June 2013

USA FOOD & BEVERAGE MARKET STUDY

OFFICIAL PROGRAMME

USA FOOD AND BEVERAGE MARKET STUDY

Language: English Number of pages: 167 Author: Global Strategy, Inc. 4250 Alafaya Trail, Ste. 212 Oviedo, FL 32765 USA Tel: +1 407 951 6750 www.consultgsi.com Other Reports: Are you interested in Reports for other sectors and countries? Please find more Reports here: www.switzerland-ge.com/study

Contents

5.4. The Internet and Consumer Empowerment: Social Media29

1. EXECUTIVE SUMMARY _______________________6 2. INTRODUCTION _____________________________8

6. SPECIALTY AND GOURMET STORES __________ 34 6.1. Overview ______________________________ 34

3. GENERAL COUNTRY INFORMATION AND FOOD

6.2. Key Drivers_____________________________ 34

INDUSTRY OVERVIEW__________________________9

6.3. Current Performance ______________________ 35

3.1. Country Information _______________________ 9

6.4. Specialization and Competition _______________ 36

3.2. Food Industry Overview ____________________ 12

6.5. Outlook _______________________________ 37 6.6. Growth and Competition ___________________ 37

4. REGULATORY ENVIRONMENT________________15 4.1. Authorities _____________________________ 15 4.2. Labeling _______________________________ 16 4.3. Certifications ____________________________17

6.7. Life Cycle ______________________________ 38 6.8. Products and Services _____________________ 38 6.9. Competitive Landscape ____________________ 40

4.4. Facility Registration _______________________ 18

7. ORGANIC AND NATURAL FOOD ______________ 41

4.5. Nutritional Analysis _______________________ 18

7.1. Regulations and Labeling ___________________ 41

4.6. Shelf-Life Study __________________________ 18

7.2. Market Size and Trends ____________________ 42

4.7. Bar Code Registration______________________ 18

7.3. Market Dynamics ________________________ 44

4.8. U.S. Agents _____________________________ 19

7.4. U.S. – EU Organic Equivalence Agreement _______ 45

4.9. Canned Foods ___________________________ 19 4.10. Seafood & Juice (HAACP) __________________ 20 4.11. Food Ingredients & Food Additives (GRAS) Notifications _______________________________ 21 4.12. Color Additive Requirements ________________ 21

8. DAIRY ____________________________________ 51 8.1. Life Cycle ______________________________ 52 8.2. Products and Markets _____________________ 52 8.3. Locations ______________________________ 54

4.13. EPA and Pesticide Regulations _______________ 22

9. FUNCTIONAL FOOD ________________________ 56

4.14. Food Safety Modernization Act (2011) __________ 23

9.1. Industry Overview ________________________ 57

4.15. Further Information ______________________ 24

9.2. Industry Dynamics _______________________ 58 9.3. Key Players, Categories and Emerging Products ____ 59

5. FOOD INDUSTRY ___________________________25 5.1. Sales and Sales Growth _____________________ 25

9.4. Key Factors to Drive Demand of Functional Foods __ 61

5.2. Industry Structure ________________________ 26

10. PROCESSED FOOD ________________________ 62

5.3. Trends and Developments ___________________ 27

10.1. Top-Line Drivers ________________________ 62

Contents

10.2. Segments _____________________________ 62

14.2. Restaurant Cuisine and Menu Trends __________ 94

10.3. Top 20 Food Processing Companies ___________ 63

14.3. Restaurant Health & Wellness Trends __________ 95

10.4. Market Demand _________________________ 67

14.4. Snack & Beverage Restaurants _______________ 95

10.5. Issues Affecting the Industry ________________ 69

14.5. Fast Food & Convenience Stores ______________ 96 14.6. Foodservice Contractors ___________________ 97

11. SAVORY SNACKS _________________________70 11.1. Market Size and Value _____________________ 70

15. INNOVATION ____________________________ 101

11.2. Market Segmentation ______________________71

15.1. Industry Innovation ______________________ 101

11.3. Market Share ____________________________71

15.2. Innovation Case Study: US Food Processor_______103

11.4. Key Drivers ____________________________ 72

15.3. Innovation Case Study: European Food Processor _ 104

11.5. Demand ______________________________ 73

15.4. Food Industry Innovations _________________105

11.6. Outlook _______________________________ 73

15.5. Open Innovation in the Food Industry __________ 107

11.7. Barriers to Entry _________________________ 73

15.6. Food & Beverage Innovation and Trends websites _ 108

11.8. Imports _______________________________ 74

16. INDUSTRY TRENDS _______________________ 109 12. BEVERAGES ______________________________75 12.1. Competitive Landscape ____________________ 75 12.2. Sectors _______________________________ 76 12.3. Product Segments and Major Market Brands _____ 78

17. CONSUMER TRENDS _____________________ 113 17.1. Consumer/Cultural Trends__________________ 113 17.2. Food, beverage and ingredient trends __________ 114

12.4. Products, Operations and Technologies _________ 80

18. DISTRIBUTION AND MARKETING ___________ 117

12.5. Sales & Marketing _______________________ 81

18.1. Food Distribution Channels _________________ 117

12.6. Indicators and Trends _____________________ 82

18.2. Other Distribution Issues __________________ 118

12.7. Opportunities __________________________ 83

18.3. Marketing Strategies______________________ 118 18.4. Route to Market Considerations ______________ 125

13. PRIVATE LABEL ___________________________84 13.1. Food _________________________________ 85 13.2. Beverages _____________________________ 86 13.3. Consumer Insights _______________________ 88

14. FOODSERVICE ____________________________92 14.1. Restaurant Sector Insights __________________ 92

18.5. Marketing Agreements and Strategic Partnerships _ 126 18.6. Contract and Tort Issues ___________________ 126 18.7. Exploring and Evaluating Market Opportunities ___130 18.8. Marketing Agreements ____________________ 131 18.9. Cooperation with U.S. Companies _____________ 132

Contents

19. CHALLENGES AND OPPORTUNITIES FOR SWISS FOOD SUPPLIERS ___________________________134 20. HOW TO ENTER THE MARKET ______________136 20.1. Importing into the USA ____________________136 20.2. Company Assessment _____________________143 20.3. Competitive, Customer and Market Landscape Assessment ________________________________143 20.4. Branding _____________________________143 20.5. Pricing, Promotion and Competitiveness ________144 20.6. Market Analysis_________________________ 145 20.7. Logistics ______________________________ 145 20.8. Pricing _______________________________146

21. SUMMARY _______________________________147 22. AUTHORS OF THIS STUDY _________________148 APPENDIX: TRADE EVENTS, ASSOCIATIONS, AND PUBLICATIONS _____________________________149

1. Executive Summary The United States is the world’s largest national economy, with a per capita GDP of $48,387 in 2011. The country has a population of 311.9 million, with over 20 percent of the population living in the top eight urban centers. The Food and Beverage industry is both large and extremely complex, consisting of multi-tiered supply chains. It is also subject to extreme competition and a heavy regulatory burden. Keeping track of industry and consumer trends is critical. A well-informed management team is the first line of defense in such an environment. The industry is fragmented, with production divided among all types of companies. Product Categories In 2011, packaged food sales totalled US$331.86 billion in the United States. The top five categories were bakery, accounting for 21 percent of total packaged food sales, dairy (16 percent), frozen processed food (10 percent), confectionery (10 percent) and sweet and savory snacks (10 percent). The fresh food market had a total volume of 77.5 million tons in 2011. Meat products dominate the market with 31 percent market share, followed by vegetables (25 percent), fruits (23 percent), starchy roots (7 percent) and eggs (6 percent). During 2006-2011, the U.S. fresh food market was stagnant with a CAGR of 0.1 percent The organic food market in the United States accounts for over 45 percent of the global organic food market. Organic food sales totalled $29.2 billion in 2011, representing a CAGR of 9.7 percent between 2006 and 2010. Fruit and vegetables dominate the market, with 38 percent share, followed by prepared food products (21 percent), dairy (15 percent), beverages (13 percent), bread and grains (11 percent) and meat, fish and poultry (2 percent). In 2012, the total U.S. dairy market was estimated at $89.3 billion and is projected to grow moderately during the five years to 2017, with revenue rising at an annualized rate of 0.7% to $92.3 billion. The dairy market in the United States accounts for 15 percent of the global dairy market. Cheese dominates the market, with 40 percent share, followed by milk (34 percent), yogurt, cream cheese and cottage cheese (12 percent), spreadable fats (8 percent), cream (5 percent) and chilled desserts (1 percent). Distribution Channels Grocery retail sales were valued at $571 billion and foodservice sales were estimated at $477 billion in 2011. In 2010, supermarket sales dominated the grocery retail market, with 36 percent share, followed by supermarkets (29 percent). Grocery retail sales grew by a 2.2 percent CAGR between 2006 and 2011. In 2010, approximately 46 percent of the foodservice market composed of fast food establishments and 49 percent of fullservice restaurants. The foodservice market was stagnant, with a CAGR of 0.6 percent during 2006-2011. However, this was an improvement from the recession when the foodservice market was hit particularly hard. Primary Demand Drivers  Demographics (particularly trends in population, age, household size, and disposable income)  Consumer trends Profitability Drivers  Good product mix  Efficient operations  Superior service  Effective marketing

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Market Potential Total food consumption is forecast to increase by a CAGR of 3 percent during the five years to 2016, due to the growing U.S. population. Food consumption in the U.S. is expected to reach $968 billion by 2016.    

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Canned food value sales are forecast to grow by a CAGR of 3.6 percent to 2016, driven by increasing consumer demands for convenience. There is high demand for frozen food products, particularly from supermarkets and restaurant chains. The frozen food market is forecast to grow at an average annual rate of 1.5 percent, reaching $96.4 billion in 2016. The organic food market is forecast to grow by a 9.7 percent CAGR between 2011 and 2016. The market is forecast to reach $46.5 billion by 2016, which is an increase of > 50 percent since 2010. The growth of the dairy market is forecast to slow, with a CAGR of 3.6 percent between 2011 and 2016, reaching $89.3 billion in 2013. The dynamic yogurt sector in the United States is expected to continue to grow, due to the on-going trend towards healthier options. The grocery retail market is expected to grow by a CAGR of 3.5 percent to 2016. The foodservice sales are expected to grow by a 3.2 percent CAGR to 2015, reaching $562.5 billion. The highest growth is forecast in foodservice establishments in travel locations (i.e. motorway service / rail stations).

Import Trends Top food and beverage imports to the United States include beverages, with 17 percent share, fish (12 percent), fruit (10 percent), coffee, tea and spices (8 percent) and vegetables (7 percent). Canada was the United States’ largest import source, with 18 percent share, followed by Mexico (15 percent), China (5 percent), Brazil (4 percent) and Thailand (4 percent).

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2. Introduction This research was carried out by Global Strategy, Inc. (www.consultgsi.com), a U.S. business development and market research consulting firm on behalf of OSEC Business Network from March to May 2013. Research Objective The main objective of the study is to provide Swiss food & beverage exporters a solid understanding of historical, current and future trends of the U.S. food & beverage market, focusing on the following topics:       

Regulatory environment Key segments Forecasts and growth drivers Market and consumer trends Distribution Recommendations on successful market entry Trade events, publications and associations

Geography United States of America Period of analysis 2009 – 2012 Target categories  Speciality and gourmet stores  Organic and natural foods  Functional foods  Processed foods  Dairy  Beverages  Private label  Foodservice Methodology Secondary research (in-depth analysis of published sources, government statistics, and in-house expertise) and primary research with select information sources. Information Sources  U.S. Census Bureau, U.S. Department of Agriculture, U.S. Food & Drug Administration, U.S. Environmental Protection Agency  Trade associations  Industry publications and databases  Company reports  Expert interviews

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3. General Country Information and Food Industry Overview

3.1. COUNTRY INFORMATION Official name Head of state Capital Monetary unit Population Total area (sq mi) Total area (sq km) Urban-rural population Life expectancy at birth GDP GDP per capita Unemployment rate Trade volume Major trade items

Currency rate Languages Religion

United States of America President: Barack Obama Washington, D.C. Dollar (U.S.$) 2011: 311.9 million (2012 estimate: 314.25 million) 3,678,190 9,526,468 Urban: (2011) 82.4% Rural: (2011) 17.6% Male: (2011) 76.3 years Female: (2011) 81.1 years $15.09 trillion US dollar (2011) $48,387 (2011) 7.9% (January 2013) Export: $1.5 billion Import: $2.23 billion Export: automotive, automotive parts, semiconductor, computer related goods, aviation, £ electronics Import: automotive, automotive parts, raw petroleum, computer related items, pharmaceuticals, apparel 1 US dollar = 0.94 CHF English is the official language. Spanish is spoken by over 10% of the population. Hawaiian is an official language in Hawaii. A large percentage of Americans are Christians.

Food Native American food includes various breads, soups and wild green salads. Colonists from Europe brought their own culinary traditions. America became a melting pot for people from all over the world. Today, food in the USA reflects this cultural diversity. The Spanish influence is particularly evident in parts of the country colonized by Spain. The American food industry is internationally known for fast-food chains such as McDonald's. American-style cookies, muffins and bagels have also made an impact on the international snack food market. Economy The United States is a leading industrial power with a highly diverse and technologically advanced economy. The US has benefited from a wealth of resources. It has enormous tracts of fertile land suitable for supporting livestock and growing timber and crops (barley, maize, oats, wheat, potatoes, groundnuts, fruit, cotton and tobacco) and possesses huge resources of coal, petroleum, natural gas, iron, gold, silver, copper, lead, phosphates, zinc, magnesium and uranium. A large labour force runs its industries: iron and steel, paper, chemicals, motor vehicles, aerospace, electronics, computer hardware, telecommunications, computer software, clothes and food processing.

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Entrepreneurial skills combined with scientific knowledge and technological advances have put the US at the fore of world industry and commerce. An early example of American know-how combined with commercial success was the production of the Model T Ford and Henry Ford's factory in Detroit. The US has led the world in research and development, for example, in the space industry. In 1958 NASA, the National Aeronautics and Space Administration, began operating at Cape Canaveral. The facilities at the Cape grew to become the John F Kennedy Space Centre. The Centre has led to aircraft and electronics manufacturing becoming an important sector of the economy. The services sector is by far the largest earner of the country's Gross Domestic Product. Tourism is an important industry within services. Tourists from abroad are attracted to the US by theme parks and National Parks. With its long coastline the US has some good beaches. In the winter, skiing is available in a number of States, for example, Colorado and Utah. In October 2008 US financial institutions experienced one of the worst disasters since the Great Depression in the 1930s. The US Treasury was forced to initiate a huge billion dollar financial bail-out plan. However, economists stated that the country had learned how to avoid a situation similar to the Depression but others pointed out the future uncertainty. Sports Sports is important in the US and is part of American school and college life. Team sports include baseball, basketball, American football, soccer, hockey and lacrosse. Other popular sports include tennis, swimming, ice skating and skiing. Rodeos and car racing are both very American activities. Fishing and hunting are traditional outdoor pursuits. Holidays New Year's Day, Inauguration Day, Martin Luther King Jr. Day, President's Day, Memorial Day, Labor Day, Independence Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. States and Territories There are 50 US states and 1 district: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming, and the District of Columbia, (Washington, DC), the capital. New York is the largest city. The Commonwealth of Puerto Rico, in the Caribbean, is a dependent of the USA but retains commonwealth status. The United States Virgin Islands is a US Caribbean Territory. The US also has Territories in Oceania.

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Region 1 (Northeast)  Division 1 (New England) Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut  Division 2 (Mid-Atlantic) New York, Pennsylvania, New Jersey Region 2 (Midwest) (Prior to June 1984, the Midwest Region was designated as the North Central Region.)  Division 3 (East North Central) Wisconsin, Michigan, Illinois, Indiana, Ohio  Division 4 (West North Central) Missouri, North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa Region 3 (South)  Division 5 (South Atlantic) Delaware, Maryland, District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida  Division 6 (East South Central) Kentucky, Tennessee, Mississippi, Alabama  Division 7 (West South Central) Oklahoma, Texas, Arkansas, Louisiana Region 4 (West)  Division 8 (Mountain) Idaho, Montana, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico  Division 9 (Pacific) Alaska, Washington, Oregon, California, Hawaii Time in the United States Time in the United States, by law, is divided into nine standard time zones covering the states and its possessions, with most of the United States observing daylight saving time for approximately the summer months. The time zone boundaries and DST observance are regulated by the Department of Transportation. Official and highly precise timekeeping services (clocks) are provided by two federal agencies: the National Institute of Standards and Technology (NIST) (an agency of the Department of Commerce); and its military counterpart, the United States Naval Observatory (USNO). The clocks run by these services are kept synchronized with each other as well as with those of other international timekeeping organizations.

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3.2. FOOD INDUSTRY OVERVIEW In the U.S., the retail grocery store and supermarket industry, with 40,229 stores, totaled about $634.2 billion in revenues during 2012, according to U.S. Department of the Census figures. However, food products and beverages in America and elsewhere are sold at a wide variety of stores other than supermarkets. To get the full picture in the U.S., it is important to consider food and beverage sales, estimated at $450 billion at 55,683 non-traditional food-sellers, such as wholesale clubs and dollar stores, as well as $165.6 billion at about 154,373 convenience stores (C stores). The restaurant and bar industry accounted for another $529.7 billion in revenues in the U.S. during 2012, according to the Bureau of the Census. The National Restaurant Association estimated that, for 2013, its industry would employ 13.1 million people at 980,000 locations. Estimates of industry revenues can vary widely, due to many factors. For example, a large portion of supermarket sales is made in non-food items such as drugs and personal care goods, and many types of non-food stores sell small amounts of specialty food products. Also, National Restaurant Association estimates of total annual revenues ($660.5 billion projected for 2013, up about 5%) are higher than figures gathered by researchers at the Census, and both groups may miss revenues earned by caterers and other non-traditional prepared food sellers. All things considered, $1.75 to $1.85 trillion is a reasonable projection for total U.S. retail food and beverage industry revenues for 2013. The fresh food market had a total volume of 77.5 million tons in 2011. Meat products dominate the market with 31 percent market share, followed by vegetables (25 percent), fruits (23 percent), starchy roots (7 percent) and eggs (6 percent). During 2006-2011, the U.S. fresh food market was stagnant with a CAGR of 0.1 percent USA FOOD & BEVERAGE MARKET STUDY

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Food retailing is rapidly becoming more diverse and sophisticated in emerging markets. For example, modern convenience stores are widespread in major Asian cities, such as the large number of highly popular 7-11 stores found in Thailand. Also, discount stores that sell food products, among other items, are increasingly popular, evidenced by the rapid growth of WalMart in Mexico and Latin America, and the fast spread of stores in China owned by Wal-Mart and its competitors including Carrefour. Nonetheless, outside of the major cities, much of the food retailing in emerging markets is conducted by modest local markets, often run as family operations. The entire food industry, from growing to processing to retailing, is an extremely competitive field where profit margins are typically so low that it is often challenging to maintain profitability. The processed food industry worldwide has been hindered by high energy costs and changing consumer tastes. High feed costs have been extremely damaging to poultry and livestock firms, and fertilizer, which is typically manufactured from petrochemical sources, has seen very high costs in recent years. In the U.S. and Europe, where the economies have been facing slow growth, consumers are shopping for bargains. Generic store brands are growing in market share while higher-priced name brands have suffered from slower sales. Supermarket chains such as Kroger, Safeway and others have been forced to modify their merchandising to meet the needs of cost conscious shoppers. In the U.S., the supermarket industry is under attack by discounter Wal-Mart in particular, as well as by Costco and Target. (Wal-Mart gets more than one-half of its U.S. revenues from grocery sales.) Vast changes are sweeping through the supermarket sector as a result, as major firms such as Safeway and Kroger have cut prices and lowered operating costs dramatically, while Albertson’s sold itself to private investors. Wal-Mart has by far the leading market share of American supermarket sales. Meanwhile, America’s leading drugstore chains, CVS and Walgreens, are dramatically expanding their food and beverage departments. Discount chain Target has put an increased emphasis on its grocery sales as well. Overall, private-label sales (in supermarkets, drug stores and mass merchandisers) grew 3.92% to reach $92.7 billion in the U.S. in 2011 over the previous year, according to the Private Label Manufacturers Association. The types of technologies affecting the food industry have evolved over time. From mechanized tractors and implements to diesel trucks to flash freezing, food technology has moved on to become high-tech. Today, computerization also has made marked changes in the food industry: Electronic data interchange ensures that inventories and shipments are well managed so the local grocer does not run out of the products that are selling quickly. Point-of-sale systems at the cash register capture minute-by-minute sales data. Biotechnology is making sweeping changes at the ground level—in seed stocks and agricultural animal health. In fact, gradual genetic improvement of grain seeds like rice and wheat, combined with better fertilizers and other technologies, created a “green revolution”. Now, genetically modified seeds are gaining ground with the promise of crops that not only resist insects and have extremely high yields per acre, but also produce high levels of desirable nutrients and vitamins. Growing health concerns are significantly impacting all sectors of the food industry, as obesity levels continue to rise to alarming proportions in the U.S. and elsewhere. Various branches of the U.S. government, including the Food and Drug Administration (FDA), along with a host of consumer groups, are squaring off with food producers over nutrition and the responsibilities and ethical issues inherent in the production and marketing of food. Childhood obesity is a particular target. In the U.S., where soaring health care costs are a prime concern, $147 billion in yearly medical costs were linked to obesity in 2008. In the massive health care act passed in 2010, the U.S. federal government set up a requirement that all restaurant chains with 20 or more restaurants post calorie counts for menu and buffet items. Even local governments, such as the cities of New York and Chicago, are increasing regulations aimed at the food industry. These include Chicago’s famous 2006 ruling outlawing of the sale of foie gras (liver from geese kept in cages and force fed to increase fat—Chicago repealed the law in 2008), and New York City’s 2007 regulations requiring that chain restaurants prominently post nutritional values of menu items. This followed New York City’s earlier restrictions on the use of trans fats in restaurant foods. City officials estimated that 56% of New York’s adults are either obese or overweight, a common

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problem throughout America. Local public school boards around the U.S. are enforcing better nutrition in meals and snacks served at schools. American food processors are dramatically altering their strategies to serve consumers who are concerned about better nutrition and fewer sugars and fats in their foods. Many chain restaurants are likewise seeing excellent sales from lower-calorie foods. McDonald’s’ soaring success with salads is an excellent example. Snack food makers are likewise offering more and more reduced fat items. Meanwhile, the soda industry is going though immense changes due to consumer trends. At one time, soda manufacturers and marketers assumed that there was limitless worldwide growth to be enjoyed in soda sales. However, the real growth in beverages lately has been in bottled waters and energy drinks. As a result, 2009-10 saw dramatic regrouping at PepsiCo and Coca Cola when the firms announced their intent to acquire the massive companies that did much of their bottling under license agreements. These soft drink giants have attempted to cut costs, streamline operations, and distribute new products as a result of these mergers In North America (as well as Asia, Europe and elsewhere), producers and retailers of foods (including restaurants) are now faced with the challenge of positioning their brands to represent consistent quality and food safety. Companies that rise to this challenge will have significant competitive advantage. This food safety positioning will go hand-in-hand with growing demand to satisfy additional consumer concerns about environmentally-sound food production methods, fair trade, fair use of labor and humane treatment of agricultural animals. However, a focus on such concerns as fair trade can add dramatically to costs.

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4. Regulatory Environment National regulations, authorities, certifications, labeling, customs regulations for food products imported from Switzerland

4.1. AUTHORITIES Two regulatory bodies oversee food and beverage safety in the United States. Eighty percent of the food supply is governed by the Food & Drug Administration (FDA) which safeguards against food adulteration (contamination) and food labeling (misbranding). The United States Department of Agriculture (USDA) accounts for the other twenty percent and oversees meat (beef, lamb, pork), poultry, eggs, and products made from them. In light of recent food recalls including a salmonella peanut butter outbreak in 2009 and salmonella egg outbreak in 2010, in January 2011 The Food Safety Modernization Act was signed into law. The legislation gives the FDA more authority to test and recall suspected contaminated foods and beverages. FDA food regulations reach all foods and all beverages distributed in interstate commerce in the U.S.A. except for products that are regulated exclusively by the USDA. All imported foods and imported beverages (including juices) are already in interstate commerce when they reach the U.S. port of entry. Therefore, for Swiss companies exportig food or beverages to the U.S.A., FDA will have jurisdiction over the product when it arrives (and even before it arrives). FDA food regulations and FDA beverage regulations cover domestic and imported food safety, food adulteration (contamination), and food labeling (misbranding). FDA’s food regulatory authority is very far-reaching, and includes:  

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fresh produce (fresh fruits and vegetables), usually concerned with pesticide residues or microbiological contamination; processed foods (dry goods, canned foods, acidified foods, prepared meals, etc.), usually interested in microbiological contamination, insect, bird, rodent or other animal filth, submission of scheduled process documentation for canned foods, and all food labeling requirements, such as Nutrition Labeling in foods and beverages; dietary supplements and nutritional supplements, related to dietary ingredient and finished product safety, Dietary Supplement Facts labeling, and other permissible dietary supplement labeling and marketing claims; infant formulas, with respect to conformity to FDA minimum nutrition requirements and product labeling requirements; fruit and vegetable juices, carbonated drinks, and functional beverages (such as energy drinks and antioxidant drinks), usually considering safe and permissible food additives and ingredients, safe color additives, percent-juice declarations, juice labeling requirements and Nutrition Facts labeling for all types of beverages and drink products; bottled water, related to conformity to FDA’s regulatory bottled water standards, chemical contamination and microbiological contamination; dairy products (cheeses, milk and milk products, yogurts, etc.), many of which are standardized foods and must meet specific FDA regulatory food standards; seafood products (fin fish, crustaceans, etc.), usually for compliance with processing requirements (HACCP, or Hazard Analysis and Critical Control Point regulations), microbiological contamination, decomposition (and histamine production), and anti-biotic or other animal drug use in aquaculture seafood; food ingredients (nutritive ingredients and non-nutritive ingredients), with respect to generally recognized as safe (GRAS) status, functional food ingredients (emulsifiers, anti-caking agents, etc.), related to appropriate intended uses and declaration in food label ingredient declarations food color additives, natural flavors and artificial flavors, spices, seasonings, and vitamins added to food food contact surfaces (containers, utensils, food manufacturing surfaces, beverage containers and food containers), and some alcoholic beverages (beer, wine)

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Most foods do not require FDA approval before being sold in the U.S. Most individual food items also do not require food registration or listing. However, all food establishments that manufacture, pack and hold (store) food are subject to FDA Food Facility Registration. FDA Food Facility Registration must occur before the imported foods arrive in the U.S. for human or animal consumption. Some food products are subject to special and additional regulations, including low acid canned foods (LACF), acidified foods (AF), infant formulas, pasteurized grade A dairy products, food colors, food contact surfaces and food contact materials, and alcoholic beverages (although alcoholic beverages are permitted for sale in the U.S. by the Alcohol and Tobacco Tax and Trade Bureau (TTB)). FDA regulates imported foods differently by requiring some pre-market review or FDA approval prior to importing food for commercial distribution in the U.S. Some foods are called “standardized foods” because FDA has established food standards for them. These additional requirements apply to a variety of foods, ranging from milk chocolate to salad dressings; and yogurt and fruit preserves to bottled water. Most foods, however, are non-standardized foods. If a food is a standardized food, it must meet the standard established by FDA or the food will be considered adulterated and misbranded. All foods are subject to specific food naming regulations, and that applies to standardized foods and non-standardized foods alike. Food labels must be correct or the foods are misbranded under U.S. law. That is, the food labels must bear all the required information in the correct formats using the correct fonts and information placements, and food labels may not bear labeling claims or statements that are not permitted by FDA regulation. The fact that FDA does not pre-approve most foods or labels does not mean that FDA will be lenient when FDA finds adulterated or misbranded imported foods. FDA will certainly take action. Therefore, it is critical for food companies to make sure that their foods and food labels comply with FDA requirements, or they are likely to be stopped by FDA when they are imported. Fixing the problem at that stage is very expensive. There are many specific requirements for many different foods that must be met before foods are imported into the U.S. Foods must be wholesome, unadulterated, properly labeled in all respects, come from FDA-registered manufacturers, packers and storage facilities, and, where required (which is rare), they must have the appropriate pre-approvals and product registrations.

4.2. LABELING Under the Federal Food, Drug and Cosmetic Act (FDCA), FDA has jurisdiction over all food labels, except meat, dairy, and egg products. FDA food label regulations include requirements concerning mandatory declarations of most information contained on food labels, such as the statement of identity, net quantity, ingredients, Nutrition Facts, allergen risks, and food label claims. FDA regulations also permit certain conventional food labels and beverage labels to bear various types of food label claims, such as nutrient content claims, structure or function claims, and health claims, under strictly regulated conditions and requirements. To comply with FDA food regulation, most food labels and beverage labels must contain Nutrition Facts declarations that conform to very specific requirements related to formatting, nutrient names and amounts, and Percent Daily Value calculations. Under the Nutrition Labeling and Education Act of 1990 (NLEA), FDA standardized and limited the types of claims permitted on food labels to include: health claims, nutrient content claims, and structure or function claims. Health claims characterize the relationship between a substance and a health-related condition (e.g., “A diet low in sodium may reduce high blood pressure.”). Nutrient Content Claims characterize the level of a nutrient in food (e.g., “Good source of protein.”). Structure or function claims describe how a food or beverage affects the structure or function of the body (e.g., “Supports healthy blood circulation.”) Food labeling on websites is a complex area of federal law because both FDA and the Federal Trade Commission (FTC) regulate food website and beverage website advertising. Therefore, websites that promote and advertise foods and beverages USA FOOD & BEVERAGE MARKET STUDY

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for sale must comply with both FTC and FDA laws and regulations. Federal law governing claims on such websites is particularly confusing because while FDA regulations limit the types of permissible claims, FTC regulations are not as restrictive. FTC regulates all food advertising claims under a “truthful and not misleading” standard. In addition, both FDA and FTC law require that all claims be substantiated, i.e. supported by adequate scientific evidence. In the United States, food and beverage product labels must contain the following basic information:       

The name under which the product is sold List of ingredients The net quantity of pre-packaged foods in each package, listed in both metric and American units (e.g. “Net Weight: 16oz (400g)”) Name, address and contact details (phone, fax, e-mail, web address) of the manufacturer, co-packer or importer (this should be a U.S. address) Place of origin (e.g. “Product of Switzerland”) Expiration date for consumption, including the day, month and year Special conditions for keeping or usage

4.3. CERTIFICATIONS Various certifications are available to specialty food manufacturers which can both improve their business practices and make their finished products more marketable. Depending on the specific, target demographics, manufacturers could look at a variety of certifications that highlight the quality practices, value chains, religious affiliations and social impacts. Analyzing what certifications, if any, to pursue is entirely up to the leadership of the manufacturer and should be done in conjunction with a well-thought-out pricing model and competitive analysis. Many companies choose to limit the amount of information on a label that does not bring either legal compliance or consumer recognition. 

ISO (International Organization for Standardization): a global network that identifies and develops International Standards for business, government and societies. ISO has developed 2 sets of standards: ISO 9000 for quality management and ISO 14000 for environmental management

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HAACP (Hazard Analysis & Critical Control Points): a systematic, preventive approach to food safety that addresses physical, chemical and biological hazards as a means of prevention rather than finished product inspection. HACCP is used in the food industry in the United States, and is required for all imported food products in the juice, seafood or meat categories.

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Organic: In the United States, the National Organic Program (NOP) was enacted as federal legislation in October 2002. It restricts the use of the term "organic" to certified organic producers. Certification is handled by state, nonprofit and private agencies that have been approved by the USDA. Quality Assurance International (QAI), a private U.S. corporation, is the largest organic certification body in the U.S. Federal organic legislation in the U.S. defines three levels of organics.

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Fair Trade: Though not as popular in the United States as it is in Europe, a Fair Trade certification can offer a unique selling point to your products. Fair Trade certification can yield certified products an additional retail margin of approximately 10-20 percent higher than the non-certified varieties. While there is no formal definition of what constitutes a “fair trade”, the most commonly referred to definition comes from FINE (Fairtrade Labeling Organizations International (FLO), International Fair Trade Association (now known as the World Fair Trade Organization – WFTO), Network of European Worldshops (NEWS), and European Fair Trade Association (EFTA).

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Religious: Various religious organizations offer certification programs, with the Islamic “Halal” and the Jewish “Kosher” being the most popular. These certifications are relatively inexpensive, and the process is quite straight forward, though specifics range, depending on the type of product. When debating whether or not to pursue such religious certifications, manufacturers should refer back to their business model and examine their target demographics. In New York City independent supermarkets, as an example, a Kosher certification might come in handy. If a manufacturer were targeting demographic markets with a high Muslim population, then a Halal certification would make sense.

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

Social: Many manufacturers look towards social certifications as a way of not only contributing to their own corporate responsibility, but also as a way of distinguishing themselves from their competitors. Social certifications can take on many forms; from standardized certification like The Rainforest Alliance or Breast Cancer Awareness.

4.4. FACILITY REGISTRATION FDA regulation requires food facility registration of all food manufacturers no matter where they are located if their food is distributed in the U.S. for human or animal consumption. This requirement applies to foreign food manufacturers and exporters of conventional foods, beverages, dietary supplements and food additives and ingredients. The food facility registration is required under the Bioterrorism Act (BTA). FDA will issue import refusals for an imported food or imported beverage manufactured by a foreign facility that is not registered under the BTA. Compliance with this required process is referred to as Registration of Food Facilities. Although registration for each food facility used to be required only once, new Food Safety Modernization Act registration changes now require a biennial registration renewal for all food facilities. Additionally, all changes or modifications to the required information must be included by way of food registration updates submitted to FDA. The Food Facility Registration Number of every foreign manufacturer of imported food or imported beverages must be declared to FDA and U.S. Customs and Border Protection (Customs) prior to the arrival of the imported food or beverage. This submission happens through the FDA Prior Notice filing.

4.5. NUTRITIONAL ANALYSIS Conducting a full, nutritional analysis at a certified laboratory is required for all food products entering the United States. While you will not be required to show proof of all analyses conducted, your nutritional label must be one hundred percent accurate, and this accuracy can only be achieved through proper, laboratory analysis. Inaccuracies on a nutritional panel do result in heavy fines from the U.S. Food and Drug Administration. Depending on the country, costs range dramatically from public-sector laboratories to private companies. Samples may also have to be sent abroad, if the required analyses are not available in locally. The required analyses for all food products entering the United States are:               

Protein Moisture Ash Fat Profile (total fat; saturated fat; mono-saturated fat; transfat from fatty acids) Sugar Profile (fructose; glucose; sucrose; maltose; lactose) Total Dietary Fiber Sodium Calcium Iron Cholesterol Vitamin A Vitamin C Carbohydrates by Calculation Calories by Calculation Calories from Fat

4.6. SHELF-LIFE STUDY Analyzing the shelf-life of any food product is a requirement for importation into the United States. “Shelf-life” is defined as “the length of time that food, drink, medicine, chemicals and other perishable items are given before they are considered unsuitable for sale, use or consumption”. Shelf-life is commonly examined using two types of stability testing: either real-time stability tests or accelerated stability tests. During each, a product is stored at elevated stress conditions, including temperature, humidity and PH for a required amount of time to measure chemical and micro-biological changes in the product. A thorough shelf-life analysis from a certified laboratory is required.

