by submitting a request in writing, along with
a sample of the merchandise, to Customs Headquarters or to the
National Import Specialist in New York City. Greater detail concerning
the ruling process is set forth later in this chapter.
Inspectors are Customs personnel who actually examine the
merchandise prior to release into the Customs territory of the U.S.
Importers typically do not have much contact with inspectors unless a
problem arises with the clearance of the merchandise. Even then, the
problem more than likely would be brought to the importer’s attention
through the import specialist. An inspector ensures that merchandise
that is presented for entry matches that described in the commercial
invoices, checks for country of origin markings, and otherwise exami-
nes the merchandise to ensure that it is in compliance. It should be
noted that only a small percentage of all merchandise imported into
the U.S. is physically examined by an inspector.
Special agents are not involved in routine Customs matters. Rather,
special agents almost always work on suspected Customs law vio-
lations. Therefore, a telephone call or visit from a special agent is a
serious matter and an importer should immediately contact Customs
counsel if such an event occurs.
Current Regulatory Environment
Compliance with the Customs laws is of utmost importance in today’s
environment where security considerations are paramount. Much of
the focus in terms of CBP resources since September 11, 2001 has
focused in the area of security generally, and CBP has promulgated
many new programs designed to make compliance more efficient
yet also meet heightened security considerations. The Customs re-
gulations change quite rapidly and it is important to keep abreast of
all new developments. Although there are many new security initiati-
ves, the program currently in the forefront is the Customs and Trade
The U.S. Food Industry 59
Partnership Against Terrorism (CTPAT) program wherein importers re-
ceive certain benefits including reduced cargo inspections when they
are certified as a C-TPAT participant. The C-TPAT program and its
impact upon food importations is discussed later in this chapter.
CBP enforces the regulations of many other governmental agencies
and acts as the primary enforcement arm for the application of such
regulations to imported products. With respect to food products,
CBP enforces the regulations of the Food and Drug Administration
(FDA), U.S. Department of Agriculture (USDA) and the Federal Trade
Commission (FTC).
11.2. Basic Customs Considerations.
Customs duties are generally determined on an ad valorem basis,
meaning that the amount of duties owed will depend upon the duty
rate applied and the value placed upon the imported merchandise.
The duty rate to be applied to imported merchandise is determined
by its tariff classification and country of origin. Customs duties may
also be specific, i.e., 10¢ each, or may be a compound rate of ad
valorem and specific duties.
Tariff Classification and Duty Rates
There are over 12,000 separate subheadings in the Harmonized Tariff
Schedules of the U.S. (HTSUS) under which imported merchandise
may be classified. In order to determine the proper classification of im-
ported merchandise within the HTSUS, an importer must be familiar
with the General Rules of Interpretation (GRI) of the HTSUS. In many
instances, an article may seem to fit exactly within a tariff provision
and yet not be properly classified under that tariff provision. The GRI’s
are to be consulted in all cases and are applied in sequential order.
Factors affecting tariff classification include whether the product is
specifically defined in the Section or Chapter Notes; whether the item
is provided for specifically in a particular tariff item; whether a particu-
lar tariff item is more specific than another; the common meaning of a
tariff item; the principal use of an item; and the component make-up
of the item.
There are also many special programs allowing for reduced duties or
importation free of duty. Many of the programs involve imports from
developing countries such as the Generalized System of Preferences
(GSP), Caribbean Basin Initiative (CBI), and other programs. Of
course Switzerland does not qualify as a developing country, but
Swiss companies may produce products in developing countries and
ship them directly to the U.S. which may qualify for dutyfree treatment
under such a program. There are also many bilateral agreements pro-
viding for duty-free treatment such as the U.S. – Israel Free Trade
Agreement, U.S. – Chile Free Trade Agreement, and others. There is
60 The U.S. Food Industry
also the North American Free Trade Agreement (NAFTA) which invol-
ves duty-free treatment for qualifying articles between Mexico, U.S.
and Canada. Again, Switzerland is not a party to any of these free
trade agreements, but it is possible to manufacture products within
these countries and qualify for duty-free treatment upon importation
into the U.S. if the technical requirements are met.
Customs Valuation of Imported Merchandise
Customs valuation can be a very complicated area, and one which
can have a major effect on Customs duties. A common mistake made
by importers is believing that imported merchandise always will be
valued (appraised) at the transaction price, or the price actually paid
for the merchandise by the importer. In fact, most appraisements are
made based upon transaction values. However, Customs may use
other methods of valuing imported merchandise such as deductive
value or computed value. These methods may require the importer to
provide costs, expenses and detailed accounting information in order
to satisfy Customs as to the correct appraised value of the imported
merchandise. Special rules also apply where merchandise is brought
into the U.S. on a consignment basis and is not sold to a purchaser
in the U.S. until a later time. Alternative methods of appraisement ge-
nerally apply in related party transactions or consignment situations.
