US Food Industry

Summer 2006.osec.ch

The U.S. Food IndustryOpportunities and Challenges for Swiss Companies.

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2 The U.S. Food Industry 3The U.S. Food Industry

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: [email protected]

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 Contents1. Introduction and Summary. 5

1.1. Opportunities. 5

1.2. Marketing. 5

1.3. Regulatory Environment of the Food Market. 6

1.4. Acknowledgements. 6

2. The U.S. Food Industry. 7

2.1. Facts and Figures. 7

2.2. Trends in the Food Industry. 8

2.3. Eating Away From Home. 9

2.4. Non-Alcoholic Beverages. 9

2.5. Manufacturers of Food & Beverages. 10

2.6 Mergers & Acquisitions. 11

3. Supermarkets and the Grocery Industry. 12


3.2. Store Types. 12

3.3. The Shopper. 12

3.4. Facing the Competition. 14

3.5 Growth Opportunities. 15

4. The Specialty and Gourmet Food Stores. 17


4.2. Specialty and Gourmet Foods. 17

4.3. Buyers of Specialty Food. 19

4.4 Specialty Food Suppliers. 19

4.5 Trendspotting. 19

4.6 Products. 20

5. The Commercial and Institutional Food Industry. 23

5.1. General. 23

5.2. Restaurants. 23

5.3. Restaurants in Hotels and Casinos. 25

5.4 Challenges. 26

5.5 Trends 26

5.6 Distribution Channels. 26

6. Natural and Organic Food. 27

6.1. Overview. 27

6.2. Definition of Organic. 28

6.3. The Organic Food Shopper. 29

6.4. Trends. 30

6.5 Pricing. 30

6.6 Retail Channels. 31

6.7 Distribution and Purchasing. 32

6.8 The Foodservice Segment. 32

7. The Functional Food Sector. 33

7.1. Overview. 33

7.2. Definition and Regulations. 33

7.3. Consumption Trends. 34

7.4 Price Trends. 36

7.5 Marketing Considerations. 36

7.6 Retail Channels. 36

7.7 Distribution. 37

8. Food Distribution. 38

8.1. Overview. 38

8.2. The Role of the Importer. 38

8.3. The Role of Food Brokers. 39

8.4 The Specialty Food Distribution System. 39

8.5 Distribution to Retail Outlets. 40

8.6 Some Larger National Distributors. 40

8.7 Food Service Distribution. 41

8.8 The National Distributors. 41

8.9 Co-Packing. 42

8.10 Supply Chain. 43

8.11 Food Marketing. 43

8.12 Consumption Trends. 43

8.13 Product Pricing. 44

8.14 Private Store Brands. 45

8.15 Promotion. 46

8.16 Category Management. 47

8.17 Food Packaging. 48


1. Introduction and Summary.9. Marketing Agreements and Strategic Partnerships. 49

9.1. In General. 49

9.2. Marketing Arrangements. 49

9.3. Contract and Tort Issues. 50

9.4. Exploring and Evaluating Market Opportunities. 50

9.5. Marketing Agreements. 51

9.6 Cooperation with U.S. Companies. 52

10. Regulation of Food by the Food and

Drug Administration (FDA). 54

10.1. Introduction. 54

10.2. Bringing a Food to Market in the U.S. I:

Categorization of a Food. 54

10.3. Bringing a Food to Market in the U.S. II:

Food Composition and Ingredients. 55

10.4. Bringing a Food to Market in the U.S. III:

Food Labelling. 55

10.5. Manufacturing Food. 57

10.6. Bioterrorism Law. 57

10.7. Enforcement. 58

11. Importing into the USA. 59

11.1. General Background. 59

11.2. Basic Customs Considerations. 60

11.3. Entering Merchandise into the U.S. 61

11.4. Food and Drug Administration (FDA)

Requirements Enforced by Customs /

The Bioterrorism Act of 2002. 62

11.5. Customs – Trade Partnership Against Terrorism (C-TPAT)

and Related SecurityCompliance Issues. 64

12. Annexes. 65

12.1. Trade Associations. 65

12.2. Periodicals. 66

12.3. Trade Fairs. 67

12.4. U.S. Government Agencies. 67

12.5. Links to Sources. 68

12.6. The Authors of the Study. 68

Martin von Walterskirchen, Swiss Business Hub USA

The purpose of this report is to help Swiss companies seeking to en-

ter the American market for food products. These interested compa-

nies will gain insights into selected market segments and an overview

of the potential opportunities and challenges they face when entering

the American food market.

The USA is the largest and most sophisticated market in the world.

The economy of the U.S. is expanding and is likely to continue to

grow over the next years. There are, at present, no indications that

the U.S. will lose its predominant role in global issues or its economic

strength. The result is unparalleled purchasing power.

The American food market differs in many aspects from the Swiss

and European markets. The size of the USA and the American way of

life confront each producer with considerable logistic challenges and

offer opportunities for innovative manufacturers and distributors. This

study concentrates therefore on the most important interfaces bet-

ween manufacturer and consumer (supermarket and grocery indus-

try, specialty and gourmet food stores, and the restaurant and food

service industry sector) and provides information on sectors offering

windows of opportunities for Swiss food manufacturers (natural and

organic food, functional food).

1.1. Opportunities.In 2005, sales of food-based retailing in the U.S. represented a $1,000

billion industry, and it is estimated to reach $1,200 billion by 2010.

This corresponds to 26% of total U.S. retail trade. We estimate that

food retail sales will grow at an average of 4% annually through 2013.

Over the past decade as income levels have risen in the U.S., the per-

centage of disposable income spent for food has declined to about

10%. At the same time, a growing slice of the pie has been going

to the food-away-from-home segment, which now garners 45% of

total dollars spent. Projections depict that by 2010 consumers will

spend 53% of every food dollar on meals, snacks and beverages

away from home.

The 35 to 44 age group claimed the highest overall food spending per

household. They were also the highest spenders for food-at-home.

The under age 25 group showed the lowest spending pattern for

food-at-home.

The Hispanic population is the fastest growing ethnic group in the

U.S. with an estimated aggregate disposable income of $800 billi-

on. The average Hispanic shopper is health conscious and spends

approximately $117 per week on groceries compared to $87 per

average U.S. shopper. Supermarket chains have responded and in-

troduced entire aisles of regional foods, reaping success with this

approach.

The mainstream consumer of today is looking for value, i.e. good

quality at lower prices. This fact has a strong impact on retailers’

profits. Swiss food products are generally niche, high quality, sophis-

ticated and high priced and, therefore, contrast with the mainstream

American food market. Additional burdens are created by the low

exchange rate of the U.S. Dollar. There are, however, three distinct

segments of the U.S. food market that offer significant opportunities

for Swiss food products:

• The power of quality and exclusivity versus low price: One in eve-

ry 125 Americans is a millionaire. This segment of the population

spends more than an aggregate $97 billion per year. Taste, fresh-

ness, innovation, sophistication, quality, exclusivity, design, cachet,

image, and healthiness are more important sales arguments than

price. The U.S. gourmet and specialty food market in general has

enjoyed a compound annual growth rate of 7% for several years.

In 2000 it had reached the $20 billion mark, of which 55% of sales

were made in supermarkets. Retail sales for this market topped

$34.8 billion in 2005 (please refer to Chapter 4). The same is true

for the up-scale restaurants and hotels who depend on the distri-

butors of high-end ingredients used in gourmet and healthy food

preparation.

• The Natural and organic food sector shows a booming double-

digit growth rate with estimated $14.5 billion in sales in 2005, and

it is expected to climb to $16 billion in 2006. The forecast is set

at around 18.4% of continued annual growth through 2008 (ple-

ase refer to Chapter 6). Please note that organic standards in the

U.S. are different from Swiss standards. A product may, therefore,

qualify as organic in Switzerland but not in the U.S. and vice versa.

• High quality private label: One in five products purchased in grocery

outlets is a “private brand” product. Private label has long been

considered as being of lower quality than its national brand coun-

terparts, but store brands are being recognized favourably and are

moving in upscale direction (please refer to Chapter 8.14).

1.2. Marketing.The environment in which a shopper makes his/her food buying de-

cisions is extremely competitive. The average time a U.S. consumer

spends in a supermarket is 17 minutes. During this time the shopper

can see only 25-28% of the store’s merchandise. The average expo-

sure to each item in a store is 0.09 seconds; hence, the necessity of

a concise marketing strategy for your products in the U.S. market,


and the importance of professional customer education through ad-

vertisement and cooperation with grocers and brokers.

• Understanding the US food distribution system (please refer to

Chapter 8) gives the Swiss food manufacturer important infor-

mation for making sound decisions, such as, whether to market

through a distributor or reseller or on his/her own.

• In addition there are numerous legal issues that can determine the

success of marketing food products in the United States. Chapter

9 Marketing Agreements and Strategic Partnerships provides infor-

mation on these important issues.

1.3. Regulatory Environment of the Food Market.The U.S. legal system is complex and needs to be treated with re-

spect. 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 manufactu-

rer 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 inter-

national, 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 inte-

rest to food importers.

1.4. Acknowledgements.It gives the publisher pleasure to thank the authors of this study: Paul

S. Anderson (Sonnenberg & Anderson, Chicago), Ally Gunduz (Swiss

Business Hub USA, New York), Claudine Haeni, (Swiss Business

Hub USA, Chicago), John Lemker, (Bell, Boyd & Lloyd, Chicago),

Frank Ustar, (Swiss Business Hub USA, Los Angeles),and Daniel A.

Wuersch (Wuersch & Gering Attorneys, New York).

I want to extend special thanks to acknowledge the contributions of

the following people, whose help in the conceptual phase of the stu-

dy and/or in assembling this text was invaluable: Guy Emmenegger,

Secretary General of FIAL, the Swiss Association for the Food

Industries; Frank Fischer and Randy Hanken, Chicago Manufacturing

Center, Chicago; Susi Gerber, Osec Business Network Switzerland;

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

2.1. Facts and Figures.The U.S. is the world’s largest producer of food and agricultural pro-

ducts. On one side is agribusiness, which represents farmers, ran-

chers and private and public companies that are involved in the early

to middle stages of food production. On the other side are food ma-

nufacturers and packaging companies, private and public companies

that are engaged in the later stages of consumer food production.

General Mechandise Chain & Department Stores,

Discount Stores42%

Pharmacies &Drug Stores5%

6%Health & Personal Care Stores

All Other 19%

Grocery Stores11%

Food ServicesDrinking Places10%

7%Supercenters

Beverage Stores 1%

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 consumpti-

on. 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.

ConsumptionThe average U.S. household today allocates substantially more in-

come dollars to housing (approximately one third), transportation and

education than in the past. In contrast, the percentage of disposable

income allocated to food has steadily declined during the past five

decades. Claiming as much as 20% at some point, U.S. consumers

have spent around 10% of their disposable income on food over the

past 9 years. The break-down of expenditures between food-at-home

and food-away-from-home in 2004 was 5.5% and 4.1% respectively

and remained unchanged in 2005. (Figures for food-away-from home

encompass direct spending in restaurants and other food establish-

ments and exclude food served in airlines or during hospital stays).

Food At Home Food Away from Home

2002

$ 800‘000

$ 700‘000

$ 600‘000

$ 500‘000

$ 400‘000

$ 300‘000

$ 200‘000

$ 100‘000

$ 02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 2: Food Expenditures and Projections 2002-2013

(Source: USDA, Economic Research Service)

Increases in actual dollars spent for food consumption have been

moderate and projections through 2013 reveal a continuation of mo-

dest annual gains. The 35 to 44 age group claimed the highest overall

food spending per household. They were also the highest spenders

for food-at-home. The under age 25 group showed the lowest spen-

ding pattern for food-at-home. According to the Bureau of Labor

Statistics, figures on food spending by career reveal that professio-

nals and employees at management levels rank number one in food

expenditures. This can be tied to their higher salary ranges. Spending

by region shows highest expenditures in the Northeast with more dol-

lars going towards dining out. The West was the leader in spending

for food-at-home. The South showed the lowest spending patterns

for food. One of the significant drivers in the spending habits is the

household head’s education level. The higher the level of education,

the higher the dollars spent for food away from home dominate. This

trend has remained over the past few years and is expected to con-

tinue. When looking at spending patterns based on gender, single

males take the lead over single females. Dining out in one-person

households takes precedence in both genders.


Retail Channels, Competition and the ConsumerCompetition among retailers has been fierce over the past several ye-

ars and continues to accelerate. Supercenter leader Wal-Mart Stores

Inc., warehouse clubs Costco and BJ’s and other retail formats have

been further expanding their already large selection of food products.

Their aggressive pricing is capturing an ever larger group of consumer

food dollars. Whereas these retailers claimed a mere 1.8% of sales for

food consumed at home in 1991, their market share had exceeded

11% in 2004. Today, food sales at supercenters and warehouse clubs

claim more than 14% market share. According to the trade publica-

tion Supermarket News, Wal-Mart, the largest food retailer in the na-

tion, dominates the food market scene. Wal-Mart operates more than

2,000 supercenters with grocery departments and it is estimated that

this number may triple by 2010. Target Corporation also has plans to

enlarge the grocery section in all of its stores. In March of this year

Wal-Mart announced its plans to incorporate organic and a wide vari-

ety of upscale specialty foods into its food product selection. A newly

designed store in Plano, Texas, is part of a pilot program Wal-Mart

launched. The store opened recently and includes not only organic

and specialty foods on a grand scale, but also features an elaborate

wine department and a sushi bar.

Wal-Mart has also become the biggest customer to a fair number of

food and beverage manufacturers. Some of these big food compa-

nies realize more than 10% of their annual sales through Wal-Mart.

This development comes at a high price and severely limits product

pricing flexibility. Conventional retailers have been forced to double

up on their promotions and marketing campaigns in their struggle for

survival, and manufacturers have been hampered in their efforts to

cover higher commodity and production expenditures.

In response to these industry changes, 2005 marked the year of

“Finding Your Niche” among the nation’s traditional retailers according

to studies conducted by the Food Marketing Institute and Progressive

Grocer Magazine. To build market share and stay ahead of the com-

petition from general merchandisers, supercenters on one end and

specialty/gourmet stores on the other, the traditional food retailers

have started to expand their specialty services and departments to

attract the discriminate segment of food shoppers and to retain their

existing patrons. A fair number among them went as far as develo-

ping and establishing their own niche stores. Two thirds of these new,

generally smaller neighbourhood markets are focused on gourmet

and specialty foods (66%), natural/organic (50%) and ethnic (25%).

On the consumer side, economics, demographic shifts, and shop-

pers who are generally better educated, more discriminating and

more worldly, are further changing the landscape of the American

food business industry. Today, consumers have more choices for their

shopping trip destinations than ever. The mainstream consumer of

today is looking for value, i.e. good quality at lower prices. A great

number among them wait for sales before making a purchase. This

trend is having a strong impact on retailers’ profits, as the consumers’

focus on price has dampened loyalty. Furthermore, easy access to

the Internet affords the consumer the ability to make price compari-

sons prior to their trip to the stores. Depending on the occasion the

consumer may purchase high quality items at a specialty/gourmet

store and make an additional stop at a supercenter to buy main-

stream goods and look for bargains. Trips to traditional food stores

have declined on average, down over 4% within the past year alone.

2.2. Trends in the Food Industry.

Health and WellnessNationwide concerns over rising health issues, obesity and diabetes

in particular, are paving the road to healthier eating habits. Food ma-

nufacturers and the U.S. government in partnership are promoting

health and wellness. One of the new communication tools about the

importance of nutrition and health features dietary guidelines and is

accessible to anybody at www.mypyramid.gov. The sixth report of

the U.S. Dietary Guidelines Advisory Committee on Dietary Guidelines

emphasizes fiber-rich diets, high intake of fruits and vegetables, and

monitoring of sugar intake (glycemic index) to fight the growing pro-

blem of obesity and its paramount effects on the health care system.

The effects of this proactive approach has marked the beginning of

a long term trend on the consumers’ food shopping behaviour and

promises significant growth in the categories of natural foods and

organics and various specialty and gourmet foods. The baby boomer

generation which accounts for nearly 30% of the U.S. population and

is very concerned about nutrition and weight issues, will help influ-

ence this trend greatly on a long term scale. They are being joined

by Generation Y (ages 18 to 27)and X (ages 28 to 41) who believe

in a healthy diet as a preventive measure against a wide variety of

diseases.

Taste and ConvenienceTime pressured consumers are looking for prepared meals and stores

that make their shopping trips easier. Scarcity of time has the consu-

mer also looking for food-on-the-go such as repackaged portions of

salads, fruits, yogurt drinks, snack bars, and tasteful innovations offe-

ring bold flavors for moments of indulgence. “Premium” and “Limited

Edition” have become buzz words for high quality. Retailers will have

to understand the consumer’s “food psyche” and reflect that in their

product palette.

EthnicityOne of the fastest growing ethnic groups are the Hispanics. Hispanics

will represent more than 50% of the U.S. population in the near future.

The second fastest growing ethnic group is of Asian background.

Shifts such as these make it essential for manufacturers and retailers

to understand and consequently focus on their target markets.

Shifts in DemographicsThe 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 fas-

test. 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 throug-

hout the industry.

Introduction of New ProductsIntroduction 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 in-

troductions, 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 num-

ber of introductions occurred in the beverage segment with nearly

one fifth of all launches, followed by bakery goods (12%) and con-

fectionery (11%). In the U.S. alone there were 16,000 new product

introductions.

Region 2004 2003 2002 2001 Total

Europe 52,456 44,220 40,742 40,086 177,504

North America 46,467 33,429 33,234 26,923 140,053

Asia Pacific 35,082 27,328 22,994 14,588 99,992

Latin America 11,419 6,895 4,564 3,714 26,592

Middle East & Africa 4,921 5,877 4,110 3,122 18,030

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

Figure 3: Global New Product Introductions by Region

(Source: Mintel)

Food IngredientsRevolutionary change in the food industry sends Chefs traveling all

over the world to discover local and exotic ingredients to use in new-

ly created, exciting dishes. This development has also spurred the

creation of Fine Casual and Family Casual Dining, a new restaurant

segment (see Chapter 5).

Spring Fancy Food Show 2006Two of the latest trends that demanded the visitor’s 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 compa-

nion 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.

2.3. Eating Away From Home.The U.S. foodservice industry consists of a wide range of away-from-

home 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 servi-

ces. 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 dual-

earner 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 pre-

dominantly 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 expec-

ted to set the pace with 6.1% growth.

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 ye-1 ACNielsen


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 le-

vels 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 Sales ($ Millions)

% Change to previous Year

% Market Share

Aguafina (Pepsi) 370.6 2.2 15.3

Private Label 307.7 24.7 12.7

Dasani (Coca-Cola) 284.4 6.1 11.7

Poland Spring (Nestle)

169.4 25.8 7.0

Propel (Gatorade Company)

141.6 44.9 5.8

Dannon (Danone*) 133.0 28.5 5.5

Arrowhead (Nestle) 126.8 15.1 5.2

Deer Park (Nestle) 94.1 49.2 3.9

Crystal Geyer (Crystal Geyer Co)

85.2 9.3 3.5

Evian (Danone*) 76.6 4.0 3.2

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 today’s 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 con-

sumer 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

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 double-

digit growth and unchanged positions for the leading brands. Number

one bottled water, PepsiCo’s Aquafina, remained in the leading positi-

on. Private Label surged with a 30% growth rate. Crystal Geyser and

Evian were two brands which experienced declining sales.

RegulationsBottled water falls under a separate, very specific regulatory envi-

ronment. Beverage manufacturers must follow multiple regulations

that include Standards of Identity, Standards of Quality, the Nutrition

Labeling Education Act and the FDA’s Good Manufacturing Practices

(GMPs).

2.5. Manufacturers of Food & Beverages.Over decades the top national food companies have built a solid re-

putation and established themselves with a strong brand-name re-

cognition. 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 2004 % Change

Kraft Foods Inc. 34,113 32,168 6

PepsiCo Inc. 32,562 29,261 11.3

Tyson Foods Inc. 26,014 26,441 (1.6)

The Coca-Cola Co. 23,104 21,962 5.2

Coca-Cola Enterprises 19,254 19,119 0.07

ConAgra Foods 18,706 18,158 3.0

General Mills 14,566 14,081 3.4

Pepsi Bottling Group Inc. 11,244 11,070 1.6

Sara Lee Corporation 11,885 10,906 9.0

Kellogg Co. 10,177 9,613 5.9

Figure 5: Top U.S. Food and Beverage Companies in 2005,

ranked by Sales in $millions.

(Source: Standard & Poor’s, Company Reports)

The packaged food and beverage industry has seen key commodity

prices rising and then leveling off for a while. To enhance their pro-

fit margins, some of the big food companies (H.J. Heinz Co., Kraft

Foods, Sara Lee Corporation, General Mills and ConAgra Foods Inc.)

have been concentrating on more efficiency through lowering of their

operating costs, introducing new technologies to track inventory, re-

ducing 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 in-

dustry. Estimates by Standard & Poor’s predict moderate growth for

some of the big players. More direct selling of their products to re-

staurants, 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 (la-

test 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 Grant-

Thornton LLP revealed that approximately two thirds of the food ma-

nufacturers participating believed that health promoting foods will be

their major growth market in 2006.

2.6. Mergers & Acquisitions.

20000

50

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005Food

Manufacturers

Restaurant & Foodservice

Packaging & EquipmentSupplies

Soft Drink, Water, Juice

Manufacturers

Raw Products & Ingredient

Supplies

Wholesalers & Distributors

Figure 6 : Mergers and Acquisitions in the Food Industry 2005

(Source: The Food Marketing Institute)

According to the Food Marketing Institute 323 mergers, and acqui-

sitions came to a close in 2005 with an additional 75 announced but

not completed. This illustrates a continued decline in M & A activi-

ty over the past five years. A high number of deals were registered

among multi-product food manufacturers and beverage companies.

Food and beverage companies continue in their efforts to optimize

their management and production lines. Standard & Poor’s indica-

tes 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 cam-

paigns and promotions are strategies these companies employ as

they strive for profitability.


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 gene-

rally responsible for the household budget, whereas older and higher-

paid shoppers in metropolitan areas gravitate more towards national

brands. The trend towards store brands continues to expand. Trader

Joe’s, 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 $ 50.31

Beverages $ 8.05

Staples, Condiments, Other $ 11.39

Non-Food Grocery $ 8.07

Snack Foods $ 4.28

Main Meal Items $ 7.09

Health & Beauty Care $ 3.66

General Merchandise $ 4.09

Pharmacy $ 3.06

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 69%

Male Head of Household 19%

Both 11%

Other 1%

Figure 10: Who is the Shopper? (Source: Progressive Grocer)

The survey conducted by Progressive Grocer revealed that the prefer-

red days to shop were unanimously the weekends starting Friday. The

majority of the shoppers prefer to do their shopping during the day;

By Claudine M. Haeni, Swiss Business Hub USA

3.1. Facts and Figures.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 nationwi-

de. Chain supermarkets generated over 90% of total sales, indepen-

dent 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-Mart’s 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.

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 divi-

ded into two main categories, traditional and non-traditional grocery

stores. Traditional store formats sell at least 65% grocery and consu-

mable items, non-traditional stores carry less than 65% food items.

Convenience stores operate on a higher margin with a limited selec-

tion 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.

