US Food Industry

The U.S.
Food Industry
Opportunities and Challenges for Swiss Companies.
Summer 2006. osec.ch
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Editor and Contributor Claudine M. Haeni Contributors: Paul S. Anderson, Ally Gunduz, John F. Lemker, Frank Ustar, Martin von Walterskirchen and Daniel A. Wuersch 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 information on our services, please contact: Martin von Walterskirchen Director Swiss Business Hub USA 737 N. Michigan Avenue, Suite 2301 Chicago, IL 60611 Telephone: 1-312-915-0061 Fax: 1-312-915-0388 e-mail: martin.walterskirchen@eda.admin.ch While this report is intended to provide an overview of this specific market and its opportunities at the time of its edition, each individual manufacturer, exporter or company may have to conduct their own analysis to get a better understanding of the possibilities and opportunities available to them. You are encouraged to explore and develop your opportunities based on research and in-depth analysis. Readers should take note that the Government of Switzerland does not guarantee the accuracy of any of the information contained in this report, nor does it necessarily endorse the organizations, associations, companies and individuals listed herein. Readers of this report should verify the accuracy and reliability of the information contained herein before making a business decision. Swiss Business Hub USA 2004 - 2009
Table of Contents
1. Introduction and Summary. 1.1. Opportunities. 1.2. Marketing. 1.3. Regulatory Environment of the Food Market. 1.4. Acknowledgements. 2. The U.S. Food Industry. 2.1. Facts and Figures. 2.2. Trends in the Food Industry. 2.3. Eating Away From Home. 2.4. Non-Alcoholic Beverages. 2.5. Manufacturers of Food & Beverages. 2.6 Mergers & Acquisitions. 3. Supermarkets and the Grocery Industry. 3.1. Facts and Figures. 3.2. Store Types. 3.3. The Shopper. 3.4. Facing the Competition. 3.5 Growth Opportunities. 4. The Specialty and Gourmet Food Stores. 4.1. Facts and Figures. 4.2. Specialty and Gourmet Foods. 4.3. Buyers of Specialty Food. 4.4 Specialty Food Suppliers. 4.5 Trendspotting. 4.6 Products. 5. The Commercial and Institutional Food Industry. 5.1. General. 5.2. Restaurants. 5.3. Restaurants in Hotels and Casinos. 5.4 Challenges. 5.5 Trends 5.6 Distribution Channels. 5 5 5 6 6 7 7 8 9 9 10 11 12 12 12 12 14 15 17 17 17 19 19 19 20 23 23 23 25 26 26 26 6. Natural and Organic Food. 6.1. Overview. 6.2. Definition of Organic. 6.3. The Organic Food Shopper. 6.4. Trends. 6.5 Pricing. 6.6 Retail Channels. 6.7 Distribution and Purchasing. 6.8 The Foodservice Segment. 7. The Functional Food Sector. 7.1. Overview. 7.2. Definition and Regulations. 7.3. Consumption Trends. 7.4 Price Trends. 7.5 Marketing Considerations. 7.6 Retail Channels. 7.7 Distribution. 8. Food Distribution. 8.1. Overview. 8.2. The Role of the Importer. 8.3. The Role of Food Brokers. 8.4 The Specialty Food Distribution System. 8.5 Distribution to Retail Outlets. 8.6 Some Larger National Distributors. 8.7 Food Service Distribution. 8.8 The National Distributors. 8.9 Co-Packing. 8.10 Supply Chain. 8.11 Food Marketing. 8.12 Consumption Trends. 8.13 Product Pricing. 8.14 Private Store Brands. 8.15 Promotion. 8.16 Category Management. 8.17 Food Packaging. 27 27 28 29 30 30 31 32 32 33 33 33 34 36 36 36 37 38 38 38 39 39 40 40 41 41 42 43 43 43 44 45 46 47 48
The U.S. Food Industry
9. Marketing Agreements and Strategic Partnerships. 9.1. In General. 9.2. Marketing Arrangements. 9.3. Contract and Tort Issues. 9.4. Exploring and Evaluating Market Opportunities. 9.5. Marketing Agreements. 9.6 Cooperation with U.S. Companies. 10. Regulation of Food by the Food and Drug Administration (FDA). 10.1. Introduction. 10.2. Bringing a Food to Market in the U.S. I: Categorization of a Food. 10.3. Bringing a Food to Market in the U.S. II: Food Composition and Ingredients. 10.4. Bringing a Food to Market in the U.S. III: Food Labelling. 10.5. Manufacturing Food. 10.6. Bioterrorism Law. 10.7. Enforcement.
49 49 49 50 50 51 52
1. Introduction and Summary.

Martin von Walterskirchen, Swiss Business Hub USA The purpose of this report is to help Swiss companies seeking to enter the American market for food products. These interested companies 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 between manufacturer and consumer (supermarket and grocery industry, 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). 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, sophisticated 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 every 125 Americans is a millionaire. This segment of the population spends more than an aggregate $97 billion per year. Taste, freshness, 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 distributors of high-end ingredients used in gourmet and healthy food preparation. The Natural and organic food sector shows a booming doubledigit 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 (please 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 counterparts, but store brands are being recognized favourably and are moving in upscale direction (please refer to Chapter 8.14).
54 54 54 55 55 57 57 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. 12.1. Trade Associations. 12.2. Periodicals. 12.3. Trade Fairs. 12.4. U.S. Government Agencies. 12.5. Links to Sources. 12.6. The Authors of the Study. 65 65 66 67 67 68 68
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 percentage 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 billion. 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-
1.2. Marketing.
The environment in which a shopper makes his/her food buying decisions 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 stores merchandise. The average exposure 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 advertisement and cooperation with grocers and brokers. Understanding the US food distribution system (please refer to Chapter 8) gives the Swiss food manufacturer important information 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 information on these important issues.
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 study 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; Gwen Morrison, President, The Store, WPP Global Retail Initiatives, Chicago; Anastasia M. Jafari, Food Marketing Institute, Washington, DC; John Rand, Management Ventures, Inc., Cambridge, MA; Eric Desbeaumes, President, Alci Contractors Technology, Geneva; Daniel Bangser, Trade Commissioner, Swiss Business Hub USA, Chicago; and Mirjam Groeneweg, Swiss Business Hub USA, Chicago.
2. The U.S. Food Industry.

By Claudine M. Haeni, Swiss Business Hub USA
Consumption
The average U.S. household today allocates substantially more income 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 encompass direct spending in restaurants and other food establishments and exclude food served in airlines or during hospital stays).
$ 800000
2.1. Facts and Figures.

The U.S. is the worlds largest producer of food and agricultural products. On one side is agribusiness, which represents farmers, ranchers and private and public companies that are involved in the early to middle stages of food production. On the other side are food manufacturers and packaging companies, private and public companies that are engaged in the later stages of consumer food production.
1.3. Regulatory Environment of the Food Market.

The U.S. legal system is complex and needs to be treated with respect. The challenges brought forth by the regulatory environment are surmountable, provided the company is willing to make a careful assessment and plan accordingly. Before market entry, products need to be in conformity with FDA rules and regulations (please refer to Chapter 10). The manufacturer has to determine if its product is subject to any specific rules applicable to composition, ingredients, labeling or manufacturing requirements. Food is subject to complex labeling requirements. These labeling requirements include but are not limited to the name, net content, nutrition value per serving size, declaration of ingredients, allergens, etc. As a consequence of the terrorist attacks on September 11, 2001, the Bioterrorism Act requires that any facility, domestic or international, which manufactures, processes, packs or holds food for animal or human consumption in the U.S. must register with the FDA. The rationale 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 (please refer to Chapter 10.6 and Chapter 11.4). Importation of Swiss food products: 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). Chapter 11 describes the structure of CBP and its operations, and identifies the most common issues of interest to food importers.
All Other 19% 6%

Health & Personal Care Stores Pharmacies & Drug Stores
Grocery Stores 11% Food Services Drinking Places 10%
$ 700000 $ 600000 $ 500000 $ 400000 $ 300000 $ 200000 $ 100000 $0
Food At Home
Food Away from Home
7% Supercenters Beverage Stores 1%
5%
General Mechandise Chain & Department Stores, Discount Stores 42%
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 modest 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 spending pattern for food-at-home. According to the Bureau of Labor Statistics, figures on food spending by career reveal that professionals 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 dollars 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 heads 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 continue. 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. The U.S. Food Industry 7
Figure 1: U.S. Retail Trade 2005. Sales in Food and Beverages are highlighted in black. Please note that the Share of Food and Beverages of Clubs and Supercenters is 3.5% (Source: Data of U.S. Census Bureau) The food and beverage industry encompasses all companies that manufacture or process food and beverages for human consumption. Based on figures published by the Census Bureau and the U.S. Department of Agriculture sales of food-based retailing represented approximately 26% of all U.S. retail trade of $4.1 trillion in 2005 (food 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.
Retail Channels, Competition and the Consumer

Competition among retailers has been fierce over the past several years and continues to accelerate. Supercenter leader Wal-Mart Stores Inc., warehouse clubs Costco and BJs 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 publication Supermarket News, Wal-Mart, the largest food retailer in the nation, 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 variety 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 companies 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 nations traditional retailers according to studies conducted by the Food Marketing Institute and Progressive Grocer Magazine. To build market share and stay ahead of the competition 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 developing 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 shoppers 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 comparisons 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 mainstream goods and look for bargains. Trips to traditional food stores have declined on average, down over 4% within the past year alone.
Shifts such as these make it essential for manufacturers and retailers to understand and consequently focus on their target markets.
Spring Fancy Food Show 2006

Two of the latest trends that demanded the visitors attention were: Foods and food ingredients and personal care products that promote antiaging. Antiaging has become a buzz word, not only among baby boomers, but also among Generations X and Y with the connotation prevention of disease and preservation of health. Natural/organic and gourmet food and supplements for companion animals. Companion animals and their well-being continue to gain in importance. Pet nutrition represented the fastest growing market segment in specialty foods in 2005.
Shifts in Demographics
The 15 to 24 year olds and the 55+ are the two largest age groups in the U.S. population, with the baby boomer numbers growing fastest. Retailers need to consider the different needs of both groups and target them accordingly. Moreover, Generation Marketing and Behaviour-Based Segmentation1 have gained in importance throughout the industry.
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 manufacturers 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 problem 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 influence 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.
Introduction of New Products

Introduction of new products reached nearly half a million over the past four years. New products bear a significant risk of not being accepted by the consumer or experiencing a short lived existence. Taste is the main driver behind consistent demand and purchasing habits by the consumer. From a global perspective, Europe is the leader in new product introductions, followed by North America (see Figure 3). A focus on individual needs among consumers encourages innovation and a wide variety in new product offerings. In 2005, 156,000 new products found their way into the market around the globe. The highest number of introductions occurred in the beverage segment with nearly one fifth of all launches, followed by bakery goods (12%) and confectionery (11%). In the U.S. alone there were 16,000 new product introductions.
Region Europe North America Asia Pacific Latin America Middle East & Africa Total 2004 52,456 46,467 35,082 11,419 4,921 2003 44,220 33,429 27,328 6,895 5,877 2002 2001 Total
2.3. Eating Away From Home.

The U.S. foodservice industry consists of a wide range of away-fromhome eating places. It comprises all commercial eating and drinking places, from restaurants and cafeterias to bars, with the main industry segments being divided into full-service restaurants, limited-service places (fast food), and food contractors and institutional food services. According to the National Restaurant Association sales of the foodservice industry were estimated at $486.1 billion in 2005. The year 2006 should see further growth of approximately 5%. Rising income levels and a harried lifestyle have greatly influenced the popularity of dining out among Americans. According to the Bureau of Labor Statistics, more than half of all U.S. families were full-time dualearner households in 2005. Demographic trends such as a growing baby boomer generation represent an older and wealthier population 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 been experiencing more consolidations. Historically, this industry has been dominated by small businesses. In the past few years larger chains have started to take over the lead by introducing standardized menus, extensive testing of consumer satisfaction and the ability to operate at a more cost-efficient level. Restaurant sales growth is predominantly expected in the Pacific (California to Alaska and Hawaii) and South Atlantic (Delaware to Florida) Regions, the two economic leaders of the nation in recent years. The mountain areas are expected to set the pace with 6.1% growth.
40,742 40,086 177,504 33,234 26,923 140,053 22,994 14,588 4,564 4,110 3,714 3,122 99,992 26,592 18,030
Taste and Convenience

Time pressured consumers are looking for prepared meals and stores that make their shopping trips easier. Scarcity of time has the consumer also looking for food-on-the-go such as repackaged portions of salads, fruits, yogurt drinks, snack bars, and tasteful innovations offering bold flavors for moments of indulgence. Premium and Limited Edition have become buzz words for high quality. Retailers will have to understand the consumers food psyche and reflect that in their product palette.
150,345 117,749 105,644 88,433 462,171
Figure 3: Global New Product Introductions by Region (Source: Mintel)
Food Ingredients
Revolutionary change in the food industry sends Chefs traveling all over the world to discover local and exotic ingredients to use in newly created, exciting dishes. This development has also spurred the creation of Fine Casual and Family Casual Dining, a new restaurant segment (see Chapter 5).
1 ACNielsen
2.4. Non-Alcoholic Beverages.