An importer is free to structure a transaction to take advantage of the
Customs laws. Some importers employ buying agents whose com-
missions are non-dutiable items. Other favorable structures involve
the utilization of the “first sale rule” which involves sales through a
middleman, who in turn sells to a U.S. importer, yet entry is made at
the first sale (price to the middleman) level. Certain legal requirements
must be met in order to utilize these structures and they are not au-
tomatically available. Finally, it should be noted that although most
appraisements are made based upon the invoice price on the com-
mercial invoice to the importer, amounts for freight and insurance are
non-dutiable items and should be broken out separately if included in
the invoice price to ensure that they are not included in dutiable value.
Country of Origin Marking
All merchandise of foreign origin imported into the U.S. must be
marked with the country of origin. The Customs marking require-
ments in Section 304 of the Tariff Act of 1930 are as follows:
Every article of foreign origin (or its container) imported into the U.S.
shall be marked in a conspicuous place as legibly, indelibly, and per-
manently as the nature of the article (or container) will permit in such
manner as to indicate to an ultimate purchaser in the U.S. the English
name of the country of origin or the article.
There are many exceptions to the above rule, so an answer to any
country of origin marking question must take into account the parti-
cular product involved and the manner in which the good is imported
and used. In general, goods imported into the U.S. must be marked
in a conspicuous manner with the English name of the country of
origin. In order for the marking to be considered conspicuous, it must
be legible, easily found and read without difficulty. Goods must be
marked in such a manner as to indicate the country of origin to the
ultimate purchaser in the U.S. The ultimate purchaser is generally the
last person in the U.S. who will receive the article in the form in which
it is imported. Failure to properly mark an imported article to indicate
its country or origin can result in a special 10% ad valorem marking
duty, demands for redelivery to Customs, and accompanying liquida-
ted damages, or other penalties.
Invoicing
Invoices presented to Customs must be properly prepared and meet
regulatory requirements. The commercial invoice should show the
port of entry to which the merchandise is destined; the name of the
party to which the merchandise is sold and the place from where
shipped; a detailed description of the merchandise, in English, in-
cluding the name by which each item is known, the grade or quality,
marks, numbers and symbols under which they are sold by the seller;
the quantity of merchandise; the purchase price of each item; the
currency in which the transaction is made; and all charges itemized
by name and amount including freight, insurance, commissions, co-
verings, costs of packing, and related expenses.
11.3. Entering Merchandise
into the U.S.
Importers typically utilize licensed Customhouse brokers to assist
in the entry of merchandise into the U.S. A Customhouse broker
is licensed by CBP and files the appropriate documentation with
Customs to obtain release of the merchandise and to effect payment
of duties. A Customhouse broker is distinguished from a freight for-
warder in that a freight forwarder performs the service of arranging for
the transportation of merchandise from point A to point B, but is not
licensed to transact Customs business with CBP or file entry docu-
mentation. Many companies frequently are both Customhouse bro-
kers and freight forwarders. It is possible for an importer to file entry
documentation himself, however, it is generally recommended that a
Customhouse broker be utilized.
The entry process begins with the Customhouse broker submitting
a Customs Form (CF) 3461 to Customs which indicates the basic
information concerning the merchandise including the shipper, im-
porter, type of merchandise, tariff classification, value and related in-
formation. The information is submitted electronically through the ABI
(Automated Broker Interface) system. CBP will then issue a release of
the merchandise or indicate that there is a problem and that additio-
nal information is needed. For shipments of products subject to FDA
requirements, appropriate information is electronically transmitted by
the broker. FDA will then notify the broker whether the merchandise
may proceed or not, as the case may be. A CF 7501 will then be filed
by the broker which is known as an “Entry Summary” and which pro-
vides all information concerning the calculation of duties, asserted ta-
riff classification items and related information, and also the payment
of duties. An entry summary must be filed within 10 business days
from the date of entry. In the event that the imported merchandise is
not granted a “May Proceed” notice by FDA, the merchandise may be
subject to detention procedures as set forth below.
It is also possible to utilize a Customs Bonded Warehouse or Foreign
Trade Zone (FTZ) regarding entry of merchandise. Merchandise may
be entered into a Customs Bonded Warehouse upon the filing of an
appropriate warehouse entry. Duties on the merchandise will not be
deposited until the product is withdrawn from warehouse for con-
sumption into the U.S. Merchandise may be inspected, repacked,
stored, and similar treatment, but may not be processed or manufac-
tured in a bonded warehouse and then brought into the U.S. In the
case of processing or manufacturing, such a product must be expor-
ted. Merchandise can also be brought into a Foreign Trade Zone, and
again, duties are not paid until merchandise is withdrawn for entry
into the U.S. A Foreign Trade Zone requires special permission but
allows for greater flexibility and freedom of manufacture, production
or manipulation.