3. Supermarkets and the Grocery Industry.

Figure 7: The top 10

Supermarket Chains in 2005

(Source: The Super 50,

Progressive Grocer, Feb 2006)

Company Sales $ Million

2005

Number Stores

2005

Number Stores

2004

Top Banner Names

Wal-Mart Stores 98,745 2,089 1800 Wal-Mart Supercenter, Wal-Mart Neighbourhood Market

Kroger Co. 58,745 2,501 2,534 Kroger, Ralphs Grocery, Smith’s Food & Drug

Albertson’s, Inc. 36,288 1,765 1,797 Albertson’s, Jewel-Osco, Shaw’s

Safeway, Inc. 32,733 1,540 1,572 Safeway, Vons Market, Dominick’s Finer Food

Ahold USA, Inc. 23,848 824 826 Stop & Shop, Giant Food Store, Tops

Publix Supermarkets, Inc. 18,532 876, 853 Publix Super Market

Delhaize America, Inc. 16,480 1,544 1,528 Food Lion, Hannaford Food & Drugs, Kash n’ Karry,

H. E. Butt Grocery Co. 10,422 272 276 H.E. Butt Food Store, H.E.Butt Central Market

Super Valu, Inc. 8,633 619 617 Save A Lot, Cub Foods, Shoppers Food Warehouse

Winn-Dixie Stores, Inc. 7,092 563 943 Winn-Dixie, Save Rite

Store Format Store Size (sqft)

Ann. Sales ($ million)

Number of SKUs

SKUs (Stock-Keeping Units)

Traditional Store Formats

Conventional Supermarket 25,800 7.8 22,000 Full line of dry groceries, canned food, meats, produce and non-food items. Annual sales reach a minimum of $2 million.

Superstore 40,000 20.0 25,000 Full line of dry groceries, canned food, meats, produce. May include in-store banking, video rental, florist shop.

Food/Drug Combo 55,700 22.0 52,000 Combination food store and full-line drug store under one roof, common check-out. One third of space is reserved for non-food items.

Limited Assortment Supermarket N/A N/A <2,000 Smaller than conventional format with very limited services.

Other (Small Grocery) Stores <5,000 <2.0 N/A Small corner grocery store with limited selection of staples and other convenience foods.

Specialty/Gourmet Retailers N/A N/A N/A Stores specializing in a specific food category, e.g. ethnic/international, health focused or organic, locally grown or produced.

Non-Traditional Formats

Supercenters 170,000 51.0 N/A High volume hybrid format of a supermarket/drug-store combination and discount store. Includes grocery products,(typically 40%; nonfood items, electronics, sporting goods. Banking, dry cleaning, restaurants, etc.

Wholesale Club 135,000 50.0 N/A 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.

Dollar Stores N/A N/A N/A 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.

Convenience Stores 3,000 N/A N/A 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.

Drug Stores N/A N/A N/A Prescription-based drug store with at least 20% of total sales from consumables, general merchandise and seasonal items.

Figure 8: Traditional and Non-

Traditional 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.


that are used together by the consumer are being rearranged and

featured in the same aisles, for example breakfast foods such as ce-

reals, syrups and pancake mixes are grouped together. More than two

thirds of supermarkets hold cooking demonstrations in their stores for

their patrons to be able to taste various foods and expand their coo-

king talents. Natural and organic foods may be placed in the center of

the store instead of locating them around the periphery of the store. It

should be noted though that such rearranging of products may affect

the manufacturers and the cost for slotting fees. More self-scanning

stations address the customer’s time issues.

Traditional supermarkets have also begun to look at new concepts

and experiment. “Finding One’s Niche” has become most important

in their search for their identity. New store formats and concepts are

their latest approach to migrate away from the “middle position” to

strengthen their position and keep a competitive edge.

• Safeway of Pleasanton, California changed its identity and rebran-

ded itself in 2004 by launching its new Lifestyle concept. Safeway

embarked on a year long marketing campaign that highlighted its

new Lifestyle stores which feature a large selection of natural and

organic foods, an impressive selection of perishables, a full-service

meat counter, bakery, floral design center and a sushi and olive bar.

142 Lifestyle stores opened their doors in 2004 and plans for ano-

ther 300 were ready to open closely thereafter. Lifestyle stores allow

for flexibility to give the individual store locations room to tailor their

assortments to their particular location. Safeway also launched its

own private label brand to create a proprietary experience nowhere

else found. Safeway’s Lifestyle stores are able to compete with

upscale and supercenters as well.

• Supervalu built new stores that offer low-price natural/organic

product and represent direct competition to the high priced natu-

ral/organic stores of Whole Foods and Wild Oats Markets. These

new stores operate under the name Sunflower Market. The first

Sunflower Market opened its doors in January 2006.

• Delhaize America’s newly launched stores Sweetbay highlight

specialty foods offered at competitive prices and feature their sig-

nature produce department “Harvest Market”.

• Publix developed a store format for the health-conscious consu-

mer under the name Green Wise Market. The first store is sche-

duled to open its doors in 2006 and will be in direct competition

with super natural Whole Foods stores.

• Save-a-Lot grocery stores focus on a limited number of stock-

keeping units and have expanded their private label assortment.

Private label brands are known to increase customer’s loyalty.

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.

19880.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1993 1998 2003 2008

Traditional Non-TraditionalConvenience Linear

(Traditional)

89.6%79.0%

73.4%

56.3%

49.0%

7.9%2.5%

8.8% 10.2%15.7%

10.9%

31.3%

12.4%

39.0%

12.0%

Figure 11: Traditional and Non-Traditional Store Formats’ Share of

Grocery and Consumables with Projections until 2008

(Source: Willard Bishop Consulting)

As the selection of food sellers expands, consumers are taking ad-

vantage of it. Marketing studies reveal that the average consumer

frequents three to four different stores carrying groceries to fulfill the

different needs. With more shopping options to choose from, the tra-

ditional grocery stores have seen their customers’ loyalty slowly erode.

Today, neighbourhood supermarkets, online grocers, specialty stores

and gourmet markets, as well as warehouse clubs and supercenters

are competing for market share and trying to win the consumer’s dol-

lars. As traditional stores continue to lose ground and see their market

share drop, non-traditional channels led by supercenters, will continue

to expand.

Willard Bishop Consulting predicts that traditional grocery store for-

mats will decline below 50% by 2008. The consulting firm forecasts

a market share of close to 40% for non-traditional stores within the

same time frame. Their increased market penetration through aggres-

sive store openings combined with price advantage will continue to

contribute to consumers making more trips to non-traditional stores.

The strongest sales growth will be claimed by supercenters. Total sa-

les of supermarket items at supercenters captured a market share of

14% of the grocery industry in 2005. Projections suggest a market

share of more than 17% by 2009. Despite the fact that profit margins

on grocery items are not high, supercenters compensate by attracting

large numbers of consumers who also buy general merchandise at

higher margins.

Wal-Mart Stores Inc., the world’s largest company, is the undeniable

market leader in this segment. According to estimates by Standard

and Poor’s Wal-Mart generated sales from its supercenters and

neighbourhood stores close to $100 billion in 2005.

Wal-Mart’s dominant position threatens the traditional chain food and

drug retail industry. As of end of May 2004 Wal-Mart owned and ope-

rated 1808 supercenters and 89 neighbourhood markets in the U.S.

Additionally, they owned 554 Sam’s Clubs. Expansion plans included

240 to 250 new supercenters (160 relocations/expansions), 25 to 30

neighbourhood markets and 30 to 40 Sam’s Clubs, all to be comple-

ted by 2006.

Wal-Mart is also the industry’s price leader. Its focus on lowest possi-

ble cost includes leverage with food manufacturers through its sheer

size, investments in the newest and most efficient technologies and

keeping employee costs in check (Wal-Mart employees are non-uni-

onized). With its recent opening of a supercenter in McKinney, Texas,

Wal-Mart has embarked on yet another trail. The McKinney supercen-

ter is experimenting with materials, processes and technologies

that should reduce the amount of natural resources required to opera-

te and maintain a store, the amount of materials in the construction of

a facility and wherever possible substitute renewable materials in the

construction and maintenance of a store location. Wal-Mart

has been closely working with Oak Ridge National Laboratory for tes-

ting and analysis of systems and materials. The idea is to open the

door to low volume and rare technologies and pave the way to turn

them into industry standards. At present, Wal-Mart preserves one

acre of wildlife habitat for every acre developed and wants to expand

its best management practices in environmental conservation.

Wal-Mart’s latest major announcement revealed its plans to capture

the interest of the more sophisticated consumer by substantially ad-

ding organic foods to its product assortments and going upscale with

new store openings, starting in Texas. The new supercenters will fea-

ture specialty foods and upscale services and include a sushi bar and

a wine department offering bottles at a price of up to $500 as well.

Success through DifferentiationBecause of the fierce competitive environment, traditional retail food

stores are continuously looking for new avenues to attract and retain

customers. Differentiation from lower cost retailers on one end (Wal-

Mart, Costco, etc) and specialty stores on the other (Whole Foods,

Wild Oats and Trader Joe’s; see also Chapter 3and 4) is one of the

most important components for supermarkets to concentrate on in

order to move out of the unfavorable “middle position” in the industry.

Historically, retailing used to thrive by focusing on the environment of

a store’s particular location. Product palettes and promotions would

specifically appeal to local demographics. Progressive Grocer

points to the fact that there is a clear trend among the supermarkets

to return to local roots.

Various avenues are embarked on. Supermarkets concentrate and

cater more to the consumer’s changes in taste, develop and improve

prepared foods, promote health and wellness by offering a wide array

of fresh produce and stock up on natural and organic foods. Products

• Kroger has been improving their product palette and is focusing

on superior customer service. Remodeling and expansion of exis-

ting stores is another strategy Kroger believes will help it to remain

competitive.

All these measures taken should help food retailers to preserve their

competitive edge. Successes and failures will manifest themselves

over time. At this point, it is too early to make predictions.

3.5. Growth Opportunities.

• Natural and organic foods have been the fastest growing seg-

ment in food retail totaling $14.5 billion in 2005 and estimated at

$16 billion by the end of 2006. Nearly 40% of the consumers regu-

larly buy natural and organic foods and the majority among them

make their purchases at their primary supermarkets versus a spe-

cialty food store (see also Chapters 4, 6 and 7 for more details).

• The U.S. Government’s latest Dietary Guidelines have been shif-

ting the consumers’ focus to a healthier lifestyle and are creating

sales opportunities. Authoritative government and self discovery

primarily through internet information sources (e.g. www.mypyra-

mid.gov) have been visibly dictating consumer behaviour recently

and are important indicators for the serious trend spotters.

• A. Elizabeth Sloan, a contributing editor to the Institute of Food

Technology’s publication states that by 2004 65% of grocery shop-

pers had redirected their diets to manage health conditions natu-

rally, ranging from high blood pressure and high cholesterol, weight

issues to preventive measures against heart disease and cancer.

The number of consumers following this trend keeps growing.

FDA’s official approval of heart-health claims for whole grains, ome-

ga-3 fatty acids, monounsaturated oils among others have noti-

ceably resulted in higher demand and consumption of fresh fruits,

vegetables, salads, grains, nuts and yogurt.

• New lines of ready-to-eat natural and organic baby food have en-

tered the market and are changing the U.S. baby food landscape.

• Private label products are gaining in recognition. Private label pro-

ducts also offer economic advantages to both the consumer as well

as the merchant. Generally, product prices are 20% to 40% lower

than national brands and a retailer’s margin is around 35% to 40%

versus a 27% average margin on national brands (see Chapter 8 for

additional details). Store-branding fosters customer loyalty.

• Ethnic food is another fast growing segment with immigrant fami-

lies introducing their surroundings to a whole new taste palette. The

Hispanic population is the fastest growing ethnic group in the U.S.

with an estimated aggregate disposable income of $800 billion. The


average Hispanic shopper is health conscious and spends approxi-

mately $117 per week on groceries compared to $87 per average

U.S. shopper. Supermarket chains have responded and introduced

entire aisles of regional foods, reaping success with this approach.

• Convenience becomes center stage. Easy-to-prepare meals, re-

sealable packaging, freshness dating, easy-to-clean-up, easy-to-

open and pre-cleaned, pre-cut and precooked food items are in

high demand and sales have been skyrocketing.

• Supermarkets which add a pharmacy and operate as a one-stop-

shop emphasizing convenience, generally see their health and

beauty care products soar 15% to 20% in their first year of opera-

tion. Larger format drugstores show a trend of adding convenience

• foods, drinks and greeting cards, merchandise traditionally not part

of a drugstore’s product selection. This, in turn, not only improves

store traffic, but also helps improve their margin.

4. The Specialty and Gourmet Food Stores.By Claudine M. Haeni, Swiss Business Hub USA

4.1. Facts and Figures.

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 “mainstre-

aming” of gourmet foods dictate the American consumer’s 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 sa-

les 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 an-

nual sales of specialty food exceeding 70%. Specialty food stores

claimed around 20% of sales.

4.2. Specialty and Gourmet Foods.In the 1980’s Americans began to introduce high-quality goods in

every supermarket category, stretching the definition of gourmet

standing for refined, sophisticated, exclusive, unique. According to

Gourmet Retailer Magazine, specialty food and gourmet products are

defined as being made with high-quality ingredients, having great tas-

te 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), produ-

ced in small quantities, rich in texture and featuring innovative ingre-

dients and unusual flavors and shapes underline the exclusiveness

expected in this sector.

From 2003 to 2005, a two year span, specialty food sales have re-

gistered record sales. As shown in above figure, there are 26 special-

ty food categories that accounted for substantially higher sales than

their mainstream equivalents. The five largest specialty food catego-

ries comprise Condiments, Juices & Functional Beverages, Cheese,

Coffee & Cocoa, and Chips, Pretzels & Snacks. Condiments account

for over one-fifth of all specialty food sales.

Segment 2003 2005 % Change

Condiments 4,622 4,651 0.6

Juices & Functional Beverages 889 1,343 51.1

Cheese 907 1,160 37.0

Coffee & Cocoa 776 1,063 37.0

Chips, Pretzels & Snacks 820 991 20.9

Figure 14: The Five Largest Specialty Food Categories

(Source: Mintel/SPINSACNielsen)

There were five specialty food categories substantiating each more

than 50% sales growth between 2003 and 2005.

2003-2005 2005 2004 2003% Change $ Million % Share $ Million % Share $ Million % Share

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

Figure 12: Sales of Specialty Food by Retail Channel.

Note: Cheese, Prepared Foods, Meat/Seafood, Bread account for approximately 38% of

Specialty Food Sales and are not included in above Figures. (Source: Specialty Food Magazine)


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 Joe‘s.

(Source: Mintel/SPINSACNielsen).

Segment % Growth 2003-2005

Bread & Baked Goods (frozen & non-frozen)

147.8

Water 61.0

Carbonated, Functional & Ready-to-Drink Tea & Coffees

65.7

Yogurt & Kefir 53.3

Juices & Functional Beverages 51.1

Figure 15: The Top Five Specialty Food Categories between 2003

and 2005 ranked by Sales (Percentages)

(Source: Mintel/SPINSACNielsen)

New ProductsThe 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 “Better-

for-You” foods and beverages that are low in fat and sugar and provi-

de 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 store’s 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 abo-

ve 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.

Spring Fancy Food Show 2006 Exhibit ShowcaseAs consumer tastes become increasingly sophisticated, manufactur-

ers take classic recipes and turn them into new, adventurous and un-

conventional 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 year’s 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 d’Oeuvres Crackers and Summer Citrus Shortbreads,

in limited edition flavors, for the summer months, and Walnut Hors

d’Oeuvres 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);

Product Category Percent Specialty

Foods

Percent Mainstream

Foods

Baking Mixes, Supplies & Flours 8 3

Beans, Grains & Rice 26 18

Beverages (Carbonated, Functional, Ready-to-Drink Tea/Coffees)

66 6

Beverages (Juices & Functional) 51 1

Beverages (Water) 61 16

Bread and Baked Goods (Frozen/Non-Frozen)

148 3

Candy & Individual Snacks 24 1

Cereals (Cold & Hot) 12 1

Chips, Pretzels & Snacks 21 8

Coffee & Cocoa 37 -1

Condiments 0.6 2

Conserves, Jams & Nut Butters 12 1

Cookies & Snack Bars 4 -10

Cooking Oils 22 13

Crackers, Crispbreads & Rice Cakes 10 5

Dairy: Cheese 28 16

Dairy: Milk and other Dairy 48 10

Dairy: Yogurt & Kefir 53 31

Desserts & Puddings (Frozen & Shelf-Stable)

4 1

Eggs 33 9

Entrees, Mixes, Shelf-Stable Meat, Poultry, Seafood

17 2

Frozen Entrees, Pizzas, Convenience Foods

6 -1

Fruits & Vegetables (Frozen & Shelf-Stable)

23 5

Nuts, Seeds, Dried Fruits & Trail Mixes 31 22

Pastas (Shelf-Stable) 7 -0.3

Sauces, Salsas, Dips (Refrigerated & Shelf-Stable)

4 5

Seasonings 14 4

Soups 10 4

Sweeteners 9 15

Teas 8 9

• 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 hors’d’oeuvres 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 con-

taining 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 in-

gredients 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.

4.3. Buyers of Specialty Food.Household income, education and geographical location are the pri-

mary aspects of the specialty food buyer. Specialty foods can make

up a large percentage of a household’s spending. Moreover, consu-

mers 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 buy-

ers 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)

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 com-

panies 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, reflec-

ting 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 51.6%Retailers 32.5%Other (not specified) 15.9%

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 dis-

like 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’ observa-

tions. Seattle, Portland and San Francisco are the leaders in disco-

vering 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 Walker’s

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 practi-ce and appreciation of the culinary arts in America. The James Beard Foundation Awards are the nation’s preeminent honors for culinary professionals.


simple dishes that often feature organic, locally grown ingredients of

highest quality, and also that Caribou Coffee Company, recently ra-

ted number one for its Columbian coffee, has created a culinary R &

D facility. Its current Chef Kurt Stiles, together with food scientists,

manufacturers and technologists, has the task to create aseptically

packaged (shelf-stable) products for its mass retail and upscale gour-

met stores. Chef Stiles predicts that shelf-stable products are the

future and consumers will learn to accept aseptically packaged pro-

ducts (source: Prepared Foods).

Chef Zukin also points to the trend of artisan foods. A growing num-

ber of individuals turn their passion for gourmet food into a business.

Across America, artisan shops open their doors and offer their cli-

entele products that range from the finest handmade bakery goods

and confectionery to savouring pates and gourmet cheeses with ex-

citing new tastes. For example, Harvest Moon is a domestic washed-

rind cow’s milk cheese which tastes like Pont L’Eveque, and Cocoa

Cardona is a semi-soft goat’s milk cheese rubbed with cocoa. Only

ingredients of impeccable quality are being used.

Alice Walker, executive chef and owner of famous Chez Panisse in

Berkeley, California, uses only the purest and freshest ingredients for

her menus at her top restaurant. She has been a strong supporter of

farmers’ markets and sustainable agriculture. In 1996 she established

Chez Panisse Foundation to help support cultural and educational

programs to foster a deeper connection to growing, cooking and sha-

ring food. (Walker was one of the founders of the Edible Schoolyard

program to establish healthy eating habits at schools). Walker is also

the author and co-author of several cookbooks including a children’s

story and cookbook, and was the recipient of the James Beard

Humanitarian Award in 1997.

Jean-Georges Vongerichten, the “Enfant Terrible” of modern

French cooking was born and raised near Strasbourg, France, and is

one of the leading chefs on an international scale. His culinary vision

and bold approaches to innovation have consistently set new stan-

dards and turned him into a superb trendspotter. The opening of his

restaurant Jean-Georges in the Trump International Hotel & Tower

in New York earned him an immediate four-star review and several

of the most prestigious awards. In one single year he received three

James Beard Awards.

Chef Thomas Keller originally from Southern California has been

known for his innovation and dedication to the culinary scene. His

restaurant acquisitions included one of the top restaurants in the

U.S., the French Laundry in Yountville in the heart of Napa Valley,

in 1994. Recently he opened Bouchon (Artisan) Bakery, also in

Yountville, California. Keller has also moved closer to the world of

wines. Modicum, a Napa Valley Cabernet wine, was developed with

The French Laundry’s influence. His French Laundry Cookbook has

brought him national and international recognition and many awards.

Chef Norman Van Aken has been following America’s evolution in

its eating habits and cooking methods for decades. He is the crea-

tor of Nuevo Latino cuisine, a blending of European “haute cuisine”

with South American and Caribbean Islands elements. He was also

a recipient of the James Beard Award. Van Aken owns Norman’s

Restaurant in Coral Gables, Florida. His observations confirm a con-

tinuing and growing interest and demand in ethnic foods and innova-

tive cuisine with exotic flavors.

4.6. Products.

Alternative/Energy DrinksThis category of mostly carbonated drinks contains a combination

of caffeine, sugar and specific ingredients such as ginseng, guarana,

inositol, vitamins B6 and B12 to provide quick bursts of energy. It dif-

fers from sports drinks that are meant for recovery after a strenuous

workout. Energy Drinks have been readily adopted by the “on-the-

go” consumer and Generation Y. They are also very popular as a

mixer in alcoholic beverages at home parties as well as in night clubs.

The company that launched this type of beverage was Red Bull; it has

remained the market leader. Pepsi offers two brands in this category,

so does Cadbury Schweppes. This market is expected to reach $2

billion in the not too far distance (ACNielsen– Trends).

CheeseArtisan and farmstead cheeses are and remain a favorite food of the

American consumer. In 2004 per capita consumption was 31.2 lbs,

an all-time high, and sales climbed to $11.9 billion. Cheese is an all-

time favorite food and growth is expected to continue. Unusual tasty

ready-touse grated cheeses and ethnic-style cheese blends find their

way into the kitchen to add pizzazz to a bland menu. Americans di-

ning out upscale have become accustomed to the cheese course

as a unique ending of a meal. This trend has been rapidly expanding

into home entertaining and casual dining. Cheeses are perceived as

a natural and healthful food item and the latest introduction has come

in the form of organic cheeses and cheeses that feature exciting new

flavors. Artisan cheeses are enjoying steady growth, further supported

by chefs creating menus with the finest foods available and a rise in

regional cuisines. Consumers have also discovered the use and con-

venience of natural cheese spreads and uniquely flavored cheeses in

sandwiches or served as a snack. Their choice ranges from Brie to

smoked Cheddar, aged Gruyere, to piquant aged Provolone and Tete

de Moines. New variations feature rinds rubbed with smoked paprika,

cumin, coriander, cocoa or cinnamon.

YogurtYogurt is in great demand. It is sold in multipacks, individual cups,

liquid form and squeeze tubes for spoon-free eating. While most top

brands of various dairy products have been experiencing a healthy

growth rate, yogurt has experienced dynamic sales showing a 7.7%

growth rate within the past year and a continued upward trend is

expected. Promotions are based on better-for-you, probiotic bac-

teria, fiber, vitamins and minerals. Products are made appealing to

adults in general, to baby boomers and kids in particular. Cultured

dairy products are staples in the daily diet and in meal preparation of

the Hispanic population. Organic Stonyfield Farm has been moving

towards the top faster than any other brand. One of their new pro-

ducts is YoBaby, a spoonable yogurt line for small children, as well as

a drinkable variation for infants and toddlers (Mintel). Yoplait Original

is the market leader, while private label yogurts take second positi-

on. Yogurt and yogurt drinks have established themselves as healthy

snacks for the wellness conscious consumer and manufacturers are

making sure that all demographics are taken into account. Growth for

2006 is expected in the 5% to 7% range.

Chocolate and Non-Chocolate ConfectioneryPremium & Gourmet chocolate represents approximately 10% of the

confectionery segment and typically contains as much as 80% cocoa

solids compared to low-cost chocolate generally consisting of 50%

to 70% sugar. The savvy consumer has discovered premium and

gourmet treats for special moments of indulgence, be it organic, non-

organic or natural. Dark chocolate has become the favorite after the

publication of studies pointing to its health benefits such as its antioxi-

dant and heart-healthy vasolidation effects. According to Packaged

Facts, chocolate confectionery sales accounted for $15.1 billion in

2004. Organic chocolate sales took the lead and are estimated at a

growth rate of 30% on an annual basis. Non-chocolate confections

reached $7.8 billion, up 1.6%. Non-traditional shapes, smaller, bite-

size, and taste are key market drivers together with attractive “on-

the-go” packaging. Products specifically for kids have been gaining

market share. It should be noted however that the non-chocolate

segment showed diminishing sales in 2004 compared to previous

years and further decline is expected due to consumers’ mounting

dietary concerns.

Super Premium and Premium Ice Cream, Frozen Desserts and Frozen NoveltiesThe U.S. is the world leader in the production of ice cream and fro-

zen desserts. The USDA’s published figures show an annual produc-

tion of 1.6 billion gallons in 2004. Despite health consciousness, the

American consumer has continued to associate ice cream with indul-

gence and has shown little interest in light (50% less fat) ice cream.