The U.S. non-alcoholic beverage retail industry is dominated by four companies: in 2005 Coca Cola Co. remained the market leader with a 43.1% market share, followed by Pepsi Cola Co. with 31.4%, Cadbury Schweppes PLC with 14.6% and Cott Corporation (private label) with 5.4%. Retail sales for carbonated soda drinks accounted for $68.1 billion in 2005. According to Beverage Digest consumption of carbonated soft drinks showed a decline for the first time in 20 yeThe U.S. Food Industry 9
Ethnicity
One of the fastest growing ethnic groups are the Hispanics. Hispanics will represent more than 50% of the U.S. population in the near future. The second fastest growing ethnic group is of Asian background.
ars. Coca Cola Classic was down 2% and Pepsi 3.2%. Reasons for this decline vary from media reports claiming a connection between soft drinks and obesity to recent research data that showed high levels of the carcinogen benzene in soft drinks to parents fighting for better nutrition for their children, especially on school premises. Energy Drinks took the lead in the non-alcoholic beverage market with a leap in growth of close to 70% and sports drinks experienced a 20% increase; teas and coffee followed closely with 19.5%. Sales of natural sodas grew around 15% between spring of 2004 and spring of 2005. Carbonated beverages sweetened with fruit juice increased 13.1% and sugar and fructose sweetened natural sodas 1.6%. The latter are predicted to decline as consumers have become aware of their high sugar content.
Brand Aguafina (Pepsi) Private Label Dasani (Coca-Cola) Poland Spring (Nestle) Propel (Gatorade Company) Dannon (Danone*) Arrowhead (Nestle) Deer Park (Nestle) Crystal Geyer (Crystal Geyer Co) Evian (Danone*) Sales ($ Millions) 370.6 307.7 284.4 169.4 141.6 133.0 126.8 94.1 85.2 76.6 % Change to previous Year 2.2 24.7 6.1 25.8 44.9 28.5 15.1 49.2 9.3 4.0 % Market Share 15.3 12.7 11.7 7.0 5.8 5.5 5.2 3.9 3.5
nonalcoholic beverages that are also low calorie/low carbohydrate, or feature innovative mixtures of fruits and possibly organic ingredients according to Beverage Spectrum. Sales figures for 52 weeks ending February 19, 2006 showed doubledigit growth and unchanged positions for the leading brands. Number one bottled water, PepsiCos Aquafina, remained in the leading position. Private Label surged with a 30% growth rate. Crystal Geyser and Evian were two brands which experienced declining sales.
have been concentrating on more efficiency through lowering of their operating costs, introducing new technologies to track inventory, reducing supply chain expenditures, eliminating less profitable brands and divesting of unprofitable operations. The trend in cost-cutting and reorganization is predicted to continue to impact this mature industry. Estimates by Standard & Poors predict moderate growth for some of the big players. More direct selling of their products to restaurants, institutions and schools and product innovations coupled with aggressive marketing may impact profits positively. Mars Inc. and Cargill Inc. are the biggest privately held companies. Together they generated aggregate sales of $210 billion in 2004 (latest figures available). Figure 5 shows the top publicly traded U.S. food and beverage manufacturers in 2005 (ranked by sales). Among the major foreign food and beverage competitors were and remain Nestle SA of Switzerland, Unilever PLC, UK, Groupe Danone, France and Cadbury Schweppes PLC, UK. A survey conducted by Food Processing Magazine and GrantThornton LLP revealed that approximately two thirds of the food manufacturers participating believed that health promoting foods will be their major growth market in 2006.
Food and beverage companies continue in their efforts to optimize their management and production lines. Standard & Poors indicates that the intense competition in the food industry has led the top food companies to increase their domestic advertising expenditures. Improved product mix, innovation and increased marketing campaigns and promotions are strategies these companies employ as they strive for profitability.
Regulations
Bottled water falls under a separate, very specific regulatory environment. Beverage manufacturers must follow multiple regulations that include Standards of Identity, Standards of Quality, the Nutrition Labeling Education Act and the FDAs Good Manufacturing Practices (GMPs).
2.5. Manufacturers of Food & Beverages.

Over decades the top national food companies have built a solid reputation and established themselves with a strong brand-name recognition. To insure profitability their operations focus on multi-million dollar products they can sell on a national basis. They tend to stay away from regional products and preferences on their home turf, which is contrary to their strategy in their international markets. Company 2005 34,113 32,562 26,014 23,104 19,254 18,706 14,566 11,244 11,885 10,177 2004 32,168 29,261 26,441 21,962 19,119 18,158 14,081 11,070 10,906 9,613 % Change 6 11.3 (1.6) 5.2 0.07 3.0 3.4 1.6 9.0 5.9
2.6. Mergers & Acquisitions.

450 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005
Packaging & Equipment Supplies Soft Drink, Water, Juice Manufacturers Raw Products & Ingredient Supplies Wholesalers & Distributors Restaurant & Foodservice Food Manufacturers
3.2
Kraft Foods Inc. PepsiCo Inc. Tyson Foods Inc. The Coca-Cola Co. Coca-Cola Enterprises ConAgra Foods General Mills Pepsi Bottling Group Inc. Sara Lee Corporation Kellogg Co.
Figure 4 : Bottled Water Sales for 52 weeks ending March 20, 2005 ( Source: Information Resources, Inc). * Allianz on the U.S. Market Evian was the first single-serve bottled water introduced to the U.S. market 25 years ago. It became the trailblazer of todays array of carbonated and non-carbonated bottled water, sports drinks, energy drinks, fruit drinks and ready-to-go teas. Fortification with vitamins, calciums and antioxidants has become the in thing and the consumer responds positively. Research figures promise continuation of strong growth. Bottled water experienced a per capita consumption that rose from 17.2 gallons in 2000 to 23.8 gallons in 2004. Single-serve bottled water showed continued growth at an 18% growth rate for the 52 weeks ending February 19, 2006. The main reasons for this surge in demand can be attributed to consumers concern about the safety of municipal water supplies as well as bottled water having finally carved its niche as a refreshment beverage in the American market. The health and wellness trend promises continued growth in water and all 10 The U.S. Food Industry
Figure 5: Top U.S. Food and Beverage Companies in 2005, ranked by Sales in $millions. (Source: Standard & Poors, Company Reports) The packaged food and beverage industry has seen key commodity prices rising and then leveling off for a while. To enhance their profit margins, some of the big food companies (H.J. Heinz Co., Kraft Foods, Sara Lee Corporation, General Mills and ConAgra Foods Inc.)
Figure 6 : Mergers and Acquisitions in the Food Industry 2005 (Source: The Food Marketing Institute) According to the Food Marketing Institute 323 mergers, and acquisitions came to a close in 2005 with an additional 75 announced but not completed. This illustrates a continued decline in M & A activity over the past five years. A high number of deals were registered among multi-product food manufacturers and beverage companies. The U.S. Food Industry 11
3. Supermarkets and the Grocery Industry.

Store Format Traditional Store Formats Conventional Supermarket
Store Size (sqft) 25,800
Ann. Sales ($ million) 7.8
Number of SKUs 22,000
SKUs (Stock-Keeping Units)

Over the past decade the U.S. grocery industry has experienced a succession of consolidations leading to intensified competition among supermarkets themselves and from other retailers, foremost from mass-merchandisers and warehouse clubs. According to Progressive Grocer Magazine, there were 34,052 supermarkets nationwide in 2005, approximately 200 store locations less compared to 2004. Of those stores two thirds belonged to a chain; the remainder consisted of independent operators. Aggregate supermarket sales were estimated at $478.9 billion for 2005, representing a growth rate of around 8.6% despite the slight decline in store locations nationwide. Chain supermarkets generated over 90% of total sales, independent supermarkets accounted for the remainder. The chains gain can primarily be traced to food sales at supercenters. Nationwide there were 2,175 supercenter stores averaging sales close to $40 million per supercenter store. Wal-Marts supercenters alone accounted for close to $100 billion in sales in 2005. This mature industry consists of an array of businesses ranging from traditional supermarkets to superstores and small grocery stores to non-traditional supercenters, warehouse clubs and convenience 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. which moved up to eighth position and pushed Winn-Dixie to tenth position.
Full line of dry groceries, canned food, meats, produce and non-food items. Annual sales reach a minimum of $2 million. Full line of dry groceries, canned food, meats, produce. May include in-store banking, video rental, florist shop. Combination food store and full-line drug store under one roof, common check-out. One third of space is reserved for non-food items. Smaller than conventional format with very limited services. Small corner grocery store with limited selection of staples and other convenience foods. Stores specializing in a specific food category, e.g. ethnic/international, health focused or organic, locally grown or produced. volume hybrid format of a supermarket/drugstore combination and discount store. Includes grocery products,(typically 40%; nonfood items, electronics, sporting goods. Banking, dry cleaning, restaurants, etc. A membership retail/wholesale hybrid with a limited variety of products in a warehouse environment. 60% to 70%general merchandise, health/beauty care products. Grocery makes balance. Merchandise and grocery sold in bulk. Often found in urban areas or strip malls; traditionally sell staples and knickknacks. Now they sell 20% to 80% grocery and consumable items at aggressively low prices. Compact, drive-to store offering a limited line of high convenience items, dry groceries, small selection of perishables (dairy and prepared foods) and nonfood items. >50% sell gasoline and fast food. Long opening hours, easy access. Prescription-based drug store with at least 20% of total sales from consumables, general merchandise and seasonal items.
3.3. The Shopper.

The mainstream consumer focuses on economics and is concerned about the price of a product. In general, his purchases represent a combination of store brand and national brand products and a desire for new innovative items. Female grocery shoppers in particular show a preference for lower-priced store brand products, as they are generally responsible for the household budget, whereas older and higherpaid shoppers in metropolitan areas gravitate more towards national brands. The trend towards store brands continues to expand. Trader Joes, Wegmans and Whole Foods are among the most successful grocery stores selling their higher quality store brands and focusing on their clients needs and desires and fostering store loyalty. (For more details on private label see Chapter 8.) How $100 Is Spent Perishables Beverages Non-Food Grocery Snack Foods Main Meal Items Health & Beauty Care General Merchandise Pharmacy $ 50.31 $ 8.05 $ 8.07 $ 4.28 $ 7.09 $ 3.66 $ 4.09 $ 3.06
Superstore
40,000
20.0
25,000
Food/Drug Combo
55,700
22.0
52,000
Limited Assortment Supermarket Other (Small Grocery) Stores Specialty/Gourmet Retailers
N/A <5,000 N/A
N/A <2.0 N/A
<2,000 N/A N/A
Figure 8: Traditional and NonTraditional Store Formats. Note: Store Size, Annual Sales and Number of SKUs present Averages of the respective Store Formats. (Sources: Willard Bishop Consulting and ERS/USDA). SKU = Stock-Keeping Units, i.e. items kept in stock.
Non-Traditional Formats Supercenters 170,000 51.0 N/A High
Wholesale Club
135,000
50.0
N/A
Staples, Condiments, Other $ 11.39
Dollar Stores
N/A
N/A
N/A
Convenience Stores
3,000
N/A
N/A
3.2. Store Types.

A supermarket is a retail business with a minimum of 5,000 square feet selling space and annual sales of $2 million plus. At least half of this space is dedicated to grocery items. Supermarkets are divided into two main categories, traditional and non-traditional grocery stores. Traditional store formats sell at least 65% grocery and consumable items, non-traditional stores carry less than 65% food items. Convenience stores operate on a higher margin with a limited selection of staple groceries, ready-to-eat and heat foods, and non-foods. More than 50% of them operate a gas station. Independent operators generally own less than 11 retail stores; chain operators account for 11 or more retail stores.
Drug Stores
N/A
N/A
N/A
Figure 9: How the American Average Shopper spends $100 at a Grocer (Source: Progressive Grocer 73rd Annual Report of the Grocery Industry, April 2006) Who Shops Female Head of Household Male Head of Household Both Other 69% 19% 11% 1%
Company
Wal-Mart Stores Kroger Co. Albertsons, Inc. Safeway, Inc. Ahold USA, Inc. Publix Supermarkets, Inc. Delhaize America, Inc. H. E. Butt Grocery Co. Super Valu, Inc. Winn-Dixie Stores, Inc.
Sales $ Million 2005 98,745 58,745 36,288 32,733 23,848 18,532 16,480 10,422 8,633 7,092
Number Number Stores Stores 2005 2004 2,089 1800 2,501 1,765 1,540 824 876, 1,544 272 619 563 2,534 1,797 1,572 826 853 1,528 276 617 943
Top Banner Names
Figure 10: Who is the Shopper? (Source: Progressive Grocer) The survey conducted by Progressive Grocer revealed that the preferred days to shop were unanimously the weekends starting Friday. The majority of the shoppers prefer to do their shopping during the day; 12 The U.S. Food Industry
Wal-Mart Supercenter, Wal-Mart Neighbourhood Market Kroger, Ralphs Grocery, Smiths Food & Drug Albertsons, Jewel-Osco, Shaws Safeway, Vons Market, Dominicks Finer Food Stop & Shop, Giant Food Store, Tops Publix Super Market Food Lion, Hannaford Food & Drugs, Kash n Karry, H.E. Butt Food Store, H.E.Butt Central Market Save A Lot, Cub Foods, Shoppers Food Warehouse Winn-Dixie, Save Rite
Figure 7: The top 10 Supermarket Chains in 2005 (Source: The Super 50, Progressive Grocer, Feb 2006)
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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% 80.0% 60.0% 40.0% 20.0% 0.0%
2.5% 7.9% 15.7% 10.9% 89.6%
79.0%
Traditional Convenience
73.4% 56.3%
Non-Traditional Linear (Traditional)

49.0%
39.0% 31.3%
8.8% 10.2%
12.4%
12.0%
1988
1993
1998
2003
2008
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 advantage 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 traditional 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 consumers dollars. 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 formats 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 aggressive 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 sales 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 worlds largest company, is the undeniable market leader in this segment. According to estimates by Standard and Poors Wal-Mart generated sales from its supercenters and neighbourhood stores close to $100 billion in 2005. 14 The U.S. Food Industry
Wal-Marts dominant position threatens the traditional chain food and drug retail industry. As of end of May 2004 Wal-Mart owned and operated 1808 supercenters and 89 neighbourhood markets in the U.S. Additionally, they owned 554 Sams Clubs. Expansion plans included 240 to 250 new supercenters (160 relocations/expansions), 25 to 30 neighbourhood markets and 30 to 40 Sams Clubs, all to be completed by 2006. Wal-Mart is also the industrys price leader. Its focus on lowest possible cost includes leverage with food manufacturers through its sheer size, investments in the newest and most efficient technologies and keeping employee costs in check (Wal-Mart employees are non-unionized). With its recent opening of a supercenter in McKinney, Texas, Wal-Mart has embarked on yet another trail. The McKinney supercenter is experimenting with materials, processes and technologies that should reduce the amount of natural resources required to operate 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 testing 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-Marts latest major announcement revealed its plans to capture the interest of the more sophisticated consumer by substantially adding organic foods to its product assortments and going upscale with new store openings, starting in Texas. The new supercenters will feature 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.
that are used together by the consumer are being rearranged and featured in the same aisles, for example breakfast foods such as cereals, 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 cooking 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 customers time issues. Traditional supermarkets have also begun to look at new concepts and experiment. Finding Ones 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 rebranded 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 another 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. Safeways 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 natural/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 Americas newly launched stores Sweetbay highlight specialty foods offered at competitive prices and feature their signature produce department Harvest Market. Publix developed a store format for the health-conscious consumer under the name Green Wise Market. The first store is scheduled 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 stockkeeping units and have expanded their private label assortment. Private label brands are known to increase customers loyalty.
Kroger has been improving their product palette and is focusing on superior customer service. Remodeling and expansion of existing 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 segment in food retail totaling $14.5 billion in 2005 and estimated at $16 billion by the end of 2006. Nearly 40% of the consumers regularly buy natural and organic foods and the majority among them make their purchases at their primary supermarkets versus a specialty food store (see also Chapters 4, 6 and 7 for more details). The U.S. Governments latest Dietary Guidelines have been shifting 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.mypyramid.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 Technologys publication states that by 2004 65% of grocery shoppers had redirected their diets to manage health conditions naturally, 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. FDAs official approval of heart-health claims for whole grains, omega-3 fatty acids, monounsaturated oils among others have noticeably 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 entered the market and are changing the U.S. baby food landscape. Private label products are gaining in recognition. Private label products 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 retailers 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 families 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
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 (WalMart, Costco, etc) and specialty stores on the other (Whole Foods, Wild Oats and Trader Joes; 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 stores 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 consumers 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
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 introduced entire aisles of regional foods, reaping success with this approach. Convenience becomes center stage. Easy-to-prepare meals, resealable packaging, freshness dating, easy-to-clean-up, easy-toopen 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-stopshop emphasizing convenience, generally see their health and beauty care products soar 15% to 20% in their first year of operation. Larger format drugstores show a trend of adding convenience foods, drinks and greeting cards, merchandise traditionally not part of a drugstores product selection. This, in turn, not only improves store traffic, but also helps improve their margin.
4. The Specialty and Gourmet Food Stores.