4.7. BAR CODE REGISTRATION In the United States, most supermarket retailers can only read Universal Product Codes (UPC), which is a barcode type used throughout North America, the United Kingdom, Australia and New Zealand for tracking food items in stores. The most USA FOOD & BEVERAGE MARKET STUDY

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common form is the UPC-A code, consisting of twelve digits. UPCs are uniquely assigned to each product by the manufacturer. UPCs are critical, because it is the only way retailers and distributors track the success or failure of a product. All sales data is generated based on the UPC for each unique product. When registering UPCs, manufacturers must acquire all codes through the international organization known as GS1.

4.8. U.S. AGENTS Foreign food manufacturers and foreign beverage manufacturers that are subject to FDA Food Facility Registration requirements must also appoint a U.S. Agent for FDA purposes. The FDA U.S. Agent acts as FDA’s primary point of contact for the foreign food or beverage manufacturer. U.S. Agent information is submitted electronically through FDA’s electronic systems during the food facility registration process. Each foreign establishment may designate only one U.S. Agent. The foreign food facility may also designate its U.S. Agent as its official correspondent. Responsibilities of a U.S. Agent The U.S. Agent may be called upon to speak to the FDA for the foreign registered manufacturer, packer or storage facility. Therefore, it is critical that the U.S. Agent understands the FDA regulations that govern the imported food or imported beverage and the manufacturing process regulations that the foreign manufacturer must follow. Many U.S. Agency services sell agency and facility registration services, primarily. Although they may also perform some rudimentary regulatory reviews, many lack substantive experience in FDA law, FDA regulations, and FDA enforcement actions. You are required to select a U.S. Agent to comply with U.S. law and FDA regulation. You should select a U.S. Agent that is also capable of providing comprehensive regulatory compliance services that ensure your imported foods comply with all FDA requirements and are successfully imported, marketed, and distributed in the United States.

4.9. CANNED FOODS Canned foods (low acid canned foods, or LACF products, and acidified food canned food products) are subject to special FDA permit controls, which are implemented through FDA Food Canning Establishment (FCE) regulations and FDA Scheduled Process Identification (SID) filings. The FDA canned food regulations are in addition to the Bioterrorism Act (BTA) food facility registration, U.S. Agency, Prior Notice, and FDA food ingredient regulations and FDA food processing and food label requirements. FCE Registration All low acid canned food (LACF) and acidified canned food manufacturers must submit a Food Canning Establishment (FCE) Registration with FDA before exporting to or distributing canned foods in the United States. The FDA FCE Registration is in addition to FDA’s Bioterrorism Act Food Facility Registration requirement. When the FCE Registration is submitted to FDA, the manufacturer must also submit to FDA its Scheduled Process filings for all of its commercially sterile, acidified and lowacid canned foods to obtain a Scheduled Process Identification (SID) Number from FDA for each specific canned food and aseptic or acidified food process. Scheduled Process Identification Any low acid canned food processor, which is required to submit an FDA FCE registration must also submit to FDA a scheduled process filing form. The canned food manufacturer’s Scheduled Process must be electronically transmitted to and reviewed (and accepted) by FDA’s Center for Food Safety and Applied Nutrition (CFSAN) before any canned food import shipments occur. The Scheduled Process form will contain necessary information about the manufacturer’s aseptic or acidification processes for producing commercially sterile low-acid canned foods or properly acidified food and eliminating the risk of botulism poisoning in the food product. Ordinarily, a separate process filing form must be submitted for each separate acidified food or LACF canned or bottled product. Modifications in the manufacturing process or changing the container type used (e.g. glass, metal, etc.), or acidulators or aseptic processing equipment will require the FCE manufacturer to submit updated SID forms. There are other important food manufacturing details that are required in order to obtain proper SID Number compliance.

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4.10. SEAFOOD & JUICE (HAACP) FDA has issued specific processing regulations (good manufacturing practices or GMP regulations) governing seafood products and juices. These regulations, called FDA Hazard Analysis and Critical Control Point (HACCP) regulations, require all seafood and many juice processors to identify the hazards that have the potential of contaminating the product through the stream of raw materials into the processing facility, or through the processing steps themselves which, if such hazards occurred, would render the food products unsafe for consumers. The HACCP regulations require seafood and juice manufacturers to identify, define, and monitor Critical Control Points (CCPs) in their processing steps to minimize, reduce or eliminate these hazards and thereby reduce the safety risks associated with such products. The HACCP regulations apply to domestic and foreign seafood and juice manufacturers alike. There are specific HACCP regulations that apply to U.S. seafood importers and juice importers. These importer requirements must be met. FDA inspectors will eventually arrive at the importer’s company and verify HACCP compliance and, ordinarily, FDA will request a copy of the foreign food processor’s HACCP plan in English. These HACCP regulations are in addition to FDA’s food facility registration requirements under the Bioterrorism Act, FDA’s FCE and SID requirements for canned food manufacturers, and FDA food labeling requirements. Foreign Seafood or Juice Manufacturers Under FDA HACCP regulations, seafood processors and juice manufacturers and importers must comply with federal regulations related to HACCP planning and management. “HACCP Plan” refers to documented procedures which ensure food safety by analyzing food processing to discover and mitigate risks associated with biological, chemical, and physical contamination. Compliant HACCP plans include the following basic elements: 1: Conduct a hazard analysis; 2: Determine the critical control points (CCPs); 3: Establish critical limits; 4: Establish monitoring procedures; 5: Establish corrective actions; 6: Establish verification procedures; and 7: Establish record-keeping and documentation procedures. When FDA finds a problem with imported seafood or imported juice, the agency often will ask to see the importer’s and the foreign supplier’s HACCP Plans. If your product is subject to the FDA HACCP regulations, it is important to conduct a hazard analysis of the product and the manufacturing/handling/shipping processes to correctly identify potential hazards. Such potential hazards must be controlled at appropriate points and these controls must be documented. On many occasions, international suppliers and processors simply borrow HACCP plans from others in the industry. This is a common and dangerous mistake since each HACCP plan must be specifically tailored to particular products and processes within a specific facility. Another common mistake, particularly among multiple food processors, is to over-commit in the HACCP plan and then fail to implement the plan completely. If FDA discovers you fail to implement your own HACCP plan completely, FDA will not consider you to have reached HACCP compliance. Borrowing a template or boilerplate HACCP plan increases the risk that you will over commit and not implement the written HACCP plan. Under FDA regulations, seafood or juice products manufactured without a valid HACCP plan are adulterated. Merely failing to have a HACCP plan is evidence under the FDA regulations that the seafood or juice was processed under unsanitary conditions. FDA regularly places foreign processors with inadequate (or no) HACCP plans on FDA Import Alert. Thereafter, FDA will automatically detain future shipments from that foreign processor without conducting any physical examination or sampling of the shipment. FDA concludes that the articles from that processor appear to be adulterated due to insanitary conditions at the manufacturing facility, and therefore FDA will not permit the FDA detained articles to be reconditioned or released for U.S. sale. This effectively bans the foreign supplier's product from the U.S. market. Domestic HACCP Inspections FDA regularly inspects domestic seafood and juice manufacturers, processors, packers, storage facilities, and importers to ensure they have implemented the agency's HACCP regulations. USA FOOD & BEVERAGE MARKET STUDY

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When FDA detains imported seafood or juice based upon violations detected through sampling and analysis, the agency requires the importer to show that it performed the required “Affirmative Steps” under the FDA HACCP regulations that apply to seafood importers. FDA often asks for this evidence before considering a request to recondition an imported FDA-detained shipment due to certain HACCP-related violations.

4.11. FOOD INGREDIENTS & FOOD ADDITIVES (GRAS) NOTIFICATIONS As food research and technology advances, new food ingredients are often introduced into food manufacturing and the U.S. food supply. However, food additives may only be used in conventional foods if they are Generally Recognized as Safe (GRAS), if they are the subject of a food additive regulation, or if they are “prior sanctioned” additives (food ingredients that have been used safely in the food supply prior to January 1, 1958). Food additives achieve GRAS status in two primary ways. First, the manufacturer “self-affirms” the GRAS status of the ingredient. In this scenario, the manufacturer maintains documentary evidence of the safety of the ingredient, including its natural or artificial derivation, the related processing, and the effects of its consumption under specified intended uses. Second, the manufacturer can submit a GRAS Notification filing to FDA, containing similar documentation. Through this process FDA is not determining GRAS status of the food additive. Rather, FDA is merely stating it does not object to the manufacturer’s assessment of the ingredient as GRAS for the intended uses and at the levels described in the GRAS Notification. Many U.S. finished food manufacturers will only purchase food ingredients or food additives if they have, at a minimum, an FDA “No Objection” letter to a GRAS Notification. If a manufacturer is using a food additive substance which is not already designated as GRAS by FDA regulation or for which FDA has not issued a “No Objection” letter, then it is particularly important for the manufacturer to be able to show and must maintain documentary evidence that the particular ingredient or food additive is GRAS. Although FDA does not require manufacturers to submit GRAS self-assessments, the agency could disagree with a manufacturer and take regulatory action against a food containing a food additive that FDA believes it can prove is not GRAS. This is far easier for FDA to do at the imported food level of distribution because FDA already has very broad authority to issue FDA import detentions, FDA Import Alerts and FDA import refusals for foods that “appear” to be in violation of federal law or FDA regulations. Therefore, it is very important for foreign food additive and food ingredient manufacturers to have evidence regarding the GRAS status of their food additives and food ingredients. Foods containing additives, which are not GRAS, are adulterated as a matter of federal law. Foods, which are deemed adulterated, are subject to FDA import detention, FDA Import Alerts, and FDA import refusal of admission. In addition, importing adulterated food may subject the manufacturer or importer to administrative and criminal penalties.

4.12. COLOR ADDITIVE REQUIREMENTS FDA strictly regulates color additives for use in the manufacture of foods, drugs, cosmetics, and medical devices. Under U.S. law, all color additives for use in cosmetics must have specific FDA approval for their intended cosmetic applications. FDA requires that color additives receive either batch certification (to ensure composition and color standards compliance) or an exemption from certification by FDA regulation. Use of an unapproved color additive or unsafe color additive violates FDA regulations. In addition, all color additives must be properly declared on food labels and beverage labels. Otherwise, the presence of the undeclared color additive will cause the imported food or imported beverage to be misbranded and possibly adulterated under U.S. law, depending upon the color additive that is present. Color Additives Used in Other Countries, But Not in the U.S.A. Some food color additives and beverage color additives used commonly in other countries are illegal or not permitted for food use in the United States. Using illegal food colors or non-permitted food colors in any food or beverage will likely result in FDA import detentions and delays, FDA Import Alerts, and FDA import refusal of the product because it bears or contains an unsafe color additive. Color Additive FDA Import Alerts FDA has a specific Import Alert for foods and beverages from foreign manufacturers and shippers that have been found to contain illegal food color additives and non-permitted beverage colors. FDA’s listing of the foreign manufacturer or shipper on USA FOOD & BEVERAGE MARKET STUDY

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FDA Import Alert is particularly troublesome for the foreign food or beverage manufacturer. The use of an unsafe color additive is a formulation problem that can only be remedied by reformulating the product. FDA routinely tries to capture such shipments containing non-permitted food colors or illegal beverage colors in order to place the foreign manufacturer on FDA Import Alert. Once on an FDA Import Alert, the foreign manufacturer’s imported food must be tested by private lab analyses to prove that the illegal or non-permitted color is not in the product anymore. This creates uniform FDA enforcement in all ports of entry — making it difficult, if not impossible, to evade FDA—and significantly increases the costs to the importer. Foreign manufacturers can petition FDA for removal from FDA Import Alerts, but specific criteria must be followed and evidence must be submitted for FDA review. Undeclared Color Additives; Improper Declaration of Color Additives Other routine problems involving imported food or imported beverage color additive violations include failing to declare on the food label or the beverage label the presence of a color additive. Such foods or beverages are considered misbranded under the Food Drug and Cosmetic Act and are subject to FDA import detention, FDA Import Alert, and FDA import refusal of admission. Again, FDA ordinarily will pursue such situations by adding the manufacturer or shipper on an FDA Import Alert, which lists the product that FDA found contained an undeclared color additive as well as its foreign manufacturer and foreign shipper. Improper declaration of color additives (for instance, failing to use the color's correct name as defined by FDA regulation or failing to use its common or usual name on the food label or the beverage label) also results in a misbranded food or beverage. It is important that foods, beverages, dietary supplements, drugs, and cosmetics in particular declare all color additives in the product label's Ingredients Statement. FDA has issued hundreds of Import Alerts covering imported food, imported beverages, and imported cosmetics that contain illegal colors, non-permitted colors, undeclared colors, or uncertified color additives. Proper product formulation, color batch certification, and ingredient labeling is critical to obtaining and maintaining access to the US market. Parallel Imports and Color Additives in Foods, Drugs and Cosmetics In some instances, foreign firms manufacture the same foods, beverages, drugs and cosmetics using different color formulations for different markets. When a parallel importer purchases a food, beverage, drug, or cosmetic manufactured for a non-U.S. market and diverts it into the U.S. market, FDA may discover the presence of an illegal color. In that case, FDA will take action against the manufacturer, potentially even placing the manufacturer on FDA Import Alert. Foreign manufacturers who have discovered that parallel shippers have exported their products (with illegal colors) to the U.S. must then demonstrate to FDA how they are controlling their supply chains to reduce the likelihood of future diversion. Without such evidence, FDA may not be willing to remove the manufacturer from an FDA Import Alert list.

4.13. EPA AND PESTICIDE REGULATIONS The Environmental Protection Agency (EPA) regulates the use of pesticide chemicals in foods through a regulatory tolerance publication process. Under EPA regulations, certain pesticide chemicals may be used in specific foods, for particular reasons, and at particular exposure levels. The amounts and kinds of pesticide residues permitted to remain on food vary according to pesticide residue tolerance levels published by EPA, which specify the maximum amount of pesticide residue permitted to remain on a food approved for pesticide application. Pesticide residues without pesticide tolerances are not permitted at all. Pesticides that have EPA pesticide residue tolerances for some foods but not others may only be used on those foods on which the pesticides are EPA approved for use and in a way that the residues remain at or below the published pesticide residue tolerances. Although EPA approves pesticide usage on foods and establishes pesticide residue tolerances by regulation, FDA enforces pesticide regulations. The majority of FDA enforcement surrounding pesticide use in foods is focused upon imported raw agricultural commodities and imported processed foods. When FDA determines that a food was exposed to a pesticide for which EPA has not established a tolerance, or if a residue exceeds the EPA’s pesticide residue tolerance level, the imported food will be subject to FDA import detention, FDA Import Alerts, and FDA import refusal of admission. FDA will often place the specific grower or food processor and the specific imported food on FDA Import Alert. As a result, FDA will automatically detain future imported foods shipped by that grower USA FOOD & BEVERAGE MARKET STUDY

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or processor until FDA receives evidence that establishes future shipments are not likely to contain the illegal pesticide or pesticide residues above the EPA pesticide residue tolerance.

4.14. FOOD SAFETY MODERNIZATION ACT (2011) President Barack Obama signed into law the FDA Food Safety Modernization Act (“FSMA”) on January 4, 2011. FSMA is the greatest expansion of FDA’s food regulatory authority since the enactment in 1938 of the Federal Food, Drug, and Cosmetic Act. It aims to ensure the U.S. food supply is safe by shifting the focus of federal regulators from responding to contamination to preventing it. FSMA enlarges FDA’s power to regulate the safety procedures, domestically and internationally, for the producing, manufacturing, packaging, storing, and transporting food. Also, FSMA provides FDA with new powers to regulate food imports by increasing FDA's ability to inspect foreign and domestic facilities, increasing FDA's enforcement powers, (including broadening FDA's administrative detention powers and FDA's ability to obtain information), and granting FDA the authority to issue mandatory recalls. Food manufacturers, importers, and distributors must begin preparing now to comply with the new requirements. Import Certification Requirement Under the FSMA, as a condition of granting admission to an article of imported food, FDA can require that the an agent or representative of the government of the exporting country from which the food originates, produce an affidavit declaring that the food complies with the requirements under the Federal Food, Drug, and Cosmetic Act. If FDA requires an import certificate for an imported food, and the importer does not possess a valid certificate, the food must be refused admission. FDA may refuse an import certificate if FDA determines it is invalid or unreliable. At any time, FDA may require that the certificate be renewed. In determining whether to require the certificate, FDA must consider: 1. the known safety risks of the food; 2. the known safety risks of the country, territory, or region of origin of the food; and 3. FDA must find that the food safety programs, systems, and standards in the country, territory, or region of origin are inadequate to ensure safety and that certification would assist FDA in making an admissibility determination. Administrative Detention Under the FSMA, effective July 3, 2011, FDA possesses significantly more power to administratively detain foods. Prior to FSMA, FDA needed credible evidence or information that an article of food presents a threat of serious adverse health consequences or death to humans or animals to detain that article of food. FSMA permits FDA the authority to administratively detain an article of food if FDA has reason to believe that the article of food merely is adulterated or misbranded. FDA must issue an interim final rule implementing this amendment by May 4, 2011. Mandatory Recall Authority Under the FSMA, FDA has new authority to order a mandatory recall when it believes there is a reasonable probability that a food is adulterated or misbranded, and that the use of or exposure to the food will cause serious adverse health consequences or death to humans or animals. The rule requires FDA to give the responsible party an opportunity to conduct a voluntary recall; upon refusal, the mandatory order can issue and the party has an opportunity to participate in an informal hearing within two days after the order has issued. Inspection-Related Refusal Power Under the FSMA, FDA may refuse food that derives from a foreign facility (or government) operator that refuses to permit FDA inspectors to inspect the establishment. For purposes of this provision, the refusal is deemed to have occurred if it is not permitted during the 24-hour period after a request is made, or after such other time period as agreed upon by FDA and the factory. HARPC Risk Prevention Under the FSMA, effective July 4, 2012, food facilities must maintain Hazard Analysis and Risk-Based Preventive Controls (HARPC). The HARPC requirements are similar to the Hazard Analysis and Critical Control Point (HACCP) requirements USA FOOD & BEVERAGE MARKET STUDY

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which apply to processors of low-acid canned foods, seafood and juice, except that HARCP applies to nearly all food facilities. Exempt facilities are (1) those subject to Standards of Produce Safety, (2) those subject to HACCP and low-acid canned food standards, and (3) those subject to Dietary Supplement current Good Manufacturing Practices. Under HARPC each facility must: 1. 2. 3. 4. 5. 6.

conduct hazard analysis; develop and implement preventive controls and monitor the controls effectiveness; develop a written plan for controlling the hazards; reanalyze processes for potential hazards at least every three years; verify the effectiveness of the controls; and, maintain records of the verification process.

FSMA requires FDA to issue regulations which will define a small and very small business, entities exempt from HARPC requirements. Foreign Supplier Verification Program Under the FSMA, effective January 4, 2013, importers must verify the safety of the food offered for import using the new Foreign Supplier Verification Program (FSVP). (The requirement doesn't apply to firms that import products from foreign suppliers subject to low-acid canned food regulations, seafood or juice HACCP.) Under this plan, every subject importer must establish a program through which it verifies that its foreign supplier complies with HARPC or Standards for Produce Safety, and also verifies that that the food is not adulterated and misbranded because it fails to disclose the presence of major food allergens. Importers must maintain records for two years that substantiate compliance with this requirement. Importers that fail to comply with this verification program violate FDCA and are prohibited from importing food into the United States. Voluntary Qualified Importer Program Under the FSMA FDA must create the Voluntary Qualified Importer Program (VQIP), which is a voluntary, fee-based program that offers its members an expedited importation process. An importer becomes eligible when FDA determines that the food offered for import is safe and the foreign facility obtains certification by third-party auditors (which verifies that the facility complies with the relevant regulations. Once admitted to the program, FDA reviews an importer's eligibility at least once every three years. The program will offer a large importer an effective means to shorten the delays inherent with importing foods. The program will particularly assist an importer of perishable foods, because importation will take less time.

4.15. FURTHER INFORMATION FDA Food Guidance Regulations www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/default.htm FDA Bottled Water and Water Beverage Regulations www.fda.gov/Food/ResourcesForYou/Consumers/ucm046894.htm US Dept. of Agriculcture (USDA) Information, Regulations, Programs and Services www.usda.gov/wps/portal/usda/usdahome USDA Food Safety and Inspection Service www.fsis.usda.gov Food Safety Modernization Act www.foodsafety.gov/news/fsma.html EPA Pesticide Regulations www.epa.gov/lawsregs/topics/pesticides.html

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5. Food Industry Retail: Market size, market structure players, competition, challenges The U.S. food marketing system links farms to consumers via food manufacturing, wholesaling, and retailing (food stores and foodservice facilities). Food wholesaling consists of that part of food marketing in which goods are assembled, stored, and transported to retailers, foodservice operators, other wholesalers, government, and other types of businesses. The retail food industry has changed significantly over the past 2 decades, as warehouse club stores, drugstores, and other nontraditional foodstores have increased their share of food sales. Changes in consumer food choices are reflected in food retailing, including the introduction of new products to meet new consumer demands.

5.1. SALES AND SALES GROWTH The 212,000 traditional foodstores in the U.S. sold $571 billion of retail food and nonfood products in 2011. Grocery stores, including supermarkets, accounted for the largest share of foodstore sales (91.0 percent), followed by convenience stores without gasoline (5.5 percent). Specialized foodstores, including meat and seafood markets, produce markets, retail bakeries, and candy and nut stores, accounted for the remaining 3.4 percent of the total. Figure 1: Traditional food store sales by segment 2011

Grocery store sales increased in 2010 and 2011, following the 2007-09 recession—a period of economic uncertainty in which traditional grocery retailers experienced negative inflation-adjusted growth. During the past decade, there were many years in which grocery store sales growth (in current dollars) exceeded the rate of inflation. Inflation-adjusted sales growth was small, averaging 0.08 percent per year. The slow and negative inflation-adjusted growth in annual sales at traditional grocery stores was likely due in part to increased competition from nontraditional food retailers—such as warehouse clubs, supercenters, drugstores, and other retailers—as more consumers economized on food spending.

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Figure 2: Growth of sales at grocery stores, 2000-11

5.2. INDUSTRY STRUCTURE Sales by the 20 largest food retailers totaled $418.0 billion in 2011, accounting for 63.7 percent of U.S. grocery store sales, an increase from 39.9 percent in 1993. Although shares held by the largest 4, 8, and 20 supermarket and supercenter retailers has decreased slightly since 2008, the longer term trend shows an increasing concentration of sales among the largest grocery retailers. One contributing factor to such increases over the past decade has been the rapid growth of Wal-Mart Supercenters. Their food and nonfood grocery sales amounted to an estimated $109.4 billion in 2011, making it the largest U.S. retailer of grocery products. In comparison, second-place Kroger, the largest traditional grocery retailer, had sales of $71.1 billion in 2011. Figure 3: Top 4, 8 and 20 firms‘ share of U.S. grocery store sales, 1993-2011

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Mergers and acquisitions contributed to increasing shares of the largest 4, 8, and 20 grocery retailers during the mid-to-late 1990s; however, divestitures and internal growth have played the greatest role in changing industry structure since 2007:    

The acquisition of 1,124 Albertson's supermarkets in 2006 by Supervalu boosted its ranking from the eighth-largest grocery retailer in 2005 to the fourth-largest in 2011. In 2007, 12th-ranked A&P Tea Company acquired Pathmark, operator of 141 supermarkets in the New York metropolitan area. In 2007, Publix Supermarkets acquired 49 Albertson's supermarkets located in Florida. Among natural foods and organic retailers, 10th-ranked Whole Foods Market purchased Wild Oats, operator of 110 supermarkets, in 2007.

Between 2007 and 2011, the share of grocery sales by the top 4, 8, and 20 grocery retailers remained unchanged.

5.3. TRENDS AND DEVELOPMENTS Nontraditional stores Since the late 1990s, nontraditional retailers have steadily increased their relative share of food-at-home sales, compared with traditional retailers. Nontraditional stores' share of food-at-home sales increased from 13.7 percent in 2000 to 21.5 percent in 2011 (traditional foodstores and nonstore food sales—such as mail order, home delivery, and direct sales by farms, processors, and wholesalers—account for the remaining shares). Most of the growth in food sales is due to supercenters and warehouse club stores, whose sales more than doubled over the period. More recently, dollar stores—such as Dollar General and Family Dollar—and drugstores—such as Rite Aid, CVS, and Walgreens—have increased sales by expanding retail food offerings. Figure 4: Food-at-home sales by type of outlet, 2000-11

Source: USDA, ERS, Food Expenditure Table

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Traditional foodstores In response to the sales inroads made by nontraditional retailers, traditional grocers are expanding the number and types of product offerings, designing new store formats, and using innovative instore technologies. Hannaford Supermarkets, a division of Delhaize Group (Belgium), introduced "Guiding Stars," a simplified nutrition label to help consumers make more healthful food choices. According to a recent ERS article, leading supermarket chains are expanding their private labels (store brands) to meet the needs of economizing consumers. Many food retailers such as Safeway, Kroger, and Giant Eagle have added gasoline pumps in their parking lots and other locations. In addition, some supermarkets offer promotional tie-ins to grocery purchases, such as gasoline discounts, in an attempt to increase sales. With many consumers seeking organic and natural foods, traditional supermarkets have responded by adding such products to their shelves. Kroger, Giant Food, and Shaw's all offer corporate-brand organic or natural products (Naturally Preferred, Nature's Promise, and Wild Harvest). Publix has introduced its GreenWise supermarkets featuring organic produce, meats with no added hormones, and more healthful prepared foods, along with conventional grocery items (see Introduction of New Food Products With Voluntary Health- and Nutrition-Related Claims, 1989-2010). Local foods Rising consumer interest in knowing where food is produced has sparked increases in purchases of locally grown food. Supermarkets have responded by emphasizing local offerings such as fresh fruits and vegetables, baked goods, meat, poultry, and dairy products, depending on the location and time of year. Safeway, Kroger, Food Lion, and H-E-B Grocery Company are some of the largest supermarket chains that promote a variety of locally grown or produced foods. Other sources of local food include farm-direct and farmers' markets. While many local foods are promoted as "organic" or "natural," retailers often claim that local foods support local agriculture and are more environmentally friendly. Food service In competing for consumers' food dollars, foodservice operators, including restaurants, fast food outlets, and institutional foodservice operators in schools, hotels, and recreational sites, have increased their share of total food expenditures over the years. By 2011, food-away-from-home spending by households and businesses accounted for 48.7 percent of all food spending, up from 47.1 percent in 2000 and 43.0 percent in 1990. Prior to the current recession, the share of household expenditures for prepared foods and meals had risen due to changes in household composition—such as more single-person households and more households with two working adults—as well as increased household incomes and changes in consumer preferences for convenience foods. Figure 5: Sales of food-at-home and away-from-home, 1960-2011

Source: USDA, ERS, Food Expenditure Tables

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In response, some supermarkets have expanded the variety of ready-to-eat entrees and meals in their prepared food departments. Many stores have added a seating area to challenge fast food outlets for business. For example, Wegman's Food Markets, a Rochester, NY-based operator of 81 supermarkets, introduced the Market Café, an instore foodservice option containing a wide range of prepared and made-to-order foods. In the mid-2000s, the annual sales of prepared foods sold in supermarkets grew 4 to 4.5 percent annually, compared with 2 to 2.5 percent for other grocery products.

5.4. THE INTERNET AND CONSUMER EMPOWERMENT: SOCIAL MEDIA The emergence of user-generated content (UGC) via social media channels from the Web 2.0 era has had a dramatic impact on the current commercial environment. Businesses can no longer simply publish content they wish potential customers to see; the social media landscape has instigated a power shift from the business towards the consumer. Communication is truly changing as a result of social media utilization and thus the dynamics of human relationships take on a new perspective. The rules of relationship marketing have been redefined. Indeed social media platforms allow consumers to form a sort of tribal community around a product or brand. However, businesses that adopt social media as a strategy must accept that they are losing an element of control to the consumer. For many businesses today social media is their largest web presence, overtaking their company websites and email programs. Thus social media has mutated how businesses interact and communicate with their customers as well as how they establish and implement their customer relationship management (CRM) policies. The main difference between traditional CRM and social CRM is that the latter involves the customer proactively. The customer is empowered and improving the customer experience is a central goal. The internet has become ‘an enabler of global marketplace’, overcoming issues such as time and distance and empowering consumers to communicate with peers, quickly form and change their own opinions and ultimately to define brands by themselves. The digital era has redefined contemporary consumption, transforming consumers from their former passive roles into an active group. This change is a direct result of the Web 2.0 era in which internet savvy consumers have unlimited access to information as well as the ability to interact freely with other consumers as well as brands and businesses. ‘Web 2.0’ is a concept that describes the evolution of the internet from a static environment to an interactive community. It views the internet as a space where web content and applications are constantly modified and adapted by users through collaboration and participation. Relationship Marketing Relationship marketing is a concept that is applicable inside a firm as well as outside; it is ‘a process, a chain of activities’. The concept relies on the success of three vital areas: an interaction process, a planned communication process that supports and enhances relationships and finally the creation of value. Evidently social media provides an ideal channel for all three elements. Indeed, many believe that the ‘network society’ offers an area of huge potential to marketers to develop their relationships with consumers. This is because relationship marketing is ‘underpinned through shared communication’. Although consumers may become emotionally involved with a brand in traditional relationships, they do not interact with the brand or enter into dialogues directly and thus the relationship is one directional. Social media eliminates these barriers, allowing brands to develop stronger bonds with the consumer much like a human relationship. The social media empowered consumer has emerged. Businesses can no longer adopt a trial-and-error approach to social media as new research finds a link between social media and business metrics such as consumers' likelihood to purchase or interact with companies through leading social channels, according to the J.D. Power and Associates 2013 Social Media Benchmark Study,SM released today. The inaugural study is based on responses from more than 23,200 U.S. online consumers who have interacted with a company via the companies' social media channel. Fielded from November to December 2012, the study measures the overall consumer experience in engaging with companies through their social platforms for both marketing and servicing needs across more than 100 U.S. brands in six industries: airline, auto, banking, credit card, telecom and utility. The study establishes performance benchmarks and industry best practices that provide insights to companies to help them maximize their social media efforts.

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"This is a unique, comprehensive consumer study that defines consumer expectations in the ever-changing social space and measures companies' performances against those benchmarks," said Jacqueline Anderson, director of social media and text analytics at J.D. Power and Associates. "This study provides companies with the framework they need to begin effectively integrating social media into their business strategies. It also illustrates the relationship between a positive social media experience and consumer purchase intent." Key Findings  67% of consumers have used a company's social media site for servicing, compared with 33% for social marketing.  Younger consumers (18-29 years old) are more likely to use brands' social media sites for servicing interactions (43%) than for marketing (23%).  The automotive industry balances marketing and servicing engagements better than any other industry included in the study.  Consumer expectations for social interactions vary across industries, although quality content and responsive service representatives are keys to higher satisfaction levels. Consumer Trends: Online Grocery Shopping As the popularity of online shopping grows, consumers are beginning to explore new digital shopping categories, including groceries. A new survey from CouponCabin.com finds that 15 percent of U.S. adults have shopped for groceries online. An additional 19 percent said they don't currently, but plan to in the future. This survey was conducted online within the United States by Harris Interactive on behalf of CouponCabin from January 29 th to 31st, 2013, among 2,109 U.S. adults ages 18 and older. The high cost of food may prompt some shoppers to click their way through their grocery list. The majority, 91 percent, of U.S. adults indicate they are at least somewhat aware of rising food prices due to weather-related issues in 2012. In addition, 70 percent of U.S. adults who haven't shopped for groceries online said they would be at least somewhat likely to do so if online groceries were less expensive than buying them in the store. Eighteen percent said they would be very likely to do so. "The combination of high food prices, busy families and easy Internet accessibility has led to an increased interest in online grocery shopping," said Jackie Warrick, senior savings advisor at CouponCabin.com. "Consumers have long bought items like apparel and electronics online. Now, they're seeking out ways to further take advantage of online shopping." For some consumers, the desire for online groceries has yet to be met. In fact, nearly four-in-ten (39 percent) of U.S. adults wish their local grocery store offered a delivery service. A variety of reasons were cited as plusses to hitting the virtual supermarket aisles. When asked what they believed to be the positive aspects of ordering groceries online, U.S. adults selected the following:       

Saves time – 65 percent Less likely to impulse buy because you're not tempted by the items in the store – 56 percent Saves money sometimes because there are better prices – 41 percent Makes it easier to plan menus because you can add items to your virtual "cart" throughout the week – 38 percent Can help you eat healthier because you're not tempted to buy junk food – 36 percent Other positive aspects – 13 percent There aren't any positive aspects to ordering groceries online – 13 percent

Not everything about ordering groceries online is peachy keen. When asked what they believed to be the negative aspects of ordering groceries online, U.S. adults selected the following:      

It's difficult to select certain items you want without seeing them in person, such as produce or meat – 73 percent You have to wait at home during a specific time window for the items to be delivered – 58 percent Not every item you want is available – 49 percent Can't use paper coupons – 46 percent More expensive – 40 percent Other negative aspects – 9 percent

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

There aren't any negative aspects to ordering groceries online – 5 percent

Regardless of the sentiment toward online grocery shopping, consumers should do their homework ahead of time to maximize the convenience and savings. Warrick offers the following tips for online grocery shopping: 





Menu plan as you go: One of the best perks of online grocery shopping is that you can add items to your cart over time as you think of them. Even better, planning like this prevents you from impulse buys if you were at the supermarket. Before you hit "buy," though, do a run-through of your meals for the week and make sure you see all the items you need. Don't forget your coupons: Some online grocery services offer discounts for first-time users or local specials, so search for those savings ahead of time. In addition, many will accept manufacturer coupons for items you purchase and then credit your account once they are processed. There can be a short lag time, but with patience you can save a few bucks. Make sure to check the grocery provider's terms and conditions ahead of time. Factor in the fees: Depending on whether you use a national online grocery provider or a local supermarket, there is going to be some type of flat fee, likely coupled with a tip. Make sure you take those costs into account before you part with your hard-earned cash.