Dreyer, one of the four top domestic ice cream manufacturers, has

been the only success story with their technological breakthrough

of “slow churned”, making light ice cream that rivals in taste any

full fat premium or super premium ice cream. According to Mintel

International, over 90% of U.S. households purchase at least 4 quarts

of ice cream per month on average.

Ice cream and frozen desserts constitute a $21+ billion market; this

includes retail (approximately one third of total sales) as well as food

service channels. Frozen novelties were purchased at a 20% higher

rate by households with children. Growth in this mature market de-

mands constant innovation. Private label has been gaining market

share with supermarkets and mass merchandisers discovering the

value of ice cream sales. Private label sales projections suggest a

growth rate of 7% through 2008.

Natural/Organic/VegetarianOrganic and natural foods have expanded phenomenally and are joi-

ning the upscale world of gourmet with unique products and new tas-

tes. They are as well gaining market share in school vending machines

thanks to Stonyfield Farm partnering with distributor United Natural

Foods Inc. and school and university communities. Organic products

offered in the vending machines range from yogurt to smoothies, soy-

milk, chocolate and string cheese. Natural products include pita and

soy chips, nuts and an assortment of snacks. Functional foods come

in with fortified yogurt and yogurt drinks, cereals with heart-health

claims and products specifically formulated for women to name a few.

With more retailers having adopted vegetarian foods into their seg-

ments, sales have risen sharply. Growing variety, interesting tastes

and a welcome menu change for the healthconscious consumer en-

sure this trend to continue.

CondimentsAs there are no clear guidelines what condiments encompass, Mintel

came up with their own definition (in order of market share): condi-

ments comprise sauces, mustards and horseradish, jams, jellies and

spreads, salad dressings and (olive) oils. The time-pressured two-

income households have been integrating the use of condiments in

their daily meals and in entertaining. The higher educated consumer

shows an eagerness to expand his culinary knowledge and exhibits a

passion for handmade unusual products. Convenience and creative

applications have been winning forces. Mintel’s research revealed an

18% increase in sales between 1998 and 2003 alone. The $3.2 billion

market holds promise for further robust growth through innovation,

bold flavors and attractive packaging. Global and regional influences

are guiding this segment and organic and artisanal products have

been rapidly gaining market share.


SnacksSnack foods are the daily companion of the U.S. consumer and their

purchase parameter ranges from gas stations to food stores, movie

theaters all the way to the most upscale specialty and gourmet stores.

Snacks can consist of a healthy energy bar, dried fruits, a handful of

nuts and raisins, but it can also include a range of other foods such

as a small serving of cheese, chips, pretzels, patés or a small frozen

item such as pizza. Sales of sweet and salty snacks grew at a 4% rate

in the past two years and reached sales of approximately $27 billion

according to Packaged Facts.

Among the consumers’ favorites are healthy (low in sodium and ab-

sence of saturated fats) high-protein and fiber-rich nuts including the

more expensive almonds. Conventional snacks are experiencing a

transformation away from containing unhealthful ingredients, espe-

cially transfats. Snack producing companies are accentuating posi-

tives in nutritional labeling and are experimenting with variety, adding

ethnic components and new flavors. Small-batch, conveniently pa-

ckaged gourmet snacks featuring new unusual flavors are a winner

and are driving growth.

Whole GrainsNew 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.

at $1.7 billion (Source: Standard & Poor’s). Institutions comprise all

noncommercial establishments such as schools, colleges, hospi-

tals and extended care facilities, vending areas, plants and offices,

correctional facilities and transportation (trains, cruise ships, and air-

planes) 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.

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 pro-

fits. As a consequence many restaurants were forced to raise their

menu prices to ease margin pressure.

The restaurant industry defines two main segments: full-service re-

staurants and limited service (fast food) restaurants which again

are divided into chains and independents (the Nation’s Restaurant

News, an industry trade magazine). Currently there are an estima-

ted 294,000 independent restaurants and 234,000 chains in the U.S.

Together, they represent approximately 72% of all restaurants nation-

wide 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 (McDonald’s Corporation, Wendy’s

By Claudine M. Haeni, Swiss Business Hub USA

5.1. General.The commercial and institutional food industry in the U.S. is com-

monly referred to as the foodservice industry. In 2005 the foodservice

industry as a whole accounted for an estimated $486.1 billion in sa-

les. 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 to-

wards 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.

Category 2005) 2006)

Full-service Restaurants 164.9 173.4

Limited-service Restaurants 135.6 142.4

Commercial Cafeterias 5.1 5.2

Social Caterers 5.3 5.7

Ice Cream, Frozen Custard, Yogurt Stands 15.5 16.9

Bars/Taverns 15.1 15.7

Total Commercial Eating & Drinking Places 343.0 360.9

Food Contractors 31.9 34.0

Lodging Places 23.7 25.0

Other Commercial Sales 45.1 47.7

Total Commercial Foodservice 443.7 467.6

Institutional Foodservice 40.6 41.6

Military Foodservice (Continental U.S. only) 1.7 1.8

Total U.S. Foodservice 486.1 511.1

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 re-

staurants including cafeterias, bars and ice cream parlors. The com-

mercial segment reached estimated sales of $443.7 billion in 2005.

The institutional foodservice segment includes all sales to institutio-

nal 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

5. The Commercial and Institutional Food Industry.


International Inc.) to full-service chains (Darden Restaurants Inc.,

Applebee’s International Inc, Outback Steakhouse Inc.).

Fine Dining and High-Price Fine DiningHigh-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 aff-

luent 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 ge-

nerate 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 Norma’s in Le Park Meridien in

Manhattan, the menu includes a “Zillion Dollar Lobster Frittata” at a

price tag of $1’000. 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. Masa’s, located in the new Time Warner Center

offers menus at $300 to $500 that included ingredients such as white-

truffles 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 restau-

rants, hotels, motels, inns and resorts in over 3’000 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

• Seeger’s, Atlanta

• Charlie Trotter’s, Chicago

• Trio, Evanston

• Alain Ducasse, Manhattan

• Jean Georges, Manhattan

• Le Bec-Fin, Philadelphia

• Aujourd’hui in the Four Seasons, Boston

• Le Cirque in the Bellagio, Las Vegas

• L’Escalier in the Breakers, Palm Beach

• The Herbfarm Restaurant, Woodinville, Washington, D.C.

• The Mansion on Turtle Creek, Dallas

Luxury Fine Dining Food CourtsThe 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 re-

staurant concepts feature major players such as Charlie Trotter of

Chicago, Jean-Georges Vongerichten of New York’s 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.

Full ServiceFull 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.

Type Atmosphere Top Chains

Dinner House Casual and fine dining. Average check ex-ceeds $10 for entrée.

Darden Restaurants, Brinker International Inc., Outback Steakhouse, Inc., Applebee’s International Inc.

Grill/Buffet Casual dining with specialization in grilled items and self-service bars offering salads and desserts.

Golden Corral (Division of Investors Management Corp.), Ryan’s Family Steak House Inc.

Family Restaurants Midscale restaurants with relaxed atmos-phere, cater to all ages.

Denny’s Restaurants, International house of Pancakes (Division of IHOP International), Cracker Barrel

Figure 18: Full Service Restaurant Categories

(Swiss Business Hub USA 2006)

Limited Service RestaurantsLimited service or fast food restaurants offer quick counter service,

low prices and plain décor. Meals can be eaten on location or taken

out. Menus encompass such items as sandwiches, hamburgers, chi-

cken 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 ye-

ars which were impacted by a rapid gain of market share through high

quality and service from quick casual operators, foremost Panera.

Shifting their focus from low pricing to product innovation encoura-

ged sales growth in the past two years. Mc Donald’s Corporation has

remained number one in the fast food industry, with $25.6 billion in

U.S. sales in 2005.

Type Atmosphere Top Chains

Fast Food Quick counter service, low prices and plain décor. Meals can be eaten on location or taken out.

McDonald’s Corporation, Burger King,Wendy’s, Jack in the Box

Specialty Chains that do not fit any category in the re-staurant business due to their type of product sold or their mode of serving.

Starbucks Corporation

Quick Casual Limited or self service restaurants that feature upscale menus with items such as gourmet soups, salads and sandwiches.

Panera Bread Co., Chipotle Mexican Grill(recently spun off from McDonald’s), BajaFresh (owned by Wendy’s 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 con-

cept that has been gaining ground quickly. “Quick casual” are limi-

ted 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 McDonald’s

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.

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 com-

pared to 2004. At present, there are approximately 82 restaurant

companies operating in hotels and motels. The top three hotel chains

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 OperationsHotel restaurants have the primary function of providing a comfor-

table dining experience to the hotel guests. A well managed restau-

rant that can distinguish itself and meet the expectations of guests

is important to further the establishment’s 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

resort’s 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 Carmine’s (Italian

cuisine) at the Atlantis, a resort consisting of three hotels with 2’300

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.

Casino Hotel RestaurantsOn an annual basis, casino hotel restaurants generate more revenues

from food and beverage sales than the typical high-class hotel res-

taurant (around $18+ million annually on average). In order to accom-

modate 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 fre-

quents the buffet style restaurants. Then there are the highrollers who

enjoy fine dining in the high priced restaurants. This category of visi-

tors represents the backbone of the gambling industry.

The Palm Restaurant, known as the ultimate hang-out for celebri-

ties, 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 resort, valued at $245 million. The Tropicana complex is the lar-

gest complex within a resort in Atlantic City, featuring amenities such

as indoor dining, entertainment, retail shops and a spa.

The restaurant itself seats 250 people and includes a private dining

space for 100 guests. The resort premises feature over 2’100 hotel

rooms (350 plus suites) and include 21 restaurants.

Las Vegas and Atlantic CityLas Vegas, Nevada keeps its number one rank as the location with

the largest casino business. It has a highly developed infrastructure

and offers more than 134,000 hotel rooms in the city and vicinity.

Approximately half of Nevada’s winnings are generated in the Las

Vegas Strip area. The casinos in Las Vegas attract many highrollers,

while Atlantic City is a convention center and its 12 casinos are more

typically frequented by low-stakes day trip visitors.

According to Standard & Poor’s overall profitability for this industry

should be positive and, favorable demographic trends such as the

baby boomers who have the discretionary income to elaborate on ex-

pensive vacations and, retirees traveling should support this forecast.

Business travel is expected to continue its upward trend.

5.4. Challenges.

Aside from fierce competition, the restaurant industry has been incre-

asingly faced with the following issues:

• Food Safety Concerns: Incidents of mad cow disease and avian

flu have been responsible for sharp rises in food prices and have

greatly affected the restaurant industry.

• Obesity: A growing health concern of the nation has resulted in

some lawsuits.

• New Federal, State and Local Regulations: New regulations such

as an expanded ban on smoking in various states, and increases in

the current federal minimum wage to more than $7 (from $5.15) are

threatening to curtail the profits of eating establishments.

Almost all segments in the restaurant business have experienced

obesity-related lawsuits in the last two years. Fast food places have

countered the rising health consciousness of the American consu-

mer by introducing new low-fat and low-carbohydrates food and by

adding a wide range of fruits and salads to their menus. Restaurant

owners have added a variety of new innovative menus that address

the consumer’s health and insatiable search for variety and adven-

tures in taste. McDonald’s Corporation developed a menu series

which includes vegetables, fruit, milk and yogurt. The company went

as far as founding the Global Advisory Council on Healthy Lifestyles.

The mounting concern over the explosive surge in healthcare costs

has also prompted the company to team up with the World Health

Organization and the U.S. Department of Health and Human Services

to educate the public on a long term basis and promote the impor-

tance of healthy nutrition and fitness.

5.5. Trends.

• Independent of economics time-pressured Americans love to eat

out. The quick-casual segment sees growing sales with upscale

products that focus on fresh ingredients and unusual flavors.

• Differentiation through innovation, sophistication and cutting edge

menus, supported by the highest level of service, paves the way to

success in a fiercely competitive environment.

• High fine dining and luxury restaurant establishments live by their

chef’s ability to evaluate their patron’s feedback and to spot trends.

Gourmet dining embracing high quality ingredients and simplicity

has become a favorite. Ingredients are often local and include orga-

nics. Smaller plates and sophisticated wine programs paired with

great hospitality are in.

5.6. Distribution Channels.

Food service establishments buy over 20% of wholesalers’ grocery

and related products. Distribution channels to restaurants and other

food service establishments are classified as broadliners, systems

distributors and specialty distributors. Broadliners carry a wide range

of food, equipment and supplies and are, therefore, geared to offer

one-stop shopping. SYSCO is the leading company in this category.

The strong growth pattern in eating out has captured the interest

of many food companies, like H.J. Heinz, Campbell Soup Co. and

ConAgra. In order to increase their business and participate directly

in this trend, these companies have created their own distribution

divisions. This also provides them with a relatively low-cost avenue to

test market new products. (For more details on distribution channels,

please refer to Chapter 8.)

nable agriculture enjoy growing acceptance. According to the U.S.

Department of Agriculture’s Economic Research Service, there were

2.2 million acres farmed under management of 8,035 certified orga-

nic farms depicting a growth rate of 15.6% within a two year

span (2001-2003). Within the same time span, organically raised

milk cows increased by 52.9% to 74,435 heads, and beef cattle

increased by 79.5% to 27,285 heads, thus confirming a growing de-

mand for organic dairy and meat. This development has continued

with campaigns and programs such as the launch of a $13 million

Land Stewardship by Horizon Organic, the nation’s largest USDA

certified organic dairy producer. Horizon Organic provides financial,

educational and technical support to approximately 300 certified or-

ganic family dairy farms who supply around 75% of the company’s

organic milk. Horizon also supports another 130 dairy farmers who

are in transition to organic management. Organic Valley Family of

Farms launched their own co-op “Generation Organic”. Within three

years, Organic Valley doubled the number of farmers joining them. In

2005 their co-op counted 723 farmers in 22 states. Another alliance

formed between Stonyfield Farm in Londonderry, New Hampshire

and the University of New Hampshire, which granted a $200,000

leadership gift to build an organic dairy farm for education and re-

search. This research farm is the first such establishment and is

scheduled to produce certified organic milk by the end of 2006.

With a growing number of consumers focusing on their well-being,

more retail channels are concentrating on this line of business and

are introducing a substantial assortment of organic products under

their private label. Small-chain and independent grocers as well as

conventional food stores like Albertson’s, Ahold, Food Lion and

Kroger all stock on average up to 20% in organic items. To profit

from the boom in organics, Safeway, the nation’s third largest super-

By Frank Ustar and Claudine M. Haeni, Swiss Business Hub USA

6.1. Overview.

The interest in organic and natural foods has turned a once minor

market niche into a booming double-digit growth sector with aggre-

gate sales of $45.8 billion in 2004 (includes foods, products, supple-

ments), a 6.9% increase over the preceding year. Organic foods and

beverages alone reached an estimated $14.5 billion in sales in 2005

and are expected to climb to $16 billion by end 2006. The forecast

for annual growth through 2008 is set at around 18.4% according

to the Organic Trade Association. It should be noted that organic

standards in the U.S. are different from Swiss standards. A product

may, therefore, qualify as organic in Switzerland but not in the U.S.

and vice versa.

Organic and natural foods are key elements of a trend which may be

called whole health solutions. At this point in time, they claim approxi-

mately 2.5% of the nation’s aggregate food and beverage sales. They

are finding their way into mainstream retailing and onto the menus of

restaurants, university and school cafeterias, and increasingly in the

cafeterias of hospitals and other institutions.

The recurrence of zoonotic diseases has resulted in rising concerns

among consumers and interest groups on food safety. Additionally,

the indiscriminate use of pesticides, insecticides, antibiotics in live-

stock and genetically modified crops has been fueling a strong inte-

rest for “better-for-you” foods to the point where demand for organic

supplies is starting to outpace supply and the need and possibilities

of locating and using foreign suppliers has become reality. This situ-

ation offers a window of opportunity for Swiss food manufacturers.

Today’s chemical-intensive farming faces increased opposition.

Alliances among consumers, food producers, business communities

and government are steadily forming and help organic and sustai-

6. Natural and Organic Foods.

2000 2001 2002 2003 2004 2005Total Food Sales ($ Million) 498,379 521,831 538,033 554,830 572,727 595,600Organic Food Sales ($ Million) 6,104 7,359 8,624 10,381 12,200 14,500Organic Food Penetration (%) 1.2 1.4 1.6 1.9 2 2.4Organic Food Growth (%) 21 20.6 17.2 20.4 17.5 18.9

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.)


market chain, took one step further in 2005 by launching its own pri-

vate label brand “O Organics”. SuperValu Inc., which announced its

acquisition of Albertson’s to become the nation’s second largest su-

permarket chain introduced Nature’s Best with 50 organic products

and plans to add 100 more organic products under private label by

the end of June 2006. SuperValu Inc. also established a natural food

line store under the name Sunflower Market, a more economical al-

ternative to supernatural food stores Whole Foods and Wild Oats.

The first Sunflower store opened in Indianapolis in January of 2006.

More recently, Wal-Mart Stores Inc. affirmed its decision to join the

organic food business movement by introducing organic foods under

their Member’s Mark line.

Among food manufacturers, some of the biggest companies have es-

tablished their own extensions into organics by acquiring well-known

organic brands over the past five years.

Food Manufacturer Organic Brand Acquired

Coca-Cola Odwalla

General Mills Muir Glen, Cascadian Farm

Kraft Boca Foods, Back to Nature

Kellogg Kashi, Morningstar Farms/Natural Touch

Dean Foods Horizon Organics

H.J. Heinz Co. Hain Celestial Group Inc. (Partial Equity/Strategic Alliance)

Cadbury & Schweppes Green & Black’s

Groupe Danone (France) Stonyfield Farm (Partial Equity)

Figure 21: Corporate Ownership of Organic Food Companies

(Canadian Organic Growers and the Certified Organic Association of

BC, 2006)

With corporate ownership expanding and organics moving main-

stream, consumers who up to this point refrained from purchasing

organic products due to pricing and scarcity will have a better op-

portunity of choice. At the same time, however, interest groups and

consumers alike are voicing growing concerns about large scale or-

ganics. Certified organic labeling through the USDA has become the

center of hot debate, as have Federal organic rules, which require

only “access to pasture” for livestock, but not actual grazing time

on the pastures. A survey conducted by the Center for Food Safety,

an advocacy group based in San Francisco and Washington, D.C.,

revealed that consumers do care about how animals are treated and

how organic products are produced and where they originate. As a

consequence the USDA is considering tightening the rules to ensure

high standards for certified organic food.

Food Processor Organic Brand EstablishedUnilever Ben & Jerry’s Organic, Ragu OrganicGeneral Mills Gold Medal Organic, Sunrise OrganicH.J. Heinz Co. Heinz OrganicCadbury Schweppes Nantucket Nectars OrganicDole Dole OrganicPepsiCo Tostito’s OrganicConAgra Hunt’s Organic,

Orville Redenbacher’s OrganicCampbell Soup Campbell’s OrganicTyson Nature’s Farm

Figure 22: A fair Number of Food Manufacturers have created their

own Organic Brands (Source: Canadian Organic Growers and the

Certified Organic Association of BC, 2006)

6.2. Definition of Organic.In 2002 the U.S. Department of Agriculture established the National

Organic Program (NOP). With NOP, strict standards for the produc-

tion and sale of organic foods were implemented. Despite growing

demand for natural and organic food, confusion prevails about the

definition of organic, natural, and functional foods and nutraceuticals,

as consumers call for exact clarification and education.

Organic refers not only to the food itself but also to how it was pro-

duced. According to the NOP, foods that fall under the Organic

Standard must be grown and processed using organic farming me-

thods that recycle resources and promote biodiversity. Crops must

be grown without synthetic pesticides, bioengineered genes or pe-

troleum- and sewage sludge-based fertilizer. Organic livestock must

have access to the outdoors and be given no antibiotic or growth

hormones. Such foods may not be irradiated.

The term Natural applies to all foods (except meat and poultry) that

are minimally processed and free of synthetic preservatives, artifi-

cial sweeteners, colors, flavors and other artificial additives, growth

hormones, antibiotics, hydrogenated oils, stabilizers and emulsifiers.

There are no specific governmental regulations beyond the health

codes that apply to all foods except for “truth in labeling.” By this

definition all organic foods are natural but not all natural foods are

organic.

Organic Labeling and Certification3

Organic production and handling operations are required to be certi-

fied by a third party accredited by the USDA. All producers are sub-

ject to these guidelines, except producers who sell less than $5,000

annually in organic products. However, these small companies do

have to follow NOP’s strict standards and confirm that they indeed do

so through documentation.

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) dis-

play the USDA Organic seals.

• “Made with Organic Ingredients” contains 70-95% organic ingre-

dients 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 cer-

tifying agency.

• On-site inspection must be permitted.

• Proper records must be maintained for at least five years and ins-

pection 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 re-

cognizing foreign certification agencies. Most countries do not have

such an agreement in place.

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 envi-

ronment. 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 America’s 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 or-

ganic 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-

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 Age Group PercentGeneration Y 18 -27 51Generation X 28 – 41 55Younger Baby Boomers 42 – 51 57Older Baby Boomers 52 – 60 50Matures 61+ 46

Figure 23: Regular Buyers of Organic Food (Source: Shopping for

Health 2005 Survey conducted by the Food Marketing Institute,

Washington, D.C.

Segment PercentFruit / Vegetables 37Cereals, Breads, Pastas 25Milk, Yogurt / Other Dairy Products 23Packaged Foods – Snacks, Beverages, Frozen Food 21Eggs 18Meats and Poultry 17Soups / Sauces 12

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 special-

ty stores Whole Foods and Wild Oats that dominate the retail market.

3 Please refer to Chapter 10.4 “Organic Claims”


6.4. Trends.“Better For You Foods” have become a preferred choice. A fair number

of Americans are changing their spending patterns, placing a higher

value on food expenditures and spending less in other areas. With

this shift in spending pattern, a European-style attitude about food is

slowly evolving. The concern about a healthy lifestyle is also no longer

a preoccupation of the baby boomer generation. Generations Y and

X are quickly adopting a behavioural pattern that fosters good eating

habits and allows for preventative measures that address disease and

the decline in health in their golden years. They would rather spend

more now and be healthier later.

Pregnancy and parenthood often serve as a catalyst for consumers to

switch to organic products. Numerous reports published by various

organizations over the past decade have fostered a growing concern

about the usage of chemicals in the food chain, especially the appli

cation of pesticides and their effect on a child’s body. Demand for or-

ganic baby food and products for children of all ages is on the rise.

Baby boomers are perpetually searching for antiaging foods and

products. Yogurt is a product that has enjoyed a stupendous de-

mand. The yogurt’s probiotic bacteria helps the digestive system and

its prebiotic counterpart helps the body absorb much needed calci-

um which aids in the prevention of osteporosis. Several brands have

launched new products. They range from Stonyfield Farm’s new na-

turally sweetened light yogurt and the new YoBaby Plus Fruit & Cereal

with DHA yogurt all the way to Weight Watcher’ line of yogurts and

smoothies (offered in nine flavors).

As with traditional foods, consumers of organics are looking for easy-

to-prepare and convenience products. Popular trends are overstuf-

fed sandwiches, car-friendly cups and drinkable lunches, and one-

dish dining. One in ten meals now is eaten “on the go”, and one

quarter of all restaurants offer take-out food which can be eaten in the

car. As a consequence, organic food suppliers need to refocus and

consider convenience without jeopardizing the organic ideal.

For Whole Foods, the largest national specialty chain of organic

foods with 184 retail stores, perishable products make up 67% of

total sales, up from 57% ten years ago. Other categories carried in-

clude seafood, grocery, meat and poultry, baked goods, prepared

foods, cheese, organic chocolates, beer, organic wine, herbal teas

and more. Special items for children are also emphasized and include

organic apple sauce, peanut butter, pasta and string cheese.