The specialty foods and gourmet market in the U.S. has experienced a steady compound annual growth of 7% over the past several years. 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 $34.8 billion and claimed a total market share of 8%. This trend is expected to continue as the changing demographics, the prevailing tendency to view mass-market products as bland and the mainstreaming of gourmet foods dictate the American consumers demand for highquality upscale products and unique tastes (Specialty Food Magazine). Specialty food and gourmet stores range from small mom-and pop operations to mass markets. Currently there are an estimated 14,000+ specialty foods and gourmet stores in the U.S. Competition for specialty food market share among the various retail channels continues at an accelerated pace. For food retailers specialty foods are an important segment, as they are generally sold at regular retail prices and typically generate a higher margin. Close to one quarter of all sales can be attributed to this segment. Sales of specialty and gourmet foods showed growth at all three sales channels with specialty and natural food stores gaining ground. Main retail channels such as traditional supermarkets, supercenters and warehouse clubs held their stake in this food segment with annual sales of specialty food exceeding 70%. Specialty food stores claimed around 20% of sales.
defined as being made with high-quality ingredients, having great taste and possessing unique qualities. These products are also offered in a variety not available otherwise in the market and feature superior packaging. Four segments define specialty and gourmet foods: Ethnic, Regional, Imports (80% from Europe) and Artisan. Together these segments comprise 30 product categories. Handmade items (artisan), produced in small quantities, rich in texture and featuring innovative ingredients and unusual flavors and shapes underline the exclusiveness expected in this sector. From 2003 to 2005, a two year span, specialty food sales have registered record sales. As shown in above figure, there are 26 specialty food categories that accounted for substantially higher sales than their mainstream equivalents. The five largest specialty food categories comprise Condiments, Juices & Functional Beverages, Cheese, Coffee & Cocoa, and Chips, Pretzels & Snacks. Condiments account for over one-fifth of all specialty food sales. Segment Condiments Juices & Functional Beverages Cheese Coffee & Cocoa Chips, Pretzels & Snacks 2003 4,622 889 907 776 820 2005 4,651 1,343 1,160 1,063 991 % Change 0.6 51.1 37.0 37.0 20.9
4.2. Specialty and Gourmet Foods.

In the 1980s 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 2003-2005 % Change 13 29 33 18 2005 $ Million % Share 15.92 72 4.24 19 2.02 9 22.18 100
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 $ Million % Share 14.05 75 3.27 17 1.51 8 18.84 100
Main Retail Channels Specialty Food Stores Natural Food Stores Total
2004 $ Million % Share 14.78 73 3.72 18 1.74 9 20.23 100
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
Product Category
Baking Mixes, Supplies & Flours Beans, Grains & Rice Beverages (Carbonated, Functional, Ready-to-Drink Tea/Coffees) Beverages (Juices & Functional) Beverages (Water) Bread and Baked Goods (Frozen/ Non-Frozen) Candy & Individual Snacks Cereals (Cold & Hot) Chips, Pretzels & Snacks Coffee & Cocoa Condiments Conserves, Jams & Nut Butters Cookies & Snack Bars Cooking Oils Crackers, Crispbreads & Rice Cakes Dairy: Cheese Dairy: Milk and other Dairy Dairy: Yogurt & Kefir Desserts & Puddings (Frozen & Shelf-Stable) Eggs Entrees, Mixes, Shelf-Stable Meat, Poultry, Seafood Frozen Entrees, Pizzas, Convenience Foods Fruits & Vegetables (Frozen & Shelf-Stable) Nuts, Seeds, Dried Fruits & Trail Mixes Pastas (Shelf-Stable) Sauces, Salsas, Dips (Refrigerated & Shelf-Stable) Seasonings Soups Sweeteners Teas
Percent Specialty Foods 8 26 66 51 61 148 24 12 21 37 0.6 12 4 22 10 28 48 53 4 33 17 6 23 31 7 4 14 10 9 8
Percent Mainstream Foods 3 18 6 1 16 3 1 1 8 -1 2 1 -10 13 5 16 10 31 1 9 2 -1 5 22 -0.3 5 4 4 15 9
Segment Bread & Baked Goods (frozen & non-frozen) Water Carbonated, Functional & Ready-to-Drink Tea & Coffees Yogurt & Kefir Juices & Functional Beverages
% Growth 2003-2005 147.8 61.0 65.7 53.3 51.1
Figure 15: The Top Five Specialty Food Categories between 2003 and 2005 ranked by Sales (Percentages) (Source: Mintel/SPINSACNielsen)
Flavor Magic Gourmet Seasoning Sheets, a new way to season meat and fish, all natural, no preservatives, available in eight flavors; Artisan Artichoke & Mixed Olive Mini Quiches and Lobster Newburg Puffs, ready to bake horsdoeuvres made from finest ingredients; Apothecary Jars filled with Chocolate Fruits (chocolate covered sun-dried plums, peaches, apricots and nectarines); Chocolatour single origin chocolate bars offering a world tour of chocolate containing cocoa from Java, Grenada, Tanzania, etc. Vintages are clearly indicated on the front of each wrapper along with tasting notes on the back; Classic dessert sauces and syrups upgraded with premium ingredients to intensify flavors, e.g. syrup infused with lavender or a combination of ginger and vodka. The majority of retail stores discover new specialty foods at trade shows (foremost at the Fancy Food Shows, followed by other trade shows), and in trade magazines. Retailers also take into account recommendations from customers. According to Specialty Food Magazine approximately 60% of retailers follow their customers input.
4.4. Specialty Food Suppliers.

This diverse group of specialty food distributors encompasses small domestic entrepreneurial manufacturers with just a few products as well as billion dollar distributors with tens of thousands of specialty food products. Distributors and brokers generally represent several manufacturers. Importers of specialty foods range from individuals focusing on a limited number of traditional products to large companies handling major brands of various countries around the globe. Approximately 50% among them generate annual sales of $500,000 to $4 million, 4.2% reach annuals sales in excess of $10 million. Four out of five importers specialize in specialty foods from Europe, reflecting the long standing tradition in this industry. Imports from all other continents are on the rise, a direct result of the growing ethnicity in the U.S. Distributors Retailers Other (not specified) 51.6% 32.5% 15.9%
New Products
The discriminate specialty food consumer is on a perpetual hunt for new products of high quality that appeal to his senses and taste real. He is drawn to ethnic foods and regional cuisines across the globe. Fitness and healthy eating habits direct his focus toward on Betterfor-You foods and beverages that are low in fat and sugar and provide nutritional benefits (added vitamins and minerals). Despite a failure rate of 50% to 90%, introduction of new products is at a high rate and generally enhances a stores sales performance. According to Mintel, more than 5,100 specialty food products were launched in 2005,. Although this is a slight decrease from 2004 (5,319) and 2003 (5,314), it is nevertheless still considerably above the previous years number of new products. Beverages took the lead with 1,007 new product launches. Other product categories that registered a significant amount of novelties included confectionery, sauces and seasonings, bakery goods and pet foods.
4.3. Buyers of Specialty Food.

Household income, education and geographical location are the primary aspects of the specialty food buyer. Specialty foods can make up a large percentage of a households spending. Moreover, consumers who purchase specialty foods tend to be more loyal and spend more on average per grocery trip. The specialty food buyer in the U.S. is likely to earn $100,000 or more annually than the average population and over 50% have a college degree. Baby Boomers are the leading purchasers in this market segment. They are generally the wealthiest among the various consumer groups, are health conscious and willing to pay for high quality and uniqueness. They, the empty nesters among them in particular, are also into gourmet cooking themselves and into the ingredients that go along with it. People living in or near cities are more likely to purchase specialty foods. People with children are as likely to purchase specialty foods as people without children. The Hispanic and Asian populations tend to be above average buyers in this segment of the food industry. The purchase of specialty foods is highest in the Pacific and Northeast regions of the U.S., followed by the Mountain and Middle Atlantic regions. (Source: NASFT)
Figure 16: Annual Sales of Specialty Food Importers by Channel (Source:Mintel/Market Tools) According to Specialty Food Magazine, distributors are the preferred sales channel of importers. More than 50% of all imported specialty food products go to market through a network of distributors; one third is shipped directly to retailers.
4.5. Trendspotting.
Across America the leading and most successful Chefs are focusing on their customers, what they order, what they eat and what they dislike on a daily basis. Aside from their talents, their closeness to their clientele is the key to their success and their being the indiscriminate trend spotters in the U.S. food scene. Food trends that will establish themselves often start on the West Coast and move eastwards according to food marketers observations. Seattle, Portland and San Francisco are the leaders in discovering what may be next on the restaurant scene. Well-known food journalist, culinary expert and chef Nick Zukin, is one of the trend spotters who is at home in the world of gourmet dining, where a strong demand in fine food paired with the highest level of service has been manifesting itself for some time. He talks about the newest observations and developments in the Northwest corner of the U.S., which also happens to be the birth place of Starbucks and James Beard2. Chef Zukin mentions that Portland is adopting Chef Alice Walkers
2 The James Beard Foundation is a national not-for-profit organization based in New York City. The organization is dedicated to fostering and furthering the practice and appreciation of the culinary arts in America. The James Beard Foundation Awards are the nations preeminent honors for culinary professionals.
Spring Fancy Food Show 2006 Exhibit Showcase

As consumer tastes become increasingly sophisticated, manufacturers take classic recipes and turn them into new, adventurous and unconventional creations. They are handmade, often produced in small batches (limited editions) and feature the most unusual and exquisite combinations of texture and flavors. The packaging of these products is of highest quality and exceptional (eye-catchers). The newest products introduced at this years Fancy Food Show included Artisan Croutons, handcrafted with the finest all-natural ingredients in three extraordinary flavors to be added to soups or salads; Basil Hors dOeuvres Crackers and Summer Citrus Shortbreads, in limited edition flavors, for the summer months, and Walnut Hors dOeuvres Crackers and Orange Cranberry Shortbreads, in limited edition flavors, for the winter holiday season; California Roasted Pecan Oil and Roasted Pistachio Artisan Oils (small batch productions);
Figure 13: Percent Sales Growth for Specialty Foods and Mainstream Foods by Product Category for 2003-2005. Percentages do not include Sales through Wal-Mart, Trader Joes. (Source: Mintel/SPINSACNielsen).
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simple dishes that often feature organic, locally grown ingredients of highest quality, and also that Caribou Coffee Company, recently rated 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 gourmet stores. Chef Stiles predicts that shelf-stable products are the future and consumers will learn to accept aseptically packaged products (source: Prepared Foods). Chef Zukin also points to the trend of artisan foods. A growing number of individuals turn their passion for gourmet food into a business. Across America, artisan shops open their doors and offer their clientele products that range from the finest handmade bakery goods and confectionery to savouring pates and gourmet cheeses with exciting new tastes. For example, Harvest Moon is a domestic washedrind cows milk cheese which tastes like Pont LEveque, and Cocoa Cardona is a semi-soft goats 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 sharing 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 childrens 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 standards 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 Laundrys influence. His French Laundry Cookbook has brought him national and international recognition and many awards. Chef Norman Van Aken has been following Americas evolution in its eating habits and cooking methods for decades. He is the creator 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 Normans Restaurant in Coral Gables, Florida. His observations confirm a continuing and growing interest and demand in ethnic foods and innovative cuisine with exotic flavors.
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 bacteria, 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 products 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 position. 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.
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 differs from sports drinks that are meant for recovery after a strenuous workout. Energy Drinks have been readily adopted by the on-thego 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).
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 demands 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 joining the upscale world of gourmet with unique products and new tastes. 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, soymilk, 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 segments, sales have risen sharply. Growing variety, interesting tastes and a welcome menu change for the healthconscious consumer ensure this trend to continue.
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, nonorganic or natural. Dark chocolate has become the favorite after the publication of studies pointing to its health benefits such as its antioxidant 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, bitesize, and taste are key market drivers together with attractive onthe-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.
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 alltime 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 dining 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 convenience 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.
Condiments
As there are no clear guidelines what condiments encompass, Mintel came up with their own definition (in order of market share): condiments comprise sauces, mustards and horseradish, jams, jellies and spreads, salad dressings and (olive) oils. The time-pressured twoincome 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. Mintels 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.
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 frozen desserts. The USDAs published figures show an annual production of 1.6 billion gallons in 2004. Despite health consciousness, the American consumer has continued to associate ice cream with indulgence and has shown little interest in light (50% less fat) ice cream. Dreyer, one of the four top domestic ice cream manufacturers, has
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, pats 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 absence 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, especially transfats. Snack producing companies are accentuating positives in nutritional labeling and are experimenting with variety, adding ethnic components and new flavors. Small-batch, conveniently packaged gourmet snacks featuring new unusual flavors are a winner and are driving growth.
5. The Commercial and Institutional Food Industry.