Social Media Servicing vs. Social Media Marketing The study focuses on two types of social media engagements, marketing and servicing, and provides best practices for each. Marketing engagements include connecting with consumers to build brand awareness and affinity, in addition to promoting coupons and deals. Servicing engagements include answering specific consumer questions or resolving problems. The study finds that social marketing engagements vary by age group. Nearly one-third (39%) of consumers 30-49 years old and 38 percent of those 50 years and older interact with a company in a social marketing engagement context, while only 23 percent of consumers who are 18-29 years old interact with companies. In contrast, 43 percent of consumers who are 18-29 years old use social media for servicing interactions, while 39 percent of consumers who are 30-49 years old use social for servicing needs. Only 18 percent of consumers who are 50 years and older interact with a company via social for a servicerelated need. "While there are vast differences among age groups in the frequency of servicing and marketing engagements, there is a consistency in the impact on brand perception and purchase intent through both types of engagement," said Anderson. "Companies that are focused only on promoting their brand and deals, or only servicing existing customers, are excluding major groups of their online community, negatively impacting their satisfaction and influencing their future purchasing decision. A one-pronged approach to social is no longer an option." Companies need to understand how their consumers use social media and then develop a strategy that addresses their usage patterns. "If your customers want service and you're pushing discount coupons out to them while ignoring their attempts to connect with you, you're going to end up with dissatisfied customers," added Anderson. The study finds a correlation between overall satisfaction with a company's social marketing efforts and consumers' likelihood to purchase and their overall perception of the company. Among highly-satisfied consumers (satisfaction scores of 951 and higher on a 1,000-point scale), 87 percent indicate that the online social interaction with the company "positively impacted" their likelihood to purchase from that company. Conversely, among consumers who are less satisfied (scores less than 500), one in 10 consumers indicate that the interaction "negatively impacted" their likelihood to purchase from the company. The study also finds that some industries are more successful than others at implementing best practices into their social media engagement strategies than others. When looking across industries, the auto industry performs particularly well in both marketing and servicing social media interactions, the only industry to do so. Other industries performing well are wireless in social servicing interactions and utility in social marketing interactions.

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Mobile Technology and Social Media to Increasingly Influence Consumer Food Purchasing Public relations firm Porter Novelli, in a recent report, argues that mobile technology and the social media will continue to change the consumer's relationship with food and will play a key role in their food purchases. According to Keith Taylor, Director, "Mobile technology is tapping into the desire for convenience, driving more informed choices and enabling more spontaneity. "People are using their phones to look up recipes as they grocery shop. Taylor goes on to say: "Users have all the information they could possibly want or need, right in their pockets. Most also have a network of people offering or asking for suggestions. Purchases may be less planned, but they’re better informed than they were even a year ago". According to Porter Novelli, food manufacturers and retailers will have to ensure that they become part of the "conversation", and, ultimately, part of the purchasing decision. "If you have a major food brand and you don’t have a community manager, hire one now", says Taylor. Israel Mirsky, who is Executive Vice President, Emerging Media and Technology for Porter Novelli in New York, believes that the social media and mobile phone applications are helping consumers to become more aware of what they eat. "Recent research indicates that consumers globally are becoming more concerned with calories than with organic or healthy eating choices. As consumers share information with one another about what matters to them when it comes to staying healthy and eating right, the best-substantiated wisdom – count your calories – seems to be bubbling to the top. Put simply, the Internet is helping consumers get smarter about what they eat", claims Mirsky. "Mobile applications like Calorie Counter and Food Tracker/DailyBurn help people track the calories they ingest and burn more easily than ever before. The apps are consultative (Should I have the chicken salad or the salmon with risotto?). Food diaries have been found to be one of the most effective vehicles for developing and maintaining healthy eating habits – a food diary that’s easy to use and carry is likely to have a strong impact on your eating habits", he also says. "Apps that help identify responsibly sourced foods are proliferating – witness Seafood Watch, which helps identify whether the sushi on the plate is ocean-friendly or not, aiming to inform consumers at a glance whether they’re contributing to overfishing", adds Mirsky. Joel Johnson, the company's Executive Vice President, Integrated Planning Director, provides more detail on how social media and its resulting business is spreading. "Social commerce or socially enabled e-commerce is now mobile enabled. In Germany, Barcoo links products with customer reviews right at the shelf through a mobile app for smartphones. The data possibilities are virtually endless: from user reviews and ratings to price comparisons or even allergy information. But, it’s impossible to look at the impact of mobile technologies on our purchase decisions without first understanding and acknowledging that consumer demand for information about food, food technologies and even the environmental or cultural impact of “eating” are driving a broader conversation", he says. The implication is that consumers are defining the relationship they want to have with producers, retailers and marketers of food – the purchase funnel is the battleground, and mobile technology is likely to be the bridge between the product, consumer and brand. Mobile technologies are transforming the purchase funnel. Though it was never really linear (anyone or anything could interrupt a purchase decision, enabling consumers to skip whole steps), smartphones empower consumers to make more informed decisions as they move from say, trial to loyalty. For example, tasting a fine wine in your wine shop doesn’t have to be the last step before trial – in fact, it could be the first step in establishing a relationship with the brand through conversation. In addition to enabling a mobile information search, smartphones might help a consumer to “like” the wine on Facebook, tweet the tasting or bookmark the wine to a “favorites” list", adds Johnson. Johnson goes on to say: "Mobile allows consumers to capture the experience in a social network, start a dialogue with the producer or note it for consumption later. On the brand side, the producers can leverage a single experience into a broader shared one with fans, followers and even critics in online conversations (providing, of course, they have the earned media assets to do this – a community, a community manager and branded social network activity). The brand can now keep the consumer engaged in a conversation about its product, whether that consumer has purchased the product or not". USA FOOD & BEVERAGE MARKET STUDY

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The following mobile developments are expected to impact the relationship between consumers and the food they eat:  More mobile apps will connect consumers at the shelf with their social network and affinity groups.  More producers will enable their food products to be scanned and uploaded via mobile, images, QR, bar codes and augmented reality readers.  More brands will try to influence consumers at the shelf through location-based services like Gowalla and FourSquare.  In the U.S., we’ll see more FCC, FTC and FDA involvement in claims from user reviews, comparison data and other “recommendations.”  PR crises will sprout up around food, as marketers struggle with increased scrutiny from consumers demanding more transparency (either through mobile social networks or mobile commerce).  Retailers will move to act as middlemen, with their own mobile technologies helping to influence the consumer at the shelf — which sets the stage for a potential marketing conflict of interest between individual brands and producers.  The growth of mobile food trucks that rely on social media technologies to alert followers. Trucks are increasing in popularity due to the economic downturn, Millennials’ impact on lifestyles and an increasing public interest in food culture.

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6. Specialty and Gourmet Stores 6.1. OVERVIEW With grocery stores and supermarkets accounting for 91% of the $571 billion food retail market in the United States, there is little room for other food retailers to get a foot in the door. Specialty food stores cannot compete with large supermarkets on price, but they can capture a share of food retail based on quality, expertise and uniqueness. Recent economic conditions have also disrupted growth opportunities for the Specialty Food Stores industry. Americans tightened their purse strings and largely became price-conscious, with discretionary and high-end food spending taking a hit during the recession. Instead of buying marked-up specialized products, Americans traded down to generic and cheaper supermarket food items. As a result of these trends, industry revenue is expected to decline at an average rate of 0.2% per year from 2008 to 2013. The average decline caused establishment numbers to stall, with the number of stores only increasing at an average 0.2% per year to 46,380 stores. Since the economy slowly started to bounce back in 2010, though, consumers have gradually bought more specialized food products. As disposable income grows, the demand for industry products will grow and push up revenue 1.5% in 2013 to $8.1 billion. Because of the specialized nature of goods sold in this industry, the majority of sales come with a high level of added value. Industry margins are traditionally high per unit sold, relative to the paper-thin earnings of their supermarket counterparts. In 2008, profit margins amounted to 5.8% of revenue; however, after a massive drop in demand, margins fell to about 2.0% in 2009. In 2013, market watchers expect the industry to earn about $291.6 million before taxes, amounting to 3.6% of total revenue. Still, this figure is highly variable, and it depends largely on the size and specialization of the retailer. From 2013 to 2018, the industry is expected to benefit from a rise in sales. As consumers regain their level of comfort in spending, industry sales and establishments will grow accordingly. Consumer sentiment and disposable income are forecast to increase, prompting consumers to expand their spending. Analysts expect revenue to increase 1.3% per year to $8.6 billion over the five years to 2018. Rising demand for organic foods will help boost sales; however, it will be offset by increased competition from grocery stores as they expand their product offerings to include specialty goods.

6.2. KEY DRIVERS Operators in this industry face competition from major grocery stores like Safeway, Albertsons and Winn- Dixie. These stores leverage economies of scale and scope when purchasing goods from manufacturers and wholesalers in bulk at lower prices, allowing them to pass these savings on to consumers through lower retail prices. Additionally, the growing presence of online retailers, who take advantage of low overhead costs to reduce price and increase profit at the expense of industry operators, has created another competitor. External competition is expected to increase slowly during 2013, indicating a potential threat to the industry. The level of household disposable income affects the purchase and consumption of industry merchandise. As the level of disposable income increases, consumers are more willing to purchase goods outside of their staple dietary requirements. Per capita disposable income is expected to increase slowly during 2013. An increase in the level of health-consciousness boosts demand for specialized food stores because they provide higher-quality products, including organic and health foods. This driver is expected to decrease marginally during 2013; nevertheless, many Americans are aware of the benefits of eating healthier, so this slight decline is not expected to affect the industry. The level of population growth has an effect on demand for industry products. When growth occurs within the target market, there will be an increase in demand for specialty foods and other goods. This driver is expected to increase slowly during 2013.

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Figure 6: Percapita disposable income / Healthy eating index

Per capita disposable income % 4 change 3 2 1 0 -1 -2 -3 -4

%

Healthy eating index

72 71

    05  06 07 08 09 10 11 12 13 14 15 16 17 18  Year     

70 69 68 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Year

Source: U.S. Census Bureau

6.3. CURRENT PERFORMANCE Niche food retailers are getting their hopes up as consumers slowly return to their stores after a period of declining sales and limited growth. The Specialty Food Stores industry found it increasingly difficult to operate in a volatile economic climate during the five years to 2013. Declining household wealth, rising unemployment, tight credit conditions and an unclear economic picture forced Americans to cut back on discretionary spending. Industry operators sell food that is considered a luxury; the food is sold at a higher markup than at supermarkets and grocery stores, making it a pricey substitute. The higher price tag has directly affected sales, with revenue expected to decline at an average rate of 0.2% per year to $8.1 billion over the five years to 2013. Severe weaknesses in household sentiment and disposable income resulting from the recession led to revenue declines of 5.8% in 2008 and 4.4% in 2009. The majority of products sold by this industry are nonessential foods, such as dessert items or specialty coffee, which consumers tend to drop first when they cut spending. According to the National Association of Specialty Food Trade, sales of established mass-market brands of coffee such as Folgers and Maxwell House increased during the recession, while sales of smaller, more specialty brands declined or stagnated. Consumers largely traded down quality in favor of cost savings from supermarkets. Sales continued to decline in 2010, though other retail stores experienced revenue growth as the economy began to recover. Consumers were still hesitant to shop at specialty food stores; disposable income had only increased 1.0% and these goods’ substitute products, such as mass-marketed desserts, could be easily purchased at cheaper outlets. In 2011, however, consumers slowly eased back into shopping at specialty food stores for items that are difficult to find elsewhere. In 2013, industry analysts expect the Specialty Food Stores industry to continue its recovery, aided by minor increases in household wealth and heightened demand for organic and health foods. Revenue is estimated to increase 1.5% in 2013, following growth of 2.5% in 2012. After years of declining profit and industry exits, surviving stores are expected to capitalize on the improving economy to regain their share of the US retail market. In 2013, profit before tax is expected to amount to $291.6 million, representing about 3.6% of total revenue.

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Figure 7: Industry revenue

% changes 4 2 0 05

06

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09

10

-2

11

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19

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-4 -6

Source: Global Strategy, Inc. Throughout the past five years, the organic and health food segments of the Specialty Food Stores industry have remained relatively consistent, not succumbing to the declines of the industry as a whole. These segments include specific vegan, vegetarian, natural and organic specialty stores. Increased consumer health awareness has caused many individuals to alter their eating habits over the period. The reason for consistent and often growing demand for these segments is the increasing popularity of vegan, vegetarian and organic diets. According to the Organic Trade Association, US sales of organic food and beverages have grown from $1.0 billion in 1990 to $29.2 billion in 2011 (most recent data available). In fact, sales of organic food increased nearly 9.0% from 2010 to 2011, signifying a steady growth in demand for healthier food products. While many of these goods can be purchased in mainstream stores such as supermarkets and mass merchandisers, 40.0% of organic food purchases were made in natural and specialty food stores in 2012. The health food segment accounts for a relatively small share of industry revenue, but it represents one of the bright spots for the industry in recent years. In addition to organic and health foods, more specialty retailers are offering allergy-sensitive food. For instance, many Americans are avoiding gluten due to allergies or health preference. Because of this trend, more industry operators are selling gluten-free cereals, breads, desserts and more. While these trends are not expected to rescue the industry from its revenue declines over the past five years, the popularity of organic and healthy eating throughout the United States offers a great deal of potential growth for the industry beyond 2013.

6.4. SPECIALIZATION AND COMPETITION Specialty food stores sell a variety of gourmet food, including nuts, ice cream, spices, tea, coffee, bakery goods, health foods and confectionery products. The industry is characterized by a large number of small, local and independent operators, which is reflected in the low concentration and high share of nonemployer firms (about 70.0%). The National Association for the Specialty Food Trade (NASFT) identified several unique trends that have emerged. Operators continually assess niche markets rather than take on larger food industries. Some operators, for example, have opened retailrestaurant stores. With this structure, retailers expand by opening a cafe or restaurant alongside their store, creating a special USA FOOD & BEVERAGE MARKET STUDY

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experience and particular culture. The concept also works in reverse, with restaurateurs becoming retailers and providing themselves entry into the food retail market. According to NASFT, supermarkets and traditional grocers are attempting to maintain sales and revenue by catering to an even larger market by diversifying into specialty and gourmet foods. Intense competition within the Supermarkets and Grocery Stores industry is responsible for this trend, and it threatens to affect sales for specialty food stores. A study by the Food Marketing Institute found that among 77 companies representing 4,208 stores, about two-thirds have diversified into a gourmet and specialty food format. This trend has created an even dimmer environment for retailers in the industry, squeezing many companies out of the market altogether. Over the five years to 2013, the number of companies operating in this industry has only increased at an average rate of 0.2% per year to 42,923 firms. However, most of the decline in companies took place from 2008 to 2010. Since then, the industry has been steadily expanding. Most companies operating in the industry are single-location, nonemployer firms. Employment and wage figures for the industry have followed the same pattern over the past five years, with growth being wiped out by the recession. From 2008 to 2013, employment numbers have declined at an average annual rate of 0.3% to 116,368 workers, despite the recent recovery.

6.5. OUTLOOK Sales growth is on the horizon for the Specialty Food Stores industry, driven by an increase in consumer sentiment, a rise in disposable income and continual demand for organic goods. However, these sales will be slightly offset by increased competition from mainstream grocery stores and supermarkets. In the next five years, revenue is projected to increase at an average of 1.3% per year to $8.6 billion in 2018. In 2014, revenue is forecast to increase 1.9% to about $8.3 billion; consumers will spend more money on discretionary goods than in prior years. The national unemployment rate is expected to improve, which will enable more people to spend money on products. Also, as consumers continue their trend toward healthy organic foods, revenue will expand. Consumers are expected to increase their spending in the next five years. Consumer sentiment will rise at an average annual rate of 1.8% from 2013 to 2018 as consumers regain confidence that the economy has stabilized. In addition, disposable income is forecast to increase at an annualized rate of 2.1% per year. As consumers gain confidence and their wallets become fuller, they will buy more discretionary products, such as gourmet foods. Americans will slowly return to their more expensive eating habits, and industry sales will rise. However, the survival of each company will be based on the variety of their product offerings and consumer demand for each product. For instance, specialty coffee retailers and organic food stores are expected to experience higher revenue because Americans still heavily demand these products. Other stores, such as spice stores, may experience weaker sales because many Americans will choose to eat out instead of cooking at home. Therefore, industry growth will be generated from incremental increases associated with new store growth; the number of specialty food retail outlets is forecast to rise at an annualized rate of 1.1% to 49,082 establishments at the end of 2018. While each has limited employment opportunities, the growth in retail stores will likely cause a parallel increase in industry employment and wages through 2018. Profit margins (earnings before interest and taxes) will remain relatively stable at an average of 3.6% of revenue, rising slightly towards the end of the period. The cost of sales may rise for some stores depending on the ingredients of their goods. For instance, candy stores may have higher purchasing costs since the price of sugar is projected to rise 3.0% in 2014, while this rise will be offset by lower cost of inputs for other retailers.

6.6. GROWTH AND COMPETITION Future areas of growth will arise from demand for organic food. According to the US Department of Agriculture, organic food is by far the fastest-growing food industry in the world, with growth occurring in new farms, products and processors. Stores are projected to experience growing demand for organic food over the next five years and beyond. Currently, organic food sales account for 4.2% of total food sales, but they are projected to account for more than 5.0% of the US food market by the end of 2018 based on current growth rates. While sales generated by the organic market are small, they are growing much faster than the food industry as a whole. Because organic food is consumer driven rather than marketing driven, health issues, obesity and

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concerns about artificial pesticides will boost demand. Fruit and vegetables will likely be the main product segment, followed by nutrition bars and other packaged foods. Organic food prices are typically higher than nonorganic food. Many consumers may desire to start purchasing organic goods, but they will not actually do so until the latter half of the five-year period, when disposable income grows more quickly. Higher prices result from the inability to capture economies of scale because production is usually more labor and management intensive and occurs on a smaller scale. Similar to the previous five-year period, the industry will face intense external competition, especially from grocery stores and supermarkets. On top of that, the Specialty Food Stores industry has dealt with increased competition from nontraditional food operators, such as mass merchandisers and big-box stores. These competitors offer many of the same goods at lower prices; therefore, to keep food retail market share, grocery stores and supermarkets will continue to diversify their product offerings and supply gourmet and specialty foods. As a result, supermarkets have taken market share away from specialty food retailers. For instance, grocery stores are increasing the amount of organic produce they carry. According to the Organic Trade Association, specialty retailers accounted for 45.0% of organic food sales in 2008 but only 36.5% in 2011 (latest available data) because external competitors, notably supermarkets, provided more organic options. This is expected to increase immensely in the next five years as more and more Americans choose to buy organic. Such competition is expected to become even more strenuous as mass merchandisers carry more organic foods, stealing sales from specialty stores and grocery stores. Establishments such as Target and Walmart already carry organic goods. As mass merchandisers continue to sell organic goods, grocery stores will diversify further and carry more goods that are similar to specialty food retailers.

6.7. LIFE CYCLE Analysis of this industry suggests that it is currently in the mature phase of its life cycle. Industry value added, a measure of the industry’s contribution to the overall economy, is expected to grow at an annualized rate of 2.1% for the 10 years to 2018, in step with the US economy, which is expected to grow at an average of 2.1% per year over the same time period. Such similarities mean the industry is not losing ground compared with other industries, but also that it is not finding new markets for growth. Retailers are likely to spend fewer resources expanding the number of stores, choosing rather to focus on existing stores. Also, unprofitable outlets are likely to close down as retailers find it increasingly difficult to operate in such a volatile climate. However, organic food stores and gourmet coffee shops are expected to expand because demand for their products has consistently grown over the past five years. Furthermore, this industry operates in an overall competitive food market, therefore the need to develop and improve existing products is important to the growth of the industry. Some recent examples include the development of new candy and confectionery creations, and soft drink flavors. Technological advances that have infiltrated this industry have largely focused on the application of computer-scanning cash registers and automated warehouse control. This has not been significant enough to alter the industry’s life cycle. The market for goods supplied by this industry has experienced very little change in recent years. The dominant buyers of industry goods continue to be consumers who are 18 to 35 years old. At the same time, confectionery wholesalers, dairy product wholesalers and other grocery wholesalers have remained the main suppliers of merchandise.

6.8. PRODUCTS AND SERVICES Together, bakery products and candy account for over half of the industry’s sales. Stores in this industry often specialize in a single product or similar products, most commonly dessert shops. The rise in healthier eating and lifestyle, and the efforts to combat child and adult obesity is expected to negatively affect the share of bakery and confectionery products sold in this industry in the next five years. The US census refers to dairy items as milk, cheese, butter, yogurt, ice cream and eggs. Note that this industry does not include ice cream parlors, because the industry excludes businesses that sell products for immediate consumption. This product line is USA FOOD & BEVERAGE MARKET STUDY

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expected to account for an estimated 10.0% of industry revenue in 2013, down from recent years. Sales for dairy products by specialized retailers have been affected by the ability of supermarkets to penetrate and gain market share in these product lines. This is especially relevant, because a sharp decline in consumer spending has greatly intensified competition among supermarkets. Specialized coffee and tea stores often sell only gourmet and rare blends, since popular brands are carried by larger grocery stores and supermarkets that are able to charge lower prices. Therefore, these are premium stores dedicated to the more sophisticated and avid coffee and tea drinkers. In the past three years, market share has slightly declined for this segment of the industry, with tight-spending consumers trading down to less expensive varieties. In 2013, coffee and tea are expected to account for about 5.0% of total industry sales. Other specialized food stores in this industry sell products such as nuts, spices, soda, bottled water and many types of organic and health foods. Organic food sales have grown extremely rapidly over the current period, relative to other segments; this trend is expected to continue strongly over the next five years, with intensifying consumer shifts towards healthy dieting. Food shops specializing in niche products tend to be most successful in this industry, as they face little external competition from other retail giants. These shops make up a huge portion of industry sales, at roughly 30.0% in 2013. Niche and specialty food item purchases are driven primarily by household disposable income and overall consumer sentiment. Gourmet food retailed in this industry is correlated with the luxury market and often retailed at higher prices. Households with higher levels of income are more likely to afford more expensive products, such as gourmet cheeses or premium coffee. By contrast, consumers with lower levels of disposable income may be limited in their purchases, choosing more generic brands at the supermarket. Income growth softened considerably over 2008 and 2009, which has had a significant effect on luxury food spending. Although income is a large determinant, household spending perceptions also indicate household purchasing patterns. Movements in sentiment take into account household finances, business conditions, unemployment, inflation, interest rates, income and government economic policy. Consumer sentiment experienced a massive drop of 25.5% over 2008, and dipped a bit further in 2009. Consumer sentiment recovered in 2010, rising 20.6%. Consumers are expected to have even higher confidence in the economy in 2013 as the stock market is stabilizing and disposable income rises. Demand is also correlated to the price of industry products relative to other retail sources. In general, store prices may be slightly higher than supermarket and grocery store prices due to higher operating costs incurred by the smaller operators in this industry. Supermarket operators and other grocery retailers are able to buy in bulk at a discount, thereby offering goods at cheaper prices. Lastly, eating trends also has an effect on the amount of demand for this industry’s products. For instance many Americans are choosing to purchase more organic foods due to health reasons. As such, the revenue for organic food stores has flourished. When consumer eating trends change specific stores within this industry benefit. Niche food retailers do not directly participate in international trade, rather, food retailed is often sourced from a variety of domestic and international locations. The majority of operators in this sector are American-owned and earn their sales domestically; however, some domestic players own foreign operations. Analysis indicates there are no significant foreign players operating in this industry. The industry does not trade in exports but it may be affected by them. Rocky Mountain Chocolate Factory Inc. manufactures and retails chocolate candy and sells its goods through factory outlet malls, regional malls and at tourist areas. In addition to the stores it operates across 40 states, the company also has stores in Canada, Guam and the United Arab Emirates. In total, there are eight company-owned stores and almost 400 franchises. Other operators include Candy Bouquet, which is a candy store franchise business. The company has more than 600 stores across 44 countries worldwide, spanning from New Zealand to Romania. In 2004, the company joined with Asian partners to form Candy Bouquet Asia Ltd. Its headquarters are now situated in Kuala Lumpur. Candy Express is a candy retailer with about 80 stores that are spread across the United States and other countries.

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Following its acquisition of Sweets from Heaven, Fuzziwig’s Candy Factory operates more than 72 stores across the United States, the Bahamas and Indonesia. Another specialty shop that operates overseas is Godiva Chocolatier Inc., which is a manufacturer and retailer of chocolate goods with a network of boutique stores worldwide, including 200 in the United States.

6.9. COMPETITIVE LANDSCAPE Players in this industry are mostly small private operators, the majority of which employ fewer than five staff members. Most players (about 88.0%) operate as standalone establishments, though a few have expanded their original stores to multiple locations. These stores remain fairly local and specialized, though, so they are not significant players on a national scale. In the absence of major players, this industry is characterized by a large number of small players, about 70.0% of which are nonemployer establishments. Establishments that employ four or fewer people account for about 60.0% to 70.0% of the industry. The industry is expected to have a low concentration level in 2013 and, due to the nature of the industry, will remain highly fragmented through the outlook period to 2018. In such a fragmented industry, specialized food stores have individually carved out a niche following by specializing in certain items, such as health foods, premium coffee or organic treats. Many establishments prefer to remain small and local to preserve uniqueness and community loyalty. As the economy continues to recover, many of the specialty food stores that were pushed out of the industry during the recession will return. Higher disposable incomes and improved consumer sentiment will make entry into the industry more enticing, thus further fragmenting it. As such, the number of specialty food stores is expected to increase at an annualized rate of 1.1% in the five years to 2018. Growth will likely be offset by mass merchandisers’ and supermarkets’ inclusion of specialty goods, but will remain healthy, especially from 2013 to 2015, on the back of the buying local trend currently observed in most retail industries.

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7. Organic and Natural Food Organic food is produce that has been independently certified to have been grown free of chemicals. Market values are taken at retail selling price (RSP). The US organic food market has experienced strong growth in recent years. Over the forecast period ending 2016, the market is predicted to continue to experience strong growth. The US organic food market had total revenues of $29.2 billion in 2011, representing a compound annual growth rate (CAGR) of 9.4% between 2007 and 2011. In comparison, the European and Asia-Pacific markets grew with CAGRs of 8.1% and 15.4% respectively, over the same period, to reach respective values of $28.7 billion and $4.3 billion in 2011. Fruit and vegetables dominate the market, with 38 percent share, followed by prepared food products (21 percent), dairy (15 percent), beverages (13 percent), bread and grains (11 percent) and meat, fish and poultry (2 percent). The performance of the market is forecast to accelerate, with an anticipated CAGR of 9.7% for the five-year period 2011 - 2016, which is expected to drive the market to a value of $46.5 billion by the end of 2016. Comparatively, the European and AsiaPacific markets will grow with CAGRs of 6.8% and 14.8% respectively, over the same period, to reach respective values of $39.8 billion and $8.6 billion in 2016.

7.1. REGULATIONS AND LABELING Organic is a labeling term that indicates that the food or other agricultural product has been produced through approved methods that integrate cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity. Synthetic fertilizers, sewage sludge, irradiation, and genetic engineering may not be used. Organic farming is one of the fastest growing segments of U.S. agriculture. As consumer interest continues to gather momentum, many U.S. producers, manufacturers, distributors, and retailers are specializing in growing, processing, and marketing an ever-widening array of organic agricultural and food products. This section summarizes growth patterns in the U.S. organic sector in recent years, by market category, and describes various research, regulatory, and other ongoing programs on organic agriculture in the U.S. Department of Agriculture. The National Organic Program regulates all organic crops, livestock, and agricultural products certified to the United States Department of Agriculture (USDA) organic standards. Organic certification agencies inspect and verify that organic farmers, ranchers, distributors, processors, and traders are complying with the USDA organic regulations. USDA conducts audits and ensures that the more than 90 organic certification agencies operating around the world are properly certifying organic products. In addition, USDA conducts investigations and conducts enforcement activities to ensure all products labeled as organic meet the USDA organic regulations. In order to sell, label, or represent their products as organic, operations must follow all of the specifications set out by the USDA organic regulations. If a product has the USDA organic seal, it is certified organic and has 95 percent or more organic content. For multi-ingredient products such as bread or soup, if the label claims that it is made with specified organic ingredients, those specific ingredients have been certified organic. There are other voluntary labels for livestock products, such as meat and eggs. Animal raising claims must be truthful and not misleading. USDA’s Food Safety Inspection Service verifies the truthfulness of these claims: 

Free-range. This label indicates that the flock was provided shelter in a building, room, or area with unlimited access to food, fresh water, and continuous access to the outdoors during their production cycle. The outdoor area may or may not be fenced and/or covered with netting-like material. This label is regulated by the USDA.

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Cage-free. This label indicates that the flock was able to freely roam a building, room, or enclosed area with unlimited access to food and fresh water during their production cycle.

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

Natural. As required by USDA, meat, poultry, and egg products labeled as “natural” must be minimally processed and contain no artificial ingredients. However, the natural label does not include any standards regarding farm practices and only applies to processing of meat and egg products. There are no standards or regulations for the labeling of natural food products if they do not contain meat or eggs.

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Grass-fed. Grass-fed animals receive a majority of their nutrients from grass throughout their life, while organic animals’ pasture diet may be supplemented with grain. Also USDA regulated, the grass-fed label does not limit the use of antibiotics, hormones, or pesticides. Meat products may be labeled as grass-fed organic.

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Pasture-raised. Due to the number of variables involved in pasture-raised agricultural systems, the USDA has not developed a federal definition for pasture-raised products.

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Humane. Multiple labeling programs make claims that animals were treated humanely during the production cycle, but the verification of these claims varies widely. These labeling programs are not regulated under a single USDA definition.

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No added hormones. A similar claim includes “Raised without Hormones.” Federal regulations have never permitted hormones or steroids in poultry, pork, or goat.

7.2. MARKET SIZE AND TRENDS Burgeoning consumer interest in organically grown foods has opened new market opportunities for producers and is leading to a transformation in the organic foods industry. Once a niche product sold in a limited number of retail outlets, organic foods are currently sold in a wide variety of venues including farmers markets, natural product supermarkets, conventional supermarkets, and club stores. Since the early 1990s, certified organic acreage has increased as producers strive to meet increasing demand for organic agricultural and food products in the United States. The dramatic growth of the industry spurred Federal policy to facilitate organic product marketing, and is leading to new government activities in research and education on organic farming systems. 

U.S. sales of organic food and beverages have grown from $1 billion in 1990 to $26.7 billion in 2010. Sales in 2010 represented 7.7 percent growth over 2009 sales. Experiencing the highest growth in sales during 2010 were organic fruits and vegetables, up 11.8 percent over 2009 sales

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Organic food and beverage sales represented approximately 4 percent of overall food and beverage sales in 2010. Leading were organic fruits and vegetables, now representing over 11 percent of all U.S. fruit and vegetable sales.

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Total U.S. organic sales, including food and non-food products, were $28.682 billion in 2010, up 9.7 percent from 2009. Organic non-food sales grew 9.7 percent in 2010, to reach $1.97 billion.

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Mass market retailers (mainstream supermarkets, club/warehouse stores, and mass merchandisers) in 2010 sold 54 percent of organic food. Natural retailers were next, selling 39 percent of total organic food sales. Other sales occur via export, the Internet, farmers’ markets/ Community Supported Agriculture, mail order, and boutique and specialty stores.

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Certified organic acreage in the United States reached more than 4.8 million acres in 2008, according to latest data posted by USDA. U.S. total organic cropland reached 2,655,382 acres in 2008, while land devoted to organic pasture totaled 2,160,577 acres.

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California leads with the most certified organic cropland, with over 430,000 acres, largely used for fruit and vegetable production. Other states with the most certified organic cropland include

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Wisconsin, North Dakota, Minnesota and Montana. Forty-five states also had some certified organic rangeland and pasture in 2008; of those, 13 states had more than 100,000 acres each, reflecting the growth in the U.S. organic dairy sector between 2005 and 2008.

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

Certified organic cropland acreage between 2002 and 2008 averaged 15 percent annual growth. However, it still only represented about 0.7 percent of all U.S. cropland, while certified organic pasture only represented 0.5 percent of all U.S. pasture in 2008. Overall, certified organic cropland and pasture accounted for about 0.6 percent of U.S. total farmland in 2008.

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Fresh produce is still the top-selling organic category in retail sales. Meanwhile, the organic livestock sector has seen growth, with 2.7 percent of U.S. dairy cows and 1.5 percent of layer hens managed under certified organic systems.

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According to Organic Monitor estimates, global organic sales reached $54.9 billion in 2009, up from, $50.9 billion in 2008. The countries with the largest markets are the United States, Germany, and France. The highest per capita consumption is in Denmark, Switzerland, and Austria.

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The U.S. organic food industry crossed a threshold in 2000: for the first time, more organic foodwas purchased in conventional supermarkets than in any other venue.

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Growth in retail sales has equaled 20 percent or more annually since 1990. Organic products arenow available in nearly 20,000 natural foods stores, and are sold in 73 percent of all conventional grocery stores.

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According to USDA estimates, U.S. certified organic cropland doubled between1992 and 1997, to 1.3 million acres and have tripled again from that period to 2010.

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The new U.S. Department of Agriculture standards for organic food are expected to facilitate further growth in the organic foods industry.

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Fresh produce is the top-selling organic category, followed by nondairy beverages, breads and grains, packaged foods (frozen and dried prepared foods, baby food, soups, and desserts), and dairy products. Organic dairy has been the most rapidly growing segment, with sales up over 500 percent between 2004 and 2010.

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Nine USDA agencies have expanded research, regulatory, and other programs on organic agriculture.

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The main regulatory program is the creation, implementation, and administration of the USDA organic standard. Other programs include crop insurance for organic farmers, information provision, and promotion of organic exports.

The United States organic food market grew by 9.4% in 2011 to reach a value of $29.2 billion. Figure 8: United States organic food market value: $ million, 2007-2011

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United States organic food market value: $ million, 2007-2011

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Year

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$ million

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€ million

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

2007

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20,410.0

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14,670.8

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

2008

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23,607.0

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16,968.8

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15.7%

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2009



24,803.0



7,828.5

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5.1%



2010



26,712.8



19,201.3

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7.7%



2011



29,223.8



21,006.2

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9.4%



CAGR: 20072011





9.4%

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

% Gro wth

Source: Organic Trade Association Rivalry is heightened by limited product differentiation and negligible switching costs for buyers. However, healthy market growth tends to alleviate the threat somewhat. As individual consumers, buyers have limited power. However, consumer demand for organic food drives growth and will likely increase choice as retailers stock a greater variety of organic products.