6.5. PricingMass marketing of organic food has an upside for the consumer.

Across the board, from fresh produce to dairy products, beverages,

snacks, desserts and confectionery, and prepared and grain-based

foods, all organic segments experienced strong growth within the past

two years. With the obvious move to “mainstream”, pricing will become

more competitive, further influenced by store branding. Private label

products are on average 27% less expensive than national brands.

While organic foods have commanded a price premium from 35-55%

on average, the broadening interest in organic products encourages a

trend of narrowing the differential. One can generalize that price diffe-

rentials are the smallest in those areas where organic versions entered

the market early and captured the greatest share, especially in every-

day categories such as milk and dairy, produce, soymilk and coffee.

Where organic options came in at a later stage with smaller production

volume, the price differential remain higher.

Produce. Initially the price of organically grown produce was double

that of its “regular” counterpart, but a combination of increased pro-

duction of scale and the development of secondary markets has led to

more competitive pricing. Prices for apples, carrots, potatoes, onions

and bagged salads have fallen due to the economies of scale.

Coffee represents a commodity which entered the market early and

was able to be positioned as a specialty item, with organic coffee

being a subset within that category. Most specialty stores now carry

100% organic coffees.

Tea and Chocolate have been less commoditized and are more

brand oriented. Here also the brand has commanded a higher price

and the organic equivalent has followed that trend.

Soy-and Rice-based Beverages. Here the price gap between orga-

nic and conventional versions has been closing. Both the rapid growth

of production and wide availability of raw materials have contribut-

ed to the narrowing of the gap. While 10 years ago the prices may

have been double for organic versions, the differential now is closer

to 15-20%.

The joining of large manufacturers, e.g. Kellogg’s or Kraft, have also

had the effect of narrowing the price gap. The price premium of cereal

from Kellogg’s newly acquired division Sunrise dropped to 15-20%

from the over 50% it enjoyed prior to the acquisition. The same holds

for organic ketchup and other commodities produced by large food

producers that are able to take advantage of economies of scale more

so than smaller producers. Campbell Soup is marketing its organic

tomato juice, and Frito-Lay introduced a new line of organic tortilla

chips, organic salsa, potato chips. In less than one year this natural

line has grown to make up four of the top five natural organic snack

products sold in supermarkets. With many items, the price premium

has dropped to 20% or less and as production continues to grow

other products will have to follow that trend as well.

6.6. Retail Channels.With competition among different types of retail channels being the

norm today, supermarkets have been expanding their assortment of

organic products by applying a mix of conventional and organic pro-

duct displays, by moving them to the center aisles, or using the con-

cept of “store-within-store” (e.g. Nature’s Marketplace of Wegman’s).

Over the past five years sales of organic and natural foods have been

steadily increasing through all major retail channels including mass

merchandisers. Supermarkets, followed by natural food stores ac-

counted for the majority of the sales.

In 2005 the Organic Trade Association (OTA), together with Earth Day

Network (based in Washington, D.C.) and a Minneapolis based mar-

keting agency launched a nationwide educational and promotional

campaign. The first campaign took place in spring under the name

“Go Organic” and reaped great success. It was followed by a se-

cond campaign in spring of this year. Participants included 58 grocers

in 43 states who were backed by leading organic brands. Retailers

included Whole Foods, Wild Oats Market, Kroger, Giant Eagle and

H.E. Butt Grocery. Organic brands were represented by Earthbound

Farm, Hain Celestial, Horizon, Nature’s Path, and others. The 2005

campaign generated sales increases of 5% and more for participating

retailers with established organic programs and reached up to 100%

for retailers just entering this market segment. The survey done by the

Natural Marketing Institute (NMI) also showed that, as a result of the

campaign, national awareness of organics increased by 8% and more

than 60% of customers chose organics over conventional products.

Whole Foods Markets and Wild Oats Markets are the two natural

food markets that offer the largest assortment of organic specialty

foods with the highest margins. They are the preferred channels for

foreign food suppliers.

Whole Foods MarketThis chain consists of 184 stores and is represented in most states.

Second quarter 2006 financials revealed double digit sales increases

for the 10th consecutive quarter, totaling $1.3 billion. The company’s

goal is to reach $12 billion in sales by 2010. For 2006, Whole Foods

plans include the development of 78 additional stores.

Whole Foods carries primarily natural foods with a limited selection of

conventional national brands according to specific quality criteria. The

chain has developed a trend-setting policy in regard to treatment of

animals and the meat which is sold in its stores:

• No antibiotics

• Each producer must provide annually an affidavit which outlines

the raising and handling of animals including feed, facility design,

environmental conditions, employee training, medical practices

and animal welfare at the farm, in transportation and throughout

processing

• Annual inspection of each producer

• Successful completion of a third-party food safety audit of each

processing plant and a humane slaughter audit

Whole Foods offers nearly 1,000 organic products under its priva-

te label to take advantage of the still relative shortage of nationally

known organic food brands. Four are corporate brands sold in each

store nationwide. In addition, Whole Foods also offers regional and

storecentered products, specialty and organic coffees and teas are

sold through the Allegro Coffee Company subsidiary.

Marketing activities at Whole Foods are focused less on advertising

than those of conventional supermarkets, instead, word-of-mouth re-

commendations are the main vehicle by which the chain promotes

itself. In addition to national brand awareness campaigns, in-store

promotions predominate such as signage, taste fairs, classes, tours

and product samplings.

Wild Oats MarketsThis is the main competitor of Whole Foods with 113 stores nati-

onwide and sales exceeding $1 billion as per second quarter 2006

financials. The stores are organized into five geographic regions each

with its own regional director who is responsible for store operations

within his/her region. At the corporate level, there are specialists for

the different product categories of natural living, food service, pro-

duce and floral, meat/poultry/ seafood and grocery merchandising

who manage centralized buying programs and formulate store-level

merchandising.

Wild Oats Markets advertise in traditional media outlets such as radio,

newspapers, TV, outdoor and direct mail to gain new customers as

well as repeat business while promotional activities are also directed

to more targeted consumers based on demographic characteristics.

Food promotions in these major chains tend to stress the health and

wholesomeness of the product offerings and so far have failed to link

those factors with the prevailing brand image of the foreign supplier.

In-store displays tend not to feature country branding but highlight the

country of origin only as a secondary factor. Successfully linking coun-

try brand image with the wholesomeness of its organic foods would

appear to be a strategy that foreign suppliers and their promotion

organizations should consider prior to entering the U.S. market and

to choosing the large natural food chains as their retail sales vehicle.


6.7. Distribution and Purchasing.

The prevailing distribution channels for organic foods are

• Natural food distributors

• Specialty food distributors

• Grocery distributors

• Produce distributors

All of the above handle natural and organic foods but only the first

category of distributor handles such items exclusively.

Natural foods distributors offer the best opportunities and pro-

grams for producers of natural and organic foods. They coordinate

marketing programs, deliver products, provide information on retail

purchasing policy and merchandising, but most importantly they

purchase the products from the manufacturer and, therefore, have

the responsibility for payment of invoices. This relieves the manufac-

turer from handling multiple accounts receivable including the verifi-

cation of credit or assuming the risk for various retailers. Such distri-

butors operate on margins of between 28% and 35%.

The two largest natural food distributors are United Natural Foods

and Tree of Life. Both Whole Foods and Wild Oats Markets have

been using United Natural Foods as their primary distributor. United

Natural Foods also operates Hershey Import Company as a subsidiary.

The majority of items carried by Tree of Life consist of nationally

recognized brands such as Horizon Organic, Hain Pure Food, Annie’s

Homegrown, Blue Diamond, Manischewitz, Kraft, McCormick,

Naturade, Nestle and others.

Whole Foods does most of its purchasing now on a regional and

national level so as to enable the chain to negotiate better discounts

with producers and distributors. Local store buyers tend to focus on

local products and the proper product mix necessary to maintain a

neighborhood feel for the stores. This chain owns two produce pro-

curement centers which facilitate the procurement and distribution

of the produce, three seafood processing and distribution facilities

as well as a specialty coffee roaster and distributor. Products are ty-

pically procured through a combination of specialty wholesalers and

direct distributors.

Increasingly, the two large national distributors manage a complete

product category as well as the product mix within each category as

opposed to the more traditional approach of the retail store tracking

the sales of each item and adjusting the product mix accordingly. The

distributor tries to optimize the product category and intra-category

mix at both its own facilities level and those of the retail store.

By Frank Ustar and Claudine M. Haeni, Swiss Business Hub USA

7.1. Overview.

Among the cultures in the Orient, food has been associated with pre-

ventive and therapeutic benefits for centuries. Chinese medicine has

documented claims of health benefiting ingredients in food that date

back as far as 1000 B.C. Over time, Western cultures have begun to

recognize and accept the view that the intake of certain food ingre-

dients is health promoting. Moreover, a rise in serious health issues

among the general population and health care costs threatening to

spin out of control have certainly helped to influence this redirection

in thinking. Demographics, broader knowledge in nutrition and a

change in attitude in general towards food have also modified con-

sumer demand. In response, food and drug companies are using the

results from scientific research and technological advances to their

benefit in developing and bringing new products offering medicinal

value to market.

This market, called functional foods, has been experiencing rapid

growth. Business Communications Company, Inc. a research firm

forecasts continued growth at an average annual growth rate of 14%

until 2010. The U.S. market is estimated to reach around $37.7 billion

by 2007 which represents a market share of more than 5% of total

food sales. It should be noted that the lack of a formal definition for

functional foods makes it difficult to estimate the true size of this mar-

ket segment and that figures may vary by information sources.

Natural Food Merchandiser mentioned the top three functional food

categories in the U.S. in 2005 as follows:

2005Soft Drinks (Bottled Water, Soda, Gatorade) $5.3Dry Breakfast Foods $4.2Snacks and Nutrition Bars $2.3

Figure 25: Top Three Functional Food Categories in the U.S. in 2005

in U.S. Dollar Billion (Source: Natural Food Merchandiser July 2005)

7.2. Definition and Regulations.

Functional Foods are foods or dietary components that may provi-

de a health benefit beyond basic nutrition. They usually exceed the

minimum daily nutritional requirements of an individual. They can be

a conventional whole food in its natural state or a novel food where

a specific ingredient was increased, or in some instances decrea-

7. The Functional Food Sector.sed, or removed. Examples of whole foods are fruits and vegetables

and grains which are naturally high in content of phytochemicals and

common examples of fortified or enhanced foods include

• Cereal and bread with added isoflavones

• Fruit juices with herbs that have alleged immuno-enhancing pro-

perties such as Echinacea

• Margarine with added phytosterols to reduce cholesterol

• Salad dressing with omega-3 polyunsaturated fatty acids.

The eating habits of two thirds of American consumers are affected

by concerns about weight as well as health issues foremost heart di-

sease, diabetes and osteoporosis. Fortified products promote health

benefits such as “Calcium helps build strong bones”. They do not

claim to prevent disease.

The term “functional food” is often used synonymously with the term

nutraceutical. For the purposes of this report, both shall be used here

to mean the same, although nutraceuticals are more correctly defined

as parts isolated or purified from foods and sold in medicinal forms

(powders, tablets or capsules). Examples are seaweed as a purified

marine source or ginseng powder derived from pressed plants. While

the U.S. Food and Drug Administration (FDA) has defined any spe-

cific food used for the prevention or treatment of disease as drugs,

the 1999 Nutraceutical Research and Education Act has defined nu-

traceuticals as a separate regulatory category which permits health

claims previously reserved for drugs only. As a rule, however, no

claims may be made without adequate scientific evidence.

The most well established and scientifically sound approach to la-

beling and marketing a functional food is through the use of FDA

approved health claims delineated by law under the Nutrition Labeling

and Education Act (NLEA) of 1990. The health claims authorized un-

der the NLEA are statements that describe a relationship between a

food substance and a disease or other health-related condition, i.e. a

“risk reduction” relationship. The law mandates that a health claim be

authorized in the labeling of FDA regulated products only if significant

scientific agreement among qualified experts exists about the validity

of the relationship described in that claim. Under the NLEA, compa-

nies petition the FDA to consider new health claims. Thirteen NLEA

health claims authorized by the FDA currently exist. Substantial clini-

cal efficacy and documentation are an important part of a company

petition submission to the FDA.

A provision in the FDA Modernization Act of 1997 (FDAMA) provi-

des an additional expedited process for manufacturers to use health

Specialty food distributors do not focus on natural and organic

foods but specialize in foods like foreign goods, ethnic foods, hard-

to-find gourmet items, kosher and various organic foods that may not

be available in the major supermarkets. The margin of these distribu-

tors averages about 32%.

6.8. The Foodservice Segment.

The food service segment currently accounts for approximately 4% of

total organic sales. Predictions call for an annual growth rate of 20%.

Organic menu offerings enjoyed an increase of 9% in 2005 and the

use of organic ingredients increased by 12% with meat, poultry, salad

greens, vegetables, legumes and breads being the most popular.

A survey conducted by Restaurants & Institutions in 2005 re-

vealed that 50% of the establishments have registered an increase in

orders for organic menu items within the past two years. In the fine

dining segment, almost two thirds offer organic menus. A fair number

of these restaurants make their purchases through local farmers and

co-ops to obtain the highest quality of products possible and simulta-

neously support local organic produce, dairy and meat farmers. The

restaurants’ patrons are willing to pay a premium for organic menus

and enjoy the frequent changes of the menus that come with the

seasonal availability of the various products.

In the institutional food service segment a certain number of opera-

tors for universities and colleges aim at offering 100 percent orga-

nic menus. Restaurant chains like O’Naturals and Panera have been

following suit, but their menu schedules are challenged by frequent

shortages of supplies.

According to a survey conducted by Natural Food Network the gene-

ral industry consensus is that organic products are going to be sold

everywhere within the next two decades and that the average U.S.

household will not only buy organic food, but also reach for organic/

natural personal care products, household cleaning agents and or-

ganic clothing.


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 pro-

tection 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 sur-

vey 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 ACNielsen’s 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. % Global Average

Whole Grain, high Fiber Products 50 40Cholesterol reducing Oils and Margarines 36 31Fruit Juices with added Supplements/Vitamins

29 29

Yogurts with Acidophilus Cultures/Probiotics

21 25

Milk with added Supplements/Vitamins 25 18Bread with added Supplements/Vitamins 24 17Fermented Drinks containing good Bacteria

4 16

Soy Milk 8 14Cereal with added Folate 14 11

Figure 26: Percentage of Consumers who regularly buy Functional

Foods; by Key Category (Source: ACNielsen)

Disease-specific foodsAccording 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.

Since heart disease and maintenance of proper cholesterol level

rank among the most pressing health concerns in the U.S., choles-

terol lowering foods and beverages are appearing on retail shelves.

Coca Cola’s Heart Smart juice contains plant sterols while PepsiCo’s

Tropicana Essentials Healthy Heart orange juice is based on a nu-

trient 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 Anchor’s Heart

Wise Omega-3 milk. Other heart-healthy drinks include White Wave

Silk’s Omega-3 fortified cholesterol-lowering soy milk. Healthy oils are

marketed by Heart Beat Foods’ Smart Balance Natural blend of ca-

nola, soy and olive oil fortified with vitamin E and Omega-3.

Calpis Company’s AmealPeptide™, designed to lower blood pres-

sure, 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 appe-

tite 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 remo-

ve 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.

Significance of IngredientsConsumers are increasingly interested in learning about health-

enhancing 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 fat-

ty 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.

Additional functional food elements are lutein and zeaxanthan offe-

red by Roche, glucosamine and condroitin in ready-to-drink teas by

various suppliers and various teas fortified with peppermint, licorice,

or chamomile.

Functional Ingredients in DrinksSince 2003 Americans may have bought more bottled water than

beer or coffee. An especially fast-growing category of water is “ener-

gy water”, such as Hansen’s Energy Water containing ginseng, tau-

rine, vitamin B, electrolytes and glucose are a fast-growing catego-

ry 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 PercentJuice fortified with Vitamins & Minerals 56Water fortified with Vitamins & Minerals 39Flavored Water 36Tea fortified with Herbals 34Tea fortified with Vitamins & Minerals 32Juice fortified with Herbals 27Drinkable Yogurt 26Bottles/Canned Smoothies 26Soy Beverages 25Water fortified with Herbals 22Organic Beverages of any type 21

Figure 27: Consumer Preferences for various Beverages

(Source: The Hartmann Group 2003)

Figure 28: Top Energy Drinks by Brand (52

Weeks October 2, 2005) (Source: IRI,

Inc. 2006)

Energy DrinksDespite strong gains for the past several years, the energy drinks

category shows no signs of slowing down. Targeted marketing pri-

marily 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 merchan-

dise outlets jumped a whopping 69.4% in 2005, while sales of non-

aseptic 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 populati-

on catching the attention of energy drink marketers is women. Coca

Cola’s sugar-free Tab Energy will be offered in midsized 10.5 ounce

cans, available both individually and in four-packs.

Coca Cola’s flagship energy drink Full Throttle, which has been on the

market less than one year but already holds the category’s number

7 spot, is also expanding its reach among women as well as calorie-

conscious 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

Brand Dollar Sales (thousands)

% Change to prior Year

Market Share

% Change to prior Year

Red Bull 213,249 53.4 54.4 (5.7)Rockstar 37,391 89.5 9.5 1.0Monster Energy 36,999 192.6 9.4 4.0Sobe Adrenaline Rush 20,298 40 5.2 (1.1)AMP 18,851 40.4 4.8 (1.0)SoBe No Fear 17,347 93.8 4.4 0.6Full Throttle 16,956 N/A 4.3 4.3Rip It 2,652 860.8 0.7 0.6Hansen’s Lost Energy 2’454 156.9 0.6 0.2SoBe Lean 2,383 N/A 0.6 0.6


energy brands in the U.S.

Natural energy sodas are rapidly growing in popularity as well.

Examples are Blue Sky’s Blue Energy Soda fortified with ginseng,

caffeine, guarana and all-natural colors and flavorings. American

National’s Ginseng Rush, also a sparkling soda, is geared especially

to athletes. Fitonat USA’s Phosphor is an instant energy drink pa-

ckaged 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:

2001 2002 2007 % IncreaseChilled Juices 2,800 3,028 4,200 50.0Sports Drinks 1,900 2,000 2,600 36.8New Age Beverages 3,300 3,500 4,200 27.3Energy Drinks 168 200 497 295.8Total 8,168 8,728 11,497 40.8

Figure 29: U.S. Dollar (thousands) Sales Projections of Functional

Beverages (Source: Business Communications Company)

Power BarsPower 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 produ-

cers; demand for soy as a source of protein has surged. Cereal and

snack/power bars have enjoyed overall strong growth, and a continu-

ed 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 Probar’s High Performance

Whole Food nutrition bar is made from 15 blended natural foods.

PowerBar’s ProteinPlus Carb Select and Promax’s CarbConscious

bars are fast sellers in the low-carb high-energy category. Soy pro-

tein-based bars are entering the market targeting teens and young

adults.

7.4. Price Trends.

The cost to develop, produce, test and register functional food in-

gredients 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

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 Kellogg’s 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 na-

tural up to that point. This helped significantly to reduce prices overall.

Similar considerations apply to the functional food segment.

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 in-

gredients, confidence in the company producing the product and its

health claims for the product are important factors in gaining consu-

mer acceptance. In cases where the producer’s 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 ex-

ample. 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 infec-

tion. 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.

7.6. Retail Channels.

Sales of functional foods were originally confined to health food

stores, but even supermarkets are increasingly opening shelf space

for “natural foods” which encompass organic and functional foods.

Usually those shelves carry the lesser-known brand products while

big name producers such as Kellogg’s reserve space in their allotted

area in the store.

Whole Foods and Wild Oats specialty chains tend to not differenti-

ate functional foods from other organic or natural items within the

store. These chains are the main outlets although there are a variety

of smaller independent health food stores whose owners pride them-

selves on individual customer service and consulting. Consequently,

the pricing structure at these stores is higher than that of the chains.

The large vitamin/supplements chains such as General Nutrition

Centers (GNC) have begun to add fortified drinks, power bars and

other ready to eat or drink items. We may see more being added if

the trend to convenient small portion drinks or foods takes hold. GNC

also offers individualized consulting.

The consumer’s perception that his/her needs are unique requiring

some advice from the retailer is likely to sustain the niche covered

by smaller health food stores and may prevent functional foods from

becoming a significant factor in the supermarket assortment. On the

other hand, low-carb foods are likely to be available in most super-

markets since this has become a mass phenomenon on which the

large chains as well as the big food producers can capitalize.

7.7. Distribution.

The wholesale distribution of functional foods is not substantially

different from that of other organic foods as the retail channels are

largely identical. Large chains such as GNC have their own regional

warehouses to which distributors deliver. The role of food brokers is

of some importance due to the many small health food stores which

rely on new product introductions by brokers.


market entry strategy, assist in designing packaging and labeling, ad-

vise 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.

8.3. The Role of Food Brokers.

The food broker functions as a lynchpin for the entire distribution net-

work. 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 penet-

ration. 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.

Broker - ManufacturerAs 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 mar-

keting 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 manufactu-

rer in formulating a strategy for launching a new product or expanding

the principal’s market share.

Broker - DistributorThe broker usually makes product presentations to the distributor. He

negotiates the terms of sale subject to the final approval of his prin-

cipal. Arranging promotional opportunities with the retailer makes up

a significant part of the broker’s activities, and may involve merchan-

dising flyers, newspaper and direct mailer inserts as well as demons-

tration 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 – RetailerThe broker takes an active role in the merchandising at the retail level

including product display, shelf space arrangements including reset-

ting store shelves, marketing, taste testing and demonstrations. The

most important function is to introduce new products to the retailer

8. Food Distribution.By Frank Ustar and Ally Gunduz, Swiss Business Hub USA

8.1. Overview.Choosing the right distributor is one of the critical decisions that an

exporter has to make and that decision encompasses the role that

the distributor has to play, the know-how in the targeted product

segment, the types of retailers on which the distributor concentrates

his efforts, and the marketing assistance that he can provide to the

producer.

Several distribution networks exist that assist the food suppliers in

reaching the end consumer. Some channels operate on a national,

others on a regional basis. The type of channel that is optimal for a

particular supplier depends on the type of product and the targeted

retail outlets. In certain markets such as that for organic foods, a

national distributor may be the best vehicle by which to reach the na-

tionally operating organic food chains. In the case of some specialty

foods, however, regional specialty distributors may be the preferred

choice for reaching regional high-end markets.

The U.S. food distribution structure is complex due to the geographi-

cal size of the market and the great variety of retail outlets available to

the consumer.

For a Swiss food manufacturer, the importer is the starting point in the

distribution chain. He has both the knowledge of the needs in the mar-

ket and the experience to handle the regulatory and logistical require-

ments that underline the import process. This is especially important in

light of the new bioterrorism regulations of the U.S. government which

place an additional burden on both the exporter and the importer.

Generally speaking there are three types of middlemen in the food

industry:

Merchant wholesalers typically buy and resell from a variety of sup-

pliers, consolidate the items and deliver them to the retailers, food ser-

vice establishments, governmental entities, schools. They may also

purchase grocery items from or deliver to other wholesalers. Merchant

wholesalers account for over one half (56%) of all grocery items and

related product sales.

Manufacturer’s sales branches account for 25% of all grocery

items distributed. Branches are maintained by manufacturers in diffe-

rent parts of the country or within a region depending upon the geo-

graphical scope of sales. Branches carry inventory while sales offices

do not.

Agents and brokers are responsible for 19% of all grocery item and

related product sales. They buy and sell goods owned by others on

commission. Brokers serve an important role in the distribution chain

and act as lynchpin of the entire system. The broker functions as an

agent of the manufacturer and establishes close relations with both

distributors and retailers for the benefit of the manufacturer which he

represents. His role is vital for the functioning of the system and will

be reviewed in more detail later.

Merchant wholesalers are also classified according to the type of pro-

ducts that they handle.

Specialty distributors tend to concentrate their activities on higher-

priced foods or items which are targeted to specific consumer groups

in more upscale retail outlets. General-line distributors sell a broad

range of dry groceries, perishable foods and non-food products sold

in grocery stores.

Brokers serve an important role in the distribution chain and act as

lynchpin of the entire system. The broker functions as an agent of the

manufacturer and establishes close relations with both distributors

and retailers for the benefit of the manufacturer which he represents.