5.1. General.
The commercial and institutional food industry in the U.S. is commonly referred to as the foodservice industry. In 2005 the foodservice industry as a whole accounted for an estimated $486.1 billion in sales. According to the U.S. Department of Agriculture food away from home as a percentage of total food expenditures has steadily risen, from an estimated 26% in 1960 to nearly 50% in 2004. Forecasts predict that by 2010 more than 53% of every food dollar will go towards food consumed away from home. This figure is supported by economic trends and mounting time pressure resulting from a rise in single-parent and dual-income households.
at $1.7 billion (Source: Standard & Poors). Institutions comprise all noncommercial establishments such as schools, colleges, hospitals and extended care facilities, vending areas, plants and offices, correctional facilities and transportation (trains, cruise ships, and airplanes) and others. Of those, clubs, sporting and recreational camps and transportation were estimated to show the highest growth rate with 5.2% and 9.5% respectively. This report will concentrate on the commercial side and focus on high-end restaurants. 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 sector in particular.
Category Full-service Restaurants Limited-service Restaurants Commercial Cafeterias Social Caterers Ice Cream, Frozen Custard, Yogurt Stands Bars/Taverns Total Commercial Eating & Drinking Places Food Contractors Lodging Places Other Commercial Sales Total Commercial Foodservice Institutional Foodservice Military Foodservice (Continental U.S. only) Total U.S. Foodservice
2005) 164.9 135.6 5.1 5.3 15.5 15.1 343.0 31.9 23.7 45.1 443.7 40.6 1.7 486.1
2006) 173.4 142.4 5.2 5.7 16.9 15.7 360.9 34.0 25.0 47.7 467.6 41.6 1.8 511.1
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.
5.2. Restaurants.
Continued rising household income and the convenience of eating out with a large number of reasonably priced restaurants to choose from is solidifying the fact that eating out remains an integral part of daily life in the U.S. According to the National Restaurant Association the restaurant industry experienced solid revenue growth in 2004. Operators of high-end restaurants in tourist areas also profited from a favorable currency exchange, as the weak dollar made vacationing in the U.S. more desirable. Nevertheless, supply shortages caused by diseases (BSE) and severe weather spurred wholesale food price increases by 5%. This price hike was much higher than in preceding years and, together with rising energy costs, severely impacted profits. 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 restaurants and limited service (fast food) restaurants which again are divided into chains and independents (the Nations Restaurant News, an industry trade magazine). Currently there are an estimated 294,000 independent restaurants and 234,000 chains in the U.S. Together, they represent approximately 72% of all restaurants nationwide and they also claim approximately 58% of revenues and half of all patrons visits. Independent restaurants have the most locations in the Northeast. The Southeast U.S. is predominantly chain-oriented, and the West favors Asian and Mexican cuisine. The publicly traded companies dominating the restaurant industry range from fast-food operators (McDonalds Corporation, Wendys The U.S. Food Industry 23
Figure 17: Projected U.S. Foodservice Industry Sales (in Billion Dollars; 2005 = Estimates; 2006 = Projections) (Source: National Restaurant Association) The commercial segment is the largest and constitutes all types of restaurants including cafeterias, bars and ice cream parlors. The commercial segment reached estimated sales of $443.7 billion in 2005. The institutional foodservice segment includes all sales to institutional organizations and businesses operating their own foodservice. In 2005 institutional services were estimated at total sales of $40.6 billion, 8% of the industry, with the sub segment of military service 22 The U.S. Food Industry
International Inc.) to full-service chains (Darden Restaurants Inc., Applebees International Inc, Outback Steakhouse Inc.).
Luxury Fine Dining Food Courts

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 billion high-rise, is managed by a culinary dream team and includes some of the most recognized chefs. Unusual and sophisticated restaurant concepts feature major players such as Charlie Trotter of Chicago, Jean-Georges Vongerichten of New Yorks Jean Georges and JoJo, and as Thomas Keller of the French Laundry in Yountville. Since its opening other famous chefs have joined and opened their own establishments, notably Gray Kunz, former executive chef of Lespinasse in New York.
Fine Dining and High-Price Fine Dining

High-price fine dining restaurants are generally run by individuals and families or limited partnerships. They are typically located in larger, cosmopolitan areas and cater to a small but growing number of affluent Americans. Fine dining restaurants claim approximately 12% of U.S. restaurant industry sales according to Raymond James & Associates. Fine dining restaurants that feature a quality wine list generate 20% to 40% of their food and beverage sales from their wine programs and some restaurants achieve an impressive result of up to 50%. For example, to encourage sales the New York Restaurant Group dedicates one week every half year to a special wine and dine program, offering a prix fixe menu with unlimited tasting of top quality wines. The ongoing program generates crowds every year and has proven to be a successful avenue to create repeat customers. Within the past year some luxury restaurants have reached new heights in their menu pricing. At Normas in Le Park Meridien in Manhattan, the menu includes a Zillion Dollar Lobster Frittata at a price tag of $1000. At Ducasse in the Essex House in New York City, the tasting menu features foie gras, lobster, caviar, and milk-fed veal, newly priced at $225. Masas, located in the new Time Warner Center offers menus at $300 to $500 that included ingredients such as whitetruffles and fugu (blowfish), and the French Laundry in San Francisco offers the most expensive vegetable tastings anywhere at $125. The Mobil Travel Guide has been a reliable source for select restaurants, hotels, motels, inns and resorts in over 3000 locations within the U.S. and Canada. Their star rating has been a helpful guideline to the quality of the various establishments and has been viewed as one of the best in the country. Some of the top restaurants that have received a five star rating (five stars = one of the best in the country, four stars = outstanding, three stars = excellent) within the past 20 months are: The Dining Room, San Francisco The French Laundry, Yountville (Napa Valley) Chez Panisse, Berkeley Seegers, Atlanta Charlie Trotters, Chicago Trio, Evanston Alain Ducasse, Manhattan Jean Georges, Manhattan Le Bec-Fin, Philadelphia Aujourdhui in the Four Seasons, Boston Le Cirque in the Bellagio, Las Vegas LEscalier in the Breakers, Palm Beach The Herbfarm Restaurant, Woodinville, Washington, D.C. The Mansion on Turtle Creek, Dallas 24 The U.S. Food Industry
Shifting their focus from low pricing to product innovation encouraged sales growth in the past two years. Mc Donalds Corporation has remained number one in the fast food industry, with $25.6 billion in U.S. sales in 2005.
Type Fast Food
Specialty
Full Service
Full service restaurants offer sit-down service for dinner. They have significantly higher per unit sales volumes than fast food restaurants and their prices range from low to high. The National Restaurant Association estimates sales at full service restaurants at $164.8 billion in 2005, an increase of 5% over 2004.
Quick Casual
Type Dinner House
Atmosphere Casual and fine dining. Average check exceeds $10 for entre.
Grill/Buffet
Family Restaurants
Casual dining with specialization in grilled items and self-service bars offering salads and desserts. Midscale restaurants with relaxed atmosphere, cater to all ages.
Top Chains Darden Restaurants, Brinker International Inc., Outback Steakhouse, Inc., Applebees International Inc. Golden Corral (Division of Investors Management Corp.), Ryans Family Steak House Inc. Dennys Restaurants, International house of Pancakes (Division of IHOP International), Cracker Barrel
Atmosphere Quick counter service, low prices and plain dcor. Meals can be eaten on location or taken out. Chains that do not fit any category in the restaurant business due to their type of product sold or their mode of serving. Limited or self service restaurants that feature upscale menus with items such as gourmet soups, salads and sandwiches.
Top Chains McDonalds Corporation, Burger King, Wendys, Jack in the Box Starbucks Corporation
based on their annual U.S. system wide food and beverage revenues (ranked by estimated sales per unit) are, according to Restaurant & Institutions, as follows: Marriott Hotels/Resorts/Suites $1.09 billion Hilton Hotels $ 979 million Sheraton Hotels $ 885 million
Restaurants in Hotel Operations

Hotel restaurants have the primary function of providing a comfortable dining experience to the hotel guests. A well managed restaurant that can distinguish itself and meet the expectations of guests is important to further the establishments revenues. A fair number of hotel restaurants have made a name for themselves and received awards. Jean Georges Restaurant in the Trump International Hotel & Tower in New York, the Dining Room at the Ritz-Carlton Hotel in Naples, Florida, and the Belvedere in the Peninsula Hotel in Beverly Hills, California are among them. There are also partnerships between restaurant operators and resort owners. These joint ventures enhance the image and quality of the resorts food operations and the reputation of the restaurants. The following are examples of hotel/restaurant partnerships: Famous Chef/Restaurateurs Jean-Georges Vongerichten, Nobu Matsuhisa and Bobby Flay are scheduled to open Carmines (Italian cuisine) at the Atlantis, a resort consisting of three hotels with 2300 rooms located in the Bahamas. Chef Matsuhisa will open Nobu Restaurant at the all-suite Royal Towers, one of the hotels at the Atlantis resort, and Bobby Flay will follow suit and open Mesa Grill on the same premises by the end of 2006.
Panera Bread Co., Chipotle Mexican Grill (recently spun off from McDonalds), Baja Fresh (owned by Wendys International)
Figure 19: Limited Service Restaurant Categories (Swiss Business Hub USA 2006) The baby boomers, those born between 1946 and 1964, were the first generation growing up on fast food. Now at a stage of maturity and affluence, this group is being targeted with a new restaurant concept that has been gaining ground quickly. Quick casual are limited or self service restaurants that feature upscale menus with items such as gourmet soups, gourmet salads and gourmet sandwiches. Checks average $7 to $10, higher than in traditional limited service units and lower than in full service casual dining restaurants. These establishments have become serious competitors to fast food chains. Panera Bread Co. reached sales of $1.6 billion in 2005. This bakery/ cafe operator was one of the fastest growing quick casual restaurant chains over the past four years. Other notable quick casual places include Chipotle Mexican Grill (recently spun off from McDonalds Corporation) and Quiznos Subs. The success of these eating places depends heavily on their advertising strength and in luring customers with new innovative menus focusing on health. It is a segment that has started to show signs of maturation.
Casino Hotel Restaurants

On an annual basis, casino hotel restaurants generate more revenues from food and beverage sales than the typical high-class hotel restaurant (around $18+ million annually on average). In order to accommodate a wide range of patrons of varied ages and budgets, many casinos incorporate several restaurants, ranging from fine dining to casual, to bars and lounges, and catering and banquet facilities. A regular hotel typically has just one to two restaurants on the premises. The mainstream casino visitor is on a tight budget and typically frequents the buffet style restaurants. Then there are the highrollers who enjoy fine dining in the high priced restaurants. This category of visitors represents the backbone of the gambling industry. The Palm Restaurant, known as the ultimate hang-out for celebrities, is a perfect example. It opened its 30th location at the Tropicana Casino and Resort in Atlantic City, New Jersey, about 18 months ago. It is part of a new dining, entertainment, retail and spa complex within The U.S. Food Industry 25
Figure 18: Full Service Restaurant Categories (Swiss Business Hub USA 2006)
Limited Service Restaurants

Limited service or fast food restaurants offer quick counter service, low prices and plain dcor. Meals can be eaten on location or taken out. Menus encompass such items as sandwiches, hamburgers, chicken and pizza. Sales at limited service restaurants accounted for $135.6 billion or 27.8% of total foodservice industry sales in 2005. This constituted an increase in sales of 4.7%. The fast food industry has recovered from low sales in the past few years which were impacted by a rapid gain of market share through high quality and service from quick casual operators, foremost Panera.
5.3. Restaurants in Hotels and Casinos.