7.3. MARKET DYNAMICS Suppliers are relatively small-scale farmers, whose influence on the market is essentially limited. However, many have integrated forwards and sell directly to end-consumers, strengthening their position somewhat. There is a strong threat from non-organic substitutes, which are cheaper to buy and are sold in greater volumes. Buyers in this market are numerous, with many being individual consumers holding little financial muscle. This weakens buyer power. Increasing consumer demand for organic food weakens buyer power somewhat, as retailers must then stock such products. Additionally, the rising presence of legislation concerning the development of organic land and food production methods is increasing the need for large retailers to integrate organic food products into their product range. However, the diversity of other products sold by most retailers strengthens their power. While switching costs for endconsumers tends to be negligible, a number of retailers operate incentive schemes for frequent shoppers and this can help secure customer retention. Price sensitivity is lowered, as consumers generally accept that organic foods cost more to produce. Although the key segments of this market (fruit & vegetable, prepared foods, dairy, beverages, bread and grains, meat, fish and poultry) are quite diverse, there is essentially limited product differentiation within each category, which enables buyers to shop elsewhere. Overall, buyer power is moderate. Organic food has a close association with direct sales to the public. Large quantities of organic food are sold through farmers markets. This is a form of forward integration, which enhances supplier power. However, individual suppliers are relatively small-scale, so their influence on the market is not great. The nature of the organic food business means that the raw material is very important, as it allows players to market their products with the organic label and command a higher price. Additionally, the geographical location is of great importance to the retailer. Retailers and suppliers often have long-term contracts, which increase supplier power. Some retailers also put emphasis on offering local produce which severely limits their choice of supplier. A few of the significant players dedicated to organic produce are also committed to certain standards when dealing with their suppliers, particularly in developing countries; this means that even smaller suppliers have significant power. However, the entrance of large retailers into the market could increase the pressure on smaller suppliers. As there are still many smaller

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organic farmers who supply the bulk of the market, large retailers are usually at a distinct advantage in this market, as they command far more power. Overall, supplier power is weak. As suppliers generally depend on retailers to sell their products, growing consumer demand for organic food products is likely to drive the growth of retail outlets. The International Federation of Organic Agricultural Movement (IFOAM) represents the worldwide body of organic agriculture and provides a platform for global exchange and co-operation, although regulation differs regionally. Labeling in the US is overseen by the National Organic Program. Compliance with legislation regarding organic labeling can be costly and may deter new entrants. Additionally, the large size of leading incumbents may serve to put off new entrants, although the diverse nature of the leading players' revenue streams means that there is less likelihood of retaliation. Strong historic growth that is predicted to continue in the forecast period is likely to attract new entrants. Overall, there is a strong threat of new entrants. The main substitutes to the organic food market include non-organic versions of the products, which are notably cheaper. For sole organic retailers, organic products are marketed for their environmental benefits and nutritional quality, which limits the threat of cheaper non-organic products. However, most retailers stock these non-organic substitutes, and thus their threat on such retailers’ revenues is limited. Another possible alternative to purchasing these types of products is subsistence farming; growing organic agricultural produce for one’s own consumption. However, this activity has switching costs, it is time-consuming, requires some degree of specialist knowledge, and incurs the cost of purchasing seeds, fertilizer, and gardening products. In addition, many people do not have the land required to make this a viable option. Moreover, quantity and quality of end produce is not guaranteed. Even those who can successfully conduct subsistence farming are unlikely to grow everything to meet their own needs; they may still need to purchase agricultural products from market players. For other categories, individual growth is not feasible. Overall, there is a strong threat from substitutes. Players within this market range from small specialized organic shops to large supermarket chains. Thus the importance of organic food revenues differs, depending on their level of specialization. Limited product differentiation within each organic food category and negligible switching costs for buyers heightens rivalry. This is, however, mitigated in instances where players offer a wider selection of organic food products. For large supermarkets, organic produce contributes a small amount to revenues; most supermarkets have not only nonorganic food, but non-food products such as clothing, electricals and homeware to provide other sources of revenue. This limits rivalry between these players. Low cost switching and undifferentiated products, to a certain extent, increase rivalry between players. Strong market growth in the US market serves to ease the degree of rivalry amongst players, as they can generate revenues without encroaching on other players’ share of the market. Overall, there is a moderate degree of rivalry in this market.

7.4. U.S. – EU ORGANIC EQUIVALENCE AGREEMENT On Feb.15, 2012, at BioFach Germany, European Commissioner Dacian Ciolos for the European Union’s (EU) Agriculture and Rural Development and Deputy Secretary Kathleen Merrigan of the U.S. Department of Agriculture signed an organic equivalence arrangement between the world’s two largest markets for organic food. For further information, please visit www.fas.usda.gov/organictrade/ [The U.S. Department of Agriculture (USDA) is conducting preliminary discussions with Switzerland regarding a possible equivalency agreement. There were meetings in November 2012 and March 2013. The next meeting is planned around June 2013. ] Under the arrangement, the EU will recognize USDA’s National Organic Program (NOP) as equivalent to the EU Organic Program (under applicable EU regulations) and will allow products produced and certified as meeting USDA’s NOP standards to be marketed as “organic” in the EU. Likewise, the United States will allow European products produced and certified under EU Organic Program to be marketed as “organic” in the United States. USA FOOD & BEVERAGE MARKET STUDY

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Timelines  February 15, 2012 – Agreement/EU Act published following exchange of letters  June 1, 2012 – Effective date that trade may begin under the arrangement  June 1, 2015 - Agreement effective for three years  EU and United States to revisit this arrangement in three years for areas of improvement and possible elimination of the import certificate requirements Geographic Scope of this Agreement  Product grown, processed, or packaged and certified by an accredited certifying agency (ACA) operating within their respective country/region borders can be shipped directly to the EU/U.S. as certified organic product.  Product certified to either standard that has not been “handled” (touched down) in the United States or EU cannot be shipped directly to the EU/U.S.  Product not grown, processed or packaged in the EU that is destined for the United States must be certified to the USDA-NOP standard by a USDA-accredited certifier.  Product not grown, processed or packaged in the United States to be shipped directly to Europe must be certified to the EU standard or certified by a Certification Body recognized by the EU as an equivalent Certification Body/Foreign Certification Agent. Mutual Accreditation  The EU and U.S. mutually recognize Accredited Certification Agents (ACA) and Certification Bodies (CB) as accredited certification agents.  Product grown, processed, or packaged in the U.S./EU can be shipped directly to the EU/U.S. as certified organic product  Product certified to either standard that has not been “handled” (touched down) in the United States or EU cannot be shipped directly to the EU/U.S.  Product not grown, processed or packaged in the EU destined for the United States must be certified to the USDANOP standard by a USDA-accredited certifier.  Product not grown, processed or packaged in the United States to be shipped directly to Europe must be certified to the EU standard or certified by a Certification Body recognized by the EU as an equivalent Certification Body/Foreign Certification Agent. Are all-natural claims losing their luster? The phrase 'all-natural' is still emblazoned on scores of new food and beverage launches, but not quite as many as it used to be, according to Mintel research. Speaking at the 7th annual Food Technology & Innovation Forum in 2012, Mintel Innovation & Insight Director Lynn Dornblaser said that natural claims featured on 14% of new product launches in the US in 2010. In 2012, that number had dipped to 12%. There is some consumer fatigue around ˜natural” While not a huge shift, it is perhaps an indication that natural claims are not quite as sexy as they used to be, she said. There is some consumer fatigue around ˜natural”, and we are starting to see companies hone in on some more specific claims instead.• But she added: We’ve also seen that since 2010, there has been a drop off in no additives/preservatives claims, organic claims and vitamin/mineral fortified claims.• Meanwhile, growth in several other claims - from ethical to plus or minus claims, functional claims and ˜suitable for” claims has also "flattened out" since 2010, she added. However, there has been growth in some specific functional claims in areas such as heart and digestive health.

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Four key consumer trends: The bulk of her presentation focused on four key consumer trends: Wellness is inescapable: Wellness is about spiritual and emotional wellbeing as well as healthy food, said Dornblaser. As such, a premium Kroger private label mac & cheese product (˜wholesome at home”) fits in very neatly with this concept. Lynn Dornblaser: "There is some consumer fatigue around ˜natural." Is it good for you? Maybe not in the strictest sense (it’s not low in calories, fat, or sodium), but is it about ˜wellness™ in a broader sense? You bet, she said. It’s comforting and wholesome, and it makes you feel good. Mainstreaming natural: While all natural claims might have dropped off a little, she said, consumers still equate natural with healthy, while the pressure to “clean up” labels is as strong as ever. The authenticity of where: Provenance is key, but it doesn’t have to be about “local” food. What matters is that you know where your product comes from and you tell consumers about it, whether it’s from the Amazon or your local farmer, said Dornblaser. Access anything, anywhere: Companies need to think more creatively about how to tap into the next generation of smart-phone equipped, on-the-move consumers, said Dornblaser, whether it’s by adding QR codes to products enabling shoppers to access key information about your wares in real time as they shop, or by offering novel ways to shop online. One very interesting example of this is attempts by Tesco in South Korea and PeaPod in Chicago to create virtual stores on the walls of railways stations or tunnels, where commuters can browse through pictures of products, scan the QR codes with their smart phones as they walk past, and get them delivered by the time they arrive home that night. What do consumers really think about food ingredients and technologies? Consumers are faced with a barrage of information from the media, social networks, blogs and other sources about 'hot button' food issues, from GMOs and food dyes to nanotechnology, said Lindsey Loving from the International Food Information Council (IFIC) But while it is important for manufacturers to keep on top of what is trending on social networks, traditional surveys can often give a more representative view of what the average consumer thinks about these issues, she said. For example, nationally representative IFIC surveys of US adults show that unprompted, consumers are not as worried about 'food chemicals' or GMOs as some commentators claim, said Loving. Negative perceptions about certain ingredients are also reinforced by the food industry itself, with consumers often citing onpack claims such as 'no HFCS' or 'no nitrates' as evidence that something must be wrong with these ingredients, she said. "These labels are raising awareness of an issue that many consumers might not actually be thinking about." As for nanotechnology, research suggests that consumers are reasonably open-minded about it at the moment provided there is a clear consumer benefit, she said. Typically, when it comes to new technologies, consumers will ask, why are you doing this, who will benefit, and is it worth it, she said. Dole Foods: Experts are out, bloggers are in... (and is it more important to be 'authentic' than right?) In a presentation about how companies can embrace social media, Dole Nutrition Institute SVP Jennifer Grossman showed delegates a chart with 'out' on the left and 'in' on the right. 'Out' are experts and authority and 'in' are bloggers and authenticity. So how can companies navigate a space where facts have been replaced by opinion and being authentic is more important than being right? It's a challenge, said Grossman. USA FOOD & BEVERAGE MARKET STUDY

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However, there are also huge opportunities for companies to join the conversation and engage with bloggers and other online influencers to find out what consumers are thinking and identify new growth opportunities, she added. It's also important to be strategic, targeted and discerning when using social media, she said, or you can end up irritating your audience and just contributing to the noise instead of being effective. "Be selective." PepsiCo: When will nutrition really get personal? PepsiCo SVP Gregory Yep kept his cards pretty close to his chest during his presentation, in which he talked about "white space opportunities", "changing paradigms" and the importance of cross-disciplinary research (Pepsi has statisticians, biologists, chemists, engineers and computer scientists all under one roof). Dr Yep: 'Eventually, nutrigenomics is a tool that all food companies will be looking at' Delegates also got a top-line view of how PepsiCo spends its R&D budget, from working with athletes at the Gatorade Sports Science Institute to technology scouting, taste trekking around the globe and searching for the next big natural high intensity sweeteners. On the subject of nutrigenomics, Dr Yep said PepsiCo does not yet have any products that embrace this technology as it is "not ready". But he added: "Eventually it's a tool that all food companies will be looking at." MyPlate 2.0 In a presentation looking at how to help Americans meet the 2010 Dietary Guidelines, USDA's Dr Robert Post said that the MyPlate design was here to stay, but that the messaging around it would evolve. Praising the Nestle 'Balance Your Plate ' initiative as a good example of how to incorporate the MyPlate concept into nutrition marketing, he said that USDA was currently exploring similar initiatives as part of 'MyPlate 2.0'.

Dr Robert Post: Americans are eating far too many empty calories. As to the relationship between the dietary guidelines and what Americans actually eat, the 2010 'report card' for the nation was "not one you want to bring home to Mom", he said. But he added. "And Mom's not doing too well herself." However, consumer surveys showed that increasing numbers of Americans are at least trying to follow government healthy eating advice, he said, with women, older people and highly educated Americans trying the hardest. Think global, act local... Dairy Queen on how to make all All-American concept work in China, Singapore and Egypt

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It's not in quite as many markets as McDonald's -yet - but Dairy Queen is now in 21 countries from Egypt to Saudi Arabia, Guatemala and China, said global product development boss Dr William Barrier. And trying to strike a balance between providing a consistent experience and catering to local tastes is an ongoing challenge. In a presentation outlining the challenges of operating in markets where the infrastructure, regulatory requirements and consumer tastes can be very different to those in Dairy Queen's home market, Dr Barrier described how the company had had to adapt its supply chain and product development systems to cope. For example, in the US, Dairy Queen typically works with Mom & Pop-scale franchisees, he said, whereas in Asia, it typically works with large corporations operating large numbers of outlets. Similarly, while Dairy Queen's target audience in some markets is families, in some Asian markets, it's core demographic is hip 18-32-year old Millennials looking for a more upmarket experience, in both products and decor. As for ingredient-sourcing, there is no one-size fits all policy, he said. In China, for example, Dairy Queen quickly discovered that finding an industrial-scale, automated supplier of chocolate brownie pieces for adding to Blizzards was not going to be easy, while in Egypt, it is only permitted to use ingredients with a shelf-life of three months. In the Middle East, meanwhile, it proved very difficult to find suppliers of fresh chicken, while any market entry in India will likely involve "radical changes" to product menus, he predicted. Dr Barrier: Think global, act local As for the development cycle for new products, this can range from six months to three to four years, depending on whether proprietary ingredients are involved and whether the infrastructure in the market in question is in place to take new concepts to market, he said. On the product development front, Dairy Queen has also been working with flavors giant Givaudan to create novel variations of the Blizzard built around concepts such as 'wellbeing' (green tea); 'rooted and real' (pink guava & almonds, ginger chocolate, lychee cheesecake); and 'desire and delight' (tiramisu, strawberry and white & dark chocolate). Some of these will translate into multiple markets, while others are more region-specific, he said. Are you ready for FSMA? It's 'HACCP on steroids', says Leavitt Partners While several aspects of the Food Safety Modernization Act (FSMA) are still being finalized, we know broadly what the FDA expects, and many manufacturers need to ask themselves some tough questions, said Leavitt Partners senior director for food & import safety Melanie Neumann. One of these is: 'Do I really know who my suppliers' suppliers are?' she said. Others include, 'How robust are my supplier assurance systems?' and 'Am I chasing up gaps/issues identified in questionnaires from overseas suppliers?' Similarly, while the details of the Voluntary Qualified Importer Program (VQIP) have not been finalized yet, Neumann urged delegates to consider whether their key overseas suppliers might benefit from being enrolled into the scheme, which would effectively shift them into the "priority lane" in the event of any hold up at the border, she said. Millennials, and busy energizing moments... In a presentation exploring how to translate consumer insights into winning new products, InsightsNow CEO Dr David Lindahl told delegates that people in focus groups are in a "rational mode". However, when consumers go into a store, or eat your product at home, they are operating at an "emotional level", and this is what manufacturers must explore if they are to find out what consumers really want, he said. By thinking about a category such as meal replacement in a more open-ended way, manufacturers can also unlock new opportunities, he suggested.

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Take meal replacement, which is currently a $2.3bn category in the US. In reality, it could be worth more than double that, he said, if you explore - via analysis of social media as well as qualitative surveys - consumers' meal replacement 'moments', what options they have, what choices they make, and how satisfied they are with those choices. For example, for many Millennials, meal replacement is not about drinking a Slimfast shake or having a protein bar, but eating a pot of Chobani and a Coke Zero while making the children's lunchboxes, he said. "It's about capturing that busy energizing moment." Does it look like a juice? Does it pour like a juice? Is there an orange on the label? So why is there only 5% juice? Consumers expect to see added sugar in donuts and candy bars. But when they discover reams of it in dried fruits, juices and other products marketed as healthy foods, they feel shortchanged, and rightly so, according to one nutrition expert. Speaking at a panel debate at the 2013 Food Technology & Innovation Forum last week, Dr Jim Painter, professor at the school of family and consumer sciences at Eastern Illinois University, said manufacturers are required by law to list the juice content in juice products on the Nutrition Facts panel (˜contains 10% juice”). But when the front of a 5% juice product looks identical to the front of 100% juice product sitting right next to it in the chiller, how many consumers bother to flip the pack and read the small print? Pointing at a picture of Sunny Delight, he said: Does it look like a juice? Does it pour like a juice? Is there a big orange on the front? But it’s only 5% Juice…” He went on to show delegates a picture of cartons of Minute Maid sitting next to each other in a chiller. One (Minute Maid Original) had pictures of oranges on the label and the phrase “100% juice” on the label. Yet at a glance, they look much the same, he said. He then compared Campbell Soup’s V8 Fusion, which has 100% juice, and V8 Splash, which looks very similar but has only 10% juice, he observed. “Here’s where we are getting a little dishonest.” Similarly, dried fruits are not always as healthy as they seem, with banana chips often sold deep-fried and coated in sugar while dried cranberries are typically made palatable through the addition of significant amounts of added sugar to combat their tart flavor, he said. While there are reduced sugar dried cranberries available (Ocean Spray now sells Craisins sweetened with sucralose as well as sugar), most sweetened dried cranberries “are more like gummy bears or M&Ms”• despite their phytonutrient content, he claimed. Raisin juice concentrate contains small amounts of glutamic acid, and works surprisingly well in savory products Raisin paste - produced by extruding raisins through a fine mesh screen - can help manufacturers reduce sugar in sundae-style yogurts and cottage cheese, ice cream, fruit-filled cereal products, granola bars and extruded breakfast cereals, said Reinagel. In bakery items, such as breads, cookies and pastries, it also inhibits molds, extends shelf-life and enhances flavor; while adding it to burgers and other meat products increases succulence and improves flavor, she said.

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8. Dairy Companies in this industry mainly manufacture dairy products such as pasteurized milk, cream, butter, yogurt, cheese, and dry, condensed and evaporated milk. The industry also manufactures substitute dairy products made from soybeans and other nondairy ingredients. Frozen dairy products like ice cream and frozen yogurt are excluded from this industry. Rapidly rising demand from growing foreign economies drove up milk and dairy product exports during the past five years, benefiting the US Dairy Product Production industry’s revenue. At the same time, heightened world demand raised the price of raw milk, which forced the industry to pass rising costs on in the form of higher prices. According the US International Trade Commission, exports made double-digit gains almost every year in the past five years. As a result of high export growth, revenue is expected to increase at an annualized rate of 0.3% in the five years to 2012. This rather anemic outcome stems largely from a 15.7% dip in 2009 revenue due to reduced disposable incomes and low world demand during the recession. Although milk and dairy products are staples in American diets, consumers bought less of each and chose value-brand products. In 2012, higher consumer spending was expected to boost revenue 1.0% to an estimated $89.3 billion. The dairy market in the United States accounts for 15 percent of the global dairy market. Cheese dominates the market, with 40 percent share, followed by milk (34 percent), yogurt, cream cheese and cottage cheese (12 percent), spreadable fats (8 percent), cream (5 percent) and chilled desserts (1 percent). During the past decade, dairy product wholesalers and retailers have undergone consolidation. The increased concentration of downstream markets required dairy producers to supply vendors on a national scale. Price competitiveness became increasingly important for securing national supply contracts, but increasing input costs (a result of rising feed costs) forced producers to raise prices. To mitigate rising costs, dairy manufacturers progressively merged, acquired competitors and formed strategic alliances to improve efficiencies through vertical integration. For example, major player Dean Foods acquired WhiteWave- Alpro in 2009, extending its market reach to include Horizon Organic milk and Silk brand products in its product mix. Consequently, the number of enterprises is expected to fall 0.1% per year on average to 749 during the five years to 2012. In the next five years, dairy manufacturers are projected to benefit from higher consumer disposable income during continued economic recovery, which will boost revenue. Manufacturers are anticipated to introduce more high-profit products that cater to changing consumer tastes; for instance, more firms are adding probiotics and introducing new flavors to their products. Meanwhile, still rising feed costs will hamper profit expansion, and competition from overseas dairy producers will temper revenue growth. The industry is forecast to grow moderately during the five years to 2017, with revenue rising at an annualized rate of 0.7% to $92.3 billion. Downstream demand for dairy products, such as grocery wholesalers and food-service industries, remained positive during the five years to 2012 because milk, cheese and butter are considered staple items and are also used in products ranging from baby formula to dried whey. As such, per capita dairy consumption generally moves in line with population growth. However, the input price of raw milk fluctuated significantly during the past five years, causing revenue to be highly volatile. Strong export growth drove revenue gains, but a recession-related dip in 2009 offset this growth somewhat and also contributed to increased volatility. Global economic recovery and growth in disposable incomes finally encouraged consumers to increase their spending on grocery items, including dairy products, further driving up industry demand from recessionary lows. As a result of contrasting trends over the past five years, analysts expect revenue to increase at an annualized rate of 0.3%. In 2012, continued gains in the price of milk (ongoing since 2010) are expected to boost revenue 1.0% to an estimated $89.3 billion. Decreasing consumption among children, who have been turning to soft drinks or fruit juices, has fueled declines in fluid-milk consumption. In addition, as children grow older, they typically increase soft drink consumption and further decrease milk consumption. As a result, a falling percentage of raw milk has been going into fluid-milk production as milk beverages

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increasingly compete with substitutes. Fortunately, consumption of other milk-based products, like cheese, whey and yogurt, has helped offset declines in fluid-milk consumption.

8.1. LIFE CYCLE The Dairy Product Production industry is expected to grow at a similar rate to the overall economy during the 10 years to 2017. Although domestic dairy consumption is relatively stable, volatile global demand affects revenue. In particular, high global demand drives up the price of raw milk, a major input. Therefore, producers must pass on the rising input costs to downstream buyers in the form of higher prices, which boosts revenue. Firms can generally raise prices successfully because dairy is a staple food product. As a result, in the 10 years to 2017, analysts estimate the industry’s contribution to the economy, as measured by industry value added (IVA), to increase at an annualized rate of 1.6%. During the same period, GDP is forecast to rise at an average annual rate of 1.9%. The comparable growth rates indicate that the industry is in the mature phase of its life cycle. Dairy products enjoy wholehearted market acceptance because milk, cheese and butter are staple items in downstream industries and consumer kitchens. Per capita dairy consumption fluctuates only slightly from year to year, but it is generally on the rise. Product development has aided growth in per capita consumption during the past five years. New yogurt flavors are regularly being introduced, including popular desserts and exotic fruits; greater organic product offerings are tapping into growing environmental consciousness; and “functional” marketing, such as promoting low-fat, probiotic and omega-3 features, is targeting the growing population of health-conscious consumers. Another indication that the industry is in the mature life cycle stage is that it is experiencing consolidation in response to consolidation at the downstream retail level. Demands from newly formed national retail chains have encouraged manufacturers to consolidate, as price competitiveness and product ranges became crucial in obtaining national supply contracts. Therefore, mergers and acquisitions are expanding firms’ product mix and market reach, while also allowing them to reduce prices. Consequently, the number of enterprises is forecast to decrease at an annualized rate of 0.5% to 717 during the 10 years to 2017.

8.2. PRODUCTS AND MARKETS Fluid milk and milk-based products Fluid milk and milk-based products make up the industry’s largest product mix, accounting for 42.2% of revenue. There are two milk quality grades: grade A, or fluid milk, is suitable for direct human consumption and is either homogenized, pasteurized or both; and grade B milk is only used in manufacturing, most often for cheese. Besides milk, this segment also includes milk-based beverages, buttermilk, cottage cheese, milk-based chocolate drinks, heavy cream, dips, sour cream, nonalcoholic eggnogs, flavored milk drinks, whipped cream and toppings. According to the International Dairy Foods Association (IDFA), total US sales of fluid-milk products changed little during the past two decades, with only slight declines. Consumers have slowly trended away from whole milk to lower-fat milk during the past five years, with rising concerns for health and fat contents in their diets. Meanwhile, sales of milk-based products have remained flat during the five-year period. While consumption for more discretionary food items, like eggnog and dips, decreased as consumers cut back on their spending during the recession, sales of healthy dairy products, like yogurt, have offset much of this loss as consumers became increasingly aware of the health benefits of some dairy foods. Cheese Cheese is expected to make up the second-largest product segment at 38.4% of revenue in 2012. The segment includes cheddar, Swiss, mozzarella, Monterey jack, blue and cream cheeses. According to the IDFA, US cheese consumption is on the rise. Increased consumption of fast foods and ethnic foods, which often use large portions of cheese, greater varieties, increasing food sophistication and more convenient packaging are driving cheese sales. In America, mozzarella cheese consumption reached 11.3 pounds per capita and cheddar reached 10.4 pounds per capita in 2010. The two cheeses are the most popular single-cheese varieties, with cheddar cheese accounting for more than 75.0% of all American-type cheese production in 2010. Dry, condensed and evaporated milk products Dry, condensed and evaporated milk products account for about 16.6% of revenue in 2012. This segment includes dry whole, nonfat, skim and butter milks as well as infant formulas. Dairy product substitutes, such as soy milk and almond milk, form one of the leading products in this group. Dairy substitutes’ share of revenue continues to rise as consumers change their taste USA FOOD & BEVERAGE MARKET STUDY

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preferences or accommodate health needs. Overall, this segment’s share of revenue has increased slightly during the past five years because of the popularity of dairy alternatives that this industry produces. Creamery butter Butter is expected to make up the smallest product segment, contributing only 2.8% of revenue in 2012. Product shipments are divided according to the weight of their consumer packages, with a distinction being made for shipments greater than or less than three pounds. This product segment is expected to decrease as consumers shift toward healthier eating and, thus, become more wary of eating butter. Demand for dairy products is primarily determined by household incomes. In the case of staple products such as butter and cheese, changes in household incomes have little effect on demand. In the case of milk powders, which are often regarded as inferior products, purchases tend to fall as household incomes increase. Conversely, the consumption of luxury products such as gourmet or specialty cheeses will increase as household incomes increase. Other determinants include price, consumer lifestyles, population growth and demographics. Figure 9: Dairy food segments

Total: $89.3 billion Source: IBISWorld 2012 Price and lifestyles Staple products tend to be price inelastic because price increases fail to cause proportional declines in product demand. Premium cheeses are price elastic, and demand varies depending on relative product prices. After the recession, households ate at establishments away from home due to higher disposable income. The demand for cheese increased as a result of these lifestyle changes because cheese is used in fast food outlets, such as pizzerias, and can also be packaged in sliced or grated form. Nutrition and dietary awareness are becoming an increasingly important determinant of demand for dairy products. Dairy product manufacturers now commonly produce a range of reduced-fat or low-fat dairy products to appeal to health-conscious consumers. For example, concerns over high fat content and the “unhealthy” nature of some dairy-based foods had an adverse effect on demand for traditional dairy products such as butter. Demographics and competition As the population increases, demand for dairy products increases. At the same time, population demographics affect demand for particular dairy products. Younger age groups tend to be the main consumers of dairy products. The demand for dairy products is also influenced by competition from substitute products. In particular, fluid milk competes with a range of beverages including soft drinks, cordials and fruit juice (milk substitutes like soy and almond milk are not

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considered competition because such products are included in this industry). Competition is based on price, nutritional content, taste, convenience, branding and advertising. Wholesalers and supermarkets Wholesalers and supermarkets are the most important distribution channels for dairy products and together account for about 53.5% of revenue in 2012. Dairy product manufacturers may supply supermarkets directly or a wholesaler may act as an intermediary to deliver products to retail outlets. Fluid milk and fresh-cultured products are also sold to other retail outlets, including grocery store chains, mass merchandisers, convenience stores, smaller retail grocery outlets, warehouse club stores and grocery warehouses. Strictly at the retail level, national supermarkets are expected to demand about three-fourths of segment sales. This share of revenue increased in the past five years as consolidation of retailers led to an increased number of consumers shopping at these larger stores. Consequently, higher volumes of dairy products have been sold to this channel. Food-service industry Restaurants, cafes, caterers and other hospitality venues account for about 39.7% of revenue in 2012. They use milk, cheese, butter and cream in food preparation. In the past five years, this segment’s share of the market remained stagnant. Because this market is often tied to changes in consumer spending, demand fluctuates in line with the industry. During the recession when people had less disposable income, they went out to eat less. When disposable income levels recovered, however, consumers ate at restaurants more, which led to a higher volume of dairy purchased by this segment. Exports Exports account for about 6.8% of revenue in 2012. Although this is a small share of revenue, it is up from 3.7% of revenue in 2007. Booming economies in Asia and Latin America have increased disposable incomes in those areas and provided the opportunity to increase spending on dairy products that were once considered luxury goods.

8.3. LOCATIONS Dairy product manufacturers tend to be located close to dairy and cattle farms given the products’ perishable nature and high transportation costs. Traditionally, milk production is localized, but improvements in raw milk quality and declining transport costs have increased competition between producers in different regions and are allowing national dairy cooperatives to emerge. The Great Lakes, Mid-Atlantic and West regions account for the largest concentrations of industry locations. The Great Lakes region is estimated to account for 30.7% of establishments in 2012. Wisconsin is the region’s greatest contributor and the country’s largest dairy-producing state. Wisconsin accounts for 18.8% of the nation’s establishments. Further, the state is home to about 14.0% of all US dairy cows, making it ideal for dairy producers to base themselves in this region. The Mid-Atlantic encompasses about 16.0% of establishments in 2012. The region is home is to some of the country’s largest population centers. The West region is estimated to comprise 14.9% of establishments in 2012. Although California is the second-largest dairy-producing state in the United States, with 10.5% of establishments, it is the largest milk producer. The Plains regions accounts for about 11.7% of establishments. Minnesota has 5.1%, and Iowa and Missouri follow with about 2.0% each.

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Figure 10: Dairy plant distribution (%)

Source: IBISWorld 2012

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9. Functional Food Functional food is a food where a new ingredient(s) (or increased quantity of an existing ingredient) has been added to a food and the new product has an additional function often related to health-promotion or reducing a disease burden. Functional foods are an emerging field in food science due to their increasing popularity with health-conscious consumers and the ability of marketers to create new interest in existing products. The term was first used in Japan in the 1980s where there is a government approval process for functional foods called Foods for Specified Health Use (FOSHU). Some countries, such as Canada, Sweden, the United States and the European Union, have specific laws concerning the labeling of such products. The term "functional foods" does not have any legal meaning in the United States, but it is defined by the Institute of Food Technologists as "foods or food components that provide a health benefit beyond basic nutrition." In the United States, the kinds of claims which are allowed are overseen and regulated by the Food and Drug Administration (FDA). However, some claims will fall outside the range of the FDA and be accompanied by the disclaimer: "These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease." Such a disclaimer typically accompanies supplements rather than foods, but since the definition of functional food is still evolving and somewhat amorphous, a functional food may also bear this warning. The Academy of Nutrition and Dietetics (AND) defines functional foods as foods "that include whole foods and fortified, enriched or enhanced foods have a potentially beneficial effect on health when consumed as part of a varied diet on a regular basis, at effective levels." The AND breaks down functional foods into four categories: conventional foods, modified foods, medical foods, and foods for special dietary use. Conventional Foods These are the most basic of the functional foods because they haven't been modified by enrichment or fortification; they're still in their natural state. Most whole fruits and vegetables fall into this category because they're rich in phytochemicals such as lycopene and lutein, as well as other beneficial compounds. Modified Foods Foods that have been enriched, fortified or enhanced with nutrients or other beneficial ingredients. Calcium-fortified orange juice, folic acid enriched breads and margarine enhanced with plant sterols are functional foods that have been modified. Energy drinks that have been enhanced with herbs such as ginseng and guarana, as well as other potentially controversial foods, also fall into this category. Medical Foods The FDA defines medical food as "food which is formulated to be consumed or administered enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation." Medical foods include specialized formulas designed for people who have specific health problems. These foods require the help and supervision of a health care provider. Foods for Special Dietary Use These are similar to medical foods, but they're available commercially and don't require the supervision of a health care provider. These foods fill special dietary needs that are due to specific health conditions, such as celiac disease, lactose intolerance, or obesity. Gluten-free foods, lactose-free dairy products and foods designed to aid weight loss are considered foods for special dietary use if you have those conditions. Infant foods are also in this category.

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Health Claims The FDA allows certain health claims to be placed on food labels. Nutrient content claims, structure and function claims, or health claims can be placed on labels. Nutrient content claims describe the content of the foods and can include words like "free," "low," and "reduced." Calorie-free foods, low-fat foods and reduced-sodium foods display these types of claims. Structure and function claims describe the role of a nutrient in the function of your body. A yogurt label, for example, can claim "calcium builds strong bones." Health claims must be approved by the FDA. For example, foods that contain olive oil or oats and oatmeal can make specific claims about how those ingredients affect health. Yet, consumer skepticism persists mainly due to the fact that benefits associated with consuming the products may be difficult to dtect. The industry suggests the establishment of a health claim regulating agency, which may increase consumer confidence. Strict examination of some of the functional food claims may discourage some companies from launching their products.

9.1. INDUSTRY OVERVIEW The functional food industry, consisting of food, beverage and supplement sectors, is one of the several areas of the food industry that is experiencing fast growth in recent years. It is estimated that the global market of functional food industry will reach $176.7 billion in 2013 with a compound annual growth rate (CAGR) of 7.4%. Specifically, the functional food sector will experience 6.9% CAGR, the supplement sector will rise by 3.8% and the functional beverage sector will be the fastest growing segment with 10.8% CAGR. This kind of growth is fueled not only by industrial innovation and development of new products that satisfy the demand of health conscious consumers but also by health claims covering a wide range of health issues. The U.S. functional foods market was valued at $7.1 billion in 2009 and is projected to grow to $8.6 billion in 2015, a 21% increase driven by the increasing popularity of energy drinks and growing demand for fortified dairy products such as probiotic yogurts. After beverages, cereal products were the next largest category, with whole grain and oat content leading the way with heart health claims. Following that were soy products. Together, these 3 categories represent 85% of the U.S. functional food category. Changing demographics, in particular the aging baby boomer population, are helping to set the foundation for future growth. Healthcare trends, including pharmaceutical investment and research into diseases and chronic conditions that are rapidly gaining greater significance, are a further source for potential growth. At the same time, inorganic growth to date has been largely driven by acquisitions, licensing and partnership agreements. The first fortified food products resulted from public health endeavors. Vitamin B-enriched flour was introduced in the 1940s to combat pellagra; iodine-fortified salt substantially decreased incidences of goiter; and vitamin D-enriched milk virtually eliminated rickets. More recent initiatives, however, are emerging wholly from the private sector. In a movement that originated in Japan about 20 years ago, companies are creating and marketing “functional foods,” nutrient-rich products aimed at consumers who appreciate the role of diet in their health, and seek to prevent the onset of chronic disease through the adoption of specific behaviors. Some examples of nutraceuticals in functional foods include probiotics (microorganisms that provide digestive benefits), omega-3 (fish oil) extracts, and phytonutrients (found in plants such as soy beans, blueberries or grapes). Functional foods are used, distributed and regulated differently from medical foods and drugs. The primary distinction is that functional foods may be consumed freely as part of everyday life. Medical foods and drugs are used in specific cases to treat or manage a condition under medical supervision (see table).