His role is vital for the functioning of the system and will be reviewed

in more detail later.

8.2. The Role of the Importer.

Importers in most cases also function as distributors so that there is

usually no clear distinction between the two functions. Importers are

more readily distinguishable by the breadth of their product range.

Large importers handle a broad assortment of items and tend to be

very selective in the products they carry. The logistics of moving the

products through the distribution channels in the most efficient man-

ner is the main business objective of these types of firms.

Small distributors on the other hand tend to specialize in handling

more limited types of products and moving them through more spe-

cialized channels all the way to specialty retail stores. In many cases

they do not require a minimum import volume. Some focus on pro-

ducts from a limited number of countries, others on a narrow range of

items such as pastries, chocolate or frozen foods.

For a foreign exporter, the latter usually is the preferred choice of

partner since especially small-to-medium size exporters find it dif-

ficult to get consideration from large importers Smaller specialty

importers are more likely to work with the exporter in establishing a

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.

8.4. The Specialty Food Distribution System.

Service % of RespondentsCategory Experience 82Ordering 64Guaranteed Sales 36In-Store Promotions 36Implementation of Merchandising Programs

27

Split Case Buying 74Individual Store Marketing 36Variety Image Enhancement 36Controlling Inventory Costs 27

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 dis-

tribution costs to estimate the costs of distributing specialty items.

However, these evaluative techniques don’t always tell the whole

story and can lead to “high-cost” decisions. Specialty food distribu-

tors 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 relation-

ship 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


8.7. Food Service Distribution.

In the foodservice industry especially chain restaurants are serviced

by large distributors such as Sysco Corporation, the largest U.S.

distributor of food products for this industry segment with a market

share of about 14%.

The food service or food-prepared-away-from-home, market repre-

sents approximately one half of total food purchases made at the

consumer level. This share has grown from about 37% in 1972, since

food purchases in the foodservice industry have grown more rapidly

than food purchases in the retail grocery industry over most of that

time period. Factors influencing this trend include increases in dual-

worker and single-parent families; busier lifestyles; the general aging

of the population; growing affluence; and the increasing demand for

the variety, convenience and entertainment afforded by the proliferati-

on of restaurants and other foodservice operations.

8.8. The National Distributors.

Products distributed by Sysco Corporation include a full line of frozen

foods, such as meats, fully prepared entrees, fruits, vegetables and des-

serts, and a full line of canned and dry foods, fresh meats, imported spe-

cialties and fresh produce. The company also supplies a wide variety of

non-food items, including paper products such as disposable napkins,

plates and cups; tableware such as china and silverware, restaurant and

kitchen equipment and cleaning supplies.

Sysco‘s operating companies distribute both nationally branded mer-

chandise and products packaged under Sysco‘s private brands.

As a rule, the prompt and accurate delivery of orders, close contact with

customers and the ability to provide a full array of products and servi-

ces to assist customers in the foodservice operations are of primary im-

portance in the marketing and distribution of products to the traditional

customer segment. Sysco‘s operating companies offer daily delivery to

certain locations and have the capability of delivering special orders on

short notice. Sysco‘s operating companies also provide ancillary services

relating to foodservice distribution such as providing customers with pro-

duct usage reports and other data, menu planning advice, food safety

training and assistance in inventory control as well as access to various

third-party services.

Sysco estimates that it purchases from thousands of independent

sources, none of which individually accounts for more than 10% of the

company‘s purchases. These suppliers consist generally of large corpora-

tions selling brand name and private label merchandise and independent

private label processors and packers. Purchasing is usually carried out

Sales to retail stores are showing a declining tendency which may be

due to increasing integration of wholesale functions by large retailers,

especially the supercenters such as Wal-Mart and Costco.

Distribution to retail food stores may be categorized as merchant

wholesaling (Supervalu, Fleming, Nash Finch), direct-store delivery

and integrated retail-wholesale. Especially the latter type is beco-

ming more prevalent with large retailers such as Kroger, Albertson,

Safeway, Ahold, and the supercenters noted above which have the

product delivered directly to their distribution centers. Nearly 34% of

all food distribution centers are operated by such integrated retail-

wholesale establishments. This arrangement reduces both labor and

operating costs.

While integrated retail-wholesale operations may show improved

operating efficiencies, traditional independent distributors, usually

classified as specialty distributors, remain significant players accoun-

ting for 38% of total distribution. They service a broad spectrum of

stores and offer excellent opportunities for quality natural, organic

and imported foods which may not be available in the traditional su-

permarkets. Upscale regional food chains as well as local specialty

stores are the primary target markets for this type of distributor.

8.6. Some Larger National Distributors.

The larger national distributors do not consider new-product intro-

duction as one of their primary functions which makes them an un-

desirable entry point to the U.S. market for foreign suppliers, espe-

cially smaller suppliers. Their advantage vis-a-vis their competitors

is their ability to continually improve operating results by maximizing

economies of scale in purchasing, warehousing, transportation and

general and administrative functions.

Large distributors often purchase on conditions not attractive to

smaller suppliers in terms of volume, price and return. The latter refers

to the ability of the distributor to return items to the supplier if they do

not sell within an agreed upon period of time.

On the other hand, some distributors such as United Natural Foods,

employ buyers who specialize in searching for overseas products.

These companies may also provide regional test marketing services

before committing to a national distribution strategy. This approach is

advantageous to a smaller producer because it does not require sig-

nificant resources and can provide a high level of customer feedback.

United Natural FoodsUnited Natural Foods also distributes monthly regional customer-

specific flyer programs featuring the logo of the participating 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 maximi-

zing sales and exposure.

• Provide sales and profit reports to the retailer.

• Provide central billing or store by store billing.

• Take position and maintain an inventory of products.

• Write orders in store.

• Deliver to each store.

• Provide less-than-case quantities of products, as needed.

• Stock the shelves of each store, manage in-store inventory.

• Rotate and freshen stock in the stores.

• Price the product in store for each store.

• Provide shelf tags (tags with a code and description of the product).

• Cross merchandise in several sections of the store.

• Train store personnel on the handling and selling points of products.

• Provide and place point of purchase materials in store.

• Set up and conduct in-store demonstrations and tasting.

• Create in-store programs, special events and promotions.

• Ethnic merchandising.

• Provide co-op advertising programs to share or lower the cost of

advertising.

• Remove damaged, dented, spoiled, out of code, and other pro-

ducts that can not be sold.

• Remove unsold product and provide full credit to the store.

• Ensure technology link-ups and data sharing.

• Category management of specialty food and sections (please refer

to Chapter 8.16 Category Management).

• Handling of lower volume brands.

• Third party logistics partnering.

• Set up and manage special displays, “Store-within-the-Store”

8.5. Distribution to Retail Outlets.

Wholesalers sell to the following outlets:

• Retailers 40%

• Other Wholesalers 25%

• Food Service 22%

• Exports 3%

• Government 2%

• Others 8%

with about 200 sale items offered by the retailer. Each flyer includes

detailed information on selected suppliers, recipes and product fea-

tures. Producer discounts and advertising allowances negotiated with

the distributor are thus passed through to the retailer. Partnership

programs with suppliers are another marketing tool offered by this

distributor. Other retailer-oriented promotional activities are

• In store signage and promotional material including shopping bags

and end cap displays

• Assistance with planning and setting up product displays

• Assistance with store layout

• Provide product data information such as best seller lists, store

usage reports and easy to use product catalogues

• Maintain website domain for retailers

Hain Celestial GroupHain Celestial products are sold in all 50 states and in approximately

50 countries. Certain product lines have seasonal fluctuations (e.g.,

hot tea products, baking and cereal products and soup sales are

stronger in cold months while sales of snack food products are stron-

ger in warm months).

A majority of Hain Celestial products are sold through independent

food distributors. Over half of these sales orders are received from

third party food brokers. Hain utilizes a direct sales force for sales

into natural food stores that has allowed the company reliance on

food brokers. Food brokers act as agents for Hain within designated

territories, usually on a non-exclusive basis, and receive commission

for their services. Food distributors purchase products from Hain for

resale to retailers. Because food distributors take title to the products

upon purchase, pricing decisions are under their discretion, although

Hain does participate in pricing in connection with promotional ac-

tivities. Hain’s customer base consists principally of mass-market

merchandisers, natural food distributors, supermarkets, drug store

chains, club stores and grocery wholesalers. Recently, growth of na-

tural and organic foods has shifted from the natural food channel to

the grocery channels as mainstream grocery distributors and retailers

offer these products to meet consumer demand and awareness.

Hain uses a mix of trade and consumer promotions as well as me-

dia advertising to market its products such as trade advertising and

promotion, including placement fees, cooperative ad vertising and

advertising in distribution catalogs. The company also utilizes adverti-

sing and sales promotion expenditures via national and regional con-

sumer promotion through TV and magazine advertising, coupons and

other trial use programs.

4 Specialty Food Distributor and Manufacturers Association


Co-packing is inherently a low-margin, high-volume business.

Manufacturers typically charge 5% to 15% over production costs.

Some manufacturers make no money at all, but use copacking as

a means to build their business up to capacity. These tight margins

leave little room for error.

How will the product be distributed? If it is to be shipped to a central

warehouse, what requirements will be imposed on the manufacturer?

Will the product be shipped in boxes or over wrapped trays and on

which kind of pallets? Will there be need for storage of ingredients,

supplies or finished products? Will the retailer require compliance with

quality and safety standards as certified by a third-party audit?

The services of an attorney who is well versed in such agreements

must be consulted to avoid unpleasant surprises and lay the ground-

work for a profitable partnership.

8.10. Supply Chain.

Primary functional areas targeted for IT investment include trade pro-

motions and supply chain planning, Other supply chain areas such

as manufacturing, distribution and transportation are all reported to

be high on company priority lists, according to a study conducted for

GMA by Computer Sciences Corporation (CSC).

At same time, GMA companies are making significant progress to-

ward global data synchronization, radio frequency identification (RFID)

and the electronic product code (EPC). Two-thirds of GMA member

companies report that they are actively synchronizing base item data

with trading partners. Nearly as many (64%) report that they are in the

information-gathering stage with RFID, while 38% are designing RFID

programs, and 19% are actively testing RFID. Five % report they are

piloting RFID with customers, while 2% are implementing RFID.

Priority areas in 2005 ran the gamut from demand planning and in-

ventory management to collaboration oriented IT systems such as

e-procurement (electronic procurement and PIM (product informati-

on management). Over the next couple of years more retailers will

also emphasize both demand planning and inventory management

systems. Increasingly, demand planning is being performed collabo-

ratively, too.

Food companies are using increased delivery frequencies, smaller

orders and faster order cycle times to keep costs low while meeting

their customers‘ and consumers‘ increasing demand for fresh food.

Co-Packing Contract ConsiderationsMany factors need to be considered when signing a contract with

a co-packer. For example, projected product volumes will influence

how good a match a foreign producer and a U.S. manufacturer will

be. If a producer has very low volumes or a single product to sell,

many manufacturers may not want to bother. On rare occasions, co-

packers turn away large volumes that would cause them to exceed

their capacity or make them too dependent on one customer.

The manufacturer‘s equipment needs to be compatible with the pro-

posed foreign products, or new equipment will have to be purchased.

Who pays for and owns the equipment depends on the situation.

Ingredient-management practices also need to be specified. Some

foreign producers choose to closely control their ingredients by

purchasing and managing their inventories directly. Others allow the

co-packer‘s purchasing agent to handle this responsibility. Depending

on the wishes of the foreign producer, a manufacturer may use the

ingredients originally specified, or substitute in-house ingredients to

streamline inventories.

Manufacturers offer varying levels of assistance to those who want

to put a formula into production. Some co-packers simply blend and

package products, and have no technical department at all, which re-

quires the foreign producer to stay abreast of all technical matters. In

other cases, co-packers can offer the gamut of quality assurance and

R&D services, and may even help formulate or refine the products.

It goes without saying that the co-packer and foreign producer should

have similar standards of quality and sanitation, or the relationship will

not be successful.

One of the biggest challenges for a manufacturer is taking the foreign

producer’s existing formula and adapting it for in-house equipment.

Oftentimes, formulas are developed on a test scale, and have never

been run at a production level; or, they may have been designed for

different equipment. Also, some products scale up more easily than

others. For example, a dry soup mix may be upsized with minimal

difficulties, whereas a formula for a beverage or a sauce may require

considerable adjustment to achieve the correct solids level.

In true co-packing arrangements the marketer will almost always set

product and ingredient specifications.

Contracts should also include detailed exit agreements that spell out

how remaining product and ingredient inventories will be handled if

the contract is terminated or a product is discontinued.

through centrally developed purchasing programs and direct purchasing

programs established by the company’s various operating companies.

While Sysco continually develops relationships with suppliers, it has no

material long-term purchase commitments with any of them.

Aramark is another foodservice distributor who provides a range

of business dining services, including on-site restaurants, catering,

convenience stores, executive dining rooms and conference center

management. In addition, Aramark provides certain of its food ser-

vice clients with facilities management services, vending and coffee

services to thousands of business and industry clients, concessions,

banquet and catering service, retail, merchandise and novelty sales,

and recreational and lodging services. Aramark is the largest supplier

of catering services to sports facilities in the U.S..

8.9. Co-Packing.

Co-packing refers to the processing of a food product by a manufacturer

other than the original processor. Examples of co-packing are outside

contracting and private label. There are several reasons why a company

would arrange to have their product produced by a second company.

They include

• space and equipment limitations

• consolidation of resources

• reduced labor and administration costs

• quality and safety assurance

Outside contracting is an arrangement between a company that is pro-

cessing a product and a second company that is already processing

a similar product or has the appropriate equipment to prepare the end

product. In this case, the original company continues to sell the product

under its own name. Sometimes the co-packer may ask for some credit

on the label such as a statement saying, „packaged by...”

There are 3 basic types of „co-packing“:

• The client uses the manufacturer’s recipe and slightly ‚tweaks‘ it to give

it a twist and to make it „proprietary“. An example would be to take a

basic mayonnaise and adding roasted garlic and cayenne and, change

the name to „ roasted garlic & pepper aioli“

• The client asks the manufacturer to develop an exclusive recipe for them.

In this case the client normally knows what he wants, he just does not

have a recipe. He may feel that both „ginger“ & „chili“ flavored products

sell well in their region and he would like private label mustard. Therefore,

the manufacturer would go to work on developing a recipe for a „chili-

ginger mustard“

• The client already has his own recipe and he would like the manufacturer to

duplicate it as closely as possible using commercially available ingredients.

Some of the latest trends in the fresh fruit supply chain:

• Increased focus on freshness. This requires that fruits, vegetables

and semi processed (ready to eat) salads must be presented to

consumers in immaculate condition while maximizing shelf life to

avoid costly waste.

• Proliferation in fruit and vegetable product variety. Along with mee-

ting increased demand for organic and imported specialty fruits

and vegetables, retailers must be able to secure high quality local

and imported products all year round. This requires wholesalers

to act as both local agent and a value added sourcing specialists.

• Increased attention to maintaining the „cold chain“.

8.11. Food Marketing.

Food marketing strategies must take into account all levels of the

supply chain, the manufacturer, the broker, distributor, retailer and

end consumer. The activities as well as materials used in the mar-

keting process must be coordinated at all these levels and provide a

consistent and coherent picture of the product to be marketed. Any

marketing program must be based first and foremost on the eating

habits of the consumer and research on consumption trends is the

critical for developing an effective marketing strategy. All other ele-

ments of the strategy such as pricing, packaging and promotion will

then need to be aligned with the results of the research.

8.12. Consumption Trends.

Convenience, freshness, cook at home are important trends

which may at times even be contradictory and present marketing

challenges to both domestic and foreign producers. Food that is easy

to prepare, comes in resalable packaging, with freshness dating, easy

to clean, easy to open and precooked are features most desired by

consumers (survey by Yankelovich, 2004).

Fresh, healthy and convenient products are likely to show then

greatest success in the marketplace such as Morey’s Marinated Asian

Sesame Ginger Shrimp, Chili Lime Tilapia and Teriyaki Salmon or

Smithfiled foods’ refrigerated Flavors’ Brand Southwestern Meatloaf

in Chipotl Sauce or Healthy Choice’ Grilled Basil and Tuscany

Chicken. Super quick foods in aseptic microwavable pouches are

being offered by major brand-name producers such as Tyson Foods

and Rice-A-Roni.


market by mass merchandisers proves that price and choice are im-

portant 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 industry’s after-tax net profit was 0.88 cents

(FMI Annual Financial Review, 2003-2004). Return on total assets, the

return generated by the firm’s asset base, was 3.20 percent in 2003

and the return on owner’s 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 spe-

cialty retailers in the organic food sector such as Whole foods and

Wild Oats or regional upscale specialty stores such as d’Agostinos

on the East Coast or Gelson’s and Bristol Farms on the West Coast.

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 co-

vering allergen labeling provide further impetus to the targeting of

foods to these consumer segments.

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 unc-

lear due to the worldwide rise in commodity prices.

Traditional retailers compete with discount superstores, club

warehouse stores, supercenters and convenience stores that incre-

asingly 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 decre-

ased 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

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. Fish-

specific condiments appear to be making strong inroads as well.

Low-fat foods across all retail channels are a major trend with man-

datory 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 whole-

grain Big G cereal, Sara Lee’s premium breads, Pepperidge Farm’s

Whole Wheat English Muffins, Brownberry’s 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 Cow’s Light and Creamy Swiss Bites fol-

low the same trend.

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

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)

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 increasin-

gly using private label not just as a way to boost margins, but also

to differentiate themselves in the market when it comes to consu-

mer 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 Joe‘s), the store‘s own brands have led to

their consumers‘ perception of a higher quality store overall. From the

manufacturer’s 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 expec-

ted to grow to $150 billion by end 2006.

Item Consumer Price Indexes Relative im-portance in %

2003 2004 2005 Forecast 2006

All foods 100.0 2.2 3.4 2.4 2.0 to 3.0Food away from home 42.7 2.1 3.0 3.1 2.5 to 3.5Food at home 57.3 2.2 3.8 1.9 2.0 to 3.0Meat, poultry, fish 14.7 4.0 7.4 2.4 0.0 to 1.0Meats 9.5 5.4 8.4 2.3 (0.5) to 0.5Beef, veal 4.6 9.0 11.6 2.6 0.0 to 1.0Pork 3.0 1.9 5.6 2.0 (2.0) to (1.0)Other meats 1.9 2.5 4.5 2.4 0.0 to 1.0Poultry 2.7 1.3 7.5 2.0 (1.0) to 0.0Fish and seafood 2.4 1.0 2.3 3.0 3.0 to 4.0Eggs 0.6 13.8 6.2 (13.7) 2.5 to 3.5Dairy products 6.1 (0.1) 7.3 1.2 0.0 to 1.0Fats and oils 1.7 1.3 6.6 (0.1) 1.5 to 2.5Fresh fruits and vegetables 7.0 2.7 3.5 3.9 4.0 to 5.0Processed fruits and vegetables 1.8 0.9 1.3 3.3 3.5 to 4.5Sugar sweets 2.2 1.9 0.7 1.2 2.5 to 3.5Cereals and bakery products 7.9 2.4 1.6 1.5 2.0 to 3.0Nonalcoholic beverages 6.5 0.4 0.4 0.4 2.0 to 3.0Other foods 8.9 1.0 0.5 0.5 2.0 to 3.0

Private Label Category Sales in US $ Share of total product

category in %

Sales in Units Average price per unit In $Sales % change over

prior yearUnit sales % change over

previous yearBeverages (carbonated) 852 -2 6 835 -3 1.02Beverages (refrig. Juice & drinks) 471 0 12 250 -1.74 1.88Candy (Chocolate) 70 32 2 36 25 1.93Candy (non-chocolate) 141 -2 6 118 2 1.19Coffee 252 19 9 77 2 3.25

Dairy (Milk) 6,504 -1.6 59 2,659 -1.5 2.45Dairy (natural cheese) 2,116 0.2 36 878 0.5 2.41Dairy (processed cheese) 426 -7 19 190 -6.5 2.24Dried Fruit 78 20 15 37 11 2.13Frozen Appetizers/Snack rolls 57 31 6 22 21 2.58Frozen Dinner/Entrees 142 8 2 50 2 2.86Frozen Pizza 188 5 7 544 2 1.79Frozen Plain Vegetables 687 3 47 541 2 1.26Frozen Seafood 637 4 39 106 4 6.04Pasta 238 4 20 271 0.9 0.88Pickels, Olives, Relish 403 -0.7 29 284 -1.2 1.42Rice 134 -4 13 92 -5 1.46Salad dressings (shelf-stable) 130 6 9 86 14 1.52Snack (Bars, granola bars) 89 28 5 43 30 2.08Snacks (nuts, seeds) 468 3 30 158 -2 2.96Snacks, salty 354 3 5 261 0 1.36


• Keep popular items from selling out;

• Reveal when products were sold and whether they were sold on or

off promotion and the profit margin on each sale;

• Improve speed-to-shelf and decrease out-of-stocks;

• Determine how product deletions affect their best customers, and

take steps to keep those customers from taking their business

elsewhere.

Although food retailers send targeted offers to individuals, they typi-

cally analyze data at an aggregate level, i.e. data from groups, not

individuals. Some stores track total purchase amounts and shopping

frequency but not individual items.

It has been estimated that a program’s first year cost can be as high

as $30 million when used by large stores with annual maintenance

and marketing costs reaching $5 million and more. Smaller operators

may be able to mitigate some of the costs by buying off-the-shelf

software. Alternatively, they can enlist an application service provider.

8.16. Category Management.

Category management as opposed to single-product management is

widely practiced by the major retailers although critics have charged

that it leads to a sameness in the product selection which can prevent

the retailer from differentiating itself from the competition. Category

management involves5.

• a joint retailer/supplier process for evaluating and managing

categories

• as separate business units

• on an item by item basis by ...

• focusing on delivering consumer value

It is driven by the retailers’ requirement to develop their categories

and satisfy customers profitably. This makes it essential for manu-

facturers to be category rather than brand focused and retailer rather

than internally focused. The aim is to grow retailers’ categories reve-

nue and profits through their brands by focusing on the consumer in

developing and monitoring targeted strategies for profitable growth.

The basic prerequisites for a category management system are

• Information and technology (the data necessary to fuel the cate-

gory management process include retailer scanning data, in-store

audits data, market data, consumer and shopper research).

• Collaborative trading partnerships

• company structure that aligns best practices across all channels

• category management benchmarks oriented toward the best

practices of the industry as a whole

Reasons for the growth in private label sales are

• increased price consciousness of the consumer

• greater push of store brands due to bigger profit margins

• less brand loyalty among younger shoppers

• increase in own manufacturing by big-box retail chains

One clear trend on the part of retailers is to move store brands in an

upscale direction. For example, the Safeway Select Line now features

1,260 items, Kroger’s Private Selection nearly 500 items, Albertson’s

launched its own brands in 2003 with 35 items and has been expan-

ding that line rapidly throughout 2004 and beyond. Such premium

store brands provide the gourmet buyer with additional choices at a

better price than company brands.

Supermarket retailers are tracking potential store-brand categories as

new opportunities and introducing products under their own banner

that threaten categories that have been dominated by other brands.

A few categories showed special strength in 2005. While private label

barely had a presence, if at all, in baby food, IRI reports that the total

category was essentially flat at $878.9 million, while private label grew

17.5% to capture $4 million in sales and about a half percent of cate-

gory share. Bottled water generated almost 12% to capture $800.4

million of sales. Private label has earned more than 20% of the bottled

water category already. The segment is likely to flourish as innovation

(flavored varieties) drive the industry. Figure 32 shows the sales and

growth rate of certain private label categories from December 2004 to

December 2005 for all supermarket, drug stores and mass merchan-

disers (except Wal-Mart).

Households with children are the most frequent buyers of private

label products followed by blue-collar households which stands to

reason due to the lower cost per item compared to national branded

items. Figure 33 gives a breakdown of the buyer categories.