The National Restaurant Association estimates that food and drink sales at hotels reached $24.8 billion in 2005, a 5.4% increase compared to 2004. At present, there are approximately 82 restaurant companies operating in hotels and motels. The top three hotel chains
the resort, valued at $245 million. The Tropicana complex is the largest 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 2100 hotel rooms (350 plus suites) and include 21 restaurants.
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 importance of healthy nutrition and fitness.
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 aggregate sales of $45.8 billion in 2004 (includes foods, products, supplements), 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 approximately 2.5% of the nations 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 livestock and genetically modified crops has been fueling a strong interest 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 situation offers a window of opportunity for Swiss food manufacturers. Todays chemical-intensive farming faces increased opposition. Alliances among consumers, food producers, business communities and government are steadily forming and help organic and sustai2000 498,379 6,104 1.2 21 2001 521,831 7,359 1.4 20.6 2002 538,033 8,624 1.6 17.2 nable agriculture enjoy growing acceptance. According to the U.S. Department of Agricultures Economic Research Service, there were 2.2 million acres farmed under management of 8,035 certified organic 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 demand 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 nations largest USDA certified organic dairy producer. Horizon Organic provides financial, educational and technical support to approximately 300 certified organic family dairy farms who supply around 75% of the companys 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 research. 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 Albertsons, Ahold, Food Lion and Kroger all stock on average up to 20% in organic items. To profit from the boom in organics, Safeway, the nations third largest super2003 554,830 10,381 1.9 20.4 2004 572,727 12,200 2 17.5 2005 595,600 14,500 2.4 18.9
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 Nevadas 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 & Poors 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 expensive vacations and, retirees traveling should support this forecast. Business travel is expected to continue its upward trend.
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 chefs ability to evaluate their patrons feedback and to spot trends. Gourmet dining embracing high quality ingredients and simplicity has become a favorite. Ingredients are often local and include organics. Smaller plates and sophisticated wine programs paired with great hospitality are in.
5.4. Challenges.
Aside from fierce competition, the restaurant industry has been increasingly 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 consumer 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 consumers health and insatiable search for variety and adventures in taste. McDonalds Corporation developed a menu series which includes vegetables, fruit, milk and yogurt. The company went 26 The U.S. Food Industry
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.)
Total Food Sales ($ Million) Organic Food Sales ($ Million) Organic Food Penetration (%) Organic Food Growth (%)
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.) The U.S. Food Industry 27
market chain, took one step further in 2005 by launching its own private label brand O Organics. SuperValu Inc., which announced its acquisition of Albertsons to become the nations second largest supermarket chain introduced Natures 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 alternative 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 Members Mark line. Among food manufacturers, some of the biggest companies have established their own extensions into organics by acquiring well-known organic brands over the past five years. Food Manufacturer Coca-Cola General Mills Kraft Kellogg Dean H.J. Heinz Co. Cadbury & Schweppes Groupe Danone (France) Organic Brand Acquired Odwalla Muir Glen, Cascadian Farm Boca Foods, Back to Nature Kashi, Morningstar Farms/Natural Touch Foods Horizon Organics Hain Celestial Group Inc. (Partial Equity/Strategic Alliance) Green & Blacks Stonyfield Farm (Partial Equity)
Food Processor Unilever General Mills H.J. Heinz Co. Cadbury Schweppes Dole PepsiCo ConAgra Campbell Soup Tyson
Organic Brand Established Ben & Jerrys Organic, Ragu Organic Gold Medal Organic, Sunrise Organic Heinz Organic Nantucket Nectars Organic Dole Organic Tostitos Organic Hunts Organic, Orville Redenbachers Organic Campbells Organic Natures Farm
Regulations for product labeling are as follows: 100% Organic contains only organic ingredients. Organic contains at least 95% organic materials. Products in this or the aforementioned category can (but are not required to) display the USDA Organic seals. Made with Organic Ingredients contains 70-95% organic ingredients and may list up to three of them. Products that contain less than 70% organic ingredients may not use the term organic other than to list specific organic ingredients. Complete information on NOP and its regulations can be found on their website www.ams.usda.gov/nop/. Major conditions for certification include: The applicant must establish, implement and update annually a production and handling system plan to be submitted to the certifying agency. On-site inspection must be permitted. Proper records must be maintained for at least five years and inspection of such records by the certifying agency must be permitted. Foreign suppliers must meet the same requirements as their U.S. counterparts and must be certified by a USDA approved certifying agency, unless an agreement exists between the two countries recognizing foreign certification agencies. Most countries do not have such an agreement in place.
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)
volved in environmental, health and life style issues. The greater the involvement, the less concerned the consumer is about price, the more frequent the purchases and the more specific the reasons for purchasing. As organics go mainstream, this profile will experience some modification. Less committed shoppers tend to be more affected in their buying decisions by price, convenience and appearance. These shoppers 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. food business. The annual Earth Day campaign Go Organic and a general consensus on the importance of a healthy population will help bridge the gaps in awareness and knowledge among a wider spread consumer pool. Figures 14 and 15 reveal who is buying organic food and what they shop regularly. Generation Generation Y Generation X Younger Baby Boomers Older Baby Boomers Matures Age Group 18 -27 28 41 42 51 52 60 61+ Percent 51 55 57 50 46
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 production 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 produced. According to the NOP, foods that fall under the Organic Standard must be grown and processed using organic farming methods that recycle resources and promote biodiversity. Crops must be grown without synthetic pesticides, bioengineered genes or petroleum- 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, artificial 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.
Figure 23: Regular Buyers of Organic Food (Source: Shopping for Health 2005 Survey conducted by the Food Marketing Institute, Washington, D.C.
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 mainstream, consumers who up to this point refrained from purchasing organic products due to pricing and scarcity will have a better opportunity of choice. At the same time, however, interest groups and consumers alike are voicing growing concerns about large scale organics. 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.
6.3. The Organic Food Shopper.

A key factor driving consumer demand for organics is the perception that organic foods promote health and well-being, prevent disease, help cure illnesses and simultaneously are protective of the environment. Generally, organics are also rated safer and better tasting than regular foods. According to a survey by the Natural Marketing 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 irradiated. According to the Organic Consumer Association an estimated 12% of Americas 106 million American households purchase primarily organic products and approximately 50% of all consumers claim to buy organics occasionally. Up to now the profile of the typical organic shopper has been a highly educated, affluent consumer who lives in a high income area. On average he/she spends $26 more on a trip to the grocery store than the consumer of conventional food. The profile also depicts a consumer who is knowledgeable and in-
Segment Fruit / Vegetables Cereals, Breads, Pastas Milk, Yogurt / Other Dairy Products Packaged Foods Snacks, Beverages, Frozen Food Eggs Meats and Poultry Soups / Sauces
Percent 37 25 23 21 18 17 12
Organic Labeling and Certification3

Organic production and handling operations are required to be certified by a third party accredited by the USDA. All producers are subject to these guidelines, except producers who sell less than $5,000 annually in organic products. However, these small companies do have to follow NOPs strict standards and confirm that they indeed do so through documentation.
3 Please refer to Chapter 10.4 Organic Claims
Figure 24: Organic Food - What the Shopper is Buying (Source: Shopping for Health 2005 Survey conducted by the Food Marketing Institute, Washington, D.C.) Initially, dairy products, produce and grain opened the door for organic food to become prominent. Increasingly, convenience foods such as frozen foods, beverages, confectioneries and condiments, herbal teas, cheeses, and even wines have made headway, especially in the specialty stores Whole Foods and Wild Oats that dominate the retail market.
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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 childs body. Demand for organic 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 demand. The yogurts probiotic bacteria helps the digestive system and its prebiotic counterpart helps the body absorb much needed calcium which aids in the prevention of osteporosis. Several brands have launched new products. They range from Stonyfield Farms new naturally 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 easyto-prepare and convenience products. Popular trends are overstuffed sandwiches, car-friendly cups and drinkable lunches, and onedish 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 include 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.
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 differentials are the smallest in those areas where organic versions entered the market early and captured the greatest share, especially in everyday 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 production 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 organic and conventional versions has been closing. Both the rapid growth of production and wide availability of raw materials have contributed 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. Kelloggs or Kraft, have also had the effect of narrowing the price gap. The price premium of cereal from Kelloggs 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 product displays, by moving them to the center aisles, or using the concept of store-within-store (e.g. Natures Marketplace of Wegmans). 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 accounted 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 marketing 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 second 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, Natures 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.
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 private 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 recommendations 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 nationwide 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, produce 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 country 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
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 companys 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:
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
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 programs 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 manufacturer from handling multiple accounts receivable including the verification of credit or assuming the risk for various retailers. Such distributors 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, Annies 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 procurement 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 typically 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
Specialty food distributors do not focus on natural and organic foods but specialize in foods like foreign goods, ethnic foods, hardto-find gourmet items, kosher and various organic foods that may not be available in the major supermarkets. The margin of these distributors averages about 32%.
7. The Functional Food Sector.

By Frank Ustar and Claudine M. Haeni, Swiss Business Hub USA
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 revealed 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 simultaneously 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 operators for universities and colleges aim at offering 100 percent organic menus. Restaurant chains like ONaturals 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 general 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 organic clothing.
7.1. Overview.
Among the cultures in the Orient, food has been associated with preventive 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 ingredients 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 consumer 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 market segment and that figures may vary by information sources. 2005 Natural Food Merchandiser mentioned the top three functional food Soft Drinks the U.S. in 2005 as Gatorade) $5.3 categories in(Bottled Water, Soda,follows: 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)
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 properties 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 disease, 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 specific food used for the prevention or treatment of disease as drugs, the 1999 Nutraceutical Research and Education Act has defined nutraceuticals 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 labeling 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 under 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, companies petition the FDA to consider new health claims. Thirteen NLEA health claims authorized by the FDA currently exist. Substantial clinical 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) provides an additional expedited process for manufacturers to use health The U.S. Food Industry 33
7.2. Definition and Regulations.

Functional Foods are foods or dietary components that may provide 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-
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
claims if such claims are based on current published authoritative statements from pre-defined federal scientific bodies. These bodies include only those with official responsibility for public health protection or research relating to human nutrition such as the national Institutes of Health, the Centers for Disease Control and Prevention, and the National Academy of Sciences.
7.3. Consumption Trends.

Food Business News Magazine released the results of an on-line survey conducted by The International Food Information Council (IFIC) in November 2005 to gain insight into consumers attitudes toward food for health. Of the 1,060 participants (age 18 up), 83% confirmed their interest in expanding their knowledge and only 5% showed no interest. Below figures show the results of ACNielsens twice-yearly global online consumer survey, the largest with over 21,100 participants worldwide. The survey conducted in November 2005 gives insight into consumers choices of certain regularly bought functional foods in the U.S. and globally. Functional Food Purchased Regularly % U.S. Whole Grain, high Fiber Products Cholesterol reducing Oils and Margarines Fruit Juices with added Supplements/ Vitamins Yogurts with Acidophilus Cultures/ Probiotics Milk with added Supplements/Vitamins Bread with added Supplements/Vitamins Fermented Drinks containing good Bacteria Soy Milk Cereal with added Folate 50 36 29 21 25 24 4 8 14 % Global Average 40 31 29 25 18 17 16 14 11
Since heart disease and maintenance of proper cholesterol level rank among the most pressing health concerns in the U.S., cholesterol lowering foods and beverages are appearing on retail shelves. Coca Colas Heart Smart juice contains plant sterols while PepsiCos Tropicana Essentials Healthy Heart orange juice is based on a nutrient bundling of potassium, vitamins B-6, B-12, C, E and foliate. Especially geared toward women are soymilk products fortified with vitamin A, C, E and omega-3s plus extra calcium. Health claims for fish, plants and nut-based omega-3s have sparked an upsurge in products containing Omega-3 such as Anchors Heart Wise Omega-3 milk. Other heart-healthy drinks include White Wave Silks Omega-3 fortified cholesterol-lowering soy milk. Healthy oils are marketed by Heart Beat Foods Smart Balance Natural blend of canola, soy and olive oil fortified with vitamin E and Omega-3. Calpis Companys AmealPeptide, designed to lower blood pressure, addresses prehypertension which afflicts about 45 million Americans. AMP-Activated Protein Kinase, by ABIC International Consultants, is an enzyme believed to have a role in regulating appetite and body weight. Diabetics are likely to see an increasing variety of low-carb and sugar-free products. South West Co. has added a low-carb dairy milk drink to its line of health drinks which is ultra-filtered to remove lactose. Chromium Picolinate as food additive has recently been petitioned with the U.S. Food and Drug Administration (FDA) to be recognized as, among other claims, reducing insulin resistance and Type 2 diabetes.
Additional functional food elements are lutein and zeaxanthan offered by Roche, glucosamine and condroitin in ready-to-drink teas by various suppliers and various teas fortified with peppermint, licorice, or chamomile.
Energy Drinks
Despite strong gains for the past several years, the energy drinks category shows no signs of slowing down. Targeted marketing primarily addresses the young party-going crowd with these stimulant drinks. The majority of these energy drinks contain more than 100 milligrams caffeine per 12 ounce container plus herbal extracts and dietary supplements which makes them more potent than a 12 ounce cup of coffee that contains on average 200 milligrams caffeine. This has sparked some controversy and discussion among physicians. Sales for 2005 topped $390 million according to Information Resources, Inc. (IRI). Adding in sales at convenience stores and gas stations, the two major sales channels for the young crowd, as well as other outlets not tracked by IRI, and the category well surpasses this figure. Sales of non-aseptic energy drinks in food, drug and mass merchandise outlets jumped a whopping 69.4% in 2005, while sales of nonaseptic sports drinks surged 20.9% (IRI, 2006). A major reason for this growth is that the energy drink category has expanded to include all demographics, not just young males. A segment of the population catching the attention of energy drink marketers is women. Coca Colas sugar-free Tab Energy will be offered in midsized 10.5 ounce cans, available both individually and in four-packs. Coca Colas flagship energy drink Full Throttle, which has been on the market less than one year but already holds the categorys number 7 spot, is also expanding its reach among women as well as calorieconscious men with the launch of a sugar free version in later 2006. A survey conducted by IRI for the 52 weeks between October 2004 and October 2005 provided the following results on sales of the top
Functional Ingredients in Drinks

Since 2003 Americans may have bought more bottled water than beer or coffee. An especially fast-growing category of water is energy water, such as Hansens Energy Water containing ginseng, taurine, vitamin B, electrolytes and glucose are a fast-growing category of water. Figure 27 shows the consumer preferences for various beverages. Ajinomoto launched Amino Vital Ready-to-Drink as a single-serve sports water and, a powder mix. Fruit water and soy water are being marketed as well. Single-serve sparkling fruit juices are also showing strength in the market.
Beverage Juice fortified with Vitamins & Minerals Water fortified with Vitamins & Minerals Flavored Water Tea fortified with Herbals Tea fortified with Vitamins & Minerals Juice fortified with Herbals Drinkable Yogurt Bottles/Canned Smoothies Soy Beverages Water fortified with Herbals Organic Beverages of any type
Percent 56 39 36 34 32 27 26 26 25 22 21
Significance of Ingredients
Consumers are increasingly interested in learning about healthenhancing food ingredients. The U.S. dairy industry has embarked on ambitious programs to raise the awareness of consumers of the health-enhancing effects of dairy products in reducing osteoporosis, obesity and diabetes. Other ingredients which are being promoted are marine-based Omega-3 fatty acids, docosahexaenoic acid (DHA), and essential fatty acids (EFA) from nuts, flaxseed and cranberries. Omega-3 and EFA top the list of most-asked-for ingredients in the specialty supplement category. Infant formulas fortified with DHA and Omega-3 make up a rapidly growing segment of the functional ingredient market. Figure 27: Consumer Preferences for various Beverages (Source: The Hartmann Group 2003)
Figure 26: Percentage of Consumers who regularly buy Functional Foods; by Key Category (Source: ACNielsen)
Brand Red Bull Rockstar Monster Energy Sobe Adrenaline Rush AMP SoBe No Fear Full Throttle Rip It Hansens Lost Energy SoBe Lean
Disease-specific foods
According to the Food Marketing Institute, 40% of shoppers sought out health and nutrition information in 2003 and frequently turned to health professionals for advice on diets for specific health problems. This trend has continued.
Dollar Sales % Change to (thousands) prior Year 213,249 53.4 37,391 89.5 36,999 192.6 20,298 40 18,851 40.4 17,347 93.8 16,956 N/A 2,652 860.8 2454 156.9 2,383 N/A
Market % Change to Share prior Year 54.4 (5.7) 9.5 1.0 9.4 4.0 5.2 (1.1) 4.8 (1.0) 4.4 0.6 4.3 4.3 0.7 0.6 0.6 0.2 0.6 0.6
Figure 28: Top Energy Drinks by Brand (52 Weeks October 2, 2005) (Source: IRI, Inc. 2006)
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energy brands in the U.S. Natural energy sodas are rapidly growing in popularity as well. Examples are Blue Skys Blue Energy Soda fortified with ginseng, caffeine, guarana and all-natural colors and flavorings. American Nationals Ginseng Rush, also a sparkling soda, is geared especially to athletes. Fitonat USAs Phosphor is an instant energy drink packaged in single-shot-sized bottles. The active ingredients are added with the twist of the cap for instant maximum energy. The following figures project sales of functional (fortified) beverages within a six year time span:
the price differential will narrow as the acceptance of functional foods by consumers increases. The arrival of mainstream manufacturers in a particular category can also have a large impact on organic price points. A good example of this trend is the organic cereal market. When Kelloggs decided to come out with its Sunrise organic cereal, it wanted the price differential to be in the 15 to 20 percent range, not the 50 to 100 percent range typically found between organic and natural up to that point. This helped significantly to reduce prices overall. Similar considerations apply to the functional food segment.
for natural foods which encompass organic and functional foods. Usually those shelves carry the lesser-known brand products while big name producers such as Kelloggs reserve space in their allotted area in the store. Whole Foods and Wild Oats specialty chains tend to not differentiate 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 themselves 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 consumers 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 supermarkets since this has become a mass phenomenon on which the large chains as well as the big food producers can capitalize.
7.5. Marketing Considerations.