Quotas
Numerous types of quotas on imported merchandise are administe-
red through CBP. Quotas cover a wide range of products and have
traditionally been evident in the importation of food products and tex-
tiles. Quotas are generally of two types, 1) absolute quotas and 2)
tariff rate quotas. Absolute quotas are quantitative amounts that
are set for a specific period of time (usually one year) wherein impor-
ted products may be brought into the U.S. only up to those specific
limits. Allocations are generally made by specific country, and there
are also allocations for “all other countries” not receiving the specific
allocation. Once the limitations have been reached for the particular
time period in question, no more imports of those products will be
allowed in the U.S. Tariff rate quotas allow a specific quantity of
merchandise to be imported at a lower duty rate. However, once the
quantitative limitation has been reached, rather than prohibiting any
further importations during that year the products in excess of the
quota amount will be assessed a higher duty rate for imports made
The U.S. Food Industry 61
through the balance of the calendar year. Allocations of quota are
subject to negotiation and change on a regular basis. Certain require-
ments are present as regards the entry procedures so that Customs
can adequately account for all products subject to quota. Depending
upon the type of product involved, there may be different documen-
tary requirements.
There are currently quotas on a wide range of products including
beef; dairy products including milk and cheese; raw sugars; other
sugar containing products; various types of chocolate; certain types
of mixes and doughs; ice cream; animal feed; and mixed condiments
and seasonings. Switzerland generally falls into an “all other” alloca-
tion on most quotas as opposed to receiving a specific amount. An
exception to this involves the importation of certain Swiss and other
types of cheese. It is critical that any potential quota applicability be
determined well ahead of time as many quotas fill quickly and it may
be extremely difficult to obtain a quota allocation and appropriate
documentation.
Rulings by Customs and Administrative Contest
As previously mentioned, an importer may obtain protection and as-
surance that its tariff classification, method of valuation, or country of
origin marking methodology is correct in the form of a binding ruling
from Customs. Binding rulings are prospective in nature and provide
a written decision from Customs as to any of those issues noted
above. A ruling may be obtained from the National Import Specialist
in New York and these rulings frequently may be secured within 30
days. Rulings from the NIS in New York are limited to simple classi-
fication issues. For other issues including valuation, more complex
classification issues, and country of origin determinations, a ruling
may be obtained from CBP Headquarters in Washington, D.C. These
rulings take longer to process and can be secured within 120 days,
but often take longer. In each case, a ruling will give predictability to
an importer as to dutiable consequences of its transactions. A ruling
may be revoked or modified but such an occurrence is relatively infre-
quent and generally would not apply on a retroactive basis.
It is also possible to obtain decisions from Customs on matters con-
tested administratively. Most of the methods employed depend upon
whether or not an entry has been “liquidated”. An importer should
note that money paid to Customs at the time of shipment clearance is
only a deposit of estimated duties. The final accounting for Customs
duties occurs at liquidation of an entry which may occur months or
even years after goods are released by Customs. An importer has a
right to contest a determination by Customs regarding an entry and
7 Ninety days has been the traditional statute of limitation for filing an administ-
rative protest but the law has recently been changed so that entries made after
December 18, 2004 are now subject to a 180 day limitation period.
62 The U.S. Food Industry
to receive a refund of any excess Customs duties paid. In order to do
so the importer must file a protest with Customs within 180 days from
the date of liquidation of the entry7.7 A protest contesting a decision
by Customs is filed at the local port where entry was made and gene-
rally the decision is also made there. In some cases, further review of
the protest by Customs Headquarters may be requested. The decisi-
on by Headquarters in such a case, referred to as an AFR (Application
for Further Review), in effect will also act as a binding ruling as to
the issue. It is also possible to request a ruling from Headquarters
where entry has been made but the entry has not yet been liquidated.
In such an instance the appropriate mechanism is referred to as a
“Request for Internal Advice”.
11.4. Food and Drug Administration
(FDA) Requirements Enforced by
Customs / The Bioterrorism Act of
2002.
CBP acts as the first level of scrutiny with regard to imported products
and their compliance with FDA regulations. Adulteration, labeling and
other traditional FDA issues are discussed in the chapter involving
FDA requirements. The passage of the Public Health Security and
Bioterrorism Preparedness and Response Act of 2002 (“Bioterrorism
Act” or BTA) has particular relevance with regard to imports. The ba-
sic elements of the Bioterrorism Act are as noted below.
Registration
The Bioterrorism Act requires that any facility, domestic or internatio-
nal, that manufactures, processes, packs or holds food for animal or
human consumption in the U.S. must register with the FDA. The ra-
tionale behind this requirement is to ensure that the FDA can quickly
locate and neutralize faulty food processors in the case of delivered or
accidental contamination of food. Basic information such as compa-
ny name, address, trade names, food product categories, and name
and contact information are required to be submitted in the registrati-
on. Importantly, for foreign facilities that have no physical presence in
the U.S., a U.S. based agent must be designated.