Private Label Purchase % of totalHouseholds with Children 40Blue Collar Households 27Female Heads of Household (age 45-55)

23

Female Heads of Household (age 33-44)

19

Household of 5+ Members 15Low Income Household 9

Figure 33: Purchases of Private Label excluding Bread, Milk, Eggs

(Source: ACNielsen)

According to the publication Private Label, Wal-Mart’s Great Value

brand is the best selling store brand in the U.S. grocery market.

Trader Joe’s relies almost exclusively on its own store label. The top

three U.S. supermarket chains with PL brands are Kroger, Albertson’s

and Safeway. Walgreens, CVS and RiteAid are the top drugstore

chains offering private label items. Costco is a trendsetter for its “co-

branding” strategy which involves linking private label brands and

national brands.

Retailer Percent Private LabelSave-a-Lot 51Kroger 28Safeway 25CostCo 21Walgreen’s 21Wal-Mart 17Sam,’s Club 10Target 8

Figure 34: Private Label - Importance by Retailer

(Source: ACNielsen Homescan Store Brands)

8.15. Promotion.

Promotional spending is on the increase both as a percentage of

gross sales (17.3% in 2003 up from 14% in 1999) and as a percenta-

ge of total marketing spending (54% in 2003 up from 49% in 1996).

Procter & Gamble and Kraft Foods were the leaders among manufac-

turers, Wal-Mart Stores Inc. on the part of retailers.

“Slotting allowance“typically refers to a lump-sum, up-front payment

by a food manufacturer to have its products placed on supermar-

ket shelves. This payment by manufacturers to persuade channel

members to stock, display and support „new“ products may also be

spread out in a series of installments, and in some instances, manu-

facturers provide free cases of new products to help gauge consu-

mer demand. Although common, slotting fees are neither uniformly

requested nor offered.

The most common allowances are for new products - so-called new

product introduction fees. Others that are sometimes also referred to

as slotting allowances may include fees for premium product place-

ments, such as on eye-level shelves or special displays; fees to have

products remain on shelves - pay-to-stay allowances; or fees to be

paid if a product fails.

The slotting fee cost varies depending on numerous factors, such

as whether the supplier has a proven track record, whether consu-

mer testing has been carried out, whether the product is carried by

competitors in the same market, and whether the supplier has a well-

thought-out advertising program. The amount can be as small as se-

veral hundred dollars to have a product introduced in a single store to

many thousands of dollars for a chain-wide promotion.

Frozen foods, together with dry grocery, beverages, household main-

tenance products, and snacks are especially the subject of slotting

allowances. On the other hand, fresh meat and seafood, produce,

and deli were only subject to „light“ usage of slotting allowances. In

addition, direct store delivery bypassing the retailer’s warehouse may

entitle the manufacturer to a reduced or entirely waved slotting fee

as the retailer thereby avoids the cost of warehousing, distribution

and stocking. This points to the importance of close supply chain

management.

In many cases slotting allowances are commingled with other pro-

motional allowances for product displays and demonstrations, cou-

pons, introductory discounts per unit. With many retailers receipt of a

slotting fee does not guarantee any particular shelf placement except

that the product is given an opportunity to gain exposure.

The amount of slotting fee varies by region, retail type and product.

While retailers are hesitant to disclose both the existence and amount

of such fees, they can be assumed to range from a low of $50 for

fresh bakery products due in part to direct-store delivery and $10,000

per grocery item.

Loyalty ProgramsFood retailers use loyalty marketing program, also known as frequent

shopper programs, savings clubs or reward-card discounts to identify

their best customers and reward them with discounts on groceries.

About 40% of food retailers offer loyalty programs. Most of these pro-

grams are free although some retailers charge a one-time fee to be-

come a member. Retailers without such programs include supercen-

ters, warehouse clubs outlets, limited assortment and other stores,

which offer every-day low prices. Many successful programs enable

retailers to customize their offering to the interest and preferences of

individual customers.

Stores use the data gathered through these programs to

• Identify the promotions that appeal most to various customer

groups, e.g. discounts or rebates for price conscious shoppers;

convenience food and delivery services for busy shoppers;

• Reduce the shelf space devoted to slow moving items in order to

stock the products that customers prefer; 5 ACNielsen


From the standpoint of promotions, a category management per-

spective strives to achieve the following:

• attract new users to the category increasing penetration for the

category

• encourage existing users of the category to buy more and thus

increase their weight of purchase

• encourage all users to buy more often increasing their frequency

of purchase

Safeway, one of the largest grocery retail chains, provides instructions

to suppliers in its Supplier Handbook as to the process of presenting

new products to the company which make it clear that the category

managers have prime responsibility for acceptance or rejection of the

product. In order to be considered as a supplier a new applicant

must purchase the ACNielsen New Item Information Package which

allows Safeway to make decisions quickly about the product’s “fit”

with other items in the category under which it is classified based on

the Safeway Merchandising Identification Code (SMIC).

Safeway reviews the categories on a specific schedule which involves

item placement and selection. Space allocation (percent of cubic feet)

is paid for by the vendor (see slotting fees).

8.17. Food Packaging.

Retail trends indicate that perishable foods comprise over 50 per cent

of all foods and, therefore, must be packaged in either gas permea-

ble or re-closable packaging to avoid spoilage, so the food will last

from the manufacturer to the table. Even non-perishable, dry foods

need to have an extended shelf life. Retailers prefer at least a year‘s

storage on shelves to meet their requirements for non-perishable dry

food packaging.

The growth in hi-tech packaging is a significant development for the

food and drink industry. It appears that about 99.8% of all food and

beverage items are at one time encased in some sort of packaging,

and that food and beverage packaging is accountable for two-thirds

of the $120-billion U.S. packaging industry.

A relatively new concept in food packaging is active packaging. This

sector includes oxygen scavengers, moisture controllers and ethylene

absorbers to help reduce the pathogens and gases that contribute to

food spoilage. The food and drink market represented $2.4 billion of

the total $5.9 billion dollar active packaging market in 2003.

Controlled packaging includes aseptic and retort packages, modi-

fied air packaging (MAP) and biodegradable packaging. Annual sales

9. Marketing Agreements and Strategic Partnerships.By Daniel A. Wuersch, Wuersch & Gering LLP

9.1. In General.

In addition to understanding the regulations of the Food and Drug

Administration (FDA) discussed in Chapter 10 and the import regula-

tions discussed in Chapter 11, when entering the U.S. markets Swiss

food manufacturers need to consider other legal issues that can de-

termine the success of marketing food products in the U.S. and limit

the risks associated with a failure of these efforts. These issues in-

clude the risks associated with tort liability for health risks posed by

food products, commercial risks, the high cost of litigation and the

tax implications of doing business in the U.S. To reduce these risks to

a manageable level, respect for the complex legal environment and

careful planning is required.

Like Switzerland, the U.S. constitution established a federal system

in which the 50 states (and the District of Columbia) maintain consi-

derable autonomy. Certain areas of the law fall both within the scope

of authority and jurisdiction of the federal and the state governments,

including income tax laws, unfair trade laws and anti-trust laws,

trademark law. Other areas are exclusively governed by federal law

(e.g. patent or copyright law) or state law (e.g., contracts and general

tort law). Thus, 52 legal systems can govern the marketing of food

products in the U.S., each with a multitude of potentially applicable

statutes, regulations, and court decisions.

Because food products are targeted to reach a large group of con-

sumers, companies may be subjected to lawsuits in several states. If

a food product poses a health risk to consumers, a company can be

sued in a so-called class action in which a plaintiff can sue on behalf

of all members of the class of consumers harmed by the defective

product. These class actions are a powerful tool in the hands of a

lawyer who represents the class on a contingency basis. Through

the multiplication effect of the class, even relatively modest damages

inflicted on a single consumer can become a multi-million dollar pro-

blem for the manufacturer of the defective product. Recently, federal

legislation restricted the ability of lawyers to shop for a sympathetic

forum in state courts in class actions on behalf of consumers located

in different states.

9.2. Marketing Arrangements.

Swiss companies can either actively market their products in the U.S.

on their own, or through intermediaries, including agents, distributors

or resellers. These intermediaries can either be independent third par-

ties or related parties, such as joint ventures or subsidiaries. Agents

are independent contractors who solicit sales of products or services

of a domestic or foreign company for a commission, typically calcu-

lated as a percentage of gross or net sales. Distributors and resellers

purchase goods or services from a manufacturer or service provider,

and then resell them at a mark-up to other distributors, wholesalers

or retail customers.

Sometimes there are several legally significant relationships between

a manufacturer and its intermediaries. E.g., a distribution agreement

can include elements of an agency relationship for certain products,

and an agreement to provide services for the manufacturer (e.g., trai-

ning customers, or organizing promotions at trade shows or in retail

outlets).

Marketing through a U.S. Subsidiary or BranchIn certain circumstances, it can be beneficial to establish a physi-

cal presence in the U.S. to more effectively market products. Often,

this decision is made once a certain market penetration threshold

has been achieved. If a foreign company is marketing its products

through employees in the U.S., a subsidiary is generally necessary

to avoid income tax consequences for the foreign parent in the U.S.

For Swiss companies, a subsidiary in the form of a corporation, rather

than a branch (or a subsidiary in the form of a transparent entity for

tax purposes), typically is the desirable form for a physical presence in

the U.S. Otherwise, the Swiss parent company may directly become

subject to taxation in the U.S. Prior to forming a U.S. subsidiary and

structuring its relationship with the Swiss parent, the impact of rules

of international taxation contained in the Internal Revenue Code of

1986 (including the transfer pricing regime pursuant to Section 482),

and the Swiss-U.S. Income Tax Treaty of October 2, 1996 should first

be understood.

of this sector reached $13 billion last year, or approximately 17 per

cent of the entire U.S. food packaging industry. MAP/CAP packaging

is the fastest growing sector with an average annual growth rate of

13.6% over the next five years.

The reason for this seems to be that flexible packaging is 75% to 90%

lighter than rigid packaging, easier to compact, and take less room in

landfills. Aseptic juice boxes for example make up approximately 9%

of the juice market but comprise only 3% of the waste.

There has been a significant change in the canned food market. Metal

cans are declining and being outperformed by flexible packets or car-

tons, such as Saupiquet’s diced tuna in a Doypack, manufactured by

Thimonier.

A major growth sector is packaging that caters to consumers with

limited time for food preparation. One innovation on display at the

show is the Plastobreiz tray, a transparent sealable microwaveable

tray for omelet’s or fresh ready-made food.

Environmentally friendly biodegradable packaging is another growth

area, reflecting consumer and retailer awareness of the issue of waste

disposal. A large number of packaging firms are launching products

made of 100% recycled materials, and their biodegradable inks are

also increasingly evident on the market.

And finally, new packaging ideas have been developed in response

to growing food manufacturer fears about food safety and tampering.

Packaging is likely to perform a key role in establishing and maintai-

ning consumer confidence.


restricted from publishing any confidential information (e.g., recipes,

marketing plans, financial projections) or from using the confidential

information for its own purposes. To ensure the enforceability of a

confidentiality agreement, the information covered must be descri-

bed as precisely as possible and may not include non-confidential

information. Because damages resulting from the violation of a confi-

dentiality agreement are difficult to prove, confidentiality agreements

should specify that injunctive relief is available to remedy any violation

of the agreement.

Under U.S. rules of civil or criminal procedure and certain laws and

regulations, confidential information may, however, be required to be

disclosed to third parties or governmental authorities. In order to avo-

id a violation of a confidentiality agreement, confidentiality agreements

typically permit the disclosure of confidential information in these

circumstances.

Consulting AgreementsDuring the evaluation and market development phase, it may become

necessary to hire consultants in the U.S. Consultants typically perform

services for a time-based flat fee, performance based compensation

or a combination of the foregoing. Generally, the terms of consulting

agreements should permit an easy termination of the relationship and

clear milestones that define the expected results. Consultants should

be bound by a confidentiality agreement (which can either be part

of the consulting agreement or a stand-alone agreement), and the

consulting agreement should specify that any work product created

by the consultant belongs to the client. Depending on the circum-

stances, an exclusivity and possibly a non-compete clause may be

appropriate elements of a consulting agreement.

9.5. Marketing Agreements.

Purchase and Sale AgreementsAgreements for the sale or delivery of food products to U.S. resellers

or customers are generally governed by UCC Art. § 2. Therefore, limi-

tations of implied warranties must follow the UCC Art. 2 rules as men-

tioned before. UCC Art. 2 also contains a special rule, Rule § 2-207,

for “battle of the forms,” i.e., situations where the general terms of a

seller and those of a buyer contradict each other. Under the common

law “mirror image” rule, a valid contract can only be formed if offer

and acceptance are identical (i.e. the mirror image of each other).

Under the UCC rule, an acceptance which contains terms that are

different from those contained in the offer can lead to a valid contract

if the new terms do not materially alter the offer and the offer did not

expressly limit the acceptance to the terms of the offer. To avoid being

bound by unexpected terms, general terms and conditions should

9.3. Contract and Tort Issues.

Contract and Tort Law in the U.S.The law on contracts and torts is state law. Except for Louisiana, all

states and the District of Columbia follow the English common law

tradition, in which case law (court decisions), rather than statutes,

traditionally determined the law. Despite its roots in the English com-

mon law, the case law is often supplemented (but not replaced) by

statutes (e.g., New York General Obligations Law of April 23, 1963

(“GOL”); California Commercial Code, effective as of January 1, 1965;

Chapter 106 of the General Laws of Massachusetts). An important

statute, which has been adopted by all states (with certain excep-

tions and modifications) is the Uniform Commercial Code (UCC), a

uniform statute drafted by the National Conference of Commissioners

on Uniform State Laws in partnership with the American Law Institute

(see www.nccusl.org). In its Article § 2 (which was not adopted by

Louisiana), the UCC establishes the rules applicable to contracts for

the sale of goods. The U.S. is also a party to several treaties that

can apply to a contract between a Swiss and a U.S company (e.g.

the Vienna Convention on the International Sale of Goods (“CISG”) of

1980). Tort law is still mostly governed by case law.

The conflict of law rules of states determines which state law applies

to a contract or a tort matter between residents of different states

(or foreign countries). These rules generally permit the parties to a

contract to select the law that shall govern their relationship. In the

absence of a choice of law by the parties, courts will decide which law

has the “most significant relationship” with the contract in question.

In the case of a tort claim, the most significant relationship is typically

with the state in which the tort has been committed.

In a contract, the parties may also choose the courts or arbitration fo-

rum that have jurisdiction over any disputes arising in connection with

their contract. Otherwise, the jurisdiction of the various state courts

is determined by the so called “long-arm” statutes of the states, and

by the jurisdictional provisions of the Rules of Civil Procedure for the

federal courts. According to these rules, the federal courts have juris-

diction in contract disputes between a U.S. and a foreign company

if the amount in dispute exceeds $75,000. In contract disputes, al-

ternative dispute resolution (such as arbitration or mediation) is often

used to resolve contract disputes. Arbitration rules that are well es-

tablished include those of the American Arbitration Association (AAA)

and, for international contracts, the rules of the International Chamber

of Commerce (ICC).

Contractual Risk AllocationBecause there is no uniform statutory law that regulates all aspects of

contract law, and contracts are interpreted strictly based on the lan-

guage in a written agreement (parole evidence rule), American con-

tracts tend to be longer and more comprehensive than their European

counterparts. Despite the understandable desire to keep contracts

“short and simple,” Swiss companies should be aware of the risks

that can result from an incomprehensive contract with a U.S. busi-

ness partner.

Most commercial risks can be freely allocated to either party to a con-

tract. However, there are limitations. For example, common law does

not permit a party to deny responsibility for willful misconduct or gross

negligence. In addition, while liability for statutory or tort liability can

be limited vis-à-vis a contract party, these limitations are not effective

vis-à-vis third parties.

Implied Covenants and WarrantiesA contract party may not only be liable for commitments and re-

presentations expressly made in a contract, but also for implied

covenants and warranties. UCC Art. 2 in particular provides that in

every contract for the sale of goods there is an implied warranty that

title to the goods is transferred to the buyer. In a contract for the

sale of goods by a merchant, implied warranties of merchantability

and fitness for a particular purpose are deemed to be given, except

where these warranties are conspicuously disclaimed with language

prescribed in UCC Art. 2.

Tort ClaimsA tort claim can be brought against a food manufacturer if it can

be shown that a food manufacturer negligently caused damages to

resellers or consumers in the U.S. (e.g., because it permitted a food

product to be contaminated in an unsanitary environment). In addi-

tion, a tort claim can also be brought against the manufacturer of

a food product without proving negligence (strict liability) if the ma-

nufacturer brought the food product into circulation despite known

health risks and without adequate warnings (e.g., carcinogenic food

additives). Compliance with the requirements promulgated by the

FDA or the USDA does not protect a manufacturer from this type of

liability. If many consumers are (potentially) harmed, a manufacturer

may, under certain circumstances, be sued in a so called class action

by one consumer on behalf of the entire class of affected consumers.

9.4. Exploring and Evaluating Market Opportunities.Confidentiality AgreementsEntering 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

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 AgreementsAs briefly described earlier, an agent is retained to solicit offers from

U.S. buyers (or licensees) in consideration of a commission. The

amount and type of commission varies greatly, depending on the pro-

duct, the expected volume, exclusivity and other factors. When struc-

turing agency agreements, it is important to create incentives for the

agent to maximize the sales for the principal. This can be achieved by

a tiered commission-structure, based on sales volume and including

penalties for an agent’s failure to reach a minimum sales level (e.g.,

loss of exclusivity in a particular territory, reduced commissions, etc.)

Because the agency relationship may not be clear to a customer (or

the general public), the agreement should clearly define the role of the

agent and specify that the agent is not authorized to commit the prin-

cipal or make unauthorized representations on its behalf. Otherwise,

the principal could become liable for unauthorized promises or war-

ranties made by the agent to third parties. The agent, on the other

hand, risks that it will likely be first in the line of fire, if problems with

a product result in liability claims in the U.S. Agents therefore have a

legitimate interest in limiting their liability to acts for which they can

reasonably be held responsible and in securing the support of the

principal in defending such claims (including indemnification for its

costs and damages).

Distribution AgreementsThe issues arising in connection with distribution agreements are in

many respects similar to those discussed with respect to the agent.

As in an agency agreement, a distribution agreement should contain

restrictions on the representations and warranties that a distributor

is authorized to make vis-à-vis its customers. On the other hand, a

distributor will have liability concerns similar to those aforementioned.

However, distribution agreements can create additional issues under

applicable intellectual property law and federal anti-trust law. Because

a distributor will use the intellectual property rights of a Swiss manu-

facturer (including its trade marks and patent rights), the issues dis-

cussed should be considered when structuring the relationship with

a U.S. distributor. Antitrust issues raised include possible prohibited

price fixing, and exclusion of third parties from competition.


The supplier, on the other hand, is interested in being excused from

performing its obligations in the event it becomes unable or com-

mercially unreasonable to adhere to the terms of the contract and in

limiting its liability for the use of the supplied material or components

to the maximum extent possible.

Packaging AgreementsAn agreement regarding the outsourcing of the packaging of its

food products for the U.S. market (whether to a U.S. or non-U.S.

packaging company) should specify the labeling requirements and

contain unambiguous instructions for handling and packaging the

product. If any contamination occurs during the packaging process,

it is important that the manufacturer can show that the contamination

would not have occurred, had the packaging company followed the

manufacturer‘s guidelines.

Joint VenturesJoint ventures can be formed for purposes of developing, manufac-

turing, or marketing food products. Contrary to the agreements dis-

cussed so far, the common denominator of all types of joint ventures

is the achievement of a common purpose by two or more parties

through a joint decision making process. Joint ventures can be mere

contractual arrangements among parties or take the form of legal en-

tities operated for the common purpose of the joint venture. The deci-

sion making process, supervision and monitoring of the joint venture’s

activities, ownership and protection of intellectual property and the

rights and obligations of the parties in the event of a break-up or sale

of the joint venture (or interests therein) are key issues that should be

addressed in a joint venture arrangement. Because unincorporated

joint ventures are generally treated as partnerships for tax purposes,

Swiss companies should consider that, absent a proper structure,

their participation could subject them to U.S. taxation.

Licensing of Intellectual PropertyThere are different types of licensing agreements, depending on

the type of intellectual property being licensed (patents, copyrights,

trade- or service marks, or trade secrets). Because patent and copy-

right license are rarely of interest to food manufacturers, the following

discussion is limited to licenses of trade marks and trade secrets.

Licensing of Trademarks Trademarks can be created under federal or state law. Under the fe-

deral Lanham Act, trademarks used to distinguish products can be

registered in the U.S. Patent and Trademark Office. Through regis-

tration, the owner of the mark is permitted to use the ® symbol in

connection with the registered mark. Use of the ® symbol without a

valid registration is prohibited in the U.S. (the “TM” symbol - ™ may

be used with unregistered marks). A trademark registration is prima

facie evidence of the exclusive ownership of a mark. However, both

under the Lanham Act and under state law, rights in trademarks or

service marks can also be created through the simple use of a mark

in commerce.

A trademark license should define (1) the territory within which the

licensee has the right to use the trademark, (2) the scope of the

licensee‘s rights (exclusive/non-exclusive use), and (3) the time period

during which the licensee may exercise these rights. Although the life

of a trademark is not limited, the owner of a trade or service mark can

lose its right (or the value of its mark) if the registration is not renewed,

the mark is no longer used in commerce or the owner of the mark

permits the use of the mark by unauthorized persons or in a manner

that diminishes the value of the mark. Therefore, a license agreement

must permit the licensor to monitor the quality of the goods that the

licensee sells under the licensor’s mark, and the licensor must in fact

exercise its control rights. The licensor can also lose the protection of

its mark if the license does not provide that all goodwill created in the

mark by the licensee inures to the benefit of the licensor.

A trademark license can either be a separate agreement or be inclu-

ded in another agreement (e.g., agency or distribution agreement).

Licensing of Know-How and Trade SecretsThe issues that must be addressed in licenses of know-how or trade

secrets are similar to those previously discussed. It is important to re-

member that the protected know-how is secret at all times during the

term of the license. Moreover, the nature of the protected information

needs to be carefully defined in the license agreement. Because the

confidential information is revealed to the licensee for the purpose of

a commercial activity, the transfer of the knowhow or trade secrets,

the scope of authorized users, the duty to maintain the information

confidential, and the return of the confidential information at the end

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 RetailersA particularity of marketing food products to retailers, in particular

supermarkets, is the so called slotting fees. Slotting fees are product

placement fees that manufacturers are to pay to retailers, and some-

times to wholesalers, for shelf-space (“slots”). These fees can be tied

to performance or flat fees (see Chapter 8). While there is controversy

regarding the influence that these fees may have on competition, they

are not illegal. Slotting fees can take the form of an upfront cash fee, a

service fee for stocking or promoting the goods, a discount or a rent

for floor space (in particular where a supermarket vendor is permitted

to put its own display into a store).

Supermarket chains also typically have guidelines or handbooks that

vendors are expected to follow. These guidelines are incorporated

into the purchase contract by the supermarket‘s purchase order and

can cover shipping and delivery requirements, safety requirements,

coding, shelf-life and penalties for non-compliance.

9.6. Cooperation with U.S. Companies.

Manufacturing AgreementsRather than exporting a food product that is manufactured in

Switzerland, a food manufacturer may manufacture the product lo-

cally in the U.S. (if this does not diminish the value of the „Swiss

made“ product) either in a subsidiary or through a third-party manu-

facturer under a manufacturing agreement. Because the Swiss ma-

nufacturer makes valuable intellectual property and know-how availa-

ble to the U.S. toll manufacturer, manufacturing agreements raise

many of the issues previously discussed. In addition, maintaining the

quality of the manufactured products, adherence to manufacturing

guidelines, timely delivery (and payment), compliance with regulatory

requirements and a fair allocation of the liability are primary concerns

that need to be addressed in these agreements. Allocating the risk

associated with product liability can become tricky in manufacturing

agreements. Depending on the nature of the cause of liability, both

the principal and the manufacturer can be liable for damages resulting

from defective products.

