New nutrition labels damage small firms, says study

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Related tags: Food industry, Nutrition

Standardized nutrition labels are dampening market competition by
helping large food manufacturers gain an even sharper edge over
their smaller rivals, according to a new Duke University study.

The study found that the standardized food label disclosures created by the Nutrition Labeling and Education Act (NLEA) of 1990 resulted in a higher percentage of companies with low market share exiting various food categories after the law took effect in May 1994.

The researchers also found that food industry leaders enjoyed a greater product distribution advantage over their smaller rivals after May 1994.

The 1990 NLEA requires mandatory nutrition labeling for almost all packaged food and strict regulation of nutrient content and health claims. In addition, it also requires a new format for the nutrition information panel called "Nutrition Facts", standardization of serving sizes, and strict regulation of use of descriptors and explicit health messages.

The Duke University report applauds the effort to improve the nation's diet, but at the same time urges policy makers to "piece together the consumer, brand and firm effects of standardized information disclosure".

It says that the legislators should understand the full impact of such regulations on potential brands that might be lost, the possible changes in product price, taste and nutrition and the longer-term effects on companies entering and leaving the market.

"The outcomes we observed would not necessarily be expected when standardized information, like a label, is infused into the marketplace,"​ said Duke University marketing professor Christine Moorman.

"We expected that label information would allow firms to compete more honestly for consumers' purchases, but instead we found an unintended loss of small firms in food categories."

The authors concluded that larger food manufacturers were better positioned to take advantage of the government's mandated labeling process because they had a greater ability to influence, plan, fund, make and promote the regulatory changes. Overall, it cost the food industry an estimated $1.4 billion to $2.3 billion to revamp approximately 250,000 food labels.

This suggests that public policies crafted to promote healthy market competition may sometimes have the opposite effect. The implication, says the report, is that unless regulations are drawn up very carefully, policies that seek to protect consumers could end up providing them with fewer brand choices.

Surprisingly however, the study uncovered little, if any, evidence of price hikes by the bigger food manufacturers after the NLEA went into effect, even though the larger firms leveraged their superior size, resources and relationships to boost their distribution power and fewer smaller firms remained as competitors. Moorman credits this development to the fact that the food industry giants remain in intense competition.

"Our findings indicate that regulation is an important external event that can be the death knell for some firms,"​ the authors write. "Further, our findings support the view that firms can make strategic use of regulation. This suggests that firms should think about the costs and benefits of regulation relative to competitors, not in absolute terms."

In addition, regulators should look more closely at how their policies might affect firms of different sizes and try to compensate for those effects.

"Think about the differential effects across firms and attempt to write policy that levels the playing field,"​ said Moorman.

The Duke research team analyzed grocery-store food sales before and after the NLEA took effect, using 1993 and 1995 supermarket data on 29,374 food firms collected by Infoscan, a service published by Information Resources Inc. (IRI). In addition, researchers combed through 1991, 1993 and 1995 sales data on 2,186 firms published in IRI's "Supermarket Review."

They controlled for other factors by looking at supermarket data over several years and also studied non-food categories not subject to the NLEA's requirements as a comparison.

The study, conducted by marketing professor Christine Moorman, associate professor Carl F. Mela and Ph.D. candidate Rex Du of Duke's Fuqua School of Business, appears in the spring issue of the journal "Marketing Science,"​ a publication of the Institute for Operations Research and the Management Sciences​ (INFORMS).

The study was funded by research grants from the National Science Foundation and the Marketing Science Institute.

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