Prior Notice
This section of the BTA requires that prior notice of the arrival of mer-
chandise at the first U.S. port of entry must be provided to Customs
and FDA. The data that must be included in the prior notice provi-
ded is the country from which the article originates; country from
which the article is shipped; the anticipated U.S. port of arrival; the
Customs entry type and date; all carriers involved in transporting
the article; the firm name and address in each instance; the email
address, telephone and fax numbers; and the registration number
and standard carrier abbreviation code. Prior notice of imported
foods must be received electronically by FDA through the Automated
Broker Interface (ABI) or via the Prior Notice System Interface (PNSI)
no more than five days before arrival in the U.S. Further, it must be
received no fewer than two hours before arrival by land via road; four
hours before arrival by air or land via rail; and eight hours before arri-
val by water. All shipments, regardless of value, must meet the prior
notice requirements unless exempted. Products that are exempted
from prior notice requirements are personal food or gifts accompa-
nying an individual; merchandise that is exclusively subject to U.S.
Department of Agricultural jurisdiction such as meat, poultry and egg
products; homemade goods shipped as gifts; food items shipped by
a diplomatic pouch; foods normally subject to the Bioterrorism Act
that are included in shipments of household goods; and noncon-
sumption samples for testing only.
Records Maintenance
The BTA also requires the maintenance of records to allow for the
identification of immediate previous sources and immediate sub-
sequent recipients of food to help the FDA track food quickly and
more efficiently should a potentially hazardous shipment be released.
Persons that must establish and maintain records include domestic
persons in the U.S. that manufacture, process, pack, transport, dis-
tribute, receive, hold or import food; foreign persons that transport
food; and persons who place food directly in contact with its finished
container. It should be noted that foreign persons who do not trans-
port food in the U.S. are excluded from these regulations.
Records that must be maintained by non-transporters of food relate
to the identity of the immediate non-transporter’s previous sources,
whether foreign or domestic, including the name of the firm, address,
telephone number, type of food, date received, quantity and type of
packaging and immediate transporter source. Also, this same infor-
mation must be provided for an immediate non-transporter’s subse-
quent recipients of all foods released. The term “transporter” includes
persons who have possession, custody, or control of an article of
food in the U.S. for the sole purpose of transporting the food. It also
includes foreign persons that transport food in the U.S. regardless
of whether a foreign person has possession, custody or control for
the sole purpose of transporting it. Records to be kept in this re-
gard include those with names of the transporter’s immediate pre-
vious source and the transporter’s immediate subsequent recipient;
the origin and destination points; the date shipment received and
date released; number of packages; description of freight; route of
movement during the time the food was transported; and transfer
points. The records must be retained depending on the type of food
and whether the record keeper is a transporter or non-transporter, for
anywhere from six months to two years. Customs records must be
kept for five years. Records must be readily available and accessible.
Detention
The BTA gives authority to the FDA to detain any shipment if it has
“credible evidence or information indicating that the article of food
presents a threat of serious adverse health consequences or death to
humans or animals”. An article of food may be detained regardless of
the size and value of the item. Should a food shipment be detained,
a detention order will be issued by FDA. The detention order must be
approved by the FDA district director at the local port and all relevant
parties will be notified. Detained food may be transferred to a secure
area as determined by the FDA. A detention order is valid for a ma-
ximum period of 30 days. If the FDA terminates a detention order or
if the detention period expires, an authorized FDA representative will
issue a detention termination notice releasing the article of food to any
person who received the detention order. If the FDA does not issue
a detention termination notice and the detention period expires, the
detention order is deemed terminated.
The detention order must have a detention order number, hour and
date of the order, identification of the detained article of food, de-
tention period involved, statement that the article of food identified
is detained for the period shown, a general statement of reasoning
behind why the food is being detained, the name of the authorized
FDA representative who approved the order, and the address and
location of where the article of food is to be detained. The detention
order may require the detained food to be marked and labeled that in
fact it has been detained Also, a detention order may be appealed as
to the reason for the detainment.
A distinction must be drawn between Administrative Detention un-
der Section 304(h) and Section 801(a) of the Federal Food Drug and
Cosmetic Act. As noted, Section 304(h) gives the FDA authority to
detain food where it has credible evidence or information that the ar-
ticle of food presents a threat of serious adverse health consequence
or death to humans or animals. On the other hand, a detention under
Section 801(a) focuses on whether the article of food 1) appears to
have been safely produced, packed and held; 2) contains no conta-
minants, illegal additives or residues; and 3) is properly labeled. As a
result, the standards of detention differ, with Section 304 detentions
requiring “credible evidence of serious adverse health consequences
or death. A detention under Section 801 will result in a document
referred to as “Notice of Detention and Hearing”. FDA has stated that
it will primarily use Section 304(h) for domestic shipments and not as
a tool to stop imports.