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Figure 11: Comparing Functional Foods with medical foods and drugs

Difference

Functional foods

Medical foods

Prescription drugs

Uses

Energy enhancement; weight management; bolster gut, bone or heart health; disease risk reduction; memory improvement

Dietary management of a disease or condition with distinctive nutritional requirements (e.g. difficulty swallowing, loss of appetitie, nutrition repletion postsurgery)

Treatment of disease, symptom, or condition

Method of obtainment

No prescription or supervision needed; consumer selects

Used with medical supervision

Prescribed by health provider

Distribution channels

Supermarkets, drugstores, online, major retailers

Hospitals, pharmacies, drugstores, online

Pharmacies, hospitals

Regulatory body

No specific body, but is considered food and is therefore subject to FDA regulation

No additional FDA review / approval needed, but must abide by regulations concerning foods, e.g., labeling

FDA approval needed, a mutiyear, multistage review process

(FDA regulates and specific health claims that might be made)

(FDA regulates any specific health claimes that might be made)

As desired

As needed

Amount consumed

As needed

Source: company reports, Nutraceutical World, The New York Times, US Food and Drug Administration, Institute of Food Technologies

9.2. INDUSTRY DYNAMICS The US functional foods market is estimated to be the largest in the world, representing between 35 and 50 percent of global sales. Asia-Pacific is the next biggest market. Together, the US and Asia-Pacific are estimated to account for approximately three-quarters of the current global market for functional foods. Food and beverage companies are the primary force and the market is largely consolidated, with US companies playing a major role. Yet partnerships often factor into functional food production; companies enter into these agreements largely to share development costs and technical expertise. Nutraceutical extraction can be relatively costly; research and development is often significant, and there can be specialized technology needs as well. The groundwork for a product may be conducted in-house, or it may be outsourced to specialized suppliers dedicated to food ingredient technology research and product development.

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Figure 12: Functional Food Supply Chain

Agricultural & biotech researchers Plant yield and hardness, inputs e.g., Monsanto, DuPont

Food and beverage companies R&D, manufacturing and packaging e.g., Nestle, PepsiCo, Kraft

Ingredient suppliers Food processing R&D; Synthesis and formulation e.g., Cargill, ADM, Danisco

Retailers Distribution to consumer e.g., Walmart, Safeway

End consumers of functional food Source: company reports, Nutraceutical World, The New York Times, US Food and Drug Administration, Institute of Food Technologies Private-label brands may be poised to gain traction in the functional foods market during the current recession. These brands tend to gain unit market share during recessionary times because of their appeal to price-sensitive consumers looking to pay less for comparable items. From 1990 to 1991, unit share for these brands increased from 17.6 percent to 20 percent, and from 2001 to 2003, from 20 percent to 21.8 percent. The trend appears to be holding in the current downturn. From 2008 - 2012, sales of private-label food and other consumer products increased about 10 percent annually, compared with 3 percent growth for branded products. It is likely the trend could extend to functional foods; some manufacturers, such as FACT Corporation, already provide functional foods through private-label retail channels.

9.3. KEY PLAYERS, CATEGORIES AND EMERGING PRODUCTS The top 20 functional food companies are estimated to account for about 70 percent of the US market, with a small number of multinational companies comprising a significant share. Smaller players are nonetheless able to maintain a presence by creating niche markets; for example, Grupo Pascual produces milk drinks containing prebiotic fiber from chicory.

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Figure 13: Key Functional Food Players

Company

Key Functional Brand

PepsiCo

Quaker, Gatorade

Coca-Cola

Vitamin Water, Odwalla

General Mills

Cheerios, Yoplait

Kellogg

Special K, Kashi

Kraft

Capri Sun, Balance Bar

Nestle

Nesquik, PowerBar

Danone

Activia, Essensis

Unilever

Slim-Fast, Blue Band

Yakult Honsha

Yakult 400, Jole

Source: Natural Products Association Figure 14: Top 10 Functional Foods Named by Consumers

1. Fruits/Vegetables

70%

2. Fish/Fish Oil

18%

3. Dairy

16%

4. Herbs/Spices

10%

5. Whole Grains

10%

6. Fiber

7%

7. Meat and Poultry

7%

8. Tea/Green Tea

5%

9. Nuts

4%

10. Vitamins/Supplements

3%

Source: Natural Products Association

Soft Drinks, Dairy and Energy Foods Functional foods are categorized both by food and by health benefit. Soft drinks and dairy products constitute 60 percent of the market among foods. The soft drink category includes enhanced water, which has grown in popularity as consumers seek alternatives to carbonated beverages, perceived by some as high in sugar or artificial ingredients and therefore less healthy.

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Dairy is gaining in popularity, driven in large part by innovations in yogurts. By now, enough consumers are likely aware of the helpful bacteria naturally present in yogurts, increasing receptiveness to the idea of probiotic and prebiotic yogurts. Moreover, consumers do not need to markedly change their behavior to reap the benefits associated with functional yogurts—a single yogurt portion may be sufficient. In contrast, phytosterol-infused margarines are meant to be consumed three times a day—a behavioral change that may be undesirable to many consumers. Foods claiming to boost energy levels constitute 29 percent of the market categorized by benefit. These products tend to have attributes that the consumer can quickly feel, which has contributed significantly to their popularity. Products in the gut, bone, and heart health categories comprise a sizable share of the market and have traditionally been purchased by older consumers. Other functional foods include products with claims to help manage weight, sharpen mental faculties, and improve infant health. These products tend to be sought by younger consumers, especially those with or expecting children. Products for enhanced cognitive health, such as omega-3 fatty acids, are expected to be an $8 billion market by 2013, according to Packaged Facts. Other areas of growth are expected to be products for weight management, mood enhancement, and those that promote healthy, beautiful skin.

9.4. KEY FACTORS TO DRIVE DEMAND OF FUNCTIONAL FOODS       

Increased consumer interest in controlling their health Certain sub-populations: baby boomers and children Evidence-base science linking diet to chronic disease risk reduction Opportunities to reach niche markets Advances in technology (e.g., biotechnology, nutrigenomics) Changes in food regulations Escalating health care costs

1.

Americans believe they have some control over their health and that food and nutrition play the most important role in maintaining and improving their overall health. Heart health and weight control are the top health concerns of Americans. Consumers are most aware of food/health benefit associations related to their top two health concerns as well as longheld diet and health relationships. Despite increases in awareness, the number of Americans actually consuming these foods for their associated health benefits has generally not changed since 2005. Americans cite price, taste, availability, and convenience, among others, as barriers to consuming functional foods. Consumers look most frequently to medical and nutrition professionals to help them make decisions around foods and beverages.

2. 3. 4. 5. 6.

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10. Processed Food The Food Processing industry consists of companies engaged in processing and packaging produce, meats, fish, animal feeds, fruit juices and dairy products. The industry includes grain milling, crop cleaning, grading and packaging, animal slaughtering and packaging operations, seafood processing, freezing, canning operations, juice, coffee, tea, diary and all other food manufacturers. The Food Processing industry excludes primary crop growers, classified in Fishing & Farming. The Food Processing Industry is a mature sector that loosely tracks underlying demographic trends, such as population and income growth. Companies generate revenue from the sale of food and ingredients to a whole host of customers, ranging from supermarket chains and local bodegas to restaurants and other players further down the processing chain. The food manufacturing industry is one of the United States’ largest manufacturing sectors, accounting for more than 10 percent of all manufacturing shipments. Demand for processed food products tends to be less susceptible to fluctuating economic conditions than other industries. There are approximately 28,000 establishments in food manufacturing. Large multinationals are a big presence in the industry but although they account for 36 percent of all the jobs in the industry, they represent just over 500 of the total number of companies. Eighty nine percent of companies employ fewer than 100 workers.

10.1. TOP-LINE DRIVERS Food, of course, is one of life's basic necessities. As such, underlying demand tends to be steady through prosperous and difficult economic times. That said, food companies benefit from population growth. Also, higher aggregate personal income affords people "richer" diets and those on the margin may rely less on homegrown staples. Proactive efforts are arguably most critical for top-line growth. Companies endeavor to capture a greater share of household budgets through strong branding and the strategic positioning of their offerings. Trend-right products and re-formulations that are easy to prepare, portable, and healthful usually gain good traction. Expansion into new geographic markets is also a key growth driver. Cross-cultural expansion can prove difficult, though, given entrenched regional cuisine and tastes.

10.2. SEGMENTS Food companies fall into various sub-segments, and painting them all with one broad, brush stroke can lead to surprising deviations from expected performance. Investors should be cognizant of where a producer resides within the commodity"value added" spectrum. Poultry and other commodity-type producers have little individual influence over product pricing, and are susceptible to such vagaries as weather-related crop damage and cross-border trade sanctions. Commodity-like producers are also constrained by long harvest (in the case of grains) and life (livestock) cycles, and, therefore, unable to quickly adjust "production" capacity. These factors result in relatively high earnings and share price volatility. Through innovation and branding, successful marketers of value-added goods face less direct competition and have more control over pricing. Accordingly, they enjoy stable returns.

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10.3. TOP 20 FOOD PROCESSING COMPANIES Figure 15: Top 20 Food Processing Companies

Current Ranking

Previous Ranking

Company Name

2011 Food Sales

2010 Food Sales

2011 Total Company Sales

2011 Net Income (Loss)

2010 Net Income (Loss)

1

1

Pepsico Inc.

38,396(1)

35,600

66,504

6,462

6,338

2

4

Tyson Foods Inc.

30,975

27,293

32,266

733

765

3

2

Nestle (U.S. & Canada)

26,200

29,600

94,000

10,500

35,000

4

3

Kraft Foods Inc.

25,171

29,524

54,365

3,547

4,139

5

5

Anheuser-Busch InBev

15,304

15,296

39,046

7,959

5,762

6

6

JBS USA

14,000E

13,342

14,000E

NA

117

7

8

Dean Foods Co.

12,698

11,758

13,055

(-1,592)

83

8

7

General Mills Inc.

12,464

12,005

16,658

1,589

1,804R

9

10

Smithfield Foods Inc.

11,093

10,264

13,094

361

521

10

9

Mars Inc.

10,500

10,500

30,000

NA-Private

NA-Private

11

13

Coca-Cola Co.

9,861

8,273

46,452

8,572

11,809

12

12

Kellogg Co.

8,873

8,402

13,198

1,231

1,247

13

21

Saputo Inc.

6,423

5,606

6,930

381

450

14

14

ConAgra Foods Inc

8,377

8,002

13,263

474

819

15

16

Cargill Inc.

8,000E

7,000E

119,500

2,690

1,990 (R)

16

15

Hormel Foods Corp.

7,895

7,221

7,895

479

396

17

11

MillerCoors LLC

7,550

7,571R

7,550

1,004

1,057

18

17

Dole Food Co. Inc.

7,224

6,893

7,224

38

(-30)

19

18

Pilgrim's Pride

6,779

6,237R

7,536

(-497)

87

20

23

Hershey Co.

6,081

5,671

6,081

629

510

Source: USDA, ERS using data from U.S. Sensus Bureau, 2011 Annual Survey of Manufacturers

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Industry Characteristics Food and beverage manufacturing plants transform raw agricultural materials into products for intermediate or final consumption by applying labor, machinery, energy, and scientific knowledge. Some products may serve as inputs for further processing (such as syrup for manufacturing soda). In 2011, these plants accounted for 14.7 percent of the value of shipments from all U.S. manufacturing plants. Because intermediate inputs (primarily agricultural materials) account for a relatively large share of food and beverage manufacturers' costs, value added in food and beverage manufacturing represents a slightly smaller share (13.7 percent) of value added in all manufacturing. Meat processing includes livestock and poultry slaughter, processing, and rendering, and is the largest single component of food and beverage manufacturing, with 24 percent of shipments in 2011. Other important components include dairy (13 percent), beverages (12 percent), grains and oilseeds (12 percent), fruits and vegetables (8 percent), and other food products (11 percent). Meat processing is also the largest component (17 percent) of the food sector's total value added, followed by beverage manufacturing (16 percent). Figure 16: Components of food and beverage manufacturing value of shipments, 2011

Meat processing is the largest single component of food and beverage manufacturing, with 24 percent of shipments in 2011

Bakery and torilla products 10%other food 11%

Grains and oil seeds 11% Meats 28%

Beverage 11% Fruit and vegetables 7%

Dairy 12%

Seafood 2%

Animal food 6% Sugar and confectionery 2%

Source: USDA, ERS using data from U.S. Census Bureau, 2011 Annual Survey of Manufacturers There are many food and beverage processing establishments (plants) in the U.S.—almost 30,000 owned by about 24,500 companies in 2007, according to the most recent comprehensive data in the Census Bureau's 2007 Economic Census. Figure 17: Components of food and beverage manufacturing: Value added, 2011

Meat processing is the largest component (17 percent) of the food sector’s total value added, followed by beverage manufacturing (16 percent)

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Grains and oil seeds 8%

other food Bakery 13%

Meats 26%

and torilla products 9%

Dairy 9%

Animal food 4%

Beverage 19%

Fruit and vegetables 8%

Sugar and confectionery 3%

Seafood 1%

Source: USDA, ERS using data from U.S. Census Bureau, 2011 Annual Survey of Manufacturers These plants employed about 1.5 million workers in 2011 (about 14 percent of all U.S. manufacturing employment and just over 1 percent of all U.S. nonfarm employment). The meat processing industry employed the largest percentage of food and beverage manufacturing workers in 2011 (32 percent), followed by bakeries (17 percent), and fruits and vegetables (11 percent). Figure 18: Food and beverage manufacturing employees by industry 2011

The meat processing industry employed the largest percentage of food and beverage manufacturing workers in 2011 (32 percent), followed by bakeries (17 percent), and fruits and vegetables (11 percent)

Bakery and torilla products 15%

Fruit and vegetables 13%

other food 10%

Grains and oil seeds 3% Meats 33%

Beverage 10%

Dairy 9% Animal food 4%

Seafood 1%

Sugar and confectionery 2%

Source: USDA, ERS using data from U.S. Census Bureau, 2011 Annual Survey of Manufacturer.

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Food and beverage processing plants are located throughout the United States. According to the Census Bureau's County Business Patterns (CBP), California had the most food and beverage manufacturing plants (4,514) in 2010, while New York (2,186) and Texas (1,774) were also leading food and beverage manufacturing States. The number of processing plants for various industry segments are also reported in County Business Patterns. Figure 19: Total food and beverage manufacturing establishments, 2010

Food processing plants include many small local plants and relatively few large plants. However, large plants account for the major portion of shipments. In 2007, small plants (0-19 employees) accounted for 66 percent of all plants, but only 4 percent of the total value of shipments. On the other hand, large plants (100 or more employees) accounted for 77 percent of shipment value in 2007, but only 12 percent of plants. Consolidation is occurring in many food processing industries, where plant sizes have increased sharply and mergers have led to fewer but larger companies. In many cases, changing processing plant technologies and the emergence of new scale economies has facilitated consolidation. When market demand grows slowly, increased consolidation can lead to increased concentration (fewer competitors). ERS researchers examined the role of changing technology and demand on structural changes in nine food processing industries. Concentration in several processing industries raises questions about market power in the sale of agricultural products and about the effects of concentration on innovation and productive efficiency. Consolidation in beef and pork slaughter has been of special interest to policy officials given the historically high and growing rates of concentration. From 1997 to 2007, the four-firm national concentration ratio in the fluid milk industry increased from 21 percent to 46 percent. In 2007, there were 21 percent fewer fluid milk processing plants than in 1997, processing 26 percent more milk per plant. Structural changes in fluid milk processing are occurring at the same time as rapid consolidation in milk production. From 1997 to 2007, 43 percent fewer farms produced over twice as much milk per farm.

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Methods of vertical coordination are also changing, with a shift away from the use of spot markets toward greater reliance on contracting in some grains and in livestock.

10.4. MARKET DEMAND Most supermarkets now offer prepared meals. There is high demand for convenience food and ready to serve products such as snack foods, snack bars, and frozen food that are popular with double income households and consumers who are generally short on time. The aging U.S. population and rising per capita incomes should cause this trend to continue. For example, the high demand for frozen food products, particularly from supermarkets and restaurant chains is evidenced in that the market is forecast to grow at an average annual rate of 1.5 percent, reaching $96.4 billion in 2016. As the U.S. population becomes increasingly ethnically diverse, consumer demand for food products also diversifies. The Hispanic population continues to grow rapidly and processed food companies are developing new products for this population. Some retailers and supermarkets now cater specifically to Hispanic populations. Also, many traditionally ethnic food products are crossing over to the mainstream population. Other factors affecting demand for processed food in the U.S. market include concern about dieting and obesity, allergens, and increased interest in sourcing locally and use of quality ingredients. According to the U.S. Department of Labor, average annual food spending per person increased 25 percent during 2000 to 2012, to $4,229. Total spending on food makes up about 13 percent of a household’s total average annual expenditures. Of the $4,229 in food spending, $2,171 was spent on food at home and $2,058 was spent on food away from home. Consumers spent the largest portion of their food at home spending (about 60%) on the “other food” category which includes sugar, sweets, fats and oils, miscellaneous foods, nonalcoholic beverages, and prepared food.

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Figure 20: Per capita food expenditures

Per capita food expenditures U.S. per capita food expenditures Current prices Year 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

U.S. resident population, July 1 Millions 167.306 164.308 167.306 170.371 170.371 173.320 177.135 179.979 182.992 185.771 188.483 191.141 193.526 195.576 197.457 199.399 201.385 203.984 206.827 209.284 211.357 213.342 215.465 217.563 219.760 222.095 224.567 227.225 229.466 231.664 233.792 235.825 237.924 240.133 242.289 244.499 246.819 249.464 252.153 255.030 257.783 260.327 262.803 265.229 267.784 270.248 272.691 282.172 285.082 287.804 290.326 293.046 295.753 298.593 301.580 304.375 307.607 309.330 311.592

At home

Away from home

1988 prices Total

At home

Away from home

Total

1,068 1,094 1,105 1,116 1,162 1,130 1,137 1,132 1,113 1,105 1,077 1,095 1,108 1,084 1,082 1,090 1,102 1,130 1,143 1,168 1,099 1,074 1,069 1,104 1,108 1,091 1,082 1,092 1,075 1,072 1,105 1,113 1,128 1,126 1,144 1,153 1,142 1,147 1,154 1,145 1,132 1,130 1,104 1,097 1,097 1,092 1,106 1,091 1,096 1,123 1,125 1,115 1,138 1,144 1,143 1,116 1,094 1,115 1,119

516 523 527 531 536 522 522 522 522 530 534 551 581 602 599 621 626 630 632 661 686 665 706 739 751 772 780 773 764 767 796 798 798 819 845 877 885 897 898 894 919 935 957 938 969 982 993 1,006 998 984 1,036 1,042 1,090 1,119 1,124 1,097 1,048 1,066 1,083

1,584 1,617 1,632 1,647 1,698 1,652 1,659 1,654 1,635 1,635 1,611 1,646 1,689 1,686 1,681 1,711 1,728 1,760 1,775 1,829 1,785 1,739 1,775 1,843 1,859 1,863 1,862 1,865 1,839 1,839 1,901 1,911 1,926 1,945 1,989 2,030 2,027 2,044 2,052 2,039 2,051 2,065 2,061 2,035 2,066 2,074 2,099 2,097 2,094 2,107 2,161 2,157 2,228 2,263 2,267 2,213 2,142 2,181 2,202

Dollars 278 282 280 283 305 310 304 306 304 303 299 307 318 327 326 339 359 387 401 428 469 526 567 597 635 690 759 828 874 902 939 981 1,009 1,036 1,097 1,153 1,216 1,301 1,344 1,343 1,360 1,397 1,408 1,452 1,488 1,509 1,558 1,571 1,631 1,692 1,731 1,781 1,853 1,894 1,972 2,049 2,019 2,065 2,171

91 94 96 99 103 103 106 109 111 116 120 126 135 147 154 168 179 194 204 223 249 272 316 353 386 433 486 529 571 603 645 683 710 757 811 877 926 982 1,017 1,033 1,081 1,119 1,170 1,176 1,249 1,299 1,347 1,396 1,425 1,440 1,549 1,604 1,730 1,832 1,907 1,944 1,921 1,978 2,058

369 376 375 382 408 413 411 415 415 420 419 433 454 474 480 507 539 581 605 650 718 798 883 950 1,021 1,123 1,245 1,357 1,444 1,505 1,584 1,664 1,718 1,793 1,908 2,030 2,142 2,283 2,361 2,376 2,441 2,516 2,578 2,628 2,737 2,808 2,905 2,967 3,056 3,132 3,280 3,385 3,583 3,726 3,879 3,993 3,940 4,043 4,229

Sources: Calculated by the Economic Research Service from various data sets from the U.S. Census Bureau and the Bureau of Labor Statistics.

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10.5. ISSUES AFFECTING THE INDUSTRY Cost Control Success also depends on the ability to control costs and leverage fixed/near-fixed expenses. Over its history, the industry has, at times, suffered margin pressure due to severe input cost inflation in the form of higher prices for ingredients and fuel (used to power processing plants and distribute goods to the retail trade). In periods of commodity-price deflation, however, the "stickiness" of retail price hikes supports profitability. When input costs spike, value-added producers, with their strong brands, are better positioned, and can pass along much of the higher expense to customers. Makers of private label brands have good cost leeway, given the absence of big marketing outlays. Higher energy costs are causing concern among manufacturers in the industry who are increasingly looking for ways to conserve energy in manufacturing processes to reduce costs. Concerns about the environment and sustainability are also having an impact on producers. Many are increasing their recycling efforts and redesigning packaging to lessen the impact on the environment. Size matters for many of these companies. Distribution costs are often nearly fixed. As such, a larger portion of each incremental sales dollar tends to flow down to the bottom line. Processors with an expanding brand portfolio can quickly realize significant economies of scale. A wide portfolio of popularly selling brands also puts these companies in a stronger bargaining position, vis-a-vis major customers in the retail trade, which has increasingly invaded the grocery space. Small food processors, however, as potential takeover targets, may be the direct beneficiaries of industry consolidation. Technology Food manufacturers continue to invest in greater automation in manufacturing processes. Budgeted spending for plant equipment, upgrades, computers, and automation remains at steady levels and manufacturers are adding additional processes to address concerns with ensuring food safety. Increased use of automation and innovation in the manufacturing process has limited employment in the manufacturing sector to some extent. According to Food Engineering, key issues for plant manufacturers include plant technology improvements and automation, consolidation, energy costs and usage, consumer demand for healthier and more nutritious products, and continuous improvement programs. Rising Commodity Prices A dramatic jump in food commodity prices worldwide has had an impact on the industry, which uses commodities such as grains and vegetable oils as inputs to many of its products. Rising food commodity prices particularly impact small producers. For example, small bakeries and bagel companies are often unable to absorb the big price increases of inputs such as wheat and flour and must ultimately raise the final prices of their products whereas larger producers are better able to absorb commodity price increases. A number of factors have contributed to this run up in prices, including slowing production, rapid growth in demand, increased demand for biofuels feedstocks, and adverse weather conditions which have affected crop yields. Food Safety In the last year, concerns over food safety have increased as the industry has been hit by several high profile and large scale recalls, as well as faced questions regarding the quality of inputs from suppliers in foreign countries. Government and industry have responded to try to address the issue. The Food and Drug Administration which regulates about 80 percent of the nation’s food products, issued a Food Protection Plan in 2007 to safeguard the nation’s food supply against unintentional and deliberate contamination. The plan focuses on risk based interventions and rapid response when problems are identified. The food industry also responded by pressing for more funding of FDA and issuing best practices guidance to its industry members on securing supply chains. The Grocery Manufacturers Association created its own food safety website for the industry. It also created an action plan for its members designed to protect consumers from unsafe imported products by calling on the industry to adopt four “pillars” of food safety. The approach focuses on prevention and a stronger public-private partnership to address food safety issues. Walmart has taken the step to become the first U.S. grocery chain to require its food suppliers to certify compliance with internationally recognized private Global Food Safety Initiative Standards. Internationally, food safety has become a top issue as well.

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11. Savory Snacks The savory snacks market consists of the retail sale of processed snacks, potato chips, nuts & seeds, popcorn and other savory snacks. Nuts & seeds category comprises nuts and seeds sold at retail packaged, primarily for snack consumption, including shelled and unshelled, plain and roasted, salted and unsalted varieties. Popcorn segment comprises microwaveable popcorn (unpopped popcorn that needs to be heated in the microwave before consumption), ready-to-eat popcorn (bagged, pre-popped popcorn, excluding ready-popped corn) and unpopped popcorn (popcorn that must be heated conventionally in a pan or dedicated machine.) Processed snacks segment comprises corn chips (processed snacks that are fried after they have been extruded), extruded snacks (manufactured by pushing a raw mixture through pipes under pressure prior to cooking; includes processed and reconstituted products) and tortilla chips (chips that have been seared after being extruded). Other savory snacks segment comprises ethnic snacks (snacks indigenous to non-western cultures, usually Asian specialties e.g. Bombay mix), meat snacks (ambient savory snacks made from meat, e.g. beef jerky) and pretzels (crisp and brittle salted baked snack made with unleavened dough).

11.1. MARKET SIZE AND VALUE The US savory snacks market has been growing at a strong rate in recent years. Gradual deceleration is expected towards the end of the forecast period, with annual rate dropping below 4%. The US savory snacks market had total revenues of $26.4 billion in 2011, representing a compound annual growth rate (CAGR) of 6.3% between 2007 and 2011. In comparison, the European and Asia-Pacific markets grew with CAGRs of 4.3% and 4.9% respectively, over the same period, to reach respective values of $17.4 billion and $20.7 billion in 2011.

Figure 21: U.S. Savory Snacks Market Value: 2007-2011

Year

$ Billion

2007

$ 20.7

2008

$ 21.6

4.4%

2009

$ 23.2

7.6%

2010

$ 25.0

7.9%

2011

$ 26.4

5.4%

CAGR: 2007-2011 Source: Packaged Facts 2012

% Growth

6.3%

Market consumption volumes increased with a CAGR of 2.5% between 2007-2011, to reach a total of 2.8 billion kg in 2011. The market's volume is expected to rise to 3.1 billion kg by the end of 2016, representing a CAGR of 2% for the 2011-2016 period.

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The performance of the market is forecast to decelerate, with an anticipated CAGR of 4.2% for the five-year period 2011 - 2016, which is expected to drive the market to a value of $32 billion by the end of 2017. Comparatively, the European and AsiaPacific markets will grow with CAGRs of 4.6% and 3.7% respectively, over the same period, to reach respective values of $21.8 billion and $24.9 billion in 2017.

11.2. MARKET SEGMENTATION The potato chips segment was the market's most lucrative in 2011, with total revenues of $10.3 billion, equivalent to 39.1% of the market's overall value. The processed snacks segment contributed revenues of $8.1 billion in 2011, equating to 30.9% of the market's aggregate value. Figure 22: U.S. Savory Snacks Market Category Segmentation: % share, by value, 2007-2011

Category

2007

2008

2009

2010

2011

2007-2011 CAGR

Potato chips

37.7%

36.6%

37.6%

39.1%

39.1%

4.8%

Processed snacks

31.7%

32.2%

31.6%

30.9%

30.9%

3.7%

Nuts & seeds

16.8%

16.7%

16.1%

15.5%

15.2%

2.6%

Popcorn

13.8%

14.4%

14.6%

14.4%

14.7%

5.3%

TOTAL

100%

100%

100%

100%

100%

16%

Source: Packaged Facts 2012 Figure 23: U.S. Savory Snacks Market Category Segmentation: $ Billion, 2007-2011

50 2011

40

2010

30

2009

20

2008

10

2007

0 Potato chips

Processed snacks

Nuts & seeds

Popcorn

Source: Packaged Facts 2012

11.3. MARKET SHARE The Snack Food Production industry is moderately concentrated, with the top four players estimated to account for 61.4% of the market in 2012. This percentage represents an increase from 58.8% in 2007, mainly because larger players have engaged in acquisitions to expand their product mix and market reach. PepsiCo, Inc. is the leading player in the U.S. savory snacks market, generating a 46.1% share of the market's value. ConAgra Foods, Inc. accounts for 5.3% of the market, with Kraft Foods at 5.2% and General Mills with a 4.8% market share.

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Figure 24: U.S. Savory Snack Market Shares: % share, by value, 2012

% Share PepsiCo, Inc. 33.4% 46.1%

ConAgra Foods, Inc. Kraft Foods, Inc. General Mills

2.1% 3.1% 4.8% 5.2% 5.3%

Kellogg Company

Source: Packaged Facts 2012 While the larger companies continued to gain dominance, the small companies at the bottom struggled to survive against their competitors during the recession. The industry’s concentration of ownership is expected to increase in the future, engendered by acquisitions, continued product innovation, strong brand loyalty and aggressive marketing initiatives. However, smaller operators are more common in this industry. About 7.9% of companies employ more than 500 workers. In comparison, about 25.7% of companies employ fewer than five workers, and about 57.8% employ fewer than 20 workers. However, these smaller companies control a minimal share of revenue.

11.4. KEY DRIVERS Wholesalers are the key source of immediate demand for snack food manufacturers. When consumers demand more of these foods from grocery stores or other outlets, wholesalers look to manufacturers to satisfy that demand. Conversely, when demand from wholesalers is low due to negative factors like diminished disposable income and high unemployment, industry demand generally suffers. Demand from soft drink, baked goods and other grocery wholesaling is expected to increase slowly during 2013. A large proportion of purchases occur at the retail level, particularly through supermarkets and grocery stores, which affects demand at the wholesale level. As customers at grocery stores demand more snacks, supermarkets purchase more from wholesalers and wholesalers purchase more from manufacturers. Some major supermarkets also have enough purchasing power to buy directly from manufacturers. Demand from supermarkets and grocery stores is expected to decrease slowly during 2013. Consumers’ health and dietary concerns determine demand for industry products. Many of the industry’s products are unhealthy and high in sodium or fat, so when consumers change their diet and reduce their fatty-food consumption, demand for some snack foods declines, hurting revenue performance. However, healthier product developments have benefited demand and revenue. The healthy eating index is expected to decrease slowly during 2013. Snack foods are considered a discretionary purchase, meaning that they are nonessential goods. When consumers experience a rise in their disposable income, they are more willing to spend on snacks, benefiting demand and revenue. Per capita disposable income is expected to increase slowly during 2013, representing a potential opportunity for the industry. Many people who engage in sports and leisure activities buy snacks because these products are filling and convenient to eat on the go. Also, many leisure activities are often coupled with snacking, such as eating chips or popcorn while watching TV. Unemployment due to recessionary layoffs increased time spent on leisure and sports. However, as the economy recovers and

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more Americans find work, people will have less time for leisure and sports, potentially hampering revenue growth. Time spent on leisure and sports is anticipated to decrease slowly in 2013.

11.5. DEMAND Demand for snack foods is largely driven by consumer preferences, product innovation to address such preferences, price, substitutes and disposable income. During the past five years, consumers changed their lifestyles and attitudes toward snack foods. Changes in population demographics and ethnicity gave rise to new tastes and preferences, causing manufacturers to adapt their product lines to meet these needs. However, one of the most prominent trends affecting the industry stemmed from an increasingly health-conscious and time-poor consumer base; therefore, they demanded convenient and healthy, yet tasty products. The healthy eating trend prompted an increase in demand for prepared, single-serving portions, such as mixed nuts and pretzels that can be easily consumed on the go. In addition, 100-calorie packs represented healthier snacks to help consumers control their portion size. Most notably, many potato and corn chip manufacturers introduced baked varieties of traditionally fried chips. Ever since Frito-Lay introduced Baked Lay’s in the late 1990s, consumers increasingly demanded healthy versions of these chips. In 2012, the company is expected to introduce more products that are made of all natural ingredients. Although many consumers are brand loyal, a rise in the price of snack food decreases the quantity that consumers demand. Consequently, they typically switch to cheaper substitute products, such as granola bars, muffins, bagels, cookies, bread and others. This factor is especially significant for high-end, branded and premium products, where even a moderate price increase can substantially hurt demand and, therefore, revenue. Typically, a rise in disposable income is directly proportionate to increased spending on consumption. Still, in some cases, an increase in income encourages consumers to switch to more expensive, branded snacks or eat out rather than boost the volume of food purchased. Therefore, a long-term increase in income will likely encourage production to shift from lower-margin to higher-margin products, such as premium roasted nuts (e.g. pistachios). However, the recession slowed this transition due to lower incomes and tight consumer spending.

11.6. OUTLOOK The snack food industry has plenty to be optimistic about in the next five years. Producers will continue to adapt their products to match changing consumer tastes, specifically the healthy-eating trend, which will drive up demand for snacks. These initiatives will contribute to the forecast 2.5% revenue growth in 2013. The industry will also look to build on this momentum as the nation climbs out of the recession, and Americans will buy more discretionary snacks with improving levels of disposable income. However, economic recovery will also lead many Americans back to work, leaving little time for leisure activities that are often paired with snacking, and slowing revenue growth. As a result of these factors, revenue is projected to increase at an annualized rate of just 1.6% to $32.0 billion in the five years to 2017. To build on the momentum that began during the past five years, producers must continue developing new products so that their product mix and brand images do not become stale in the saturated marketplace. New snack foods will be healthier to cater to changing consumer preferences. Specifically, producers will continue lowering the fat and cholesterol content of products to attract more health-conscious consumers. Producers will also promote healthy eating through marketing initiatives. Many new products are introduced from year to year, but only a few will be successful over the long term; therefore, businesses must closely monitor specific consumer needs and patterns to adjust product lines appropriately.

11.7. BARRIERS TO ENTRY The barriers to entry in the snack food industry are moderate; however, the initial capital investment required is significant. Due to the high dependency on machinery, new firms must buy new equipment and obtain a facility to produce within. These investments are expensive so firms that cannot afford such investments will be unable to enter the industry. Another threat facing potential new entrants is the extremely well entrenched position of the industry’s major players. These companies experience high brand and customer loyalty and have considerable resources to invest in advertising and promotions to protect and grow their market share. Enormous advertising budgets allow these companies to aggressively USA FOOD & BEVERAGE MARKET STUDY

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promote their products through a variety of media outlets that are often inaccessible to new entrants. All of the industry’s major players also have very strong product portfolios, containing most of the world’s best-known snack food brands. Although this is not a barrier to entry, it may hamper the success of new entrants. In addition, major players typically have favorable contracts with key suppliers like grocery stores and supermarkets, which may be difficult for new entrants to secure. Larger firms also enjoy efficiencies that are created by economies of scale and scope. Lower per-unit production costs and varied product lines, combined with high levels of investment in technology and equipment, make competition very difficult. Although these are not barriers to entry, they may hamper the success of new entrants. Nevertheless, many new entrants have established themselves within the industry, with the majority in the low-priced, unbranded segment. Other smaller players managed to carve out regional market niches, reducing direct competition from the major players.

11.8. IMPORTS The US domestic market accounts for the majority of snack food demand and consumption where imports are estimated to make up about 2.4% of domestic demand. Although imports make up a small proportion, they rose at a rapid annualized rate of 14.0% to $689.8 million during the five years to 2012. The fast annualized rate is mostly a result of the 15.4% increase in 2011 and 53.1% spike in 2012 as Americans gained more disposable income post-recession and became more willing to spend more on snacks from abroad. In 2012, Mexico is expected to account for 31.7% of imports, followed by Canada at 16.7%. These countries are major importers of snacks produced in the United States because of the North American Free Trade Agreement (NAFTA), which reduces trade barriers and makes trading less costly as well as efficient. In addition, these countries are immediate neighbors to the United States, reducing transportation costs and making it more attractive to buy from these countries. Argentina is the next largest source of imports at 14.5% of imports in 2012 followed by China at 6.3%. The share of imports originating from countries in the Asia-Pacific, specifically China, Thailand and Vietnam, steadily increased in the past few years due to their low cost production, which in turn, reduced the price of its products.