What can companies do to gain acceptance in the market place? Brand owners, for one, can adopt the wellness-oriented strategies of the most successful companies, using only healthy ingredients and positive wellness messages, or they can choose the ultra-niche disease risk reduction message. They must also consider carefully before they add a new ingredient whether their target consumers will really accept it and understand its health benefits. If the consumer does not understand the health benefit, that means that time and money needs to be invested in a consumer education program to get the message across. Brand establishment is critical and a major factor in the success of well-known food producers. Since a fair amount of confusion and uncertainty remains among consumers as to the efficacy of the ingredients, confidence in the company producing the product and its health claims for the product are important factors in gaining consumer acceptance. In cases where the producers brand is less well known, that of the retailer may make up some of this deficiency; for example, consumers have come to place trust in the product lines carried by chains such as Whole Foods or Wild Oats. Some products benefit from an established image of being healthy without having specific claims attached; cranberry juice is a good example. The producer Ocean Spray never went much beyond a simple claim of its juice being healthy and refreshing although consumers have used it in the belief that it is effective against urinary tract infection. An added benefit of this restrained approach to marketing is that the product avoids the pitfall of being pigeonholed into a narrow niche, but retains its appeal to a broad base of customers.
Chilled Juices Sports Drinks New Age Beverages Energy Drinks Total
2001 2,800 1,900 3,300 168 8,168
2002 3,028 2,000 3,500 200 8,728
2007 4,200 2,600 4,200 497 11,497
% Increase 50.0 36.8 27.3 295.8 40.8
Figure 29: U.S. Dollar (thousands) Sales Projections of Functional Beverages (Source: Business Communications Company)
Power Bars
Power bars can be cereal-based or may have another base such as soy which is high in protein and offers all essential amino acids. Protein and its sources has become of major concern to food producers; demand for soy as a source of protein has surged. Cereal and snack/power bars have enjoyed overall strong growth, and a continued upward trend at an estimated 7.6% AAGR for the next three years is expected according to Mintel. Intrinsic health or high protein bars are one segment in the cereal bar food category which, together with high protein powders are slowly moving beyond their sports niche. Clif Bar offers a baked energy bar made with whole grains and fruit while Probars High Performance Whole Food nutrition bar is made from 15 blended natural foods. PowerBars ProteinPlus Carb Select and Promaxs CarbConscious bars are fast sellers in the low-carb high-energy category. Soy protein-based bars are entering the market targeting teens and young adults.
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.

The cost to develop, produce, test and register functional food ingredients is reflected in the retail price which tends to be higher than that for non-fortified or even organic foods. It is likely, however, that 36 The U.S. Food Industry
7.6. Retail Channels.

Sales of functional foods were originally confined to health food stores, but even supermarkets are increasingly opening shelf space 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 nationally 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 geographical 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 market and the experience to handle the regulatory and logistical requirements 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 suppliers, consolidate the items and deliver them to the retailers, food service 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. Manufacturers sales branches account for 25% of all grocery items distributed. Branches are maintained by manufacturers in different parts of the country or within a region depending upon the geographical 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 products that they handle. Specialty distributors tend to concentrate their activities on higherpriced 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.
market entry strategy, assist in designing packaging and labeling, advise the exporter on the needs of the specialty retailers to which they sell or handle arrangements with food brokers. Many small importers started out as wholesalers and as such maintain close relations with the retailers they serve which represents an important advantage for an exporter since specialty foods are pushed through the channels of distribution rather than pulled by heavy promotion and branding outlays which are often unaffordable to smaller exporters.
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 product quantities. If the retailer meets the required purchase quantity he receives a discount from the distributor who in turn charges back the cost to the manufacturer. The broker maintains the records for those transactions as well as for various promotional activities offered by the manufacturer.
8.3. The Role of Food Brokers.

The food broker functions as a lynchpin for the entire distribution network. He does not take title to the goods but functions as an agent of the manufacturer. His relationship with the various participants in the network is a significant factor in achieving successful market penetration. Most often, brokers sell food products to distributors although some larger retailers also buy directly from food brokers if the retailer maintains his own warehouse. The commission payable to the broker ranges usually from 2-7%. Following is an outline of typical broker relationships with the other channel members and their significance.
8.4. The Specialty Food Distribution System.

Service Category Experience Ordering Guaranteed Sales In-Store Promotions Implementation of Merchandising Programs Split Case Buying Individual Store Marketing Variety Image Enhancement Controlling Inventory Costs % of Respondents 82 64 36 36 27 74 36 36 27
Broker - Manufacturer
As mentioned, the broker acts as an agent of the manufacturer. This arrangement often is exclusive based on product category, territory or targeted retail channel. The broker stays on top of product and marketing trends in the industry, sales and promotional tools that have proven successful, consumer buying trends, and price and delivery considerations. These elements enable him to assist the manufacturer in formulating a strategy for launching a new product or expanding the principals market share.
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 manner 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 specialized channels all the way to specialty retail stores. In many cases they do not require a minimum import volume. Some focus on products 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 difficult to get consideration from large importers Smaller specialty importers are more likely to work with the exporter in establishing a
Figure 30: Most Valued Specialty Food Distributor Services (Source: Specialty Food Distributors and Manufacturers Associations www.specialtyfoods.org) The specialty food distribution channel accounts for 2-5% of retail store sales. Traditionally retailers evaluate their distribution options by gut feel/experience or by substituting average dry grocery distribution costs to estimate the costs of distributing specialty items. However, these evaluative techniques dont always tell the whole story and can lead to high-cost decisions. Specialty food distributors can identify trends in the food market and work with the retailer to identify product mix/shelf set changes that will take advantage of these new trends and opportunities. They know which new items will have the biggest impact. Certain chains such as Tree of Life or United Natural Foods, which are well-known for their broad coverage of organic foods, also offer other types of specialty foods including ethnic items. Figure 30 lists the benefits that retail buyers derive from their relationship with specialty distributors. There are a number of reasons why a small to medium size Swiss food company should consider using a specialty food distributor. Such distributors play an important role between the manufacturer The U.S. Food Industry 39
Broker - Distributor
The broker usually makes product presentations to the distributor. He negotiates the terms of sale subject to the final approval of his principal. Arranging promotional opportunities with the retailer makes up a significant part of the brokers activities, and may involve merchandising flyers, newspaper and direct mailer inserts as well as demonstration and tasting programs. Most of these activities are charged to the manufacturer. He also oversees any discount arrangements that the manufacturer makes with the distributor to be passed through to the retailer for special promotional purposes.
Broker Retailer
The broker takes an active role in the merchandising at the retail level including product display, shelf space arrangements including resetting store shelves, marketing, taste testing and demonstrations. The most important function is to introduce new products to the retailer
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 maximizing 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 products 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
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 becoming 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 retailwholesale 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 accounting 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 supermarkets. Upscale regional food chains as well as local specialty stores are the primary target markets for this type of distributor.
with about 200 sale items offered by the retailer. Each flyer includes detailed information on selected suppliers, recipes and product features. 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
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 represents 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 dualworker 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 proliferation of restaurants and other foodservice operations.
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 stronger 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 activities. Hains customer base consists principally of mass-market merchandisers, natural food distributors, supermarkets, drug store chains, club stores and grocery wholesalers. Recently, growth of natural 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 media 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 advertising and sales promotion expenditures via national and regional consumer promotion through TV and magazine advertising, coupons and other trial use programs.
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 desserts, and a full line of canned and dry foods, fresh meats, imported specialties 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. Syscos operating companies distribute both nationally branded merchandise and products packaged under Syscos 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 services to assist customers in the foodservice operations are of primary importance in the marketing and distribution of products to the traditional customer segment. Syscos operating companies offer daily delivery to certain locations and have the capability of delivering special orders on short notice. Syscos operating companies also provide ancillary services relating to foodservice distribution such as providing customers with product 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 companys purchases. These suppliers consist generally of large corporations 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
8.6. Some Larger National Distributors.

The larger national distributors do not consider new-product introduction as one of their primary functions which makes them an undesirable entry point to the U.S. market for foreign suppliers, especially 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 significant resources and can provide a high level of customer feedback.
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
United Natural Foods

United Natural Foods also distributes monthly regional customerspecific flyer programs featuring the logo of the participating retailer
40
through centrally developed purchasing programs and direct purchasing programs established by the companys 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 service 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..
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, copackers turn away large volumes that would cause them to exceed their capacity or make them too dependent on one customer. The manufacturers equipment needs to be compatible with the proposed 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-packers 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 requires 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 producers 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 groundwork for a profitable partnership.
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 meeting 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 marketing 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 elements of the strategy such as pricing, packaging and promotion will then need to be aligned with the results of the research.
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
8.10. Supply Chain.

Primary functional areas targeted for IT investment include trade promotions 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 toward 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 inventory management to collaboration oriented IT systems such as e-procurement (electronic procurement and PIM (product information 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 collaboratively, 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.
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 Moreys 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.
Outside contracting is an arrangement between a company that is processing 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 manufacturers 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 chiliginger 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
43
Premium food has been the category most sought after by food marketers. Fish plays a major role in that market segment which has penetrated also the traditional fast-food segment with some of the major chains offering seafood sandwiches, burritos, burgers. Fishspecific condiments appear to be making strong inroads as well. Low-fat foods across all retail channels are a major trend with mandatory transfat labeling. The new Dietary Guidelines for Americans address the strong concern about heart disease and marketers are moving rapidly to develop transfat free foods. Major brands such as Frito-Lay, Kraft Foods JM Smuckers are removing transfats from all snack foods. Unilever is offering trans fat free margarine, Wilbur Candy Company has launched zero transfat cinnamon drops. Whole-grain baking products are another important trend embraced by major brand-name producers such as General Mills with its wholegrain Big G cereal, Sara Lees premium breads, Pepperidge Farms Whole Wheat English Muffins, Brownberrys Natural Oatmeal and 12-Grain Breads. Pasta lines made from whole wheat are showing up on shelves as well. Low-calorie entrees are marketed by Heinz, Lean Cuisine, and Hershey is adding more fiber to its line of sugar-free products. Light cheeses such as Laughing Cows Light and Creamy Swiss Bites follow the same trend.
Allergies are another concern that food producers are addressing (19% of consumers are allergic to milk, 16% to seafood or tree nuts, 15% to peanuts, 14% to wheat, 8% to eggs). New regulations covering allergen labeling provide further impetus to the targeting of foods to these consumer segments.
market by mass merchandisers proves that price and choice are important for the food shoppers who increasingly view super centers and warehouse clubs as their primary level of supermarkets in terms of quality and freshness of food selection. The intense competition among food retailers is demonstrated by profit margins which continue to hover around 1 cent on each dollar of sales. In 2003 the industrys after-tax net profit was 0.88 cents (FMI Annual Financial Review, 2003-2004). Return on total assets, the return generated by the firms asset base, was 3.20 percent in 2003 and the return on owners equity was 9.38 in the same year. Traditional supermarkets are losing market share on the one end to the super centers and warehouse clubs and on the other end to specialty retailers in the organic food sector such as Whole foods and Wild Oats or regional upscale specialty stores such as dAgostinos on the East Coast or Gelsons and Bristol Farms on the West Coast.
8.14. Private Store Brands.

According to the Private Label Manufacturing Association, one in five products purchased in grocery outlets is a private brand product. Such items have long been considered as being of lower quality than their national brand counterparts. More recently however, the perception of store brands has changed significantly. According to AC Nielsen Homescan Consumer Insights Retailers are increasingly using private label not just as a way to boost margins, but also to differentiate themselves in the market when it comes to consumer shopping patterns. Retailers efforts to improve quality and packaging of their own brands has been rewarded with incremental sales and profits and has become a major factor in customer loyalty. In some cases (like Trader Joes), the stores own brands have led to their consumers perception of a higher quality store overall. From the manufacturers viewpoint the product image, promotion and pricing must meet the image of the retailer for the product to be successful. U.S. retail sales of private label food and beverages amounted to $118 billion in 2003 as estimated by Packaged Facts and are expected to grow to $150 billion by end 2006.
8.13. Product Pricing.