The U.S. Food Industry 63
Penalties
Under the U.S. Customs laws it is unlawful to enter, introduce or att-
empt to enter or introduce any merchandise into the U.S. by means
of a material false statement or omission, whether by fraud, gross
negligence, or negligence. The amount of penalty imposed depends
upon the level of culpability, but can be quite severe. If Customs de-
termines that an importer fraudulently evaded duties, it may assess
a penalty up to the amount of the U.S. domestic value of the mer-
chandise. If Customs determines that an importer violated Customs
laws because of gross negligence, it may impose a penalty of up to
four times the loss of Customs duties and up to two times the loss
of Customs duties for ordinary negligence. When a violation of the
Customs laws has occurred, an importer may avoid the imposition of
the harsh penalties described above by filing a prior disclosure or a
petition to mitigate penalties. A prior disclosure is a detailed explana-
tion of the circumstances and factors resulting in a false statement or
material omission which is filed by an importer before an investigation
commenced, or without knowledge of an investigation.
Importers also need to be aware of the additional sizable penalties
which may be imposed for failing to keep and present proper records.
Under this law, the duty to maintain Customs records is extended to
any owner, importer, consignee, importer of record, entry filer, or any
other party who is involved in such import related activity. Customs
has compiled a list of records which must be maintained for five years
(the “(A)(1)(A)” list), but importers should also take care to keep related
business documents for the same period of time.
11.5. Customs – Trade Partnership
Against Terrorism(C-TPAT) and Re-
lated Security Compliance Issues.
Security considerations have been at the forefront of the CBP agenda
since the September 11, 2001. Many programs relate to developing
greater security at ports in the U.S. and major ports throughout the
world, and other programs pertain to container security and supply
chain security considerations. The Customs – Trade Partnership
Against Terrorism (C-TPAT) is the major initiative by CBP in strengthe-
ning security considerations as regards importers, Customs brokers,
freight forwarders and ocean transportation intermediaries, and mo-
des of transportation along the supply chain. The program has recei-
ved increasing acceptance and all importers should at least consider
the possibility of participating in the program.
C-TPAT is a voluntary partnership between Customs and mem-
bers of the importing community. The program provides incentives
to join C-TPAT and encourages applications from those importers
64 The U.S. Food Industry
who do business with other C-TPAT certified businesses. Because
the program is voluntary, in return for an importer’s participation and
demonstration that it meets or exceeds certain minimum security
requirements, Customs offers incentives to the importer such as re-
duced cargo inspections, an assigned account manager, access to
the C-TPAT membership list, and eligibility for account-based pro-
cess with CBP. The application process requires 1) preparation of
the C-TPAT Supply Chain Security Profile; 2) electronic submission of
the profile and 3) assessment and verification of the importer’s actual
processes.
An importer must conduct an assessment of its international supply
chain. The “supply chain” for C-TPAT purposes is defined as from
point of origin (manufacturer/supplier/vendor) through the point of
distribution in the U.S. CBP has mandated specific security criteria.
Not all the criteria will apply in all cases and Customs personnel have
indicated that each submission is evaluated on a case-by-case basis
taking into consideration specific risk factors such as the country of
origin or transshipment. Customs states that the C-TPAT program re-
cognizes the complexity of international supply chains and endorses
the application and implementation of security measures based upon
“risk analysis”.
The following measures are mandatory: Written procedures for selec-
ting business partners; container security; physical access controls;
procedures regarding documentation processing; security training
and threat awareness; physical security; and information technology
security. The C-TPAT program continues to progress and be sub-
ject to additional revisions. Potential participants should consult with
knowledgeable experts as to future changes in the program and the
advisability of participation.
12. Annexes.
12.1. Trade Associations.
The Food Institute
American Institute of Food Distribution
One Broadway, Elmwood Park, NJ 07407
Phone: (201) 791-5570
www.foodinstitute.com
The Food Institute is a nonprofit organization that provides research
and information to the entire food distribution system. Its members
range from seed companies to grocery chains.
The Food Marketing Institute (FMI)
655 15th Street NW, Suite 700, Washington, D.C. 20005
Phone: (202) 452-8444
www.fmi.org
The Food Marketing Institute is a nonprofit organization which provi-
des education, research and public relations services. Its members
include food retailers, wholesalers and their customers internationally.
Institute of Food Technologists
525 W. Van Buren, Suite 1000, Chicago, IL 60607
Phone: (312) 782-8424
www.ift.org
The Institute of Food Technologists is a non-profit scientific society
with 22,000 individuals working in food science, food technology, and
related professions in industry, academia and government. FT publi-
shes various resources for the food industry.