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12. Beverages The beverage industry includes manufacturers and distributors of soft drinks, bottled water, energy drinks, sports drinks, milk products, coffee and tea based products, nutritional drinks, and alcohol products. Some factors that influence the consumption of these products can include the time of day or other environmental situations, but consumer tastes, demographics and lifestyles are the engine that drives the demand for beverages. Large companies benefit from economies of scale in production and distribution. Small companies can compete by producing new products, catering to local tastes, or nimbly reacting to changes in the marketplace. The beverage industry is a huge part of the U.S. economy that affects many different sectors. The beverage Industry is a mature sector and includes companies that market nonalcoholic and alcoholic items. Since growth opportunities are limited, many members of the industry endeavor to diversify their offerings to better compete and gain share. Too, they may pursue lucrative distribution arrangements and/or acquisitions to expand their operations and geographic reach. Companies in this industry produce soft drinks, bottled water, and other nonalcoholic beverages. Major companies include Britvic (UK), Coca-Cola (US), Cott (Canada), Dr Pepper Snapple Group (US), Nestlé (Switzerland), PepsiCo (US), and Red Bull (Austria). The US nonalcoholic beverage manufacturing industry includes about 1,500 companies with combined annual revenue of about $55 billion. Low growth is forecast for the next two years. Key growth challenges include dependence on consumer spending and health concerns surrounding soft drinks. Non-alcoholic beverages include a large variety of drinks, but sodas account for about 60 percent of the market. The manufacture and distribution of most national soda brands is a two-tiered process. The primary manufacturer produces syrup called concentrate, and local bottlers manufacture and distribute the finished product. The flavored syrup, corn syrup (as a sweetener), and filtered water are mixed in the right proportions, carbon dioxide gas is injected, and the finished soda product is poured into bottles or cans, which are capped, labeled, and packaged. The market for U.S. milk and dairy products, both domestically and internationally has been growing dramatically in recent decades. As a result, U.S. farm milk production has grown to about 190 billion pounds per year. Fragmentation occurs when many competitors jockey for dominance in a category. For example, the top 50 companies in the beer wholesale industry account for about a third of industry revenue. The wine and spirits wholesale industry is concentrated, with the top 50 companies account for more than 70 percent of industry revenue. Major alcohol products are beer, wine, and distilled spirits (hard liquor). Distributors tend to specialize in either beer, or wine and spirits. About half of overall industry revenue comes from the sale of beer, 30 percent from liquor, and 20 percent from wine.

12.1. COMPETITIVE LANDSCAPE The beverage industry is enormous, with new products introduced almost daily. There are hundreds of different drinks on the market, all produced and bottled in different and attractive packaging. There are already some very high profile drinks on the market with Coca-Cola being the top seller now for decades. Other competitive carbonated soft drinks have since had success. Some are direct competitors in the cola category, such as Pepsi Cola and others have created new categories, as with the sports drink segment with brands like Gatorade, or with the energy drink segment with brands such as Red Bull. The revolution and popularity of bottled spring water has also taken the market by storm. With such hefty competition in the drink industry, every brand is jostling for consumer attention, making a strong beverage business plan all the more vital.

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Demand for nonalcoholic beverages is driven by consumer tastes and demographics. The profitability of individual companies depends on effective marketing. Large companies have economies of scale in production and distribution. Small companies can compete by producing new products, catering to local tastes, or selling at lower prices. The industry is highly concentrated: the eight largest soft drink companies account for about 70 percent of the market and the eight largest bottled water companies account for about 85 percent of the market. Largely because of the high costs of shipping a heavy product, US imports and exports of soft drinks are relatively low. Imports of soft drinks and bottled water together account for about 5 percent of the US market; exports account for about 2 percent of US production. Despite this highly competitive arena, there is ample room for new products, and consumers are always willing to experiment. Beverage package design is another aspect very important in the drinks industry. To attract consumers it is vital to have something attractive and functional. To get an indication of what will work best, proper market research is crucial and this is one facet of a beverage business plan. A proper plan is vital to the successful launch for any new product onto the market, and all too often short cuts can be doomed to fail. In the US, soft drink and bottled water manufacturing is concentrated in California, Texas, Pennsylvania, Florida, and Indiana. Most smaller beverage producers make products for a local or regional market, capitalizing on different local tastes or selling their product at lower prices than national brands.

12.2. SECTORS The beverage industry consists of different segments with the first differentiation being locally consumed beverages versus packaged and shipped beverages. Locally produced and consumed beverages include fresh coffee, tap water, fountain drinks and freshly squeezed juice. Bottled water and beer are examples of packaged beverages. Packaged beverages consist of two types, retail and home produced. The Nonalcoholic Segment Historically, two large entities have dominated the nonalcoholic beverage landscape: Pepsi (PEP) and Coca-Cola (KO). They distribute their well known carbonated and noncarbonated drinks internationally via sizeable bottling subsidiaries. The bottlers depend on these two industry leaders to create new products, improve existing offerings and maintain sufficient advertising. Related capital spending amounts to several billion dollars each year. The industry titans often boost their results (and those of their subsidiaries) by purchasing smaller market players or by inking promising distribution agreements. In prosperous economic times, consumers usually favor the most famous brand names. Still, when customers are short of disposable income, they turn to competing, inexpensive private label and lesser-known beverages. Sales are seasonal, not surprising, peaking during warm summer months. Consumer preferences will drive product diversification. Most notably, greater awareness of the causes of common health issues, e.g., obesity and diabetes, has increased demand for bottled water and other low-sugar or sugar-substitute drinks. Too, beverage companies have capitalized on the popularity of energy drinks and ready-to-drink coffee. Product diversification may be achieved through internal or external means. The same goes for geographic expansion. China and Russia, two, of course, very large markets in the developing-nation arena, have gotten much attention. Beverage companies have spent heavily to open new bottling plants and develop distribution networks in these countries. Wine, Beer, and Spirits The range of wine, beer and distilled spirits offered by brand and type is wide. Demand is somewhat inelastic across good and bad economic times. There is an overall long-term trend of rising affluence around the globe. Thus, more and more consumers are becoming increasingly discerning about what they purchase. Premium alcoholic beverages are gaining in popularity. This trend is disrupted during recessions, when people trade down to cheaper, low-margined products. As is the case with premium wine and spirits, microbrew or craft beer is very popular with consumers. These beers are priced higher and are quite profitable, as long as the cost of their rich ingredients is covered. Small brewers, paying close attention to quality, expand slowly, but, over time, can win a decent share of business. Large brewers have acquired such operators or developed their own premium beers so as not to lose any sales. Like their nonalcoholic peers, makers of alcoholic beverages invest large amounts of capital in marketing and advertising to build brand recognition. USA FOOD & BEVERAGE MARKET STUDY

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Tap Water Municipal tap water systems are among the biggest beverage industries in the world. Tap water is a part of indoor plumbing and first became common in the developed world by the mid-20th century. The delivery of tap water requires a massive infrastructure of piping, pumps and water purification works. Hoover Dam, a concrete arch-gravity dam in the western United States, is part of the tap water systems for several states. Consequently, tap water becomes a component of many of the packaged beverages as well. Soda and Bottle Water Production The US beverage manufacturing and bottling industry includes about 3,000 companies. Major beverage companies include Coca-Cola, PepsiCo and the Dr Pepper Snapple Group. The industry includes manufacturers and distributors of soft drinks and bottled water. Figure 25: Product Segmentation by Revenue

Market Share 15% Soft drinks Bottled Water 85%

Source: Global Strategy, Inc. Soda sales declined 0.6% last year through Dec. 30 to $28.70 billion at U.S. stores tracked by SymphonyIRI Group. In volume terms, sales dropped 1.8%. The data don't include sales of soda in restaurants, vending machines, and some other venues. Industry insiders say taking those outlets into account, overall soda sales revenue likely rose slightly last year. While Coke, Pepsi, and Dr Pepper Snapple have all aggressively expanded their portfolios to include faster-growing products like sports drinks and fruit juices, a prolonged drop in U.S. soda revenues would represent a serious blow. Soda represents nearly 25% of the U.S. beverage market. Its massive scale has also guaranteed profit margins for decades. About 60% of Coke's revenue in the U.S. is derived from carbonated soft drinks, compared with about 25% at PepsiCo. More than 70% of sales at Dr Pepper Snapple, the No. 3 player, are from soda and about 90% of its revenue is from the U.S. Unlike Coke and PepsiCo, though, it hardly sells any cola, which has suffered steep declines. Coke and PepsiCo together spent about $20 billion in 2010 to acquire their biggest U.S. bottlers, increasing U.S. exposure and thinning profit margins. Soft drink manufacturing is a $47 billion industry in the United States based on revenue. It was forecast to generate a profit of $2 billion in 2012. The industry’s annual growth was 1.8% from 2005 to 2010, and it is expected to maintain this growth rate between 2010 and 2015. Coffee and Tea After water, tea is the most widely consumed beverage in the world. In many places, the boiling of water for tea is a traditional method of reducing water borne bacteria. Coffee is a brewed drink prepared from the roasted seeds, commonly called coffee

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beans, of the coffee plant. The coffee cherries that yield the seeds grow on trees in over 70 countries. Besides coffee and tea, many other substances, from cocoa to Kool-Aid (a popular powdered children’s drink), can also flavor water. Beverage Packing and Labels In the North American beverage market, the most popular packaging material is plastic with over 40 percent of the market. Bottles are the most popular packaging type with over 55 percent of the market. Experts predict that plastic as a packaging material and bottles as a packaging type will provide the vast majority of incremental sales increases of beverage containers over the next 10 years. Common Characteristics Both the nonalcoholic and alcoholic sides of the Beverage Industry are dominated by a few sizeable players and competition among them is often intense. Changing consumer tastes adds to operating uncertainty. Pricing and margins frequently come under pressure. Also, volatile commodity costs will challenge managements to protect profitability. Good operating efficiency and cost-control practices, mostly on an ongoing basis, are important. Notably, the companies take care to hedge raw material (e.g., aluminum and carbon dioxide) purchases. Missteps in reading the trends of ingredient prices can have a measurable negative impact on earnings. Beverage makers with the most established brands produce the widest operating and net income margins. Government Influence Much has changed since American Prohibition of the 1920s and 1930s. With the exception of a few counties and towns, the prohibition of alcohol has been repealed in all U.S. states. Industry sales are considerable, and the federal government and states see sin taxes as a good source of revenue. Authorities are also considering tax increases on soft drinks to curb citizens’ sugar (corn syrup) intake and boost revenue. Incremental taxes have not hurt overall beverage demand, but, to a degree, they have pressured sales of premium offerings.

12.3. PRODUCT SEGMENTS AND MAJOR MARKET BRANDS Products produced in this industry are broadly referred to as soft drinks but can be further divided into six main segments based on industry revenue: Carbonated Soft Drinks (CSDs)  45% of industry revenue  Includes well-known brands and lesser-known household and private label brands sold in supermarkets and discount chain  Top brands: Coke (Coca-Cola), Pepsi (PepsiCo), Mountain Dew (PepsiCo), and Dr Pepper (Dr Pepper Snapple Group)  Accounts for 33% of the total volume of liquid soft drink produced in the Americas during 2009 Fruit Beverages  ’? of industry revenue  Includes 100% fruit juices, juice drinks (which contain less than 100% juice), and fruit-flavored drinks with no juice  Top brands: Tropicana (PepsiCo) and Minute Maid (Coca-Cola)

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Figure 26: Market Leaders in the Soft Drink Industry

Market Share 9% 36% 27% Dr. Pepper Snapple Group PepsiCo, Inc. The Coca-Cola Company 29%

Others

Source: Global Strategy, Inc.

Bottled Waters  12.6% of industry revenue  Includes bottled spring and filtered water along with flavored waters and waters enhanced with vitamins and minerals  Top brands of enhanced waters: Glacéau Vitaminwater (Coca-Cola) and Propel (PepsiCo) Functional Beverages  11.3% of industry revenue  Includes energy drinks, relaxation drinks, and ready-to-drink (RTD ) teas and coffees  Top brands of energy drinks: Red Bull (Red Bull) and Monster Energy (Hansen Natural)  Top brands of RTD s: Arizona (Hornell Brewing), Lipton (PepsiCo), Snapple (Dr Pepper Snapple Group), and Nestea (Coca-Cola) Sports Drinks  8.7% of industry revenue  Includes both liquid and powdered sports formulas  Top brand: Gatorade (PepsiCo) Other  

7.2% of industry revenue Includes ice manufacturing, dairy-based drinks, and soy-based drinks

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Figure 27: Market share of soft drink

Market Share 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Global Strategy, Inc.

12.4. PRODUCTS, OPERATIONS AND TECHNOLOGIES Major products include soft drinks (about 85 percent of industry revenue) and bottled water (about 15 percent). Soft drinks include sodas (also referred to as carbonated soft drinks, or CSDs), as well as tea and coffee drinks, sports drinks, energy drinks, fruit and vegetable drinks, and artificially carbonated water. The soft drink industry is actually made up of two major manufacturing systems that, taken together, bring soft drinks to the market. These two systems fall into distinct categories: (1) flavoring syrup and concentrate manufacturing and (2) soft drink manufacturing. The supply chain is largely dependent on the syrup producer, as this is the driver for most downstream operations. The majority of the bottled soft drinks follow a similar product life cycle, moving from syrup producer, to bottler, to distributor (if used), to merchant, to final consumer. The locations of the syrup manufacturers and the bottlers are closely linked to both the locations of strategic raw materials and major population centers in the United States and/or areas that see above-average temperatures, where demand for the soft drinks tends to be highest. Once soft drinks are bottled and ready for distribution, a variety of distribution channels are leveraged to get the final product to the end consumer. The two-tiered structure is most efficient for national companies with large volume, because the manufacturing process is simple and because water, the main ingredient of sodas, is expensive to ship and is available locally. Smaller companies combine the syrup production and bottling operations in one plant. For soft drink bottlers, the major raw materials, aside from the flavored syrup, are corn syrup and containers - glass bottles, aluminum cans, or plastic bottles made from polyethylene terephthalate (PET). Bottlers frequently operate sizable distribution systems, including warehouses and fleets of specialized delivery trucks. Production and distribution volume is usually measured in unit cases of 192 ounces (24 eight-ounce servings), although actual cases of 12-ounce cans contain 288 ounces. In addition to producing canned and bottled soft drinks, large manufacturers sell sweetened syrups to restaurants and other retailers that produce the finished product at the point of sale by mixing the syrup with carbonated water to produce fountain products. The manufacturing process for most noncarbonated beverages is usually more complicated than the mixcarbonate-and-bottle soda process and therefore isn't usually handled by local bottlers. In most cases, USA FOOD & BEVERAGE MARKET STUDY

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nonsoda products are bottled by the manufacturer and distributed through the same types of channels -wholesalers, distributors, brokers -- used by food manufacturers, although bottlers may also participate. Bottled waters are either bottled at specific springs or made locally from filtered tap water. Manufacturers and bottlers typically operate under contracts, called bottler agreements, that specify the territory within which the bottler has an exclusive right to make, sell, and distribute the manufacturer's brand in bottles or cans. Fountain products are often sold separately through wholesalers, under distributor agreements. Bottle and fountain territories may overlap and bottlers may also be fountain distributors. Agreements often are perpetual and can be terminated only for breach of contract. Bottler agreements usually require that container and packaging materials be bought from suppliers that are approved by the manufacturer, and that the bottlers not handle competing products. Agreements also specify the price that the bottler must pay for concentrate. The manufacturer has no control over the prices the bottler charges customers, and usually isn't obligated to spend money for marketing or promotions in the bottler's territory. Often, however, the manufacturer will provide marketing and promotion support. In 2010, for example, Coca-Cola provided about $5 billion in marketing support to bottlers, resellers, and other buyers of its products. The industry depends on technology for developing new products in the labs and packaging product at the plants. Most bottling plants are highly automated with mechanical automation and computerized robotics.

12.5. SALES & MARKETING Beverage manufacturers, bottlers, and wholesalers sell products through a variety of channels, such as food and convenience stores, restaurants, vending machines, mass merchandisers, and institutions, including schools and colleges. Retailing consists of the sale of drinks from a fixed location such as a convenience store, supermarket or bar in small or individual lots for direct consumption by the purchaser. A bar is an establishment that serves drinks, especially alcoholic beverages such as beer, liquor and cocktails for consumption on the premises. A supermarket is a self-service store offering a wide variety of beverages, food and household merchandise for consumers to take away before consuming or using. Soda bottlers typically own local vending machines. The marketing approach to each of these channels is quite different and often includes promotional spending. Large manufacturers may also sell directly to national accounts and usually advertise on national or regional TV and in print. Manufacturers typically produce a line of brands and often test and introduce new products into the market through their existing distribution channels. Beverage manufacturers and bottlers typically have high gross margins, about 50 percent, and high marketing expenses. Because of high product turnover with most customers, accounts are usually settled rapidly and accounts receivable are fairly low. Inventories are also low because most raw materials are easily obtained and cheap. Investment in equipment may be high, especially if the company manufactures products that require refrigeration. Supplier contracts may specify that the costs of plastic bottles, aluminum cans, and sweeteners can rise if the costs of the underlying commodities (PET resin, aluminum, and high-fructose syrup, respectively) rise, exposing bottlers to the commodity markets. The industry is capital-intensive: average annual revenue per worker is about $480,000. The industry is subject to the usual state and federal regulations that apply to any manufacturer, and to regulations that apply to truck fleets and underground gasoline storage tanks (USTs). The manufacture of food products is subject to FDA regulations under the Food, Drug and Cosmetic Act. To reduce litter and promote recycling, a number of states, including New York and California, require consumers to pay a refundable deposit on soda containers. Most bottlers, and to some extent manufacturers, operate in defined territories, so growth is limited by local demographics. With demand for soda flat, bottlers have turned to beverages such as ready-to-drink tea as soft drink sales soften. Local bottlers compete with national companies such as Coke and Pepsi for shelf space in convenience and grocery stores.

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12.6. INDICATORS AND TRENDS US nondurable goods manufacturers' shipments of beverages, an indicator of beverage products and bottling production, rose 8 percent year-to-date in November 2012 compared to the same period in 2011. The spot price of crude oil, which indicates energy prices paid by beverage manufacturers, fell 9.4 percent in the week ending January 4, 2013, compared to the same week in 2012. US retail sales for food and beverage stores, a potential measure of demand for beverages, increased 3.3 percent in 2012 compared to 2011. The output of US soft drinks manufacturing is forecast to grow at an annual compounded rate of 2 percent between 2012 and 2016. Figure 28: Growth rate of soft drink

6% 5% 4% 3% 2% 1% 0% 2011

2012

2013

2014

2015

2016

Source: Global Strategy, Inc. Soda Demand Slows - US sales of carbonated soft drinks (CSDs), particularly colas, have steadily declined since 2005. CSD sales in 2011 reached their lowest level since 1996. The decline is mainly driven by consumer concerns about soda sugar content and increased awareness of rising obesity and diabetes rates in the US. Consumers are also drinking more bottled water, energy and sports drinks, and ready-to-drink teas. Although diet soft drinks are becoming more popular, companies like Coca-Cola and PepsiCo maintain their flagship sugared brands. Soft Drink Health Concerns - The large amounts of sugar in many sodas are believed to contribute strongly to the obesity epidemic in US children. The relatively high levels of caffeine in diet sodas heavily consumed by teenage girls also are a concern. Energy drinks have also been criticized as stimulants that should not be marketed to minors. As a result, federal and state governments often discuss imposing taxes on sweetened beverages. Some public health groups also say a caramel coloring ingredient in dark colas (4-methylimidazole, or 4-MEI) causes cancer. Although the FDA and soft drink makers say there is no health risk, California recently banned 4-MEI. In response, PepsiCo and Coca-Cola also changed dark cola formulas for California consumers to avoid warning labels. Many soda makers are also creating new diet or decaffeinated product versions to improve health perceptions. Sugary soft drinks have become a lightning rod in the U.S. for consumer health concerns, such as diabetes and obesity. Meanwhile, baby boomers are aging, and soda's traditional target market—youth—is often turning to water, energy drinks and coffee instead. Criticism of School Contracts - Contracts between beverage manufacturers and school districts to maintain vending machines in school cafeterias are being attacked by critics who believe that schools shouldn't encourage poor eating habits by making high-calorie drinks easily available. A voluntary industry ban on sweetened beverages in schools began in USA FOOD & BEVERAGE MARKET STUDY

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2006 in response to pressure from health groups and threats of litigation. But sodas are still sold in some schools, and many criticize the industry for replacing high-sugar sodas in vending machines with highsugar and high-calorie juice drinks and sports drinks. Raw Material Costs - Ingredient and packaging material prices fluctuate, exposing beverage companies to cost increases. Corn for high fructose corn syrup (HFCS), aluminum for cans, and glass for bottles are examples of commodities that commonly experience price swings and cause challenges for the industry. Polyethylene terephthalate (PET), the petroleumbased resin used for drink bottles, is not a traded commodity. Beverage manufacturers cannot enter into fixed price contracts for PET, which they often do to mitigate cost swings for commodities like aluminum. Volatile oil prices over the past several years have caused fluctuating PET prices. Companies often have a hard time passing commodity price increases on to customers, which can pressure profit margins. Possible Regulation of Water Sources - Concerns and lawsuits continue to grow over the depletion of natural spring water sources by bottled water operations. The problem, state officials say, is no one knows how much water the bottlers are extracting or if they're straining water resources. The bottled spring water industry, which pipes its water straight from natural springs or municipal water sources, is increasingly being attacked by government, utilities, and environmentalists. Consolidation - With overall growth of the beverage market slow, national companies have grown through overseas sales and acquisitions. Coca-Cola owns or markets more than 500 brands globally, PepsiCo, more than 20. Both Coca-Cola and PepsiCo recently acquired their leading bottlers, which distribute rival brands from Dr Pepper Snapple Group. Canada-based Cott, one of the largest private-label soda makers, has also grown in recent years through the acquisition of local bottlers. Brand Management - To distinguish their products from the large number of available competitors, manufacturers have relied heavily on using familiar brand names for new products. For example, Coca-Cola comes in several different versions that are sugar- or caffeine-free or both, but all under the Coca-Cola label. Gatorade and Tropicana orange juice are available in many different versions. PepsiCo has agreements with Starbucks and Lipton to use their brand names on new beverages. Environmentally Friendly Packaging - One way that beverage manufacturers can enhance their brand image and promote sustainability is to introduce packaging made from recycled or biodegradable materials. Many beverages are packaged in PET bottles, but bottled water has received more scrutiny than soft drinks, most likely because tap water is often an available, more environmentally friendly option. To address consumer concerns, many water brands added eco-labels to packaging. Coca-Cola introduced the plant bottle in 2010 that uses 30 percent biodegradable plant-based materials. PepsiCo announced it will make bottles from 100 percent recyclable materials starting in 2012.

12.7. OPPORTUNITIES Ready-to-Drink Tea - As soft drink sales continue to drop, ready-to-drink (RTD) tea sales are rising. The volume of soft drink sales fell for the seventh consecutive year in 2011, and the category also lost market share. Sales of RTD tea, on the other hand, saw an increase of about 5 percent in 2011 compared to the previous year, according to Packaged Facts. Sales have grown because of consumer demand for variety and healthier options. Many perceive tea as a healthier option than soda, even though many times sweet tea has no less sugar. Both individual servings and gallon bottles of tea continue to grow in popularity. Private-Label Products - Amid the perception by consumers that colas don't taste different, private-label sodas continue to be popular with budget-minded consumers and local supermarkets. Even though they're priced lower than national brands, private-label sodas have higher margins for grocers because they're cheaper to produce and don't have heavy marketing costs. Cott has a large share of the private-label market, mainly because it supplies Wal-Mart, the nation's biggest retailer. Convenience/Health Drinks - Consumers are buying more beverages that are substitutes for solid food, including drinks loaded with vitamins and minerals. Manufacturers like Monster Beverage and PepsiCo's (maker of Naked Juice) are producing refrigerated versions of smoothies for groceries and convenience stores. Coconut water is among the fastest-growing health drinks. PepsiCo, Coca-Cola and Dr Pepper Snapple Group have begun distributing coconut water in response to the rapid success of VitoCoco, the top-selling coconut water brand. Healthrelated beverages also include single-serve nutrition drinks for children and vitamin drinks for older adults. US sales of energy drinks increased almost 15 percent to $1.9 billion for the 52 weeks ending Dec. 2, 2012, according to data from SymphonyIRI Group reported by Supermarket News.

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13. Private Label U.S. retailer food brands, i.e. private label brands, are on track to achieve market penetration of between 25% and 30% in the next decade, up from their current market share of under 20%. This projected growth, which would put the U.S. retail brand segment on par with Europe in terms of market penetration, translates as one in every three food product purchases in the U.S. being a retailer branded product by the year 2025. In a new report titled "What Would Apple Do? How Can U.S. Branded Food Companies Withstand the Retailer Brand Onslaught?", Rabobank's Food & Agribusiness Research and Advisory group looks at drivers behind the rising power of U.S. retailer brands – that is, brands developed and sold by supermarkets and other food retailers. The report also proposes strategies for consumer packaged goods companies to defend their national brands and/or to compensate for the loss of market share to retail brands. "Many national brand owners need to be bolder in their thinking and strategizing," says Nicholas Fereday , Rabobank analyst and author of the report. "Instead of opting for low cost, low risk, conservative solutions, they need to think and act more like the Apples of the world, innovating new game-changing food products and entering new categories. Alternatively, national brand owners should consider downsizing brand-building efforts and diversifying their manufacturing into B2B activities." No Longer "Cheap and Cheerless", Retailer Brands Are Powerful Competitors Retailer brands have grown 6% over the past five years, compared with the sales of national branded packaged food manufacturers which have grown just 2%. The increasing competitive strength of retailer brands reflects a power shift from consumer packaged goods companies (CPGs) to food retailers, as well as the growing trust and loyalty consumers have to today's innovative and high quality retailer brands. "Retailer brands have matured from their original positioning as 'cheap and cheerless' generic products," says Nicholas Fereday , Rabobank analyst and author of the report, "into a more diverse range of national brand equivalents and, more recently, highly innovative premium products. On grocery shelves around the U.S., from convenience stores to upscale supermarkets, retail brands now compete successfully and often win against national brands, earning consumer trust in terms of pricing, quality, image and value." Rising Consumer Acceptance and Loyalty for Retailer Brands There are several factors driving retailer brand momentum: 1.

Innovation and investment in brand management by retailers. Successful retailers have developed premium products, employ sophisticated packaging, or have expanded into new categories such as the fast-growing chilled ready meats segment. Retailers have also started to move into branded categories once thought impenetrable, such as candy and snack food. Smart retailers now act like brand managers, following a multi-tiered approach by offering value brands, national brand equivalents, and value-added premium brands. In 2011, retailer brands were estimated to account for nearly one third of new food and beverage items in the U.S.

2.

Retailer brands win on value in recessionary times, and rarely cede back ground in good times. At the height of the 2008 recession, retailer brand sales grew 14%, compared to 3% for national brands. Even after the official end to that recession, consumers remained cautious and value-oriented, and growth in retailer brand sales has stayed 2% to 3% ahead of national brands since 2010.

3.

Retail consolidation and concentration increases the degree of retail brand penetration and power. Market share of the top ten national retailers is just over 50%, although there is much more regional concentration. Retailer brands, an integral part of Walmart's sales strategy, account for about 20% of Walmart's grocery sales, which in turn account for over half of the chain's total sales. For other leading supermarkets, retailer brands make up between 19% to 26% of total sales.

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4.

Changing dynamics in the retail model: the rise of retailer brands in convenience stores, drugstores and online retailers; and the emergence of hard discounters and dollar stores that offer retailer brands among a limited range of SKUs. Stores like Target, which now derives 20% of sales from food, recognize the value of food as a driver of foot traffic and, in turn, discretionary non-food purchases.

Survival Strategies for National Brands and Consumer Food Manufacturers All national brands are feeling the retailer brand squeeze, to varying degrees. Besides traditional avenues to shore up brand strength (ad spend, for example), two other options appear promising for consumer packaged goods companies in the U.S. market: 1.

Real innovation. National brands employ a continuum of options, from promotions and co-branding to reformulations to technological breakthroughs, but bold innovation should be part of the repertoire. National food brands need to follow the creative model of other industries, funding research that will lead to radical new products which address unmet consumer needs, or create wholly new categories. Currently more than three quarters of new food products are line extensions or product derivatives.

2.

Go to plan B2B – diversify into B2B manufacturing for national brands and/or contract manufacturing for retail and foodservice channels. A number of CPG companies who make national brands also make retailer brands, leveraging strengths in R&D, operational knowhow, food safety, and category management to realize benefits of scale, increase output and sales, and maximize profits.

13.1. FOOD Over the past two decades, private label food products have grown steadily in sales and often directly compete for market share with national brands. This competition lowers prices and increases product choices for consumers. This report analyzes the relationship between private label and national brand product prices and in-store promotions for two major U.S. grocery store chains during the 2007-2009 recession and the year following the recession (2010). Retailers promote private label products (offer price discounts) strategically in response to national brand pricing promotions to protect private label market share during national brand promotions. However, the extent of the retailer response varies widely across supermarket departments and is also affected by both the density of food stores and the market share of supercenters within a market area. These findings hold true regardless of the state of the economy, although the magnitude of the interaction between national brands and private labels differs in times of recession and recovery. One of the most striking changes in U.S. food retailing over the past two decades has been the rise of private labels (PLs), also known as store brands. Retailers have expanded PL product offerings across the supermarket, and PLs have increased in popularity, as measured by both dollar sales and shares within product categories. Promotional competition between PLs and national brands (NBs) has the potential to benefit consumers through lower prices and expanded product choices. In studies of food retailing, private label foods (PLs) generate interest because of the ways in which they differ from national brands (NBs). NB products, regardless of the departments in which they are sold, travel from the farm gate to the consumer’s dinner plate by way of branded food manufacturers and distributors. For example, Heinz Ketchup is a homogenous product across every chain throughout the country in terms of taste and appearance. In contrast, supermarkets obtain PLs through a form of vertical coordination or from manufacturers specializing in private label products (Berges-Sennou et al., 2004). PLs are unique to the chains at which they are sold, or at least are so marketed. Nearly every supermarket chain in the country offers at least one PL ketchup in addition to NB ketchups. Recent trends illustrate the evolution of PLs and their importance in food retailing. For example, the Food Institute Report (2011) notes that PL sales grew an average of 4.5% per year from 2003 through 2010. Sales for packaged NBs fell during the same period. PLs have improved in quality relative to NBs (Consumer Reports, 2010). They have also increased in total product offerings, as most supermarkets today offer at least one PL option in nearly all product categories (The Food Institute, 2012).

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The Food Industry Review (The Food Institute, 2012) demonstrates that much of this growth comes at the expense of NB sales. Food product categories with the most gains relative to NBs include baking ingredients and snacks. From 2005 through 2011, total channel sales (those involving NBs) increased by $24 billion, or about 8%, while PL sales increased by $10 billion, or 18%. Hence, PLs gained over 2 % of the NB market share during the 5-year span. Figure 29: Dollar Trend Sales for Supermarkets ($ Billion)

$350.0 $300.0

2005

$250.0

2006 $200.0

2007 2008

$150.0

2009 2010

$100.0

2011 $50.0 $0.0

Total Channel

Private Label

Source: Packaged Facts 2012 Retailers are increasingly using PLs as a means to differentiate themselves from competitors. In addition to standard flagship PLs that bear firm names, supermarkets are offering more premium and organic brands, such as Safeway’s SELECT and O Organics, Kroger’s Private Selections and Naturally Preferred, and Giant’s Nature’s Promise (Martinez, 2007). These premium PLs serve not only to distinguish supermarket chains’ product lines from one another but also to place NBs and PLs more directly in price and quality competition.

13.2. BEVERAGES Currently, some of the strongest private label beverage categories are bottled water, powdered beverage concentrates and 100 percent juice. Bottled water and 100 percent juice are commodity-based categories, so the price of the product becomes more important. Powdered beverage concentrates is a category that’s sold on value. According to SymphonyIRI Group, Chicago, in the 52 weeks ending July 10, 2011 in supermarkets, drug stores, mass merchandisers, club stores, gas and convenience stores, excluding Walmart, U.S. dollar sales for national branded bottled water products totaled $4.9 billion, while private label bottled water dollar sales totaled nearly $1.3 billion. Using the same qualifications, national branded bottled juices totaled $3.8 billion, while private label totaled $666.6 million. Consumers aren’t necessarily purchasing private-label products only for the value aspect anymore. According to market research companies, private label’s reputation has changed. Consumers formerly viewed private label brands as those geared toward people on tight budgets who are unable to afford “the best. Nielsen research shows that three-quarters of consumers believe store brands are a good alternative to name brands, and two out of three agree that quality is also on par.