The index of retail food prices which had risen significantly in 2004 due to a combination of unexpected shocks in the supply system, pressures from a recovering economy and higher energy prices did level off and even decline in 2005. The outlook for 2006 remains unclear due to the worldwide rise in commodity prices. Traditional retailers compete with discount superstores, club warehouse stores, supercenters and convenience stores that increasingly offer a broader array of food products to their price sensitive and time pressured customers. These non-traditional outlets have increased their share of food-at-home expenditures from 17.7% in 1998 to 32.9% in 2004. At the same time, traditional retailers decreased their share from 73.4% to below 60%. Grocery expenditures vary by region. Households on the East Coast averaged the most ($100 per week), followed by shoppers in the 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 priority in the selection of retail outlets. Increased penetration of the 2005 2.4 3.1 1.9 2.4 2.3 2.6 2.0 2.4 2.0 3.0 (13.7) 1.2 (0.1) 3.9 3.3 1.2 1.5 0.4 0.5 Forecast 2006 2.0 to 3.0 2.5 to 3.5 2.0 to 3.0 0.0 to 1.0 (0.5) to 0.5 0.0 to 1.0 (2.0) to (1.0) 0.0 to 1.0 (1.0) to 0.0 3.0 to 4.0 2.5 to 3.5 0.0 to 1.0 1.5 to 2.5 4.0 to 5.0 3.5 to 4.5 2.5 to 3.5 2.0 to 3.0 2.0 to 3.0 2.0 to 3.0
Figure 32: Sales and Growth of Private Label Categories, Sales in U.S. Dollar million, Unit Sales in million, December 2004 December 2005 (Sources: IRI, Inc., Private Label Buyer, February 2006) Private Label Category Sales in US $ Sales % change over prior year 852 -2 471 0 70 32 141 -2 252 19 6,504 2,116 426 78 57 142 188 687 637 238 403 134 130 89 468 354 -1.6 0.2 -7 20 31 8 5 3 4 4 -0.7 -4 69 28 3 3
Share of total product category in % 6 12 2 6 9 59 36 19 15 6 2 7 47 39 20 29 13 86 5 30 5
Item Consumer Price Indexes All foods Food away from home Food at home Meat, poultry, fish Meats Beef, veal Pork Other meats Poultry Fish and seafood Eggs Dairy products Fats and oils Fresh fruits and vegetables Processed fruits and vegetables Sugar sweets Cereals and bakery products Nonalcoholic beverages Other foods 44 The U.S. Food Industry
Relative importance in % 100.0 42.7 57.3 14.7 9.5 4.6 3.0 1.9 2.7 2.4 0.6 6.1 1.7 7.0 1.8 2.2 7.9 6.5 8.9
2003 2.2 2.1 2.2 4.0 5.4 9.0 1.9 2.5 1.3 1.0 13.8 (0.1) 1.3 2.7 0.9 1.9 2.4 0.4 1.0
2004 3.4 3.0 3.8 7.4 8.4 11.6 5.6 4.5 7.5 2.3 6.2 7.3 6.6 3.5 1.3 0.7 1.6 0.4 0.5
Beverages (carbonated) Beverages (refrig. Juice & drinks) Candy (Chocolate) Candy (non-chocolate) Coffee Dairy (Milk) Dairy (natural cheese) Dairy (processed cheese) Dried Fruit Frozen Appetizers/Snack rolls Frozen Dinner/Entrees Frozen Pizza Frozen Plain Vegetables Frozen Seafood Pasta Pickels, Olives, Relish Rice Salad dressings (shelf-stable) Snack (Bars, granola bars) Snacks (nuts, seeds) Snacks, salty
Sales in Units Unit sales % change over previous year 835 -3 250 -1.74 36 25 118 2 77 2 2,659 878 190 37 22 50 544 541 106 271 284 92 14 43 158 261 -1.5 0.5 -6.5 11 21 2 2 2 4 0.9 -1.2 -5 1.52 30 -2 0
Average price per unit In $ 1.02 1.88 1.93 1.19 3.25 2.45 2.41 2.24 2.13 2.58 2.86 1.79 1.26 6.04 0.88 1.42 1.46 2.08 2.96 1.36 45
Figure 31: Retail Food Price Changes from 2003 through 2006 (estimated); Source: Bureau of Labor Statistics; Forecasts by Economic Research Service of the U.S. Department of Agriculture
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, Krogers Private Selection nearly 500 items, Albertsons launched its own brands in 2003 with 35 items and has been expanding 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 category 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 merchandisers (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 Households with Children Blue Collar Households Female Heads of Household (age 45-55) Female Heads of Household (age 33-44) Household of 5+ Members Low Income Household % of total 40 27 23 19 15 9
According to the publication Private Label, Wal-Marts Great Value brand is the best selling store brand in the U.S. grocery market. Trader Joes relies almost exclusively on its own store label. The top three U.S. supermarket chains with PL brands are Kroger, Albertsons and Safeway. Walgreens, CVS and RiteAid are the top drugstore chains offering private label items. Costco is a trendsetter for its cobranding strategy which involves linking private label brands and national brands.
The slotting fee cost varies depending on numerous factors, such as whether the supplier has a proven track record, whether consumer testing has been carried out, whether the product is carried by competitors in the same market, and whether the supplier has a wellthought-out advertising program. The amount can be as small as several 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 maintenance 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 retailers 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 promotional allowances for product displays and demonstrations, coupons, 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.
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 typically 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 programs 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.
Retailer Save-a-Lot Kroger Safeway CostCo Walgreens Wal-Mart Sam,s Club Target
Percent Private Label 51 28 25 21 21 17 10 8
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 manufacturers to be category rather than brand focused and retailer rather than internally focused. The aim is to grow retailers categories revenue 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 category 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
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 percentage of total marketing spending (54% in 2003 up from 49% in 1996). Procter & Gamble and Kraft Foods were the leaders among manufacturers, Wal-Mart Stores Inc. on the part of retailers. Slotting allowancetypically refers to a lump-sum, up-front payment by a food manufacturer to have its products placed on supermarket 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, manufacturers provide free cases of new products to help gauge consumer 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 placements, 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.
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 programs are free although some retailers charge a one-time fee to become a member. Retailers without such programs include supercenters, 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;
Figure 33: Purchases of Private Label excluding Bread, Milk, Eggs (Source: ACNielsen)
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From the standpoint of promotions, a category management perspective 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 products 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).
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 cartons, such as Saupiquets 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 omelets 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 maintaining consumer confidence.
9. Marketing Agreements and Strategic Partnerships.

By Daniel A. Wuersch, Wuersch & Gering LLP
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 parties 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 calculated 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., training customers, or organizing promotions at trade shows or in retail outlets).
9.1. In General.
In addition to understanding the regulations of the Food and Drug Administration (FDA) discussed in Chapter 10 and the import regulations discussed in Chapter 11, when entering the U.S. markets Swiss food manufacturers need to consider other legal issues that can determine the success of marketing food products in the U.S. and limit the risks associated with a failure of these efforts. These issues include 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 considerable 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 consumers, 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 problem 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.
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 permeable 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 years 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, modified air packaging (MAP) and biodegradable packaging. Annual sales 48 The U.S. Food Industry
Marketing through a U.S. Subsidiary or Branch

In certain circumstances, it can be beneficial to establish a physical 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.
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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 common 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 exceptions 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 forum 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 jurisdiction in contract disputes between a U.S. and a foreign company if the amount in dispute exceeds $75,000. In contract disputes, alternative dispute resolution (such as arbitration or mediation) is often used to resolve contract disputes. Arbitration rules that are well established include those of the American Arbitration Association (AAA) and, for international contracts, the rules of the International Chamber of Commerce (ICC).
guage in a written agreement (parole evidence rule), American contracts 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. business partner. Most commercial risks can be freely allocated to either party to a contract. 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--vis a contract party, these limitations are not effective vis--vis third parties.
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 described as precisely as possible and may not include non-confidential information. Because damages resulting from the violation of a confidentiality 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 avoid a violation of a confidentiality agreement, confidentiality agreements typically permit the disclosure of confidential information in these circumstances.
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 product, the expected volume, exclusivity and other factors. When structuring 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 agents 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 principal or make unauthorized representations on its behalf. Otherwise, the principal could become liable for unauthorized promises or warranties 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).
Implied Covenants and Warranties

A contract party may not only be liable for commitments and representations 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.
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 circumstances, an exclusivity and possibly a non-compete clause may be appropriate elements of a consulting agreement.
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 addition, a tort claim can also be brought against the manufacturer of a food product without proving negligence (strict liability) if the manufacturer 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.
9.5. 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, limitations of implied warranties must follow the UCC Art. 2 rules as mentioned 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
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--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 manufacturer (including its trade marks and patent rights), the issues discussed 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.
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
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 lan50 The U.S. Food Industry
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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 copyright license are rarely of interest to food manufacturers, the following discussion is limited to licenses of trade marks and trade secrets.
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 sometimes 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 supermarkets purchase order and can cover shipping and delivery requirements, safety requirements, coding, shelf-life and penalties for non-compliance.
The supplier, on the other hand, is interested in being excused from performing its obligations in the event it becomes unable or commercially 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 manufacturers guidelines.
Licensing of Trademarks
Trademarks can be created under federal or state law. Under the federal Lanham Act, trademarks used to distinguish products can be registered in the U.S. Patent and Trademark Office. Through registration, 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 licensees 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 licensors 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 included in another agreement (e.g., agency or distribution agreement).
Joint Ventures
Joint ventures can be formed for purposes of developing, manufacturing, or marketing food products. Contrary to the agreements discussed 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 entities operated for the common purpose of the joint venture. The decision making process, supervision and monitoring of the joint ventures 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.
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 locally 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 manufacturer under a manufacturing agreement. Because the Swiss manufacturer makes valuable intellectual property and know-how available 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.
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 remember 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
Supply Agreements
In a supply agreement, the customer is primarily concerned with securing 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 U.S. Food Industry 53
10. Regulation of Food by the Food and Drug Administration (FDA).

By John Lemker, Bell, Boyd & Lloyd, LLC, Chicago
10.3. 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 restrictions 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 pesticide residues in or on food and FDA enforces those residue limitations. 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 enforcement 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 particular 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 representations 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 exceptions and exemptions which may apply under given circumstances.
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 agencies are the Food and Drug Administration (FDA) which is a component 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 responsible 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.
The scope of term food includes food contact articles if any substance migrates from the contact article to the food. This would include 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 labeling foods which are in compliance with the laws of the U.S.
Statement of Identity
The food label on the principal display panel must bear a statement of the foods 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 foods basic character. Flavor labeling may also be required as part of the foods name should the nature of the foods ingredients so require.
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 accurately 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 aspects of its composition and ingredients and also includes some labeling 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 specific types of foods, such as quality standards and special food categories, 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.
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 depending 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 foods serving size is to be determined.
FDA Organization
The Center for Food Safety and Applied Nutrition (CFSAN) is the organization within FDA which is responsible for implementing the FDAs authority over foods. It regulates substances used in foods, implements compliance programs for enforcement and develops regulations for virtually all aspects of FDAs responsibilities for ensuring foods are safe and properly labeled. The FDAs 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 implementation of FDAs jurisdiction over foods.
Ingredient Declaration
The general requirement is that each ingredient must be listed in its descending order of predominance by weight by its common or usual name. Many exceptions exist so the regulations need to be referenced 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, FDAs regulations and enforcement policies. These are health, nutrient content and structure/function claims. Following is a discussion of these claims.
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
Health claims
Health claims describe a relationship between a food, food component, 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
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health claims may become eligible to be used on a label or in labeling for a food or dietary supplement: 1) FDA may issue regulations authorizing health claims for foods and dietary supplements after review 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 FDAs enforcement discretion, it permits the use of qualified health claims when there is evidence for a relationship between a food, food component, or dietary supplement 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 language 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 conditions specified in the authorization letter. Nutrient Content Claims The FFDCA and FDAs 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).
racterize the means by which a nutrient or dietary ingredient acts to maintain such structure or function, or they may describe general wellbeing from consumption of a nutrient or dietary ingredient. The manufacturer 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.
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 produced 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.
The exemptions for flavor, colorings and incidental additives were rescinded 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.
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 organic ingredients. Foods that are sold, labeled, or represented as organic 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 USDAaccredited certifying agents. A certified operation may label its products or ingredients as organic and may use the USDA Organic seal. Labeling requirements are based on the percentage of organic ingredients 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 organically produced ingredients (excluding water and salt). Any remaining product ingredients must consist of nonagricultural substances approved 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 ingredients 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.
10.5. Manufacturing Food.

The law, as implemented by FDA, requires that food be made in accordance 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 factors are important in processing these foods. The HACCP (Hazard Analysis Critical Control Point) concept is important in the manufacturing of foods in the U.S. The hazards in manufacturing a food are identified and specific controls are developed to prevent their occurrence.
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 allergens, 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 specified 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 understanding 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.
10.6. Bioterrorism Law.