International Food Information Council (IFIC)
International Food Information Council (IFIC) and the IFIC Foundation
1100 Connecticut Ave, NW, Suite 430, Washington, D.C. 20036
Phone: (202) 296-6540
www.ific.org
IFIC’s mission is to communicate science-based information on food
safety and nutrition to health and nutrition professionals, educators,
journalists, government officials and others providing information to
consumers. IFIC is supported primarily by the broad-based food, be-
verage and agricultural industries.
Food Products Association
1350 I (Eye) Street, NW, Suite 300, Washington, D.C. 20005
Phone: (202) 639-5900
www.fpa-food.org
The Food Products Association (FPA) is the principal scientific and
technical trade association representing the food products industry.
Since 1907, the food industry has relied on FPA for government and
regulatory affairs representation, scientific research, technical assis-
tance, education, communications and crisis management.
Grocery Manufacturers of America (GMA)
2401 Pennsylvania Ave NW, Washington, D.C. 20037
Phone: (202) 337-9400
www.gmabrands.com
GMA represents food and beverage and consumer product compa-
nies at the state, federal, and international levels on legislative and
regulatory issues; leads efforts to increase productivity, efficiency, and
growth in the food, beverage and consumer products industries.
Private Label Manufacturers Association
369 Lexington Ave, 3rd Fl., New York, NY 10017
Phone: (212) 972-3131
www.plma.com
PLMA is an international trade association of store-brand food and
non-food products manufacturers and suppliers.
Beverage Marketing Corporation
850 Third Ave, New York, NY 10022
Phone: (212) 688-7640; Inside U.S. (800) 275-4630
www.beveragemarketing.com
Leading supplier of information, consulting and financial services to
the global beverage industry.
Food Processing Suppliers Association
1451 Dolley Madison Blvd., Suite 200, McLean, VA 22101
Phone: (703) 761-2600
www.iafis.org
FPSA is the largest U.S. association of suppliers of equipment, pa-
ckaging, ingredients and services to the global food, beverage and
pharmaceutical processing industries.
The Organic Trade Association
P.O. Box 547, Greenfield, MA 01302
Phone: (413) 774-7511
www.ota.com
Business association for the organic industry in North America to en-
courage global sustainability through promoting and protecting the
growth of diverse organic trade.
The U.S. Food Industry 65
International Association of Culinary Professionals Monthly publication with focus on the industry, trends, trade shows 12.3. Trade Fairs. 12.4. U.S. Government Agencies.
304 West Liberty Street, Suite 201, Louisville, KY 40202 and business perspectives.
Phone: (502) 581-9786 National Association for the Specialty Food Trade U.S. Department of Agriculture (USDA)
www.iacp.com Natural Food Network, Natural Grocery Buyer, Functional NASFT Summer Fancy Food Show 1400 Independence Avenue SW
IACP is a not-for-profit professional association which provides con- Foods & Nutraceuticals Jacobs K. Javits Center Washington, D.C: 20250
tinuing education, communication, or in the preparation of food and New Hope Natural Media July 9-11, 2006 in New York City, NY Phone: (202) 720-2791
drink. 1401 Pearl St., Boulder, CO 80302 Phone: (212) 482-6440 www.usda.gov
Phone: (303) 939-8440 www.fancyfoodshows.com Government agency in charge of providing key statistics on the U.S.
National Restaurant Association www.newhope.com PLMA Private Label Trade Show agricultural industry.
1200 17th St., NW, Washington, D.C. 20036 Their trade and consumer publications are respected for their high Rosemont Convention Center
Phone: (202) 331-5900 quality of content. New Hope Natural Media also provides integrated November 12-14, 2006 in Rosemont, IL U.S. Bureau of Labor Statistics (BLS)
www.restaurant.org marketing solutions that help companies reach their markets, whether Phone: (212) 972-3131 2 Massachusetts Avenue NE
The National Restaurant Association is the leading business associa- around the corner or around the world. Organizer of various shows www.plma.com Washington, D.C. 20212
tion for the restaurant industry. Together with the National Restaurant including Natural Products Expo West (Anaheim, CA). Phone: (202) 691-5200
Association Educational Foundation, the Association’s mission is to National Association for the Specialty Food Trade www.stats.bls.gov
represent, educate and promote a rapidly growing industry. Restaurants and Institutions Magazine Moscone Center A division of the U.S. Department of Labor, BLS is the principal fact-
Reed Business Information NASFT Winter Fancy Food Show finding agency for the federal government in the field of labor econo-