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44 percent of grocery shoppers believe store brand products are of better quality today than they were five years ago, according to Mintel research. Thirty-nine percent of respondents who identify themselves as the primary grocery shopper of their household say they would recommend a store brand product. Thirty-four percent say they don’t believe they’re giving anything up, such as flavor or prestige, by using store brands. Furthermore, only 19 percent believe it’s worth paying more for national brand products. However, in the beverage industry, these statistics change depending on the category. For instance, in the soft drinks category, national brands have worked to build brand equity, keeping many consumers from even considering private label soft drinks. With regard to carbonated soft drinks, most analysts believe that Coke and Pepsi have done a very good job over the years of establishing their brands and what people expect from it, and private label’s not as strong in carbonates. But that doesn’t mean private label beverages can’t adapt. Although many retailers are competing with national brands, some are offering unique and innovative varieties. Save-A-Lot, Earth City, Mo., recently introduced a soft drink called Mountain Holler Red Howl, which is a citrus-flavored beverage with a taste of cherry. Additionally, Safeway, Pleasanton, Calif., launched a line of Refreshe flavored waters in Raspberry Acai, Pomegranate Acai Blueberry, Cranberry Raspberry and Strawberry and Kiwi varieties. The waters are calorie-, sodium- and caffeine-free and enhanced with vitamins B3, B5 and B12. Bentonville, AR-based Sam’s Club offered a seasonal juice drink, Member’s Mark Blackberry Flavored Lemonade from concentrate. This summer, the club store sold two 96-ounce bottles for $4.48, according to Mintel’s Global New Products Database. In 2010, Austin-based Whole Foods Market stores introduced the first private label refrigerated organic almond milk under its 365 Organic Everyday Value brand, the company says. Some of the strong private label brands are the upper-tier store brands where retailers are offering a quality product for a good price, Haffner says. He notes that private label products are getting more competitive in the ready-to-drink tea segment. The RTD tea segment] has grown substantially, so it’s becoming a much larger segment that is able to attract the attention of private label. For the 52 weeks ending July 10, 2011 national brands of canned and bottled tea totaled nearly $1.3 billion while private label brands of canned and bottled tea totaled $34.5 million, according to SymphonyIRI Group, in supermarkets, drug stores, mass merchandisers, club stores, gas and convenience stores, excluding Walmart. “Lower pricing has been the single biggest driver [for private label beverages],” says Zenith International. “Other factors have been improving quality, quick response innovation and intelligent segmentation. The latest steps have been in the expansion of in-house brands.” In summer 2011, Fresh & Easy, El Segundo, Calif., introduced a line of private label coffee in multiple varieties. “[The introduction of the new line] makes private label look like national brands by offering a wide range of items,” said Jonathon Asher, senior vice president of Perception Research Services, in a June 2011 article on PL Buyer’s website, privatelabelbuyer.com. The coffee line consists of Donut Shop coffee, a Fair Trade blend, whole bean blends and trial size blends in a variety of flavors, including Cinnamon and Hazelnut, the article states. Also in 2011, Deerfield, IL-based Walgreens stores launched the private label beer brand Big Flats 1901, supplied by the Winery Exchange. Comparable in taste and quality to the top-selling national brand beers, Big Flats 1901 is available in cans in sixpacks for $2.99 and 24-packs for $11.49, the company says. The beer is made with six-row barley malt, corn grits, hops from Yakima Valley and bottom fermenting yeast, it adds. This summer, the brand expanded with a Light variety, also retailing for $2.99 a six-pack. USA FOOD & BEVERAGE MARKET STUDY

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“As far as trends in [private label] beer, we are experiencing explosive growth in the private label beer portfolio, most significantly in craft beer and premium domestic cans,” says Jennifer Verdon, public relations and marketing coordinator at the Winery Exchange. “Some of our established brands, like Tap Room 21 with Kroger, are now standalone brands in the eyes of the consumer. This brand was launched in 2007 and has seen tremendous growth. For some of our new programs, we are delivering to an underserved market and see customers eager to accept these private label brands. “Consumers are initially drawn to our price points and innovative packaging designs,” she says. “It is the superior quality that keeps them coming back for more.” A pricing study conducted by PLMA discovered that consumers can save more than 35 percent, on average, off of their grocery bills by opting for the retailer’s brands. The study looked at a range of basic food and non-food items that an average family might put on its summer shopping lists and compared store brands versus national brands. Consumers can save as much as 50 percent on cola, according to the study. The typical national brand unit price for cola is $1.58 while the typical store brand unit price is $0.79, it adds. According to the “PLMA 2011 Private Label Yearbook,” shoppers who reached for the store brand version of their favorite products rather than the national brand in all U.S. outlets enjoyed an estimated $28 billion in savings in 2010. In total outlets, including U.S. supermarkets, drug stores and mass merchandisers, including Walmart, annual private label sales have increased by $4.5 billion, or 5 percent, during a three-year period, Nielsen’s report states. Retail sales were $84 billion in 2008 and $88.5 billion in 2010. Similarly, the annual store brand units have increased by $1.5 billion, or 4 percent, from $38.6 billion in 2008 to $40.1 billion in 2010, it adds. When comparing 2010 to 2009, however, there was less activity. Sales of store brands in total outlets were up $1.5 billion, or 1.8 percent, in 2010 compared to 2009. Private label dollar share rose by 0.4 points to 17.4 percent and unit share stayed flat at 21.8 percent. Although the economic downturn opened the door for private label, Euromonitor’s Haffner doesn’t expect it to falter as the economy recovers. “Private label’s a high-quality product and the quality of it has improved over the years,” Haffner explains. “As people may have gone to the product because of price, they found that there isn’t that much of a quality difference from the branded players. So I don’t expect they’ll decline much as the economy improves.”

13.3. CONSUMER INSIGHTS Economically speaking, there are now two U.S. consumer groups: those who have surfaced from the recession and those still under water. The wealthiest one-fifth of consumers posted more frequent shopping trips and higher spending in 2011 versus 2009, while the remaining 80 percent of the population lost ground on both dimensions. This bi-polar consumer picture may explain the upward growth trajectory of store brands, as lower income consumers exhibit a slightly stronger commitment to private label than their higher-earning counterparts. But their store brand preference isn’t driven exclusively by price. Lower income households perceived private label product quality to be “as good as” or “some higher quality” than national brands. Predictably, attitudinal attachment to store brands and store brand dollar share both decline as income rises. Affluent households pursue an earn more/spend more strategy, purchasing 52 percent more national branded goods than households with annual incomes less than $20,000. A comparison of the Top 10 private label product favorites among the lowest and highest income groups underscores some significant differences in purchase patterns. For example, pet food holds the number five spot among low income households, with annual sales of $18,327 per 1,000 households and a sales rate 30 percent higher than affluent families. Conversely, pet food plummets to number eleven among high income earners, with annual sales of $14,344 per 1,000 households. Income disparity offers retailers an opportunity to pursue a tiered store brand strategy, with high/medium/low price levels attracting different consumer segments.

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Diverse store brand assortment & support required to meet diverse demand _______________________________________________________________ Figure 30: Top 10 store brand $ sales per 1,000 households by demographic group

Household Income < $20,000

Household Income $100,000+

Milk

47,296

Milk

61,722

Cheese

31,036

Cheese

39,503

Bread & Baked Goods

28,543

Paper Products

31,115

Paper Products

24,365

Bread & Baked Goods

29,717

Vitamins

17,522

Vitamins

23,889

Medications/Remedies

15,068

Unprep Meat/Seafood

19,783

Packaged Meat

13,682

Medications/Remedies

17,766

Unprep Meat/Seafood

12,568

Packaged Meat

15,446

Vegetables-Canned

12,215

Dressing/Salad/Prep Deli

14,684

Source: Nielsen Homescan; Total U.S., 52 weeks ending 05/21/2011; UPC-coded Although Hispanics maintain the most positive attitudes toward store brands among the four major ethnic groups, they remain much stronger branded buyers than African-Americans and Asians based on respective dollar buying rates. However, Hispanics also post a store brand buying rate just nine percent below that of White Non-Hispanics, a much smaller gap than that of African-Americans [23 percent lower] and Asians [25 percent lower]. Figure 31: Multicultural households are relatively bigger brand spenders

How will population growth impact store brand growth? _______________________________________________________________ Index vs. Non-Hispanic

Source: Nielsen Homescan, Total U.S. 52 weeks ending 05/21/2011; UPC-coded USA FOOD & BEVERAGE MARKET STUDY

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As for the top 10 best-selling store brands among Hispanic households, the product rank order parallels that of White NonHispanics, although the absolute category sales rates for Hispanics are lower. Among the third decile tier of top-selling store brand categories for Hispanics and Non-White Hispanics, ranking differences emerge between the lists. Due to the higher Hispanic birth rate, disposable diapers wrap up the number 28 position, but drop to number 56 on the corresponding White Non-Hispanic roster. Given their overall positive perception of store brands, the Hispanic community comprises a high potential audience for private label products. Millennials, the shopper segment born between 1981 and 2000, embrace store brands unreservedly, recording the highest store brand dollar share [18.8 percent] and most positive attitude toward store brands of any generation. Nevertheless, with household formations more likely to include kids, the private label dollar buying rate among Gen X is eight percent greater than the average household. However, the influence of these young consumers pales in comparison with the sheer spending power and household size of the Baby Boomer [born 1946-1964] and Generation X [born 1965-1980] age cohorts. Comparing Greatest Generation [born 1922-1945] and Boomer store brand shopping preferences reveals striking similarities, with identical categories listed and only the rank order and buying rates changing with each generation. Drilling down by generation underscores the influence of age and household composition on product purchase patterns, guiding retailers toward making the right trading area assortment decisions. Diverse store brand assortment & support required to meet diverse demand _______________________________________________________________ Figure 32: Top 10 store brand $ sales per 1,000 households by demographic group

Greatest Generation (prior to 1946)

Boomers (1946-1964)

Milk

50,473

Milk

54,429

Vitamins

33,649

Cheese

36,670

Bread & Baked Goods

31,497

Bread & Baked Goods

31,796

Paper Products

26,378

Paper Products

28,623

Cheese

25,942

Vitamins

23,003

Medications/Remedies

22,279

Pet Food

19,160

Pet Food

19,242

Fresh Produce

18,850

Fresh Produce

16,125

Medications/Remedies

18,439

Packaged Meat

13,478

Unprep Meat/Seafood

17,070

Unprep Meat/Seafood

12,656

Packaged Meat

16,378

Source: Nielsen Homescan; Total U.S., 52 weeks ending 05/21/2011; UPC-coded Many retailers capture a higher share of store brand dollars by organizing their private label lines into tiers: a value tier representing the opening price point; a mid-priced tier of national brand equivalents for price-and-compare shoppers; and aspremium tier featuring unique, locally-sourced, natural orsorganic items that don’t necessarily use the store name.

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Different tiers appeal to different shopper segments. Mid-tier store brand lines comprise the largest segment by far on a dollar sales basis, drawing in the mainstream loyals and two low spend shopper groups. The two downscale shopper segments represent big value tier store brand buying potential, while premium tier store brand offerings pull in upscale premium shoppers. Figure 33: Store brand $ share varies by department

Source: Nielsen Homescan, Total U.S. 52 weeks ending 05/21/2011; UPC-coded

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14. Foodservice The Foodservice Industry is generally categorized based on type of eating establishment, such as full service restaurant, limited service restaurant, fast casual restaurant (also referred to as quick service restaurant or QSR) and snack and beverage restaurant. This industry comprises establishments primarily engaged in providing food services (except snack and nonalcoholic beverage bars) where patrons generally order or select items and pay before eating. Food and drink may be consumed on premises, taken out, or be delivered to the customer’s location. Some establishments in this industry may provide these food services in combination with selling alcoholic beverages.

14.1. RESTAURANT SECTOR INSIGHTS Sales at restaurants and drinking places reached $476.7 billion in 2011, up 6.1% from 2010. Sales are forecast to rise by 4.2% in 2012, 4.1% in 2013, and 4.4% in 2014 ($562.5 billion). In 2011, full-service restaurants sales rose 8.1% during 2011, generating $234.7 billion, some 49% of all sales. Limited-service eating place sales rose 4.5% during 2011, generating $220.0 billion, or some 46% of total sales. Sales at drinking places rose 3% to $21.9 billion. Figure 34: 2011 Market Share of restaurants

4%

2011 Market Share

49% 46%

Full-service Restaurants Limited-service Restaurants Drinking Places

Source: IBISWorld 2012 Snack & beverage restaurant performance has been mixed: all but one major coffeecentric brand (Caribou Coffee) has grown same-store sales during 2005-2010, while same-store sales at ice cream operator Baskin-Robbins and smoothie purveyor Jamba Juice have declined. But momentum is positive: compared to Q3 2010, Q3 2011 same store sales at all players were positive, and two-year cumulative comparisons are also all positive.

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Figure 35: Sales at Restaurants and Drinking Places (2006-2014)

Total restaurant and drinking places Limited-service eating places

Full-service restaurants Drinking places

$600.0

$476.7

$500.0 $407.2

$426.8

$435.8

$435.3

$496.6

$516.8

$539.8

$449.2

$400.0

$300.0

$200.0

$234.7 $244.1 $253.9 $239.6 $217.4 $210.4 $212.1 $220.0 $229.9 $200.9 $211.4 $210.5 $186.4 $194.8 $203.2 $204.3

$266.6 $249.2

$100.0 $19.9

$20.6

$20.5

$20.6

$21.3

$21.9

$22.6

$23.3

$24.0

$0.0 2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Bureau of Economic Analysis Same-store sales momentum at leading QSR players is mixed: compared to Q3 2010, Q3 2011 sales at four players are above 100, while those at four other players are negative. Among fast casual players, Chipotle Mexican Grill, Panera Bread and Qdoba have robustly grown same-store sales. Asian concept Pei Wei has come back to earth, and Rubio’s, Einstein Noah and (especially) Cosi have been mired in sales declines. Moving through 2011, the family restaurant picture is less bleak, with more players indexing toward 100 (the point at which sales trends are no longer negative). In comparison to annual trends, Denny’s sales are improving while those at Cracker Barrel are worsening. While sales are now trending positively, many casual restaurant chains have yet to reach same-store sales levels they achieved prior to the recession, which means that, store for store, they are simply not bringing in as much revenue as they did before. 2011 has brought a moderate rebound to the fine dining segment. But the hill back to 2007 remains very steep. The number of lower-income and high-income households grew during 2007-2010, while the number of middle-income households declined. Because restaurant spending correlates significantly to HH income, household movement “downstream” bodes ill for the industry. Consumers aged 65+ spent more on limited-service restaurants (13%) and full-service restaurants (1%) in 2010 than they did in 2007; younger consumers also spent a great deal more on limited service restaurants (17%) and full-service restaurants (34%) in 2010 than they did in 2007.Under 25s and 65+s are also driving restaurant spending by daypart. $100K+ households generate more than one-third of spending on meals at restaurants, even though they comprise only 17.1% of all households.

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Figure 36: Restaurant Usage by Major Segment, 3 Year Growth Index (2008-2011)

2008

2011

3-Year Growth Index

All restaurants Percentage use Usage population

89% 194.7

89% 200.8

100 103

Full-service restaurant Percentage use Usage population

65% 142.5

64% 144.0

98 101

Limited service restaurant Percentage use Usage population

83% 181.6

84% 190.6

100 103

Snack and beverage Percentage use Usage population

37% 80.5

36% 80.5

97 100

Total adult population

218.7

225.7

103

Source: 2011 Experian Simmon NCS The downward migration in consumer household incomes during 2008-2011 has serious ramifications for restaurant industry. From the standpoint of restaurant traffic, restaurant visits are being driven by significantly increased numbers of lower-income individuals and lower numbers of higher-income individuals. Some 98.1 million (or 43.5%) of adult respondents to the Summer 2011 Simmons Experian NCS say they have household incomes of less than $50,000—up 16% from 2008; during the same period, adults reporting household incomes $50,000+ dropped by 5%. Population growth has come to the restaurant industry’s rescue. Industry analysts estimate that the number of restaurant visits actually grew by 3% during 2008-11, based entirely on population growth, not usage penetration. During 2008-11, full-service restaurant use grew by 1% while the percentage of users declined by 2%; limited-service restaurant use grew by 3% while the percentage of users remained flat; snack & beverage use remained flat, while the percentage of users declined by 3%. Hispanic, black and Asian consumers are also driving growth, with their visits increasing for each restaurant segment, corresponding roughly to their respective general population increases during this period of time. Growth in the number of restaurant breakfast (5%) and snack (8%) users outpaced population growth during 2008-2011. The percentage of breakfast and restaurant snack users also increased, reaching 32% and 19% respectively.

14.2. RESTAURANT CUISINE AND MENU TRENDS According to the National Restaurant Association’s “What’s Hot in 2011” survey, local/sustainable and healthfulness trends are top of mind, with four different “local” trends cracking the top 15. 

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Chicken has nearly universal restaurant industry penetration, with 97% of restaurants featuring chicken as/in an appetizer, entrée or side, with little variation by restaurant segment. Fish, on the other hand, reaches 50% penetration, with casual and fine dining restaurants each more than 20% more likely than average to offer it on the menu. The potato takes a bow as the most highly penetrated side item on the menu, with more than 6 in 10 restaurants offering a potato as a side (although fine dining restaurants are almost 40% likely than average to do so). Chips, on the other hand, while offered by almost 4 in 10 restaurants, are more likely found at a quick-service restaurant. A number of vegetables, such as spinach, broccoli and carrots, make the list, with their presence skewed generally to full-service restaurants (midscale, casual and fine dining).

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Children’s menu items are generally more apt to be found at full-service restaurants (especially casual restaurants) and least likely to be found at quick-service restaurants. The nugget, an old standby, reigns, with almost 6 in 10 restaurants featuring children’s fare offering nuggets. Restaurant health claim penetration is highly dependent on the specific health claim made. While organic and natural claims are more to be likely found on casual and fine dining menus, fat free and low fat claims are most likely to be found on QSR menus. All natural and organic are not only the most prevalent health claims on menus, but their menu presence has grown during 2007-2011. Other health claims that have gained traction during 2007-2011 include whole grain, multi grain and sugar free. Some 21% of restaurants feature a broiled entrée, appetizer or side on the menu. Quickservice restaurants, however, index at 37 for broiling—or 63% less likely than average to feature that preparation method. In fact, quick-service restaurants are far less likely to feature most of the more popular preparation methods, in part because these restaurants do not generally emphasize cooking technique. Mexican-influenced menu items comprise almost 10% of menu items nationwide, with the highest percentage found on casual restaurant menus. Caribbean menu items (Cuban, Jamaican, etc.) and South American menu items each comprise only 0.5% of menu items nationwide.

14.3. RESTAURANT HEALTH & WELLNESS TRENDS Health and wellness trends shaping the restaurant industry include obesity and calorie count trends; health and food away from home correlations; government and industry health initiatives; and menu labeling effectiveness.   

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Obesity now accounts for 9.1% of all medical spending. Overall, an obese patient has $4,871 in medical bills a year compared with $3,442 for a patient at a healthy weight. The number of calories consumed has increased from 2,169 in 1970 to 2,594 in 2009, a 19.6% jump. However, calorie intake has actually dropped from the peak reached in 2002. According to USDA Economic Research Service (ERS) data, between 1989-91 and 2007-08, the fraction of daily calories from food away from home increased from about a quarter to more than a third, while the fraction of total household food expenditures on food away from home increased from 21% to 26%. USDA data shows that people who rate their diet as “excellent” eat food prepared away from home, on average, a little over three times per week, while those who rated their diets as “poor” ate food away from home nearly six times per week. According to a 2011 study, young adults who frequently eat food from burger-and-fries fast-food restaurants are at increased risk for overweight/obesity and poor dietary intake. The past few years have seen an avalanche of government and industry action geared toward addressing consumer healthfulness, including MyPlate, HealthierUS School Challenge and Kids Livewell. According to a 2011 study, mandatory menu labeling had no significant impact on monthly transactions and calories sold per transaction. Menu labeling is expected to have a clear educational effect that will impact point-of-purchase decisions over time. Never before have restaurant patrons had widespread opportunity to assess the nutritional profile of what they are ordering. This, with continued pushes to educate while minimizing confusion, will alter long-term ordering habits. Children as young as 1-3 years already bypass the daily recommended 4 teaspoons per day, typically consuming around 12 teaspoons. According to the CDC, almost all U.S. adults and children exceed the dietary guidelines for salt, putting them at risk for hypertension and heart disease. 0n 2011 menus, organic and natural claims were the most predominant, with 15.7% of restaurants featuring a natural claim and 13.5% featuring an organic claim. The tendency to market these claims on the menu corresponds to price point. “Mini” on the menu continues to grow, but the trend is losing steam. Some 8.6% of restaurants featured a “mini” menu item in 2010, up only a hair from 8.5% in 2010, up from 5.9% in 2007.

14.4. SNACK & BEVERAGE RESTAURANTS With some of the lowest price points in the restaurant industry and a strong foothold in breakfast and snacking, snack and beverage restaurant are poised to outperform the industry. Coffee-driven concepts, as well as those that seek to meet health and wellness need states while delivering on convenience and quality, should perform especially well. USA FOOD & BEVERAGE MARKET STUDY

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Snack & Beverage performance has been mixed: all but one of the coffee-centric brands (Caribou Coffee) have grown samestore sales for virtually every coverage period, while same store sales at ice cream operator Baskin-Robbins and smoothie purveyor Jamba Juice have declined during virtually every period. Starbucks is trending the strongest, with Q3 2010-2011 same-store sales indexing at 110 and Q3 2009-2011 same-store sales indexing at 118, translating to 10% and 18% sales growth per store during these time periods. During the recession, quick-service restaurants were the natural beneficiaries of restaurant industry trade-down (whereby consumers migrate downward to restaurants with lower price points) . Less treat-driven than some of their snack and beverage competitors, they were also less susceptible to consumers trading out, into the home. But as the recession bottomed, same-store sales at many quick-service restaurant chains turned negative. With the spurt of trade down-driven guest traffic behind it, the segment overly relied on extreme affordability strategies (in the form of a plethora of dollar deals and very low-price point promotions) that did little to garner loyalty beyond the end of the promotion. The largest players have performed well, most notably industry giant McDonald’s, which continues to operate with profit margins well above most of its competitors. With its already massive footprint, we believe McDonald’s is soaking up the lion’s share of QSR segment growth, leaving little room for other players to gain traction. Within the QSR segment, “fast casual” operators continue to outperform their QSR competitors, largely because leading brands such as Chipotle Mexican Grill and Panera Bread continue to avoid steep promotional discounting and, with positive health, quality and ambience brand images, they continue to draw from a customer pool less affected by the recession. With restaurant concepts generally perceived by consumers to be more healthful and of better quality than many of their fast food/QSR brethren, “fast casual” players came into the recession with a leg up on the competition. By continuing to differentiate their brands on quality, healthfulness, and ambience, these players have an opportunity to appeal not only to traditional QSR customers, but also to former casual restaurant customers seeking a positive but less expensive restaurant experience. In part because of this positioning, fast casual players weathered the recession relatively well, buoyed by industryleading unit growth and largely positive same-store sales.

14.5. FAST FOOD & CONVENIENCE STORES According to proprietary consumer research conducted by Packaged Facts in June 2011, some 85% of consumers age 18-24 have gotten breakfast, lunch, dinner or a snack from a fast food/QSR in the past month, compared to 79% of all consumers. Similarly, 36% of consumers age 18-24 have gotten prepared foods for breakfast, lunch, dinner or a snack from a convenience store/gas station in the past month—making them 50% more likely than average to do so. Both foodservice concepts also perform well among 25-34s. The tendency for younger consumers to use these foodservice options underscores some important similarities between them, such as later hours; quick, portable meal options; and low price. However, while fast food maintains usage rates above 90% among all age groups, convenience store usage plummets among consumers age 55+, with 65s+ half as likely as the average to get food from convenience stores. This follows general convenience store usage trends, but may also underscore a mismatch between convenience foodservice offerings (which are not generally perceived as healthful) and the needs of older consumers. Some 21% of white consumers use convenience store foodservice, whereas more than 30% of Hispanic, black, and Asian consumers do so. Convenience store foodservice is also more likely to be used by urban respondents than by suburban or rural respondents. Dinner is a minor convenience store foodservice item, in part because this has never been generally associated with convenience stores and because convenience stores have not moved to offer more competitive dinner-oriented programs— but this is changing. Snacking is a convenience store stronghold, a consequence of the segment’s mixture of low price, portability, quick service and location-driven convenience.Snacking is more likely among 18-24s, those with $100K+ HH incomes, and females. As females are less likely than men to obtain prepared foods from convenience stores, targeting this group with healthful, snack worthy food items may incent trial and use. USA FOOD & BEVERAGE MARKET STUDY

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14.6. FOODSERVICE CONTRACTORS Industry companies provide food services at institutional, governmental, commercial or industrial locations. Examples of facilities where food services are provided include airports, food courts, college and university cafeterias and recreation and sports venues. The three main service segments in the Food Service Contractors industry include preparing food and beverages for consumption on premises, providing food and beverages for carryout and serving alcoholic drinks on premises. On premises The largest industry service segment involves preparing food and nonalcoholic beverages for consumption on premises. Over the last five years, the relative size of this service segment has shrunk; in 2007, it accounted for 67.5% of revenue; however, in 2012 it is expected to account for only 63.3% of revenue. This decline is due to changing consumer tastes and an increasingly time-poor population. Many consumers do not have the time to sit and eat at cafeterias; instead they are opting for quicker snack and beverage outlets. The health concerns associated with some foods served at sit-down cafeterias may have also driven consumers to go to different types of restaurants. Carryout The second-largest service segment in this industry includes providing food and nonalcoholic beverages for carryout. This segment has grown from 28.2% of industry revenue in 2007 to 31.7% in 2012. It has increased its share of revenue due to an increasingly time-poor population and people’s food preferences shifting toward to-go foods. Alcohol The smallest segment in this industry is alcoholic beverages served on premises. This product segment has grown slightly over the last five years. In 2007, it accounted for 1.7% of revenue; however, in 2012, it is estimated to account for 2.2% of revenue.

Figure 37: Product and Services Segmentation (2012): Total $32.6 billion

2% 1%

3%

32% 63%

Food & Beverages Served OnPremises Food & Beverages Served OffPremises Alcoholic Drinks Served OnPremises Rented Public Rooms and Venues Others

Source: IBISWorld 2012 Most food service contractors provide catering services at the clients’ own premises or meeting rooms. In addition to the service segments mentioned above, some large operators are increasingly providing full or bundled services to clients, including cleaning, maintenance and security, under one contract. Over the five years to 2012, revenue for the Food Service Contractors industry was projected to grow at a marginal average annual rate of 0.4% to $32.6 billion. After a disappointing 2009, when revenue declined 4.3% due to the struggling economy, revenue climbed back up 1.4% in 2010 and 3.1% in 2011. During 2011, health, correctional, educational and sports facilities outsourced their catering functions to industry firms, driving revenue growth. Revenue is expected to increase an additional 4.4% in 2012. USA FOOD & BEVERAGE MARKET STUDY

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In 2009, the declining domestic economy and rising unemployment rate forced people to become more selective regarding how they spent their disposable incomes. As a result, consumer spending fell 1.9%. As people cut spending, they were less likely to spend money on nonessential activities like eating out at restaurants and cafeterias, causing demand for industry services to suffer. However, consumer spending rose 1.8% in 2010 and 2.5% in 2011, leading to greater demand for food service contractors. Consumer spending is forecast to rise an additional 1.9% in 2012. With the economy having improved since 2010, and some recessionary fears subsiding, consumers are treating themselves to meals at cafeterias, sporting events and other industry-served facilities more frequently. This trend is expected to result in increased demand for food service contractors going forward. The outsourcing of catering services by correctional, education and healthcare (including elderly care) facilities will provide continued growth prospects for operators. Bundling food services within broader facilities management contracts for clients will also drive growth. Over the five years to 2017, industry employment is expected to grow an average 1.5% per year to 449,852 employees. During the same period, the number of establishments will grow at an average annual rate of 1.7% to reach 23,256 locations. An anticipated growth in revenue and the expansion of some service contracts is expected to drive this growth in employees and establishments. Over the five years to 2017, industry revenue is forecast to grow an average 3.2% per year to $38.3 billion. The industry is affected by changes in consumer spending. Changes in interest and tax rates and employment partly determine consumption. Higher consumer spending causes people to eat out more, boosting demand for food service contractors. This driver is expected to increase slowly in 2013 and is a potential opportunity for the industry. Trends in employment and investment in the manufacturing sector affect demand for outsourced catering services, influencing expenditure on canteen items (i.e. restaurant or refreshment bar items provided by an industrial or commercial entity). Since 2008, significant restructuring has occurred in the manufacturing sector, particularly in automobile manufacturing, which has adversely affected demand for catering services. This driver is expected to increase in 2013. The weak economy and rapid unemployment growth have battered the Food Service Contractors industry throughout the past few years. However, the industry has managed to mitigate its losses due to the long-term trend of healthcare facilities, prisons and educational institutions outsourcing their food service functions. This trend has provided continued opportunities for growth in an otherwise down economy. Over the five years to 2012, revenue is expected to grow at an average annual rate of 0.4%. Industry revenue declined 4.3% in 2009 and partly bounced back in 2010 and 2011, increasing 1.4% and 3.1%, respectively. In 2012, revenue was projected to grow 4.4% to $32.6 billion. As the economy fell deeper into a recession and unemployment rose, consumers became more selective about how they spent their disposable incomes. In 2009, consumer spending declined 1.9%, and luxuries like eating out were some of the first expenditures to go. Some consumers cut meals outside the home from their budgets entirely and opted to save money by eating in. While some industry customers, such as retirement communities and correctional facilities, are insulated from these changes, sporting venues and educational institutions felt the pinch from consumers’ declining incomes. This trend reversed in 2010 and 2011, with consumer spending increasing an estimated 1.8% and 2.5%, respectively; it is expected to grow an additional 1.9% in 2012. Because the economy has consistently improved since 2010, some of the fears surrounding the state of the economy have subsided. As a result, analysts estimate that more consumers will treat themselves to meals and snacks outside the home, ultimately benefiting food service contractors. Despite recession-related declines in demand for industry services, demand for outsourced catering services from correctional, elderly care, health, educational, recreational and sports facilities has increased. By outsourcing nonessential functions like catering, these institutions can focus on their core service activities and not worry about running a kitchen or cafeteria. Outsourcing catering functions also allows these institutions to accurately budget their food and catering costs, since they generally use fixed-price contracts, which are not subject to the variability in food, labor and equipment costs associated with running a cafeteria. Additionally, major industry players have moved toward offering full services to clients, ranging from catering to maintenance to security services.

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In an increasingly competitive market, it is important for food service contractors to retain and expand existing contracts and seek out new growth opportunities. They can take advantage of these opportunities through mergers and acquisitions or international expansion. Successful firms must also provide clients with menu choices and dining options at different price points. Over the past few years, it has also become important for food service contractors to offer healthier foods. Over the five years to 2017, analysts forecast industry revenue will increase at an average annual rate of 3.2% to $38.3 billion. The Food Service Contractors industry showed its first signs of postrecession growth in 2010, when revenue increased 1.4%; it is expected to resume its long-term growth trend from 2011 onward. In 2013, revenue is expected to grow 3.0% to $33.6 billion. Food service contractors will benefit as the economy improves, unemployment rates decline and consumers resume spending on luxuries like eating out. In fact, over the next five years, consumer spending is expected to increase at an average annual rate of 2.8%. Food service contractors will also benefit from stronger growth in downstream markets, which will start employing workers again, increasing demand for catering services. Outsourcing catering services in the correctional, educational and healthcare (including nursing homes and elderly care facilities) industries will provide growth prospects for operators. Catering will also continue to be bundled with other services such as security and cleaning as part of single facilities management contracts. Contracting management companies will coordinate these contracts, so strategic alliances with suitable partners will be vital to some firms’ success over the next five years. Growth in the longer term will likely remain solid among sports, recreation, entertainment and leisure (including tourist attractions) facilities, and with elderly care, nursing home and childcare facilities. Some growth in outsourced catering contracts from the education and health sectors is expected; however, these customers are less profitable than others. Hospitals will likely continue to shorten their patients’ length of stay through improved surgical techniques and more daytime surgery admissions. These factors will increase the number of patients going through hospital doors, but they will also reduce the amount of food that each patient requires during their stay. Growth from the defense industry will also be sluggish as overseas troop deployments progressively decline. Food service contractors service several major markets, including manufacturing, industrial and mining; education; sports and recreation industries; airport and airline industries; and government and healthcare industries. Manufacturing, industrial and mining Catering for the manufacturing, industrial and mining industries (including remote locations like oil rigs) accounts for about 25.0% of industry revenue. This segment services industrial customers. This market segment has shrunk over the five years to 2012 due to the declines that these industries experienced. College and university College and university catering is estimated to be about 32.0% of industry revenue. This segment has experienced aggressive growth over the five years to 2012, especially with the continuing rise in enrollments and more stringent food safety and handling regulations. Recreation and sports It is estimated that recreation and sports catering represent 20.0% of the market. This segment is sensitive to consumer travel patterns and expenditure on recreation. Therefore, it is very sensitive to any spike in unemployment, which the United States has been experiencing since 2008. Still, the recreation and sports components of this market have grown during the five years to 2012. Airlines and airports Airlines and airports’ contribution to industry market share (10.0% of revenue) shrunk during the five years to 2012. This factor mostly occurred because of declines in travel rates over the course of 2009 and 2010. Government and healthcare The government and healthcare (including retirement homes) segment of this industry makes up about 13.0% of industry revenue. This market segment has grown over the last five years and is expected to continue growing over the next five years. This growth is due to an aging US population and their rising need for healthcare, especially end-of-life care.

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Figure 38: Major Market Segmentation (2012): Total $32.6 billion

Market Share 10% 13%

Colleges and Universities 32%

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Source: IBISWorld 2012

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Manufacturing, Industrial and Mining Recreation, Leisure and Sports Government and Healthcare Airlines and Airports

15. Innovation 15.1. INDUSTRY INNOVATION Major changes in demand for agricultural and food products are being fueled by growing populations, rising incomes, and changing lifestyles. These alter where and how food products are grown, processed and distributed; furthermore, new social and environmental concerns are bringing pressure for more change. Demand, not supply, drives product offerings with technology tailoring products to meet consumer needs and sophisticated business models delivering them to the customer in a secure manner. In the food industry, just as any other industry, product and process development is considered a vital part – indeed the lifeblood – of smart business strategy. Failure to develop new and improved products relegates firms to competing solely on price which favors the players with access to the lowest cost inputs (land, labor etc). Adopting a low cost strategy can have unexpected consequences for the economy as a whole when another country, which has a lower cost structure, enters the market. Consumers’ demands keep changing over time. These changes range from basic considerations such as improving food safety, shelf life, and reducing wastage, to demands for increasingly sophisticated foods having special characteristics in terms of nutritional value, palatability, and convenience. The actual product development process is determined by the interaction between consumer expectations and demand, the technical capacity of the food producer, and emerging knowledge from food science research. There are several systems for classifying food products on their newness. They define the innovation spectrum using terms such as “new to the world”, “product improvements” and “cost reductions”. Innovations can also be described as leading to incremental, major and radical changes. Product platforms can be used to group similar products. The ultimate test of product development occurs in the market and a new product can only be considered successful if it is a market and financial success. There are essentially four basic stages in these models for every product development process. These are:  product strategy development  product design and development  product commercialization  product launch and post-launch What constitutes a new or innovative product? Newness of a product may be judged differently according to those who perceive it. In the context of consumer goods such as food products, there are three groups of actors: consumers, distributors, and producers. Each may have a different view of whether or not a product is new. There are many ways to classify the degree of newness of a product. One useful example uses seven categories:  creative products  innovative products  new packaging of existing products  reformulation of existing products  new forms of existing products  repositioned existing products  line extensions The challenge for product development is to develop a product which is acceptable to the target consumer. For example, Asian for food products sold in the U.S., the specific flavors, ingredients and levels of spiciness are normally significantly different to that found traditionally in Asia. Similarly, ice cream flavors found in the U.S. (e.g. mint chocolate chip, cookies & cream) are not popular in other countries which may feature more traditional chocolate, vanilla and strawberry flavors. Even countries of USA FOOD & BEVERAGE MARKET STUDY

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seemingly similar culture can have major differences. For example, a launch of colored ketchup in USA was a tremendous success for Heinz, whereas the same launch in Australia and New Zealand was a major failure. The key principle in product development, which differentiates this research from all other natural science research, is the mandatory need to ensure the development meets a consumer demand. Without a market, no matter how innovative a change, there will be no sales and the product is worthless. A major feature which distinguishes food product development is the ethical considerations of producing a large volume of safe food for human consumption. This is coupled to the fact that food raw materials are labile, unstable and must be stored for prolonged periods of time prior to consumption. In spite of food industry efforts to create a more exciting and interesting food culture and new food experiences, there seem to be ever-longer periods between great innovations in the food industry. One simple reason could be that the food industry is low-tech; it is an industry in which it is difficult to distinguish between products. There are few barriers to market entry and it is difficult (though not impossible) to use patents or other forms of intellectual property rights in the food sector. So, product characteristics are copied by competitors, who produce me-too products. This low rate of radical change, coupled with the high failure rate of food products following market launch implies that the methodology for new food product development urgently needs to become more focused, quantitative, rapid and knowledge based. The majority of food innovations in the last 20 years have been incremental changes; in other industry sectors this is called “continuous innovation”. Such innovation takes place within existing infrastructures and builds on knowledge in existing markets without challenging the underlying strategies and assumptions. It is worth noting that some published literature describes true innovation in the food industry as being in its hey-day during the 1960s and 1970s. This was when really novel food products were introduced and companies (such as McDonalds, Proctor & Gamble, General Foods, etc.) were regarded as the leading innovators of all industries at the time. Since then, the industry has become more introverted and the rate of truly novel foods has greatly declined. So has the profitability and corporate stability of these food organizations. In the last 5 years, some of the major food corporations have begun a new corporate strategy which has been termed “discontinuous” innovation (Miller & Morris, 1998). Discontinuous innovation involves a strategic jump to a totally new paradigm. This may involve novel technologies or ingredients, or the application of knowledge generated in one discontinuous area to another. A good example was the introduction of the MARS confectionary bar as an ice cream confectionary. MARS Corporation at the time had no skills in ice cream and the key ice cream manufacturers (Unilever and Nestle) had no skills in confectionary. This sort of innovation may extend beyond specific food product identification in order to capture the value that the customer places on the product. In some cases food products can embody services and intangible benefits that complement the food product itself and add to its value. For example, in some markets, useful food storage regimes might involve drying foods, which need to be re-hydrated prior to use. This may be excluded in these markets because of the lack of availability of a safe and reliable water supply. The opportunity for a food company may be to provide the water supply for a community (market niche) and thereby gain the market opportunity and brand support for their dry foods. The key to discontinuous innovation is to identify the limits of knowledge or capability and extend the realm of possibilities beyond the obvious. The food industry appears to be populated with companies that prefer to re-develop existing products (incremental change), rather than create new products (radical change). Because food product development is considered a highly risky venture, the incremental change strategy may be an attempt to increase success rates. Ironically, this apparently ‘safe’ approach perpetuates the problem of high food product failure, since truly innovative products are often more successful for a company. However, there are some indications that certain factors may improve the number of the success rate in product development. Three important factors that contribute to new product success which have been cited by various authors are: 1. marketing and managerial synergy; 2. strength of marketing communications and launch effort; and 3. market need, growth and size. These factors emphasize the role of marketing in the product development process. Other authors mentioned different factors, for instance market need satisfaction, unique and superior product, technological and production synergy and efficient development. USA FOOD & BEVERAGE MARKET STUDY

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Ground breaking research during the late 1970s by Calatone and Cooper [Stewart-Knox & Mitchell, 2003] established that product success is dependent upon several factors during the product development process. The following factors were drawn from De Brentani & Kleinschmidt, 2004; and Stewart-Knox & Mitchell, 2003:           

the product being unique and superior; good understanding of consumer wants, needs and preferences; an open and innovative global NPD culture; commitment of sufficient resources to the NPD program; cross-functional teams; effective communication between product development team personnel; careful planning at the concept stage of product development; top management support; involvement of senior personnel; thorough market research; effective product marketing and launch.