In response to concerns about a potential terrorist attack on the food supply, Congress amended the FFDCA to increase the FDAs 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.
Structure/Function Claims
Structure/function claims describe the role of a nutrient or dietary ingredient intended to affect normal structure or function in humans, for example, calcium builds strong bones. In addition, they may cha56 The U.S. Food Industry
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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 designate a U.S. agent (for example a facilitys 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 manufacturing/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 manufacturer/processor of the foods must register.
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 responsible 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 substantially disrupt a persons 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.
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 information 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 importers 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 examines 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 violations. 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.
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 resolution of the allegations upon which the detention order was issued or further enforcement action.
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 informed compliance whereby Customs and the importing community would share the responsibility of administering the U.S. Customs laws. This informed compliance concept places an affirmative burden on importers to exercise reasonable care in the discharge of their responsibilities relating to the importation of merchandise. An importer must exercise reasonable care in all facets of the importing process, 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 obligations. The concepts of informed compliance and reasonable care permeate all aspects of Customs administration and enforcement.
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 removing 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 establishments are exempt.
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-today importing activity occurs. The NISs in New York provide supervisory guidance with respect to classification decisions at the outlying local ports so as to ensure consistency throughout the country.
Current Regulatory Environment

Compliance with the Customs laws is of utmost importance in todays 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 regulations change quite rapidly and it is important to keep abreast of all new developments. Although there are many new security initiatives, the program currently in the forefront is the Customs and Trade The U.S. Food Industry 59
10.7. Enforcement.
FDA has a wide range of enforcement actions 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
Partnership Against Terrorism (CTPAT) program wherein importers receive 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).
also the North American Free Trade Agreement (NAFTA) which involves 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 generally 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 commissions 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 automatically available. Finally, it should be noted that although most appraisements are made based upon the invoice price on the commercial 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.
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.
There are many exceptions to the above rule, so an answer to any country of origin marking question must take into account the particular 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 liquidated damages, or other penalties.
porter, type of merchandise, tariff classification, value and related information. 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 additional 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 provides all information concerning the calculation of duties, asserted tariff 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 consumption into the U.S. Merchandise may be inspected, repacked, stored, and similar treatment, but may not be processed or manufactured in a bonded warehouse and then brought into the U.S. In the case of processing or manufacturing, such a product must be exported. 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.
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, including 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, coverings, costs of packing, and related expenses.
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 imported 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 GRIs 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 particular 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 providing 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
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 forwarder 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 documentation. Many companies frequently are both Customhouse brokers 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-
Quotas
Numerous types of quotas on imported merchandise are administered through CBP. Quotas cover a wide range of products and have traditionally been evident in the importation of food products and textiles. 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 imported 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
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 requirements 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 permanently 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.
through the balance of the calendar year. Allocations of quota are subject to negotiation and change on a regular basis. Certain requirements 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 documentary 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 allocation 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.
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 generally the decision is also made there. In some cases, further review of the protest by Customs Headquarters may be requested. The decision 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.
Rulings by Customs and Administrative Contest

As previously mentioned, an importer may obtain protection and assurance 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 classification 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 infrequent and generally would not apply on a retroactive basis. It is also possible to obtain decisions from Customs on matters contested 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 administrative 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.
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 basic elements of the Bioterrorism Act are as noted below.
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 arrival 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 accompanying 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 nonconsumption samples for testing only.
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 maximum 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, detention 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 under 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 article 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 contaminants, 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.
Records Maintenance
The BTA also requires the maintenance of records to allow for the identification of immediate previous sources and immediate subsequent 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, distribute, 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 transport 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-transporters 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 information must be provided for an immediate non-transporters subsequent 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 regard include those with names of the transporters immediate previous source and the transporters 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
Registration
The Bioterrorism Act requires that any facility, domestic or international, that manufactures, processes, packs or holds food for animal or human consumption in the U.S. must register with the FDA. The rationale 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 company name, address, trade names, food product categories, and name and contact information are required to be submitted in the registration. 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 merchandise 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 provided 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
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Penalties
Under the U.S. Customs laws it is unlawful to enter, introduce or attempt 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 determines that an importer fraudulently evaded duties, it may assess a penalty up to the amount of the U.S. domestic value of the merchandise. 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 explanation 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.
who do business with other C-TPAT certified businesses. Because the program is voluntary, in return for an importers participation and demonstration that it meets or exceeds certain minimum security requirements, Customs offers incentives to the importer such as reduced cargo inspections, an assigned account manager, access to the C-TPAT membership list, and eligibility for account-based process 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 importers 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 recognizes 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 selecting 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 subject 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 provides 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 publishes 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 IFICs 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, beverage 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 assistance, 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 companies 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, packaging, 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 encourage global sustainability through promoting and protecting the growth of diverse organic trade.
11.5. Customs Trade Partnership Against Terrorism(C-TPAT) and Related 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 strengthening security considerations as regards importers, Customs brokers, freight forwarders and ocean transportation intermediaries, and modes of transportation along the supply chain. The program has received 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 members of the importing community. The program provides incentives to join C-TPAT and encourages applications from those importers 64 The U.S. Food Industry
65
International Association of Culinary Professionals 304 West Liberty Street, Suite 201, Louisville, KY 40202 Phone: (502) 581-9786 www.iacp.com IACP is a not-for-profit professional association which provides continuing education, communication, or in the preparation of food and drink. National Restaurant Association 1200 17th St., NW, Washington, D.C. 20036 Phone: (202) 331-5900 www.restaurant.org The National Restaurant Association is the leading business association for the restaurant industry. Together with the National Restaurant Association Educational Foundation, the Associations mission is to represent, educate and promote a rapidly growing industry.
Monthly publication with focus on the industry, trends, trade shows and business perspectives. Natural Food Network, Natural Grocery Buyer, Functional Foods & Nutraceuticals New Hope Natural Media 1401 Pearl St., Boulder, CO 80302 Phone: (303) 939-8440 www.newhope.com Their trade and consumer publications are respected for their high quality of content. New Hope Natural Media also provides integrated marketing solutions that help companies reach their markets, whether around the corner or around the world. Organizer of various shows including Natural Products Expo West (Anaheim, CA). Restaurants and Institutions Magazine Reed Business Information 360 Park Avenue South, New York, NY 10014 www.rimag.com Restaurants and Institutions (R&I) is the leading source of vital information for the entire food service industry, both in print and online, covering chains, independent restaurants, hotels and institutions. Prepared Foods Business News Publishing Co. 1050 IL Route 83, Ste 200, Bensenville, IL 60106 Phone: (630) 694-4344 www.preparedfoods.com Monthly publication that covers trends in the U.S. packaged foods and beverage industries. Beverage Industry Stagnito Communications Inc. 155 Pfingsten Road, Ste 205, Deerfield, IL 60015 Phone: (847) 205-5660 www.bevindustry.com Publication that covers trends and issues pertaining to the U.S. beverage industry on a monthly basis.
12.3. Trade Fairs.

National Association for the Specialty Food Trade NASFT Summer Fancy Food Show Jacobs K. Javits Center July 9-11, 2006 in New York City, NY Phone: (212) 482-6440 www.fancyfoodshows.com PLMA Private Label Trade Show Rosemont Convention Center November 12-14, 2006 in Rosemont, IL Phone: (212) 972-3131 www.plma.com National Association for the Specialty Food Trade Moscone Center NASFT Winter Fancy Food Show January 21-23, 2007 in San Francisco, CA Phone: (212) 482-6440 www.fancyfoodshows.com Food Marketing Institute Show FMI The Power of Five - McCormick Place May 6-8, 2007 in Chicago, IL Phone: (202) 452-8444 www.fmishow.org This is the largest event of its kind on a worldwide basis and the premier show for supermarket retailers and wholesalers now offering five shows in one location: FMI Show, Fancy Food Show, U.S. Food Export Showcase, United Produce Expo and All Things Organic. Natural Products Expo West Anaheim Convention Center March 9-11, 2007 in Anaheim, CA Phone: (866) 458-4935 www.expowest.com NCA All Candy Expo McCormick Place June 6-8, 2006 in Chicago, IL (2007 dates not known at time of printing) Phone: (703) 790-5750 www.allcandyexpo.com
12.4. U.S. Government Agencies.

U.S. Department of Agriculture (USDA) 1400 Independence Avenue SW Washington, D.C: 20250 Phone: (202) 720-2791 www.usda.gov Government agency in charge of providing key statistics on the U.S. agricultural industry. U.S. Bureau of Labor Statistics (BLS) 2 Massachusetts Avenue NE Washington, D.C. 20212 Phone: (202) 691-5200 www.stats.bls.gov A division of the U.S. Department of Labor, BLS is the principal factfinding agency for the federal government in the field of labor economics and statistics. USDA Economics and Statistics System Albert R. Mann Library Cornell University, Ithaca, NY 14853-4301 Phone: (607) 255-5406 www.usda.mannlib.cornell.edu The USDA Economics and Statistics System includes nearly 200 data sets published by the USDAs Economic Research Service, national Agricultural Statistics Service and the World Agricultural Outlook Board. The data describes all aspects of domestic and international agriculture, agricultural economics, and rural affairs. U.S. Food and Drug Administration (FDA) 5600 Fishers Lane Rockville, MD 20857 Phone: (888) 463-6332 www.fda.gov FDA is a division of the U.S. Department of Health and Human Services and responsible for the supervision of the food and pharmaceutical industries. U.S. Department of Commerce 1401 Constitution Avenue NW Washington, D.C. 20230 Phone: (202) 482-2000 www.commerce.gov Cabinet level department providing key statistics on the U.S. industry. Its mission is to ensure and enhance economic opportunity by working with businesses and communities to promote economic growth.
12.2. Periodicals.
Supermarket News Fairchild Publications Inc. 7 West 34th Street, New York, NY 10001 Phone: (212) 630-4000 www.supermarketnews.com Weekly coverage of general supermarket industry trends; includes financial highlights. Progressive Grocer VNU Business Publications USA 770 Broadway, New York, NY 10003 Phone: (646) 654-7561 www.grocerynetwork.com/grocerynetwork/index.jsp Monthly articles featuring statistics, trends in the grocery industry and on companies. Specialty Food Magazine 120 Wall Street, 27th Floor New York, NY 10005 Phone: (212) 482-6440 www.specialtyfoodmagazine.com Published monthly. Articles on specialty foods and special reports on the specialty food industry, products and trends. The Gourmet Retailer 3301 Ponce de Leon Blvd., Ste 300, Coral Gables, FL 33134 Phone: (305) 446-3388 www.gourmetretailer.com 66 The U.S. Food Industry
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12.5. Links to Sources.

Standard & Poors 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
Claudine M. Haeni, Swiss Business Hub USA, Headquarters, is a native of Basel, Switzerland. Her professional background includes assignments with the Swiss government and over 15 years of experience in the finance industry. She previously worked for American Express Financial Services, and holds the internationally recognized Certified Financial Planner Professional Education Certificate from the College of Financial Planning in Denver, Colorado, the Series 7 Securities License, and is a member of the International Financial Planning Association. Ms. Haeni received her BA with honors from DePaul University in Chicago and also does cross-cultural training for executives. Contact Claudine@SwissBusinessHub.org, Tel 312 915 0061 or Fax 312 915 0388 John F. Lemker is a member of Bell, Boyd & Lloyd, in the firms Food, Drug and Device Group. He concentrates his practice in regulatory law relating to food, drug and medical industries and transportation and automotive industry. Mr. Lemker has represented clients before the FDA, the USDA, the FTC and State Regulatory Agencies. He has counseled firms in the food and healthcare industries regarding compliance with regulatory requirements. Mr. Lemker is the former chair of the Chicago Bar Association, Food, Drug and Consumer Products. 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 graduate (honors) of the University of St. Gallen. Contact Martin@SwissBusinessHub.org, Tel 312 915 0061 or Fax 312 915 0388
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 NorwegianAmerican 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 mother, 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
Daniel A. Wuersch is the Managing Partner of Wuersch & Gering LLP, an international boutique firm with 15 lawyers in New York. His practice focuses on corporate law, mergers & acquisitions, corporate finance and strategic partnerships and marketing agreements. He is admitted to the bar in New York and Zurich, Switzerland. He acquired his Dr. iur. degree at the University of Zurich Switzerland in 1989. In 1991, he obtained an LL.M. degree at the Georgetown University Law Center, Washington, D.C. In addition, he attended graduate and post-graduate courses in international law and EU law at the University of Lausanne, Switzerland and the London School of Economics. Prior to co-founding Wuersch & Gering LLP in 1997, he practiced international corporate and securities law with Morgan Lewis & Bockius (1996-1997) and Fried, Frank, Harris, Shriver & Jacobson (1991-1996) in New York, as well as Homburger / Baker & McKenzie in Zurich, Switzerland (1988-1990). He has written and co-authored books and articles on U.S. and Swiss corporate and contract law and the law of the European Union. Mr. Wuersch is a frequent speaker on legal issues involving business activities of foreign companies in the U.S. He is President of the Swiss Society of New York and a member of the Chapter Board Doing Business in USA of the Swiss American Chamber of Commerce. Contact daniel.wuersch@wg-law.com Tel 212-509-4722
69

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The U.S. Food Industry

The U.S. Food Industry

1. Introduction and Summary.

The U.S. Food Industry

2. The U.S. Food Industry.

2.1. Facts and Figures.

1.3. Regulatory Environment of the Food Market.

All Other 19% 6%

Grocery Stores 11% Food Services Drinking Places 10%

$ 700000 $ 600000 $ 500000 $ 400000 $ 300000 $ 200000 $ 100000 $0

Food Away from Home

7% Supercenters Beverage Stores 1%

General Mechandise Chain & Department Stores, Discount Stores 42%

The U.S. Food Industry

Retail Channels, Competition and the Consumer

Spring Fancy Food Show 2006

2.2. Trends in the Food Industry.

Introduction of New Products

2.3. Eating Away From Home.

Taste and Convenience

150,345 117,749 105,644 88,433 462,171

Figure 3: Global New Product Introductions by Region (Source: Mintel)

2.4. Non-Alcoholic Beverages.

2.5. Manufacturers of Food & Beverages.

2.6. Mergers & Acquisitions.

3. Supermarkets and the Grocery Industry.

Store Format Traditional Store Formats Conventional Supermarket

Store Size (sqft) 25,800

Ann. Sales ($ million) 7.8

Number of SKUs 22,000

SKUs (Stock-Keeping Units)

3.1. Facts and Figures.

3.3. The Shopper.

Limited Assortment Supermarket Other (Small Grocery) Stores Specialty/Gourmet Retailers

N/A <5,000 N/A

N/A <2.0 N/A

<2,000 N/A N/A

Non-Traditional Formats Supercenters 170,000 51.0 N/A High

Staples, Condiments, Other $ 11.39

3.2. Store Types.

Top Banner Names

The U.S. Food Industry

3.4. Facing the Competition.

Non-Traditional Linear (Traditional)

3.5. Growth Opportunities.

Success through Differentiation

4. The Specialty and Gourmet Food Stores.

4.1. Facts and Figures.

4.2. Specialty and Gourmet Foods.

2004 $ Million % Share 14.78 73 3.72 18 1.74 9 20.23 100

Percent Specialty Foods 8 26 66 51 61 148 24 12 21 37 0.6 12 4 22 10 28 48 53 4 33 17 6 23 31 7 4 14 10 9 8

Percent Mainstream Foods 3 18 6 1 16 3 1 1 8 -1 2 1 -10 13 5 16 10 31 1 9 2 -1 5 22 -0.3 5 4 4 15 9

% Growth 2003-2005 147.8 61.0 65.7 53.3 51.1

4.4. Specialty Food Suppliers.

4.3. Buyers of Specialty Food.

Spring Fancy Food Show 2006 Exhibit Showcase

The U.S. Food Industry

The U.S. Food Industry

Chocolate and Non-Chocolate Confectionery

The U.S. Food Industry