360 Park Avenue South, New York, NY 10014 January 21-23, 2007 in San Francisco, CA mics and statistics.
12.2. Periodicals. www.rimag.com Phone: (212) 482-6440
Restaurants and Institutions (R&I) is the leading source of vital infor- www.fancyfoodshows.com USDA Economics and Statistics System
Supermarket News mation for the entire food service industry, both in print and online, Albert R. Mann Library
Fairchild Publications Inc. covering chains, independent restaurants, hotels and institutions. Food Marketing Institute Show Cornell University, Ithaca, NY 14853-4301
7 West 34th Street, New York, NY 10001 FMI The Power of Five - McCormick Place Phone: (607) 255-5406
Phone: (212) 630-4000 Prepared Foods May 6-8, 2007 in Chicago, IL www.usda.mannlib.cornell.edu
www.supermarketnews.com Business News Publishing Co. Phone: (202) 452-8444 The USDA Economics and Statistics System includes nearly 200 data
Weekly coverage of general supermarket industry trends; includes 1050 IL Route 83, Ste 200, Bensenville, IL 60106 www.fmishow.org sets published by the USDA’s Economic Research Service, national
financial highlights. Phone: (630) 694-4344 This is the largest event of its kind on a worldwide basis and the Agricultural Statistics Service and the World Agricultural Outlook
www.preparedfoods.com premier show for supermarket retailers and wholesalers now offering Board. The data describes all aspects of domestic and international
Progressive Grocer Monthly publication that covers trends in the U.S. packaged foods five shows in one location: FMI Show, Fancy Food Show, U.S. Food agriculture, agricultural economics, and rural affairs.
VNU Business Publications USA and beverage industries. Export Showcase, United Produce Expo and All Things Organic.
770 Broadway, New York, NY 10003 U.S. Food and Drug Administration (FDA)
Phone: (646) 654-7561 Beverage Industry Natural Products Expo West 5600 Fishers Lane
www.grocerynetwork.com/grocerynetwork/index.jsp Stagnito Communications Inc. Anaheim Convention Center Rockville, MD 20857
Monthly articles featuring statistics, trends in the grocery industry and 155 Pfingsten Road, Ste 205, Deerfield, IL 60015 March 9-11, 2007 in Anaheim, CA Phone: (888) 463-6332
on companies. Phone: (847) 205-5660 Phone: (866) 458-4935 www.fda.gov
www.bevindustry.com www.expowest.com FDA is a division of the U.S. Department of Health and Human
Specialty Food Magazine Publication that covers trends and issues pertaining to the U.S. beve- Services and responsible for the supervision of the food and phar-
120 Wall Street, 27th Floor rage industry on a monthly basis. NCA All Candy Expo maceutical industries.
New York, NY 10005 McCormick Place
Phone: (212) 482-6440 June 6-8, 2006 in Chicago, IL U.S. Department of Commerce
www.specialtyfoodmagazine.com (2007 dates not known at time of printing) 1401 Constitution Avenue NW
Published monthly. Articles on specialty foods and special reports on Phone: (703) 790-5750 Washington, D.C. 20230
the specialty food industry, products and trends. www.allcandyexpo.com Phone: (202) 482-2000
www.commerce.gov
The Gourmet Retailer Cabinet level department providing key statistics on the U.S. industry.
3301 Ponce de Leon Blvd., Ste 300, Coral Gables, FL 33134 Its mission is to ensure and enhance economic opportunity by wor-
Phone: (305) 446-3388 king with businesses and communities to promote economic growth.
www.gourmetretailer.com

66 The U.S. Food Industry The U.S. Food Industry 67

12.5. Links to Sources.
Standard & Poor’s http://www.standardandpoors.com
Mintel http://www.mintel.com
Packaged Facts: http://www.packagedfacts.com
ACNielsen: http:// www.acnielsen.com
The National Association for the Specialty Food Trade: http://www.
specialtyfood.com
Prepared Foods: http://www.preparedfoods.com
The Food Marketing Institute: http//:www.fmi.org
The Organic Trade Association: http://www.ota.com
U.S. Department of Agriculture (USDA): http://www.usda.gov
12.6. The Authors of the Study.
Paul S. Anderson, is a Partner of the law firm of Sonnenberg &
Anderson, Chicago. He is admitted to the Bar in Illinois, the U.S.
Court of International Trade, the U.S. Court of Appeals for the Federal
Circuit, the U.S. District Court for the Northern District of Illinois, and
the U.S. Court of Appeals for the Seventh Circuit. He is a member of
the American, Illinois, Chicago, and Customs and International Trade
Bar Associations, and served as Chairman of the Customs and US.
Trade Law Committee of the Chicago Bar Association. Mr. Anderson
is also Honorary Chair of the Chicago Chapter of the Norwegian-
American Chamber of Commerce where he served as President
from 1985 to 1987. He is also currently President of the International
Trade Association of Greater Chicago. In 2000 he was appointed
Honorary Consul General for Norway to Chicago and the State of
Illinois. Mr. Anderson obtained his BA from Wake Forest University,
JD from Illinois Institute of Technology/Chicago-Kent College of Law
and attended the University of the Pacific, McGeorge School of Law,
European Programs (graduate program in international legal studies
based in Salzburg, Austria).