Supply AgreementsIn a supply agreement, the customer is primarily concerned with se-

curing the timely supply of raw material or product components at

the desired quality and the allocation of liability to the supplier for

damages resulting from defective or inadequate material supplied.


10.4. Bringing a Food to Market in the U.S. III: Food Labelling.The labeling of foods while appearing relatively straightforward can be

quite complex depending on the food, its ingredients, and any repre-

sentations made about the food. All of the nuances to food labeling

cannot be covered in this summary. The basic labeling components

will be covered in this review. Note that there are a number of excep-

tions and exemptions which may apply under given circumstances.

Statement of IdentityThe food label on the principal display panel must bear a statement

of the food’s identity, i.e., name. The name could be one established

by regulation, the common or usual name for the food or a descriptive

term which accurately describes the food’s basic character. Flavor

labeling may also be required as part of the food’s name should the

nature of the food’s ingredients so require.

Net ContentsThe principal display panel must also have a declaration of the net

contents by weight, count or volume, or a combination of these de-

pending on the nature of the food: solid, viscous or liquid. There are

detailed regulations on the placement and type-size of the declaration.

Nutrition LabelingVirtually all packaged foods for retail sale must have nutrition labeling.

The format and content are spelled out in the regulations. The key to

determining the content of the nutrition panel is the serving size. FDA

regulations have extensive rules regarding how a food’s serving size

is to be determined.

Ingredient DeclarationThe general requirement is that each ingredient must be listed in its

descending order of predominance by weight by its common or usu-

al name. Many exceptions exist so the regulations need to be refe-

renced for specific requirements.

Health, Nutrient Content and Structure/Function ClaimsGenerally, there are three types of health related claims permitted for

foods under the FFDCA, FDA’s regulations and enforcement policies.

These are health, nutrient content and structure/function claims.

Following is a discussion of these claims.

Health claimsHealth claims describe a relationship between a food, food compo-

nent, or dietary supplement ingredient, and reducing the risk of a

disease or health-related condition. There are three ways by which

10. Regulation of Food by the Food and Drug Administration (FDA).By John Lemker, Bell, Boyd & Lloyd, LLC, Chicago

10.1. Introduction.

Regulatory JurisdictionThe authority to regulate food in the U.S. falls within the jurisdiction of

various federal, state and local agencies. The principal federal agen-

cies are the Food and Drug Administration (FDA) which is a com-

ponent of the Department of Health and Human Services and the

Food Safety and Inspection Service (FSIS) and Animal Plant Health

Inspection Service (APHIS), both of which are in the Department of

Agriculture6.

FSIS regulates meat, poultry and egg products and APHIS is res-

ponsible to ensure that imported products do not introduce pests

or other threats to domestic plants and animals. The focus of this

summary is with FDA regulatory authority which extends to all foods

except for the authority given to FSIS over meat, poultry and egg

products. FDA has some jurisdiction over these foods but they are

primarily regulated by FSIS.

FDA OrganizationThe Center for Food Safety and Applied Nutrition (CFSAN) is the

organization within FDA which is responsible for implementing the

FDA’s authority over foods. It regulates substances used in foods,

implements compliance programs for enforcement and develops re-

gulations for virtually all aspects of FDA’s responsibilities for ensuring

foods are safe and properly labeled.

The FDA’s district offices are the primary enforcement arm of the FDA.

The import officers who review all imported foods are assigned to

the district offices. There are many other components of the FDA but

CFSAN and the districts are the ones most involved in the implemen-

tation of FDA’s jurisdiction over foods.

The Definition of Food under the Federal Food Drug and Cosmetic Act (FFDCA)Basically, the term food includes all articles which are used as food by

man or animals and includes the components of food. This appears

straightforward but the interpretation of the definition by FDA and the

courts has expanded this meaning beyond the usual understanding.

The scope of term food includes food contact articles if any subs-

tance migrates from the contact article to the food. This would in-

clude food packaging materials and even such items as pottery and

eating utensils. All ingredients of foods and their components are

“foods” and subject to the same legal requirements.

The following section will discuss briefly the basic considerations

which are involved in developing, packaging, manufacturing, labeling

and importing a food for distribution in the U.S.. It is an overview of

the matters which need to be considered in manufacturing and labe-

ling foods which are in compliance with the laws of the U.S.

10.2. Bringing a Food to Market in the U.S. I: Categorization of a Food.The initial determination is to identify the category of food into which

the product belongs. This is basic and may be self-evident but ac-

curately identifying the category or type of food is important. One

major reason is that for many, but not all, foods FDA has established

pursuant to its statutory authority, standards of identity for various

foods. For example, many cheeses have standards of identity. Also,

chocolate products have standards.

A standard of identity generally describes the food, prescribes as-

pects of its composition and ingredients and also includes some la-

beling requirements.

If a manufacturer wants to produce and distribute a food for which

a standard of identity exists, the manufacturer must comply with the

standard. In addition, there are other regulations which apply to spe-

cific types of foods, such as quality standards and special food cate-

gories, as example, infant formula and dietary supplements.

An important first step is to determine if the product is subject to

any specific rules applicable to composition, ingredients, labeling or

manufacturing requirements in addition to the generally applicable

regulations.

10.3. Bringing a Food to Market in the U.S. II: Food Composition and Ingredients.All of the ingredients of a food must either be generally recognized

as safe under the law or otherwise specifically approved for use by

the responsible governmental agency, usually FDA. FDA has issued

many regulations listing ingredients which may be used in foods and,

in some instances, has placed restrictions on their use. These restric-

tions could be on the foods in which the ingredients may be used

and/or their levels of use in a particular food.

Unfortunately, not all ingredients permitted in foods are covered by a

regulation. Many ingredients which are recognized as safe may not

have a specific rule identifying them.

However, every color added to a food must be used in accordance

with a specific regulation. If there is no regulation for the color, it may

not be used in a food.

Pesticides present in foods are also specifically regulated. The U.S.

Environmental Protection Agency establishes the tolerances for pesti-

cide residues in or on food and FDA enforces those residue limita-

tions. If an unapproved pesticide is used on a food, it causes the food

to be adulterated.

Chemical contaminants in an ingredient can cause a product to be

in violation of the law. Purity of ingredients is important. For example,

excess levels of lead or mercury in foods have resulted in enforce-

ment actions against the food or company.

Even though a food substance, color additive or pesticide residue

may be authorized in other countries, they may not be legal in the

U.S. A thorough review of each ingredient is required to ensure it

is permitted. An example is herbal products. While many herbs are

widely used, FDA has objected to the use in traditional foods of some

herbs, although their use in dietary supplements has been tolerated.

Reasoning being that there is a different regulatory standard used for

determining the acceptability of ingredients used in traditional foods

compared to the dietary ingredients used in dietary supplements.

In addition to actual ingredients, some processing procedures such

as irradiation are also subject to regulatory limits under food additive

regulations.

Each ingredient needs to be evaluated for its acceptability in a parti-

cular food.6 The Department of Treasury has jurisdiction over the labeling of most alcoholic beverages


The percentage of organic content and the certifying agent seal or

mark may be used on the principal display panel.

Products with less than 70 percent organic ingredients cannot use

the term “organic” anywhere on the principal display panel. They may

identify the specific ingredients that are organically produced on the

ingredients statement.

Any product labeled as organic must identify each organically produ-

ced ingredient in the ingredient statement.

The name and address of the certifying agent of the final product

must be displayed on the information panel of the label.

AllergensThe “Food Allergen Labeling and Consumer Protection Act of 2004”

(the “Amendments”) amended the FFDCA to address specifically the

labeling of certain allergens present in foods.

Generally, the new amendments defined the term “major food aller-

gens,” required their labeling, provided procedures for exemptions

and eliminated some labeling exemptions which existed in the FFDCA

that manufacturers relied upon to avoid labeling certain ingredients. A

major food allergen is defined in the law as follows:

‘(qq) The term ‘major food allergen’ means any of the following:

‘(1) Milk, egg, fish (e.g., bass, flounder, or cod), Crustacean shellfish

(e.g., crab, lobster or shrimp), tree nuts (e.g., almonds, pecans, or

walnuts), wheat, peanuts, and soybeans.

‘(2) A food ingredient that contains protein derived from a food speci-

fied in paragraph (1), except the following:

‘(A) Any highly refined oil derived from a food specified in paragraph

(1) and any ingredient derived from such highly refined oil.

‘(B) A food ingredient that is exempt under paragraph (6) or (7) of

section 403 (w).’.

An important provision of the amendments which assist in understan-

ding their scope is Section 203(a)(4), which provides:

Notwithstanding subsection (g), (i), or (k), or any other law, a flavoring,

coloring, or incidental additive that is, or that bears or contains, a

major food allergen shall be subject to the labeling requirements of

this subsection.

health claims may become eligible to be used on a label or in labe-

ling for a food or dietary supplement: 1) FDA may issue regulations

authorizing health claims for foods and dietary supplements after re-

view of the scientific evidence submitted in health claim petitions if

it meets the rigorous criteria for authorization; 2) health claims can

be based on an authoritative statement of a scientific body of the

U.S. government or the National Academy of Sciences, a health claim

notification to FDA is required prior to use; and 3) FDA, in response

to court decisions has provided for qualified health claims where the

level of the scientific evidence is not sufficient enough for FDA to issue

a regulation.

• Authorized Health Claims. The FFDCA provides for health claims

used on labels that characterize a relationship between a food, a

food component, dietary ingredient, or dietary supplement and risk

of a disease (for example, “diets low in saturated fat, total fat and

cholesterol may reduce risk of heart disease”), provided the claims

are authorized by an FDA regulation and meet the requirements of

that rule.

• Health Claims Based on Authoritative Statements. Another

way to obtain approval for the use of a health claim on foods is

through a successful notification to FDA of a health claim based

on an “authoritative statement” from a scientific body of the U.S.

Government or the National Academy of Sciences.

• Qualified Health Claims. Under FDA’s enforcement discretion, it

permits the use of qualified health claims when there is evidence

for a relationship between a food, food component, or dietary sup-

plement and reduced risk of a disease or health-related condition.

In these cases, the evidence is not sufficient to meet the standard

required for FDA to issue a health claim regulation. Qualifying lan-

guage is included as part of the claim to indicate that the evidence

supporting the claim is limited. The qualified claims are available for

use on any food or dietary supplement product meeting the condi-

tions specified in the authorization letter.

Nutrient Content Claims

The FFDCA and FDA’s regulations permit the use of label statements

that characterize the level of a nutrient in a food (i.e., “fat free,” “low

cholesterol”) if they are made in accordance with the requirements of

the regulations. Nutrient content claims describe the level of a nutrient

in the product, (i.e., high in vitamin C) or they compare the level of a

nutrient in a food to that of another food, (i.e., 30% fewer calories

than our regular chocolate).

Structure/Function ClaimsStructure/function claims describe the role of a nutrient or dietary in-

gredient intended to affect normal structure or function in humans, for

example, “calcium builds strong bones.” In addition, they may cha-

racterize the means by which a nutrient or dietary ingredient acts to

maintain such structure or function, or they may describe general well-

being from consumption of a nutrient or dietary ingredient. The manu-

facturer is responsible for ensuring the accuracy and truthfulness of

these claims; they are not pre-approved by FDA, although for dietary

supplements they must be submitted to FDA. They must be truthful

and not misleading and supported by adequate substantiation.

Organic ClaimsThe National Organic Program (NOP) is administered by the U.S.

Department of Agriculture (USDA) and is intended to assure that

organic foods are produced, processed, and certified to consistent

national organic standards. The labeling requirements of the program

apply to raw, fresh products and processed foods that contain orga-

nic ingredients. Foods that are sold, labeled, or represented as orga-

nic have to be produced and processed in accordance with the NOP

standards.

Except for very small operations, farm and processing operations

that grow and process organic foods must be certified by USDA-

accredited certifying agents. A certified operation may label its pro-

ducts or ingredients as organic and may use the “USDA Organic”

seal.

Labeling requirements are based on the percentage of organic ingre-

dients in a product.

Products labeled as “100 percent organic” must contain (excluding

water and salt) only organically produced ingredients.

Products labeled “organic” must consist of at least 95 percent orga-

nically produced ingredients (excluding water and salt). Any remaining

product ingredients must consist of nonagricultural substances ap-

proved on the National List or non-organically produced agricultural

products that are not commercially available in organic form.

Products meeting the requirements for “100 percent organic” and

“organic” may display these terms and the percentage of organic

content on their principal display panel.

The USDA seal and the seal or mark of involved certifying agents may

appear on product packages and in advertisements.

Processed products that contain at least 70 percent organic ingre-

dients can use the phrase “made with organic ingredients” and list

up to three of the organic ingredients or food groups on the principal

display panel.

The exemptions for flavor, colorings and incidental additives were re-

scinded by the amendments with respect to those which are, bear or

contain a major food allergen. Only highly refined oils from the listed

foods have been exempted under the amendments.

Basically, if a food bears or contains a major food allergen at any level

from direct or indirect addition, it needs to be noted on the label.

10.5. Manufacturing Food.

The law, as implemented by FDA, requires that food be made in ac-

cordance with “Good Manufacturing Practices” (GMPs). FDA has

regulations which describe in a general manner GMPs for food.

However, certain foods which are deemed to present a higher risk to

health if not properly processed have specific regulations that apply

to some or all aspects of their manufacture.

For example, specific regulations exist for low-acid foods, acidified

foods, seafood products, vegetable and fruit juices, infant formula

and bottled water. Regulations for other foods are proposed or under

consideration.

Also, FDA has issued guidance documents regarding the production

and processing of certain foods, such as fresh produce. Although

they are not regulations, they influence the interpretation of what fac-

tors are important in processing these foods.

The HACCP (Hazard Analysis Critical Control Point) concept is impor-

tant in the manufacturing of foods in the U.S. The hazards in manu-

facturing a food are identified and specific controls are developed to

prevent their occurrence.

10.6. Bioterrorism Law.

In response to concerns about a potential terrorist attack on the food

supply, Congress amended the FFDCA to increase the FDA’s ability

to obtain information regarding persons engaged in the food business

and products imported into the U.S., and to take prompt enforcement

action if products may present a serious health threat. Major aspects

of the new authorities include establishment registration, prior notice

for imported foods, administrative detention and recordkeeping.

These new authorities will be briefly reviewed. Each is the subject of

detailed regulations. Prior Notice is covered in the section concerning

imported food and customs requirements.


RegistrationDomestic and foreign facilities that manufacture, pack, or hold food

for human or animal consumption in the U.S. are required to register

with the FDA. A domestic facility must register whether or not food

from the facility enters interstate commerce. A foreign facility must de-

signate a U.S. agent (for example a facility’s importer or broker), who

must live or maintain a place of business in the U.S. and be physically

present in the U.S., for purposes of registration.

There are a number of exceptions listed in the regulations. Registration

is not required if a foreign facility manufactures/processes, packs, or

holds food and sends it to another foreign facility for further manu-

facturing/processing or packaging before the food is exported to the

U.S., only the second foreign facility is required to register. However,

if the second foreign facility performs only a minor activity, such as a

putting on a label, both facilities would be required to register. Also,

any foreign facility that packs or holds food after the last foreign ma-

nufacturer/processor of the foods must register.

Administrative DetentionFDA may detain an article of food it if poses a serious hazard.

Detained product may be held for up to 30 days pending the resolu-

tion of the allegations upon which the detention order was issued or

further enforcement action.

RecordkeepingFDA has issued a rule requiring the establishment of records which

will permit it to track the distribution of foods for the purpose of re-

moving them form sale or use in the event they pose a risk of serious

adverse health consequences to humans or animals. The records

that must be kept are those that are needed to permit the FDA to

identify the immediate previous sources and immediate subsequent

recipients of food, including its packaging. Generally, the people and

companies subject to the requirement are those domestic persons

that manufacturer, process, pack, transport, distribute, receive, hold

or import food and persons that transport food in the U.S. Except for

those foreign persons who transport food in the U.S., foreign estab-

lishments are exempt.

10.7. Enforcement.

FDA has a wide range of enforcement action’s it can use to prevent

violations or remove violative product from distribution. These include

administrative and formal measures.

For imports, if a product appears to be in violation of the law, FDA can

detain it and require the importer to demonstrate the food complies

with the law, correct the violation, re-export the product, or destroy

it. If a product is admitted into the country prior to FDA detecting a

violation, FDA can issue regulatory correspondence, usually entitled

as a “Warning Letter,” seeking voluntary corrective action including a

recall. If the response is not satisfactory, FDA could seek to seize the

product, enjoin the manufacturer or criminally prosecute the respon-

sible company and individuals.

Voluntary corrective action, including recalls, is the most frequently

used form of enforcement action. Also, for imports, FDA may place

product on the automatic detention list which can prevent or substan-

tially disrupt a person’s ability to import the food.

11. Importing into the USA.By Paul S. Anderson, Partner, Sonnenberg & Anderson

11.1. General Background.

The importation of products into the U.S. is regulated by, and through,

the U.S. Department of Homeland Security, Bureau of Customs and

Border Protection (“Customs” or “CBP”). The purpose of this chapter

is to briefly describe the structure of CBP and its operations, and to

identify the most common issues of interest to food importers. The

following comprises a brief synopsis only and is designed to provide

a basic knowledge of importing requirements. Many issues may arise

which require fine technical distinctions or fall within grey areas of

the law. It is highly recommended that an importer take the time to

obtain expert advice prior to the importation of any product so as to

minimize potential problems and to make its importation program as

cost effective as possible.

Informed Compliance and Reasonable CareThe Customs Modernization and Informed Compliance Act (“Mod”

Act) was signed into law in 1993 and introduced the concept of “in-

formed compliance” whereby Customs and the importing communi-

ty would share the responsibility of administering the U.S. Customs

laws. This “informed compliance” concept places an affirmative bur-

den on importers to exercise reasonable care in the discharge of their

responsibilities relating to the importation of merchandise. An impor-

ter must exercise reasonable care in all facets of the importing pro-

cess, including the manner in which it describes, classifies and values

imported merchandise. “Reasonable care” means that an importer

will act reasonably, and with knowledge of the facts and its legal ob-

ligations. The concepts of informed compliance and reasonable care

permeate all aspects of Customs administration and enforcement.

Customs and Border Protection StructureCustoms’ basic structure involves CBP Headquarters in Washington

DC; the National Import Specialist Division (NIS) in New York; and the

numerous local ports throughout the country where the merchandise

actually is presented to Customs for clearance. Headquarters sets

policy, has oversight of security procedures, and issues rulings and

decisions through the Office of Regulations and Rulings (OR&R). Port

Directors are in charge of the local ports and this is where the day-to-

day importing activity occurs. The NIS’s in New York provide supervi-

sory guidance with respect to classification decisions at the outlying

local ports so as to ensure consistency throughout the country.

CBP has several levels of personnel with which an importer should be

familiar. The most frequent point of contact will be the local import

specialists who are Customs officials responsible for monitoring

merchandise imported into the U.S. Import specialists request infor-

mation so that they can properly examine the classification and value

of imported merchandise. In addition, import specialists administer

quotas, make determinations on country of origin markings, check

documents for accuracy and completeness, and perform many other

similar day-to-day tasks.

Oral advice from an import specialist is not binding on Customs and

generally can be changed at any time. Importers may obtain a binding

ruling from Customs by submitting a request in writing, along with

a sample of the merchandise, to Customs Headquarters or to the

National Import Specialist in New York City. Greater detail concerning

the ruling process is set forth later in this chapter.

Inspectors are Customs personnel who actually examine the

merchandise prior to release into the Customs territory of the U.S.

Importers typically do not have much contact with inspectors unless a

problem arises with the clearance of the merchandise. Even then, the

problem more than likely would be brought to the importer’s attention

through the import specialist. An inspector ensures that merchandise

that is presented for entry matches that described in the commercial

invoices, checks for country of origin markings, and otherwise exami-

nes the merchandise to ensure that it is in compliance. It should be

noted that only a small percentage of all merchandise imported into

the U.S. is physically examined by an inspector.

Special agents are not involved in routine Customs matters. Rather,

special agents almost always work on suspected Customs law vio-

lations. Therefore, a telephone call or visit from a special agent is a

serious matter and an importer should immediately contact Customs

counsel if such an event occurs.

Current Regulatory EnvironmentCompliance with the Customs laws is of utmost importance in today’s

environment where security considerations are paramount. Much of

the focus in terms of CBP resources since September 11, 2001 has

focused in the area of security generally, and CBP has promulgated

many new programs designed to make compliance more efficient

yet also meet heightened security considerations. The Customs re-

gulations change quite rapidly and it is important to keep abreast of

all new developments. Although there are many new security initiati-

ves, the program currently in the forefront is the Customs and Trade


also the North American Free Trade Agreement (NAFTA) which invol-

ves duty-free treatment for qualifying articles between Mexico, U.S.

and Canada. Again, Switzerland is not a party to any of these free

trade agreements, but it is possible to manufacture products within

these countries and qualify for duty-free treatment upon importation

into the U.S. if the technical requirements are met.

Customs Valuation of Imported Merchandise Customs valuation can be a very complicated area, and one which

can have a major effect on Customs duties. A common mistake made

by importers is believing that imported merchandise always will be

valued (appraised) at the transaction price, or the price actually paid

for the merchandise by the importer. In fact, most appraisements are

made based upon transaction values. However, Customs may use

other methods of valuing imported merchandise such as deductive

value or computed value. These methods may require the importer to

provide costs, expenses and detailed accounting information in order

to satisfy Customs as to the correct appraised value of the imported

merchandise. Special rules also apply where merchandise is brought

into the U.S. on a consignment basis and is not sold to a purchaser

in the U.S. until a later time. Alternative methods of appraisement ge-

nerally apply in related party transactions or consignment situations.

An importer is free to structure a transaction to take advantage of the

Customs laws. Some importers employ buying agents whose com-

missions are non-dutiable items. Other favorable structures involve

the utilization of the “first sale rule” which involves sales through a

middleman, who in turn sells to a U.S. importer, yet entry is made at

the first sale (price to the middleman) level. Certain legal requirements

must be met in order to utilize these structures and they are not au-

tomatically available. Finally, it should be noted that although most

appraisements are made based upon the invoice price on the com-

mercial invoice to the importer, amounts for freight and insurance are

non-dutiable items and should be broken out separately if included in

the invoice price to ensure that they are not included in dutiable value.

Country of Origin MarkingAll merchandise of foreign origin imported into the U.S. must be

marked with the country of origin. The Customs marking require-

ments in Section 304 of the Tariff Act of 1930 are as follows:

Every article of foreign origin (or its container) imported into the U.S.

shall be marked in a conspicuous place as legibly, indelibly, and per-

manently as the nature of the article (or container) will permit in such

manner as to indicate to an ultimate purchaser in the U.S. the English

name of the country of origin or the article.

Partnership Against Terrorism (CTPAT) program wherein importers re-

ceive certain benefits including reduced cargo inspections when they

are certified as a C-TPAT participant. The C-TPAT program and its

impact upon food importations is discussed later in this chapter.

CBP enforces the regulations of many other governmental agencies

and acts as the primary enforcement arm for the application of such

regulations to imported products. With respect to food products,

CBP enforces the regulations of the Food and Drug Administration

(FDA), U.S. Department of Agriculture (USDA) and the Federal Trade

Commission (FTC).

11.2. Basic Customs Considerations.Customs duties are generally determined on an ad valorem basis,

meaning that the amount of duties owed will depend upon the duty

rate applied and the value placed upon the imported merchandise.

The duty rate to be applied to imported merchandise is determined

by its tariff classification and country of origin. Customs duties may

also be specific, i.e., 10¢ each, or may be a compound rate of ad

valorem and specific duties.

Tariff Classification and Duty RatesThere are over 12,000 separate subheadings in the Harmonized Tariff

Schedules of the U.S. (HTSUS) under which imported merchandise

may be classified. In order to determine the proper classification of im-

ported merchandise within the HTSUS, an importer must be familiar

with the General Rules of Interpretation (GRI) of the HTSUS. In many

instances, an article may seem to fit exactly within a tariff provision

and yet not be properly classified under that tariff provision. The GRI’s

are to be consulted in all cases and are applied in sequential order.

Factors affecting tariff classification include whether the product is

specifically defined in the Section or Chapter Notes; whether the item

is provided for specifically in a particular tariff item; whether a particu-

lar tariff item is more specific than another; the common meaning of a

tariff item; the principal use of an item; and the component make-up

of the item.

There are also many special programs allowing for reduced duties or

importation free of duty. Many of the programs involve imports from

developing countries such as the Generalized System of Preferences

(GSP), Caribbean Basin Initiative (CBI), and other programs. Of

course Switzerland does not qualify as a developing country, but

Swiss companies may produce products in developing countries and

ship them directly to the U.S. which may qualify for dutyfree treatment

under such a program. There are also many bilateral agreements pro-

viding for duty-free treatment such as the U.S. – Israel Free Trade

Agreement, U.S. – Chile Free Trade Agreement, and others. There is

There are many exceptions to the above rule, so an answer to any

country of origin marking question must take into account the parti-

cular product involved and the manner in which the good is imported

and used. In general, goods imported into the U.S. must be marked

in a conspicuous manner with the English name of the country of

origin. In order for the marking to be considered conspicuous, it must

be legible, easily found and read without difficulty. Goods must be

marked in such a manner as to indicate the country of origin to the

ultimate purchaser in the U.S. The ultimate purchaser is generally the

last person in the U.S. who will receive the article in the form in which

it is imported. Failure to properly mark an imported article to indicate

its country or origin can result in a special 10% ad valorem marking

duty, demands for redelivery to Customs, and accompanying liquida-

ted damages, or other penalties.

Invoicing Invoices presented to Customs must be properly prepared and meet

regulatory requirements. The commercial invoice should show the

port of entry to which the merchandise is destined; the name of the

party to which the merchandise is sold and the place from where

shipped; a detailed description of the merchandise, in English, in-

cluding the name by which each item is known, the grade or quality,

marks, numbers and symbols under which they are sold by the seller;

the quantity of merchandise; the purchase price of each item; the

currency in which the transaction is made; and all charges itemized

by name and amount including freight, insurance, commissions, co-

verings, costs of packing, and related expenses.

11.3. Entering Merchandise into the U.S.Importers typically utilize licensed Customhouse brokers to assist

in the entry of merchandise into the U.S. A Customhouse broker

is licensed by CBP and files the appropriate documentation with

Customs to obtain release of the merchandise and to effect payment

of duties. A Customhouse broker is distinguished from a freight for-

warder in that a freight forwarder performs the service of arranging for

the transportation of merchandise from point A to point B, but is not

licensed to transact Customs business with CBP or file entry docu-

mentation. Many companies frequently are both Customhouse bro-

kers and freight forwarders. It is possible for an importer to file entry

documentation himself, however, it is generally recommended that a

Customhouse broker be utilized.

The entry process begins with the Customhouse broker submitting

a Customs Form (CF) 3461 to Customs which indicates the basic

information concerning the merchandise including the shipper, im-

porter, type of merchandise, tariff classification, value and related in-

formation. The information is submitted electronically through the ABI

(Automated Broker Interface) system. CBP will then issue a release of

the merchandise or indicate that there is a problem and that additio-

nal information is needed. For shipments of products subject to FDA

requirements, appropriate information is electronically transmitted by

the broker. FDA will then notify the broker whether the merchandise

may proceed or not, as the case may be. A CF 7501 will then be filed

by the broker which is known as an “Entry Summary” and which pro-

vides all information concerning the calculation of duties, asserted ta-

riff classification items and related information, and also the payment

of duties. An entry summary must be filed within 10 business days

from the date of entry. In the event that the imported merchandise is

not granted a “May Proceed” notice by FDA, the merchandise may be

subject to detention procedures as set forth below.

It is also possible to utilize a Customs Bonded Warehouse or Foreign

Trade Zone (FTZ) regarding entry of merchandise. Merchandise may

be entered into a Customs Bonded Warehouse upon the filing of an

appropriate warehouse entry. Duties on the merchandise will not be

deposited until the product is withdrawn from warehouse for con-

sumption into the U.S. Merchandise may be inspected, repacked,

stored, and similar treatment, but may not be processed or manufac-

tured in a bonded warehouse and then brought into the U.S. In the

case of processing or manufacturing, such a product must be expor-

ted. Merchandise can also be brought into a Foreign Trade Zone, and

again, duties are not paid until merchandise is withdrawn for entry

into the U.S. A Foreign Trade Zone requires special permission but

allows for greater flexibility and freedom of manufacture, production

or manipulation.

QuotasNumerous types of quotas on imported merchandise are administe-

red through CBP. Quotas cover a wide range of products and have

traditionally been evident in the importation of food products and tex-

tiles. Quotas are generally of two types, 1) absolute quotas and 2)

tariff rate quotas. Absolute quotas are quantitative amounts that

are set for a specific period of time (usually one year) wherein impor-

ted products may be brought into the U.S. only up to those specific

limits. Allocations are generally made by specific country, and there

are also allocations for “all other countries” not receiving the specific

allocation. Once the limitations have been reached for the particular

time period in question, no more imports of those products will be

allowed in the U.S. Tariff rate quotas allow a specific quantity of

merchandise to be imported at a lower duty rate. However, once the

quantitative limitation has been reached, rather than prohibiting any

further importations during that year the products in excess of the

quota amount will be assessed a higher duty rate for imports made


to receive a refund of any excess Customs duties paid. In order to do

so the importer must file a protest with Customs within 180 days from

the date of liquidation of the entry7.7 A protest contesting a decision

by Customs is filed at the local port where entry was made and gene-

rally the decision is also made there. In some cases, further review of

the protest by Customs Headquarters may be requested. The decisi-

on by Headquarters in such a case, referred to as an AFR (Application

for Further Review), in effect will also act as a binding ruling as to

the issue. It is also possible to request a ruling from Headquarters

where entry has been made but the entry has not yet been liquidated.

In such an instance the appropriate mechanism is referred to as a

“Request for Internal Advice”.

11.4. Food and Drug Administration (FDA) Requirements Enforced by Customs / The Bioterrorism Act of 2002.CBP acts as the first level of scrutiny with regard to imported products

and their compliance with FDA regulations. Adulteration, labeling and

other traditional FDA issues are discussed in the chapter involving

FDA requirements. The passage of the Public Health Security and

Bioterrorism Preparedness and Response Act of 2002 (“Bioterrorism

Act” or BTA) has particular relevance with regard to imports. The ba-

sic elements of the Bioterrorism Act are as noted below.

RegistrationThe Bioterrorism Act requires that any facility, domestic or internatio-

nal, that manufactures, processes, packs or holds food for animal or

human consumption in the U.S. must register with the FDA. The ra-

tionale behind this requirement is to ensure that the FDA can quickly

locate and neutralize faulty food processors in the case of delivered or

accidental contamination of food. Basic information such as compa-

ny name, address, trade names, food product categories, and name

and contact information are required to be submitted in the registrati-

on. Importantly, for foreign facilities that have no physical presence in

the U.S., a U.S. based agent must be designated.

Prior NoticeThis section of the BTA requires that prior notice of the arrival of mer-

chandise at the first U.S. port of entry must be provided to Customs

and FDA. The data that must be included in the prior notice provi-

ded is the country from which the article originates; country from

which the article is shipped; the anticipated U.S. port of arrival; the

Customs entry type and date; all carriers involved in transporting

the article; the firm name and address in each instance; the email

through the balance of the calendar year. Allocations of quota are

subject to negotiation and change on a regular basis. Certain require-

ments are present as regards the entry procedures so that Customs

can adequately account for all products subject to quota. Depending

upon the type of product involved, there may be different documen-

tary requirements.

There are currently quotas on a wide range of products including

beef; dairy products including milk and cheese; raw sugars; other

sugar containing products; various types of chocolate; certain types

of mixes and doughs; ice cream; animal feed; and mixed condiments

and seasonings. Switzerland generally falls into an “all other” alloca-

tion on most quotas as opposed to receiving a specific amount. An

exception to this involves the importation of certain Swiss and other

types of cheese. It is critical that any potential quota applicability be

determined well ahead of time as many quotas fill quickly and it may

be extremely difficult to obtain a quota allocation and appropriate

documentation.

Rulings by Customs and Administrative ContestAs previously mentioned, an importer may obtain protection and as-

surance that its tariff classification, method of valuation, or country of

origin marking methodology is correct in the form of a binding ruling

from Customs. Binding rulings are prospective in nature and provide

a written decision from Customs as to any of those issues noted

above. A ruling may be obtained from the National Import Specialist

in New York and these rulings frequently may be secured within 30

days. Rulings from the NIS in New York are limited to simple classi-

fication issues. For other issues including valuation, more complex

classification issues, and country of origin determinations, a ruling

may be obtained from CBP Headquarters in Washington, D.C. These

rulings take longer to process and can be secured within 120 days,

but often take longer. In each case, a ruling will give predictability to

an importer as to dutiable consequences of its transactions. A ruling

may be revoked or modified but such an occurrence is relatively infre-

quent and generally would not apply on a retroactive basis.

It is also possible to obtain decisions from Customs on matters con-

tested administratively. Most of the methods employed depend upon

whether or not an entry has been “liquidated”. An importer should

note that money paid to Customs at the time of shipment clearance is

only a deposit of estimated duties. The final accounting for Customs

duties occurs at liquidation of an entry which may occur months or

even years after goods are released by Customs. An importer has a

right to contest a determination by Customs regarding an entry and

address, telephone and fax numbers; and the registration number

and standard carrier abbreviation code. Prior notice of imported

foods must be received electronically by FDA through the Automated

Broker Interface (ABI) or via the Prior Notice System Interface (PNSI)

no more than five days before arrival in the U.S. Further, it must be

received no fewer than two hours before arrival by land via road; four

hours before arrival by air or land via rail; and eight hours before arri-

val by water. All shipments, regardless of value, must meet the prior

notice requirements unless exempted. Products that are exempted

from prior notice requirements are personal food or gifts accompa-

nying an individual; merchandise that is exclusively subject to U.S.

Department of Agricultural jurisdiction such as meat, poultry and egg

products; homemade goods shipped as gifts; food items shipped by

a diplomatic pouch; foods normally subject to the Bioterrorism Act

that are included in shipments of household goods; and noncon-

sumption samples for testing only.

Records MaintenanceThe BTA also requires the maintenance of records to allow for the

identification of immediate previous sources and immediate sub-

sequent recipients of food to help the FDA track food quickly and

more efficiently should a potentially hazardous shipment be released.

Persons that must establish and maintain records include domestic

persons in the U.S. that manufacture, process, pack, transport, dis-

tribute, receive, hold or import food; foreign persons that transport

food; and persons who place food directly in contact with its finished

container. It should be noted that foreign persons who do not trans-

port food in the U.S. are excluded from these regulations.

Records that must be maintained by non-transporters of food relate

to the identity of the immediate non-transporter’s previous sources,

whether foreign or domestic, including the name of the firm, address,

telephone number, type of food, date received, quantity and type of

packaging and immediate transporter source. Also, this same infor-

mation must be provided for an immediate non-transporter’s subse-

quent recipients of all foods released. The term “transporter” includes

persons who have possession, custody, or control of an article of

food in the U.S. for the sole purpose of transporting the food. It also

includes foreign persons that transport food in the U.S. regardless

of whether a foreign person has possession, custody or control for

the sole purpose of transporting it. Records to be kept in this re-

gard include those with names of the transporter’s immediate pre-

vious source and the transporter’s immediate subsequent recipient;

the origin and destination points; the date shipment received and

date released; number of packages; description of freight; route of

movement during the time the food was transported; and transfer

points. The records must be retained depending on the type of food

and whether the record keeper is a transporter or non-transporter, for

anywhere from six months to two years. Customs records must be

kept for five years. Records must be readily available and accessible.

DetentionThe BTA gives authority to the FDA to detain any shipment if it has

“credible evidence or information indicating that the article of food

presents a threat of serious adverse health consequences or death to

humans or animals”. An article of food may be detained regardless of

the size and value of the item. Should a food shipment be detained,

a detention order will be issued by FDA. The detention order must be

approved by the FDA district director at the local port and all relevant

parties will be notified. Detained food may be transferred to a secure

area as determined by the FDA. A detention order is valid for a ma-

ximum period of 30 days. If the FDA terminates a detention order or

if the detention period expires, an authorized FDA representative will

issue a detention termination notice releasing the article of food to any

person who received the detention order. If the FDA does not issue

a detention termination notice and the detention period expires, the

detention order is deemed terminated.

The detention order must have a detention order number, hour and

date of the order, identification of the detained article of food, de-

tention period involved, statement that the article of food identified

is detained for the period shown, a general statement of reasoning

behind why the food is being detained, the name of the authorized

FDA representative who approved the order, and the address and

location of where the article of food is to be detained. The detention

order may require the detained food to be marked and labeled that in

fact it has been detained Also, a detention order may be appealed as

to the reason for the detainment.

A distinction must be drawn between Administrative Detention un-

der Section 304(h) and Section 801(a) of the Federal Food Drug and

Cosmetic Act. As noted, Section 304(h) gives the FDA authority to

detain food where it has credible evidence or information that the ar-

ticle of food presents a threat of serious adverse health consequence

or death to humans or animals. On the other hand, a detention under

Section 801(a) focuses on whether the article of food 1) appears to

have been safely produced, packed and held; 2) contains no conta-

minants, illegal additives or residues; and 3) is properly labeled. As a

result, the standards of detention differ, with Section 304 detentions

requiring “credible evidence of serious adverse health consequences

or death. A detention under Section 801 will result in a document

referred to as “Notice of Detention and Hearing”. FDA has stated that

it will primarily use Section 304(h) for domestic shipments and not as

a tool to stop imports.7 Ninety days has been the traditional statute of limitation for filing an administ-rative protest but the law has recently been changed so that entries made after December 18, 2004 are now subject to a 180 day limitation period.


PenaltiesUnder the U.S. Customs laws it is unlawful to enter, introduce or att-

empt to enter or introduce any merchandise into the U.S. by means

of a material false statement or omission, whether by fraud, gross

negligence, or negligence. The amount of penalty imposed depends

upon the level of culpability, but can be quite severe. If Customs de-

termines that an importer fraudulently evaded duties, it may assess

a penalty up to the amount of the U.S. domestic value of the mer-

chandise. If Customs determines that an importer violated Customs

laws because of gross negligence, it may impose a penalty of up to

four times the loss of Customs duties and up to two times the loss

of Customs duties for ordinary negligence. When a violation of the

Customs laws has occurred, an importer may avoid the imposition of

the harsh penalties described above by filing a prior disclosure or a

petition to mitigate penalties. A prior disclosure is a detailed explana-

tion of the circumstances and factors resulting in a false statement or

material omission which is filed by an importer before an investigation

commenced, or without knowledge of an investigation.

Importers also need to be aware of the additional sizable penalties

which may be imposed for failing to keep and present proper records.

Under this law, the duty to maintain Customs records is extended to

any owner, importer, consignee, importer of record, entry filer, or any

other party who is involved in such import related activity. Customs

has compiled a list of records which must be maintained for five years

(the “(A)(1)(A)” list), but importers should also take care to keep related

business documents for the same period of time.

11.5. Customs – Trade Partnership Against Terrorism(C-TPAT) and Re-lated Security Compliance Issues.

Security considerations have been at the forefront of the CBP agenda

since the September 11, 2001. Many programs relate to developing

greater security at ports in the U.S. and major ports throughout the

world, and other programs pertain to container security and supply

chain security considerations. The Customs – Trade Partnership

Against Terrorism (C-TPAT) is the major initiative by CBP in strengthe-

ning security considerations as regards importers, Customs brokers,

freight forwarders and ocean transportation intermediaries, and mo-

des of transportation along the supply chain. The program has recei-

ved increasing acceptance and all importers should at least consider

the possibility of participating in the program.

C-TPAT is a voluntary partnership between Customs and mem-

bers of the importing community. The program provides incentives

to join C-TPAT and encourages applications from those importers

who do business with other C-TPAT certified businesses. Because

the program is voluntary, in return for an importer’s participation and

demonstration that it meets or exceeds certain minimum security

requirements, Customs offers incentives to the importer such as re-

duced cargo inspections, an assigned account manager, access to

the C-TPAT membership list, and eligibility for account-based pro-

cess with CBP. The application process requires 1) preparation of

the C-TPAT Supply Chain Security Profile; 2) electronic submission of

the profile and 3) assessment and verification of the importer’s actual

processes.

An importer must conduct an assessment of its international supply

chain. The “supply chain” for C-TPAT purposes is defined as from

point of origin (manufacturer/supplier/vendor) through the point of

distribution in the U.S. CBP has mandated specific security criteria.

Not all the criteria will apply in all cases and Customs personnel have

indicated that each submission is evaluated on a case-by-case basis

taking into consideration specific risk factors such as the country of

origin or transshipment. Customs states that the C-TPAT program re-

cognizes the complexity of international supply chains and endorses

the application and implementation of security measures based upon

“risk analysis”.

The following measures are mandatory: Written procedures for selec-

ting business partners; container security; physical access controls;

procedures regarding documentation processing; security training

and threat awareness; physical security; and information technology

security. The C-TPAT program continues to progress and be sub-

ject to additional revisions. Potential participants should consult with

knowledgeable experts as to future changes in the program and the

advisability of participation.

Since 1907, the food industry has relied on FPA for government and

regulatory affairs representation, scientific research, technical assis-

tance, education, communications and crisis management.

Grocery Manufacturers of America (GMA)

2401 Pennsylvania Ave NW, Washington, D.C. 20037

Phone: (202) 337-9400

www.gmabrands.com

GMA represents food and beverage and consumer product compa-

nies at the state, federal, and international levels on legislative and

regulatory issues; leads efforts to increase productivity, efficiency, and

growth in the food, beverage and consumer products industries.

Private Label Manufacturers Association

369 Lexington Ave, 3rd Fl., New York, NY 10017

Phone: (212) 972-3131

www.plma.com

PLMA is an international trade association of store-brand food and

non-food products manufacturers and suppliers.

Beverage Marketing Corporation

850 Third Ave, New York, NY 10022

Phone: (212) 688-7640; Inside U.S. (800) 275-4630

www.beveragemarketing.com

Leading supplier of information, consulting and financial services to

the global beverage industry.

Food Processing Suppliers Association

1451 Dolley Madison Blvd., Suite 200, McLean, VA 22101

Phone: (703) 761-2600

www.iafis.org

FPSA is the largest U.S. association of suppliers of equipment, pa-

ckaging, ingredients and services to the global food, beverage and

pharmaceutical processing industries.

The Organic Trade Association

P.O. Box 547, Greenfield, MA 01302

Phone: (413) 774-7511

www.ota.com

Business association for the organic industry in North America to en-

courage global sustainability through promoting and protecting the

growth of diverse organic trade.

12.1. Trade Associations.

The Food Institute

American Institute of Food Distribution

One Broadway, Elmwood Park, NJ 07407

Phone: (201) 791-5570

www.foodinstitute.com

The Food Institute is a nonprofit organization that provides research

and information to the entire food distribution system. Its members

range from seed companies to grocery chains.

The Food Marketing Institute (FMI)

655 15th Street NW, Suite 700, Washington, D.C. 20005

Phone: (202) 452-8444

www.fmi.org

The Food Marketing Institute is a nonprofit organization which provi-

des education, research and public relations services. Its members

include food retailers, wholesalers and their customers internationally.

Institute of Food Technologists

525 W. Van Buren, Suite 1000, Chicago, IL 60607

Phone: (312) 782-8424

www.ift.org

The Institute of Food Technologists is a non-profit scientific society

with 22,000 individuals working in food science, food technology, and

related professions in industry, academia and government. FT publi-

shes various resources for the food industry.

International Food Information Council (IFIC)

International Food Information Council (IFIC) and the IFIC Foundation

1100 Connecticut Ave, NW, Suite 430, Washington, D.C. 20036

Phone: (202) 296-6540

www.ific.org

IFIC’s mission is to communicate science-based information on food

safety and nutrition to health and nutrition professionals, educators,

journalists, government officials and others providing information to

consumers. IFIC is supported primarily by the broad-based food, be-

verage and agricultural industries.

Food Products Association

1350 I (Eye) Street, NW, Suite 300, Washington, D.C. 20005

Phone: (202) 639-5900

www.fpa-food.org

The Food Products Association (FPA) is the principal scientific and

technical trade association representing the food products industry.

12. Annexes.


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 con-

tinuing 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 associa-

tion for the restaurant industry. Together with the National Restaurant

Association Educational Foundation, the Association’s mission is to

represent, educate and promote a rapidly growing industry.

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

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 infor-

mation 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. beve-

rage 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 fact-

finding agency for the federal government in the field of labor econo-

mics 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 USDA’s 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 phar-

maceutical 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 wor-

king with businesses and communities to promote economic growth.


12.5. Links to Sources.

Standard & Poor’s http://www.standardandpoors.com

Mintel http://www.mintel.com

Packaged Facts: http://www.packagedfacts.com

ACNielsen: http:// www.acnielsen.com

The National Association for the Specialty Food Trade: http://www.

specialtyfood.com

Prepared Foods: http://www.preparedfoods.com

The Food Marketing Institute: http//:www.fmi.org

The Organic Trade Association: http://www.ota.com

U.S. Department of Agriculture (USDA): http://www.usda.gov

12.6. The Authors of the Study.Paul S. Anderson, is a Partner of the law firm of Sonnenberg &

Anderson, Chicago. He is admitted to the Bar in Illinois, the U.S.

Court of International Trade, the U.S. Court of Appeals for the Federal

Circuit, the U.S. District Court for the Northern District of Illinois, and

the U.S. Court of Appeals for the Seventh Circuit. He is a member of

the American, Illinois, Chicago, and Customs and International Trade

Bar Associations, and served as Chairman of the Customs and US.

Trade Law Committee of the Chicago Bar Association. Mr. Anderson

is also Honorary Chair of the Chicago Chapter of the Norwegian-

American Chamber of Commerce where he served as President

from 1985 to 1987. He is also currently President of the International

Trade Association of Greater Chicago. In 2000 he was appointed

Honorary Consul General for Norway to Chicago and the State of

Illinois. Mr. Anderson obtained his BA from Wake Forest University,

JD from Illinois Institute of Technology/Chicago-Kent College of Law

and attended the University of the Pacific, McGeorge School of Law,

European Programs (graduate program in international legal studies

based in Salzburg, Austria).

Contact [email protected], Tel 312 899 1100

Ally A. C. Gunduz, Swiss Trade Commissioner for New York, Swiss

Business Hub New York Office. Ms. Gunduz is also the founder and

executive director of the Swiss American Council for Women Inc. She

started her first business at the age of 18 with her sister and late mo-

ther, Ms. Bea. She also owned and operated a small business near

the United Nations in New York for nine years helping international

clients enter the American market. In 2004, the Manhattan Chamber

of Commerce and the Manhattan International Development

Corporation awarded her the “International Service Award”. Ally A.C.

Gunduz is a native New Yorker, published poet, avid angler, and holds

a B.A in International Relations from Boston University and a Masters

in International Business Management.

Contact [email protected], Tel 212 599 5700 ext. 1032

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 expe-

rience 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 [email protected],

Tel 312 915 0061 or Fax 312 915 0388

John F. Lemker is a member of Bell, Boyd & Lloyd, in the firm’s 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 com-

pliance 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 [email protected], 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.


Tel 310 575 1145 or Fax 310 575 1982

Martin von Walterskirchen is Director of Swiss Business Hub USA.

His previous activities for the Swiss government include Councilor of

the Swiss Embassy in Moscow, Swiss Chief Negotiator for Services

(GATS) during the Uruguay Round of the GATT, General Secretary of

the Swiss Federal Office for Foreign Economic Affairs, and Personal

Advisor to the Swiss Minister of Justice and Police and to the Swiss

President. The Swiss Government conferred on him the title of

Minister on September 21, 2001. Mr. von Walterskirchen is a gradua-

te (honors) of the University of St. Gallen.


Tel 312 915 0061 or Fax 312 915 0388

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, corpo-

rate 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 fre-

quent 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 [email protected] Tel 212-509-4722

Documents

US Food Industry