Contact psa@sonnander.com, Tel 312 899 1100
Ally A. C. Gunduz, Swiss Trade Commissioner for New York, Swiss
Business Hub New York Office. Ms. Gunduz is also the founder and
executive director of the Swiss American Council for Women Inc. She
started her first business at the age of 18 with her sister and late mo-
ther, Ms. Bea. She also owned and operated a small business near
the United Nations in New York for nine years helping international
clients enter the American market. In 2004, the Manhattan Chamber
of Commerce and the Manhattan International Development
Corporation awarded her the “International Service Award”. Ally A.C.
Gunduz is a native New Yorker, published poet, avid angler, and holds
a B.A in International Relations from Boston University and a Masters
in International Business Management.
Contact Ally@SwissBusinessHub.org, Tel 212 599 5700 ext. 1032
68 The U.S. Food Industry
Claudine M. Haeni, Swiss Business Hub USA, Headquarters, is a Daniel A. Wuersch is the Managing Partner of Wuersch & Gering
native of Basel, Switzerland. Her professional background includes LLP, an international boutique firm with 15 lawyers in New York. His
assignments with the Swiss government and over 15 years of expe- practice focuses on corporate law, mergers & acquisitions, corpo-
rience in the finance industry. She previously worked for American rate finance and strategic partnerships and marketing agreements.
Express Financial Services, and holds the internationally recognized He is admitted to the bar in New York and Zurich, Switzerland. He
Certified Financial Planner® Professional Education Certificate from acquired his Dr. iur. degree at the University of Zurich Switzerland
the College of Financial Planning in Denver, Colorado, the Series 7 in 1989. In 1991, he obtained an LL.M. degree at the Georgetown
Securities License, and is a member of the International Financial University Law Center, Washington, D.C. In addition, he attended
Planning Association. Ms. Haeni received her BA with honors from graduate and post-graduate courses in international law and EU law
DePaul University in Chicago and also does cross-cultural training at the University of Lausanne, Switzerland and the London School
for executives. of Economics. Prior to co-founding Wuersch & Gering LLP in 1997,
Contact Claudine@SwissBusinessHub.org, he practiced international corporate and securities law with Morgan
Tel 312 915 0061 or Fax 312 915 0388 Lewis & Bockius (1996-1997) and Fried, Frank, Harris, Shriver &
Jacobson (1991-1996) in New York, as well as Homburger / Baker
John F. Lemker is a member of Bell, Boyd & Lloyd, in the firm’s Food, & McKenzie in Zurich, Switzerland (1988-1990). He has written and
Drug and Device Group. He concentrates his practice in regulatory co-authored books and articles on U.S. and Swiss corporate and
law relating to food, drug and medical industries and transportation contract law and the law of the European Union. Mr. Wuersch is a fre-
and automotive industry. Mr. Lemker has represented clients before quent speaker on legal issues involving business activities of foreign
the FDA, the USDA, the FTC and State Regulatory Agencies. He has companies in the U.S. He is President of the Swiss Society of New
counseled firms in the food and healthcare industries regarding com- York and a member of the Chapter Board “Doing Business in USA” of
pliance with regulatory requirements. Mr. Lemker is the former chair the Swiss American Chamber of Commerce.
of the Chicago Bar Association, Food, Drug and Consumer Products. Contact daniel.wuersch@wg-law.com Tel 212-509-4722
He is an Adjunct Professor of Law at Northwestern University School
of Law. He received both his B.A. and J.D. at Northwestern University.
Contact jlemker@bellboyd.com, Tel 312 807 4413
Frank Ustar is Deputy Director of Swiss Business Hub USA and Trade
Commissioner for Los Angeles. Mr. Ustar holds a BA in Economics
and a MA in Marketing. Before joining the Swiss government in 1984,
Mr. Ustar worked as a Research Associate for Ohio State University.
Prior he held various positions in the private sector.
Contact Frank@SwissBusinessHub.org,
Tel 310 575 1145 or Fax 310 575 1982
Martin von Walterskirchen is Director of Swiss Business Hub USA.
His previous activities for the Swiss government include Councilor of
the Swiss Embassy in Moscow, Swiss Chief Negotiator for Services
(GATS) during the Uruguay Round of the GATT, General Secretary of
the Swiss Federal Office for Foreign Economic Affairs, and Personal
Advisor to the Swiss Minister of Justice and Police and to the Swiss
President. The Swiss Government conferred on him the title of
Minister on September 21, 2001. Mr. von Walterskirchen is a gradua-
te (honors) of the University of St. Gallen.
Contact Martin@SwissBusinessHub.org,
Tel 312 915 0061 or Fax 312 915 0388
The U.S. Food Industry 69