On the other hand, factors that are associated with product failure were reported as:          

lack of market knowledge, e.g. due to poor market research; misdirected marketing efforts; dynamic and competitive markets; inadequate market size; resistance by marketing staff; technical problems; high prices; distribution problems; internal conflicts.

15.2. INNOVATION CASE STUDY: US FOOD PROCESSOR Flavored Fruit Pieces Cranberries gained popularity when the American navy used them as a good source of vitamin C against scurvy. However, the suppliers had to depend on wild cranberries. Cranberries require unusual soil: a poorly drained, highly acid combination of peat and clay. This type of soil is found where glaciers have scoured the earth. The wild cranberry was eventually tamed by spreading sand over cultivated plants, after it was observed that the biggest and juiciest wild cranberries grew where the wind blew layers of sand over the plants. Thanks to a series of more and more efficient mechanical harvesters, cranberry production became increasingly automated. Two main process innovations, however, came from studying the natural properties of the fruit. First, good cranberries bounce and float due to internal air pockets. This bounce property is used for the automatic sorting of the fruit. Cranberry sauce is mostly consumed at Thanksgiving and Christmas. To spread demand for their production capacity Ocean Spray looked for other products to make from cranberries that could be sold all year. Juice was one; however, there was a challenge to get people to buy the product. Ocean Spray focused on the newness of the drink in bars and on how cranberries can help to cure bladder and other infections. This type of demand-building efforts encouraged people to taste the product; brand-building held them to loyal to Ocean Spray. Dried cranberries were also sold to bakers and cereal producers. In their search for diversified food products Ocean Spray determined that cranberry hulls, which were normally smashed when juice was made, could be emptied and re-filled with juice from blueberries, mangoes, raspberries or any other juice using the principle of osmosis. Distilled water was forced into the hulls and cranberry juice was removed. The result was a whole, waterfilled hull. Next, the process is reversed; the hull is filled with another fruit juice. This gave Ocean Spray their ‘flavored fruit pieces’, which are cranberries with the taste of orange, cherry or any other fruit taste. The advantages of this product are that it is durable, with a shelf-life of two years, while keeping a chewy texture when baked, unlike the fruits whose flavors they mimic.

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Another recent product innovation is gelatin-treated fruit pieces that stay soft and chewy for two years. This is perfect for breakfast cereals. The dynamic that is relevant in this case is behind many mass-produced goods. Growing demand provides the incentive to create cheaper and more reliable supply. Cheaper and more reliable supply, in turn, creates incentives to find new markets, which requires new products. Success in new markets increases demand again. This helps to maintain growth and profitability.

15.3. INNOVATION CASE STUDY: EUROPEAN FOOD PROCESSOR Milk for Lactose-Intolerant Valio is Finland’s biggest dairy company. The company seeks to develop innovative products for consumers who are interested in food that increases health and well-being. For instance, Valio has acquired the global commercial rights to the bacterium Lactobacillus GG (LGGTM). Now, the company has licensed dairy products containing LGG to markets in more than 25 countries and this is seen as an innovative procedure in the industry. Between 15 and 20 percent of the Finnish population is lactose intolerant. In Mediterranean countries the proportion is closer to 50 percent, while in parts of Asia the entire populations are lactose intolerant. Individuals who are lactose intolerant find that their stomachs do not accept any milk, so most of them have stopped drinking milk. Today, Valio produces and sells more than 100 different products that are lactose-reduced dairy products. However, Fins have never liked the sweet-tasting low-lactose milk. The challenge to Valio was to produce milk that could be tolerated by the lactose intolerant, but which was also acceptable in terms of taste. After a long period of research and development, Valio was able to perfect a unique process to produce lactosefree milk (< 0.01 percent) that tasted just as milk should. They use, among things, chromatographic separation. At first, Valio was not allowed to call the product ‘milk’, as one of its natural constituents had been removed. Finally, it was launched as ‘light milk drink’. Even though the price is twice as high as normal milk, consumers were not deterred. The desire for milk among lactose intolerant was obviously far higher than expected. In 2004, sales of 40 million liters were expected. The milk was to be supplemented by a fat-free version in 2004. 8 Leading Innovators 1. Stonyfield Farm For making its supply chain more sustainable--and more profitable. Over the last six years, the yogurt company has introduced eco-friendly innovations in transportation, light-weight packaging, and waste reduction (including a program to recycle up to 90% of manufacturing waste) that have cut costs by some $24 million. Now, the company is helping its suppliers do the same. A new program is underway to build small, mobile processing plants at a Costa Rican banana coop so that its growers can slash waste by as much as 50% and improve their profit margins. The project is a model for Stonyfield’s parent, the global giant Danone Group, which has made sustainable development a corporate priority. 2. BrightFarms For slashing the distance from farm to market by building farms on grocers’ rooftops. Farmers markets are great. But the truth is, most people shop at the supermarket. BrightFarms works with supermarkets to plant lettuce, tomatoes, and herbs on site (or very nearby), which cuts transport costs and waste for the grocer and adds days to the shelf life of perishable foods in customers’ refrigerators. This spring, the company will debut a 100,000-square-foot rooftop farm, the largest in the world, in Brooklyn’s Sunset Park, which will produce 1 million pounds of produce annually. 3. Kind Snacks For showing that “performance foods” don’t have to be processed and weird, and in doing so, doubling revenue last year to more than $125 million. After expanding steadily for seven years, the company grew explosively in 2012: consumption of its line of fruit-and-nut bars (which made their way into Starbucks stores nationwide in 2009) rose over 100%, and two new lines of granola and low-sugar nut bars took off. In 2011, the company launched a charitable campaign called the Do The Kind Thing, through which it delivered diapers to new families in shelters, partnered with the San Francisco and Marin food banks, and last December, worked with the non-profit Luke’s Wings to fly soldiers home from overseas for the holidays. USA FOOD & BEVERAGE MARKET STUDY

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4. Lyfe Kitchen For employing fast-food industry secrets to sell healthy food on a mass-market scale. Most people wouldn’t imagine that brussels sprouts, kale-banana smoothies, and “unfried” chicken would be ingredients in a recipe for success in the fast-casual business. But Lyfe’s team of former McDonald’s execs, along with well-known executive chef Art Smith, have used supplychain management know-how (and their street cred) to prove otherwise. Its first outlet, in Palo Alto, was expected to have revenues of $2.4 million in its first year (about the same as an average McDonald’s). It beat estimates by 20%. The company aims to open 250 more outlets around the country in the next five years. 5. BluePrint Cleanse For leading the way in packaging and branding of the cold-pressed juice trend. The company started in 2006 with a simple line of juice cleanses, sole ingredients of a detox diet, a concept that took off when celebrity endorsers like Salma Hayek and Gwyneth Paltrow began advertising the method to their fans. BluePrint Cleanse caught the eye of Whole Foods, which last year began selling the company’s fresh, cold-pressed juices, targeting people who want the health benefits of juicing but don’t want to invest in a juicer. Revenues in 2012 grew by 100% to $20 million. In December, the company was acquired by healthy food giant Hain Celestial Group for an undisclosed (though persumably healthy) sum. 6. Bon Appetit Management Co. For creating tools that give nutrition information about the catering company’s made-from-scratch meals. Long before the word “locavore” entered the dictionary, BAMCo was mandating its chefs to buy seasonally and locally. Today, the 135 million meals it serves each year at colleges and corporations (including Google, Twitter, Starbucks, and Target) serve cage-free eggs, antibiotic-free meats, sustainable-only seafood--and bring in about $700 million annually. Its latest innovation is a custom nutrition tool that calculates a “well-being score” for its dishes so that diners can see at a glance what the healthiest choices are. 7. Copilot Labs For letting restaurants measure the success of their social marketing strategies. In the bewildering age of Yelp reviews, Groupon promotions, and Seamless food delivery, Copilot exists to help restaurateurs make sense of it all. Launched in 2012 by Eli Chait, the son of a successful California restaurateur, the marketing analytics company looks at the spending, visits, and profitability of guests that use promotions from Groupon, LivingSocial, Restaurant Week, and others. Its software helps restaurateurs draw a direct line between a new marketing strategy and its results and hold marketing companies to account. 8. ScanAvert For putting allergy information into a simple bar-code scan, helping millions of Americans avoid dangerous reactions. More than 15 million Americans suffer from food allergies. With the ScanAvert app, consumers upload details of their medical conditions, then scan grocery, beauty, and pharmaceutical bar codes to ensure that nothing they buy contains ingredients that will provoke dangerous reactions--a far simpler process than trying to read ingredient lists in tiny type or relying on manufacturer allergy warnings. ScanAvert cross-references the barcodes with a database of over 300,000 products and shows users a red alert or a green all-clear signal. The app also notifies customers about product recalls.

15.4. FOOD INDUSTRY INNOVATIONS Food Industry Innovations Every day, manufacturers and researchers are working on ways to make food and eating more interesting and profitable. Here are some of the recent and most intriguing inventions. Glowing food BioLume® is trying to use natural bioluminescence to make your food glow, just like a firefly, squid, or jellyfish. These are the sources of bioluminescence researchers are using. Bioluminescence is “cold” light produced by a chemical reaction within a living organism. Anyone who eats fish also consumes trace amounts of bioluminescence. So far, glowing whipped cream, bubble gum, lollipops, and beverages have panned out, but if BioLume has its way, these glowing foods and drinks will become common. According to the company’s Web site, “The food, beverage and cosmetic applications will be regulated as a food additive by the U.S. Food & Drug Administration (FDA) Center for Food Safety and Applied Nutrition (CFSAN), and thus require no human

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testing for safety or efficacy. BioLume will have to conduct toxicity testing in several relevant animal models at several “doses” to support a pre-market approval (PMA) petition.” Programmable food Programmable food will allow you to make your food work for you. Researchers say that they are well on their way to inventing foods that can adjust to individual tastes, allergies, and nutritional needs. For instance, Kraft Foods is already designing a drink that you could buy in a colorless, flavorless state and then determine its nutrients, color, and flavor once you bring it home. Basically, these foods will contain many different flavors, colors, and nutrients, each encapsulated until the consumer decides which ones to release to their liking. Spoilage-resistant packaging Some researchers are trying to invent packaging to slow food spoilage, and many of these applications include metal. However, some people are concerned that metal could contaminate the food itself, possibly making it dangerous. Self-cleaning and antibacterial cutting boards also are under consideration. Just the good stuff Researchers also are studying nanotechnology to try to create foods that will allow you to absorb only the healthiest components of foods, while allowing you to excrete the less healthy parts. Healthier fried food As disgusting as it might sound, batter for fried foods might soon come from discarded fish parts in an effort to make these foods healthier. The muscle from certain fish parts lock in taste and moisture, while preventing the absorption of fat from the oil used for frying. Researchers state that the finished product has 25%-75% less fat. Plus, the added protein cuts down the total carbohydrate content by 15%. To date, tests are complete on the batter used on fish filets, chicken, and potato chips. This process has received approval from the FDA. No more icy ice cream A tasteless protein, gelatin hydrosylate, prevents ice crystals from forming when added to frozen desserts, such as ice cream. Called the “edible antifreeze,” this protein could dramatically increase the shelf life of ice cream, and make it creamier and more enjoyable for consumers. The product does not require FDA approval. Tricky gum A company already has created a prototype of a chewing gum that tricks the mouth and brain of consumers into believing that they are actually eating chocolate. Cholesterol blocking oil A company from Israel has created Canola Activa Oil, a rapeseed cooking oil that actually prevents cholesterol from entering the bloodstream. Lower sugar without artificial sweeteners Slim Shake Chocolate is a powdered drink that uses nanotechnology to cluster the cocoa cells, reducing the need for sugar to sweeten the beverage. References and recommended readings Biolume. Natural glowing chemistry for broad consumer & medical applications. Available at: www.biolume.net/index.htm Renton A. Welcome to the world of nano foods. Available at: http://observer.guardian.co.uk/foodmonthly/futureoffood/story/0,,1971266,00.html#article_continue ScienceDaily. Could nanotechnology make an average donut into health food? Available at: http://www.sciencedaily.com/releases/2009/02/090214162746.htm ScienceDaily. Edible antifreeze saves ice cream: food chemists use ‘edible antifreeze’ to make smoother ice cream. Available at: www.sciencedaily.com/videos/2008/0702-edible_antifreeze_saves_ice_cream.htm USA FOOD & BEVERAGE MARKET STUDY

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ScienceDaily. Low-fat fried food? Food chemist develops protein-based batter for healthier frying. Available at: www.sciencedaily.com/videos/2006/0111-lowfat_fried_food.htm

15.5. OPEN INNOVATION IN THE FOOD INDUSTRY www.cremeglobal.com/information/articles/openinnovation.php There are major new drivers impacting how consumers make choices about the foods they will spend money on. The food industry is responding to these drivers by developing new and innovative products. This has led to the development and marketing of more sophisticated food products from functional foods to nutraceuticals. From the earliest food supply drivers such as survival and satisfaction of hunger, the food industry has evolved through phases, where the development of foods is driven by higher level consumer desires such as indulgence, conscience and more recently impact on health. Whereas yesterday's food market was driven by taste and safety, today's consumer is driven by taste, safety, health and well-being. This is an important shift which has pitched food companies into the Health and Wellbeing market. This is a competitive space occupied by agriculture companies, consumer product companies, biotech companies and pharmaceutical companies. It is a growing and fast moving market where the lines between food and medicine are becoming blurred. Open Innovation Open Innovation is the term that refers to the current thinking that companies cannot afford to rely entirely on their own research, but should instead buy or license processes or inventions from other companies. In addition, internal inventions not being used in a firm's business should be taken outside the company. Food companies are turning to open innovation to access the novel technologies, expertise and intellectual property they need from organizations around the world. Firms embracing Open Innovation use external as well as internal ideas in their research and development. They also use internal and external paths to market to capitalize on their opportunities. These companies are developing teams of people dedicated to connecting with organizations outside their own company to discuss innovative technologies and opportunities. So what are the implications of this shift in focus, from traditional in-house R&D to open collaborative methods, for food research, nutrition and safety? Research Collaborative research and communication are vital in integrating the ideas of Open Innovation. The Internet provides a powerful communication opportunity for researchers. Collaboratively funded key research grants from government agencies such as the EU framework program or the USDA help to stimulate and integrate research. Nutrition Companies need to perform detailed research into the ever-changing food consumption and nutritional requirements of consumers. This allows industry to target key nutritional requirements for different demographic groups that are not currently being met by current food consumption habits. Ingredient and product innovation concepts can be gleaned from by analyzing opportunities to increase nutritional levels in the diets of consumers. Substantiating Health Claims Food manufacturers claiming health benefits from functional foods must ensure that their claims are scientifically substantiated. Food Safety Food safety issues have to be addressed when you are dealing with novel and fortified foods. Governments, industry and researchers have a responsibility to ensure that consumers will not be over-exposed to any chemicals which may cause harm. USA FOOD & BEVERAGE MARKET STUDY

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Supply Chain In an Open Innovation supply chain, additional links are added to the supply chain. Each link in the chain has to ensure safety for the end consumer. Communication and sharing of information and data on food safety issues are important.

15.6. FOOD & BEVERAGE INNOVATION AND TRENDS WEBSITES About.com: Food & Beverage http://foodbeverage.about.com/od/Whats_Hot/a/Food-Trends-for-2012-How-the-Experts-Uncover-The-Future_2.htm Kara’s Culinary Trends blog www.ccdinnovation.com/trends/trendsblog.php Jim Carroll consumer & food blog www.jimcarroll.com/category/trends/consumer-food-trends/#.UYkWBbzD9hE SIAL Food Innovation www.sial-group.com/News/Food-Beverage-News/Food-Innovation Food Business Innovation Network http://fyi.uwex.edu/foodbin/2013/02/28/future-food-trends-2013/ XTC Online Food Innovation Database www.xtcworldinnovation.com FastCasual.com www.fastcasual.com BusinessWeek www.businessweek.com/innovate/next/archives/food/

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16. Industry Trends According to the first annual U.S. Food & Beverage Industry Study, released today by WeiserMazars LLP, an accounting services firm, food companies look to new customers for the majority of increased product sales in 2013. This inaugural study, a joint effort between WeiserMazars and The Food Institute – delved into the trends, performance, plans, and challenges of food and beverage companies. Survey participants included manufacturers and wholesalers/distributors representing a range of annual sales volumes from $10 million or less to more than $100 million. The survey addresses how these companies are adapting to changing consumer trends, proposed government regulations, new companies entering the field, and new product and service offerings. Participants are confident sales will increase 13% compared to 2011 and project net profits to rise by almost 6%. These solid gains, though, are offset by rising commodity and production costs, resulting in a modest net profit. This inaugural study delved into the trends, performance, plans, and challenges of food and beverage companies. The study offers food and beverage companies data against which to assess 2012 performance, insights into potential drivers for the industry in 2013, and best practices to stay ahead of the competition. Survey participants expect that the most important industry factors influencing sales growth in 2013 will be new customers (59%), new products (51%), and increased selling prices (40%). “With food prices forecast to move 3% to 4% higher this year, it is not surprising that the major concern among food and beverage companies surveyed was the cost of goods,” stated Brian Todd, President & CEO of The Food Institute. “Inflation almost entirely offset sales increases last year at grocery stores, with the Food Institute noting that sales in the sector increased less than 1% last year after inflation was taken into account, based on the association’s exclusive pricing indices.” Trending Upwards  Capital Expenditures increased by an average of 9.3 percent  Expansion or new facilities based on square footage increased by an average of 9.1 percent  Product lines increased by an average of 4.9 percent  Employment increased by an average of 2.1 percent  R&D spending increased by an average of 1.9 percent  Promotions/Rebates averaged no change The top issues for food & beverage companies are rising commodity and other costs (69 percent of study participants), health insurance (61 percent), income taxes (47 percent), ability to develop new products/services (41 percent), and supply-chain issues (40 percent). A majority of participants also cited “other” concerns, identifying factors such as the state of the economy and their ability to obtain financing.

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Figure 39: Food & Beverage Industry Concerns

Private label purchasing Acquisitions Emergence of ethnic brands Food marketing/advertisement… Food marketing/advertisement… Food safety, traceability and QA Technology issues Supply chain issues New product/service capability Income Taxes Health insurance Rising commodity and other costs 0%

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*participants could select more than one answer Source: WeiserMazars 2012 The top three concerns are likely to continue to be concerns throughout 2013, as food & beverage companies seek to: 1. 2. 3.

Offset commodity-cost increases through internal improvements, improved management of suppliers, and strategic procurement; Navigate healthcare changes contained in the Affordable Care Act, such as the employer mandate and increased premiums; and Prepare for the new tax environment that emerged from the fiscal-cliff deal, one that is generally more favorable than executives feared going into the political showdown. Only 23 percent of participants indicated that they were “fully prepared” to react to federal tax and/or regulatory changes that may occur in the next 12 months, which is not surprising, given fluid political conditions at the time of their responses

Addressing three of the top five concerns — traceability/tracking, food safety, and knowledge/information sharing — will be necessary if the U.S. FDA enacts two new food safety rules proposed in January 2013 to help prevent foodborne illness under the recently passed FDA Food Safety Modernization Act. One rule would require makers of food sold in the United States, whether produced at a foreign- or domestic-based facility, to develop a formal plan for preventing food products from causing foodborne illness while also requiring plans for correcting problems that do arise. The other rule would apply enforceable science- and risk-based safety standards for production and harvesting of produce on farms. “The FDA knows that food safety, from farm to fork, requires partnership with industry, consumers, local, state and tribal governments, and our international trading partners,” said FDA Commissioner Margaret A. Hamburg, in the rules announcement. “Our proposed rules reflect the input we have received from these stakeholders and we look forward to working with the public as they review the proposed rules.”According to the first annual U.S. Food & Beverage Industry Study by WeiserMazars LLP, a leading accounting, tax and advisory services firm, food companies look to new customers for the majority of increased product sales in 2013. According to the study, the top four trends to impact the industry in 2013 are healthy/nutritious, organic, ethnic/international, and private label foods.

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Healthy/nutritious foods were noted as the industry trend most likely to impact company sales in 2013 (47 percent of study participants), with other trends each affecting approximately one quarter of organizations. This, again, indicates the need for F&B companies to focus on trends impacting their particular sector or region, and, when possible, to develop offerings that can take advantage of multiple trends concurrently. For example, some businesses, stores, and restaurants provide products that address all five of the noted trends simultaneously. Figure 40: Industry Trends that will impact 2013 sales

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In the past, policymakers were consumer’s food eductors. Now, chefs have taken on this role. This is evidenced in the proliferation of publications, television shows and websites featuring high profile “celebrity“ chefs. As value-conscious consumers adopt a “recessionary mindset” and attempt to stretch their dollar in the challenging macro environment, retailers are benefiting as private label sales continue to strengthen o Private label product quality has improved significantly over the years, making private label an increasingly effective alternative to branded products o In an effort to offset private label gains, branded manufacturers have increased their promotional and instore activity to lure back price conscious consumers Consumer preference for health and wellness focused products is increasing in response to the rise of obesity and weight related diseases o This is driving brand innovation and line extensions as manufacturers look to capitalize on consumers desire for products marketed with “green”, “sustainability”, and “health/wellness” connotations o Green shoppers are a great consumer target, representing a high value segment who buy more products on each trip, visit the store more regularly, and demonstrate more brand and retailer loyalty in their purchasing behavior As a result of several high profile e-coli and salmonella scares, consumers are increasingly focused on how and where their products are produced. Manufactures and retailers are taking many of the following actions to enhance their food safety procedures: o Requesting suppliers to become audited through recognized, accredited certification programs o Improving the recall process by establishing electronic communication between manufacturers and retailers Retailers are returning to personal interaction with consumers. Supermarket chains are removing self-checkout lanes as their popularity drops. Major retailers are now considering customer experiences with regard to human contact and personal interaction over “machines as future problem solvers.“

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Animal welfare has become a key consideration based on increasing consumer demand over labeling standards for meat and eggs. There is an ever-growing need for a single set of industry standards. The GMO controversy remains, less over the concern about the effects of GMO than about consumers‘ right to know how their food was grown and handled (transparency) – mirroring the trend toward fresh, real, and less processed. Packaging innovations are causing a shift where branded products are no longer the force that drives consumer interest, as consumer loyalty to legacy brands has turned into brand shifting over sale prices. Additionally, the quality of private label products continues to improve (and impress), garnering repeat purchasing patterns and consumer loyalty. Also, consumers are increasingly knowledge and concerned over use of recyclable plastics and use of dangerous chemicals such as BPA. Sustainabilty is also important, as consumers connect to brands with sustainable packaging as this suggests an eco-concern on the part of the manufacturer and creates a sense of connection to the brand. Mobile retail innovation is on the rise. A prime example is the largest U.S. drug store chain Walgreen, and their smartphone applications. More than 50% of Walgreen’s drug refills originate from smartphone apps. Regarding QR Codes, these are not widely understood or used and may be more of interest to marketers than consumers.

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17. Consumer Trends The landscape of American eating occasions is very different than one might expect. Culture is changing how consumers shop for foods and beverages. The lines between channels (traditional food retailers, C-stores, and restaurants) are becoming quite muddled. Consumer eating behavior continues to change and evolve in relationship to shifts in lifestyle dictated by any combination of factors: demands of work, commuting to and from work, raising families, social interaction, holidays, kids’ after school or weekend activities, etc. Given these factors traditional views of mealtime can pretty much be thrown out the window. The imprint of these dynamic cultural changes is the blurring of the boundaries between “snack” and “meal.” In this context, highly important cultural phenomena include snacking, the rise of eating alone eating occasions, and convenience (those foods and beverages consumed within one hour of purchase). Consumers often make stylized food-quality choices driven by food culture.

17.1. CONSUMER/CULTURAL TRENDS 1.

Meal fragmentation: Today's households are run as "loose democracies" in which children have an equal say in what, where and when the family should eat. 2. Eating alone: Forty-four percent of adult eating happens alone. Most CPG marketing ignores this reality. 3. The snack culture: Nearly half (48%) of all adult eating occurs between meals, a combined result of the increase in eating alone and the decline in family dining. However, a return to commitment to family dining will continue to gain momentum, says Hartman. 4. Immediate consumption: More than 11% of all adult eating today includes foods or beverages consumed within one hour of purchase. Immediate consumption reflects a long-term shift toward impulsive, unplanned eating. 5. The new American family: Marketers need to focus on today's nontraditional, intergenerational, unmarried, singleparent, multi-ethnic families. 6. Wellness is driven by quality-of-life issues: People strive for health/wellness in order to enjoy a better life. That’s why, for example, people are increasingly using dance for exercise, rather than treadmills. 7. Food culture is more complex than ever: Food makers need to understand all of food culture – meaning all food niches, trends and preferences, not just their own categories and specialties. 8. Education only goes so far: Research is inconclusive as to whether calorie counts on menus change purchase behaviors. But what is clear is that consumers want help that supports their interests in food and cooking. 9. Eating occasions proliferate: Hartman has identified more than 150 distinct eating occasions beyond the traditional daily meals or day parts. CPG brands and retailers should better leverage these opportunities. 10. You can’t buy loyalty: Engendering loyalty among Millennials takes transparency and integrity, as well as fun. 11. Niche brands represent opportunities: As CPG categories become overcrowded, smaller brands that appeal to niche needs or subcultures have become good investments. 12. Retail needs a makeover: The retail experience has lost significance with today's shoppers, who want culturally relevant retail and brand experiences.

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Figure 41: Consumers continue to define health and wellness as a „High Quality of Life“

Source: The Hartman Group, Looking Forward

17.2. FOOD, BEVERAGE AND INGREDIENT TRENDS Foods that were in for 2012 and should maintain their appeal in 2013, according to a study by The Hartman Group, include: real butter and healthy fats; grass-fed meat; sea salt; stevia; dark-meat chicken; local/seasonal super fruits; cage-free whole eggs; farmstead cheese; fresh produce; portion control; craft beer; kettle potato chips and dark, leafy greens.

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Eating from the local landscape, including “wild crafting” and stressing purity, freshness, simplicity and ethics in food sources and cooking – reviving regional specialties and local offerings. Consumers prize scarcity over ubiquity, novelty over the guaranteed sameness of legacy brands and drama over utility. Consumers are willing to embrace brands that take a little effort, especially if that effort rewards them with something exciting and rare (examples: McDonald’s McRib; Trader Joe’s “treasure hunt” dynamic). Smaller can be better. Not only for weight management purposes, but in terms of cost and sustainability. Consumers are coming to appreciate that there is a wisdom in smallness as they savor and appreciate less is more. Health & Wellness. The emergence of Nutritional Genetics (Nutrigenomics or personalized nutrition), with its focus on a person’s genetic makeup and and their response to specific foods and ingredients. Food science will enable creating individualized diets that reflect individuals’ genetic makeup, replacing “one-size-fits-all” better-for-you diets. This will result in less demand for better for you packaged foods and greater interest in less processed, higher quality foods.

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Rejecting “nutritionism,” meaning celebrating or demonizing particular ingredients rather than focusing on foods as a whole. This has allowed processed foods to go relatively unchallenged, even as whole, fresh foods are far too infrequently consumed. Diets: Happy, Slim and Well-Rested. Specialty diets appealing to distinct consumer segments such as The Happiness Diet (focused on foods to boot mood and weight loss) and The Paleolithic Diet (focused on elimination of entire categories of ingredients for weight loss and alleviation of chronic health conditions). Anti-fat sentiment is on the decline. New evidence revealed that the right kinds of fats can make you healthier, smarter, more musuclar and leaner. Challenges with foods and ingredients previously considered as healthy for all – soy, wheat, apple juice, high fructose corn syrup, hydrogenated oil, etc. Mindless eating as a social health issue. In many locations, particularly the office, the candy dish has replaced smoking as the #1 workplace-related health threat. Consumers have become fickle when it comes to beverages, regularly seeking interesting varieties. Novel flavors, limited seasonal editions and a bit less sweet is where consumer expectations are moving. Carbonated soft drinks: CSDs are increasingly seen as a treat rather than everyday liquid refreshment so CSD manufacturers will need to update flavors and ingredients to maintain consumer interest. Coffee: Starbuck’s VIA coffee revolutionized the instant coffee market, yet options are limited in terms of ready-todrink, higher quality chilled coffee in grab-n-go bottles and cans. In the meantime, these cold brews offer consumers a customizable option for sweetening and adding milk preferences. Superfruits: Consumers are becoming skeptical about exotic fruits from afar, touting “super-extreme” antioxidant levels. Rather than powdered out-of-season exotic fruits bearing functional overtones, expect to see a wider variety of local berries and tree fruits in beverages, baked goods and snack foods. All are high in antioxidants and smack of seasonality and the regional sense of place consumers are increasingly looking for in the CPG arena. Dairy: Cutting-edge consumers concerned with getting high-quality fat in their diet seek grass-fed dairy products made from these particular breeds. There is no other category that symbolizes freshness and purity quite the way dairy does. The positive attributes of organic and hormone-free represented the highest of quality cues not too long ago, then hyper-local and grass-fed pointed to greater distinction and transparency. Currently, forward-leaning consumers are categorizing dairy even further to specific breeds for their culinary and health-promoting quality cues. This trend suggests that dairy will become even more differentiated in the coming years. Consumers are developing an appreciation for the bitter and mineral flavors found in land (i.e. Kale) and sea (i.e. seaweed) greens. In terms of greens from land, CPG and food service will want to offer a variety to appease consumers looking to add dark leafy greens to their diet, but find challenging, be it time or skill level. Food service and CPG will want to leverage the mineral power and global flavors found in seaweed in salads and snacks, including chips and nut snacks/trail mixes. Condiments: Seen as a low-risk item for upgrading basic foods such as sandwiches, eggs, grains, and vegetables into a heightened meal or snack. Manufacturers have recently introduced upscale condiments such as canola oil mayonnaise, harissa chile sauce, and balsamic ketchup. Carbohydrates: Consumers now realize that carbohydrates in moderation are good for them and have returned to this category, particularly for foods that reflect authentic preparation methods, a culinary history, and are rooted in tradition. Examples include hand crafted pretzels, crisps, breadsticks, bagel varieties, and mini brioche buns. American consumers are increasingly perceiving snacking as an integral part of a healthy lifestyle, rather than the empty calories associated with the snacking or “treats” of their youth. The desire for less processed foods and global flavors is shifting what consumers are looking for on snacking or mini meal occasions. Snacks containing naturally occurring protein and fiber traditionally found on meal occasions are appealing to consumers looking to replace, bridge, and upgrade their current snack repertoire.

Ingredients that are in include: coconut oil (contains beneficial lauric acid); palm sugar (no fructose); faro (nutty, complex grain); cheaper, tasty butcher cuts (sustainable use of whole animal from a trusted source); and kefir (higher level of probiotics than yogurt).

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Figure 41: Ingredient Trends

Source: The Hartman Group, Looking Forward On the way out: margarine; processed soy protein (GMO, hormonal effects); low-sodium; fat-free; artificial sweeteners; whitemeat chicken; from-afar super fruits; egg whites; processed cheese; excessive supplements; ultra-light beer; baked potato chips and wheat-grass shots.

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18. Distribution and Marketing The food distribution system in the U.S. is complex. Many players - including middlemen - produce, manufacture, transport, distribute, market, and sell every type of food product imaginable. By the time a product is placed on a grocery store shelf, it has traveled countless miles and has been handled by many people. Each person has evaluated and scrutinized the product to assess its risk and opportunity. Each has considered quality, price, packaging, labeling, and marketing plans. By the time the product is purchased, the manufacturer, broker, distributor, and retailer have all determined it to be viable and profitable, and the end consumer has deemed it to be of significant value. Not every new product reaches the final consumer. Many great products never leave the manufacturer’s warehouse. Creating the product is only half the battle; the next step is to distribute and market it. While some manufacturers can market their products directly to consumers (e.g., through farmers’ markets, online sales, or Direct Store Delivery or DSD ), most food manufacturers need to use middlemen.

18.1. FOOD DISTRIBUTION CHANNELS The food system encompasses many activities, from harvest to processing, retailing, and consuming. This system is called by many names: marketing channel, distribution channel/chain, or supply chain. In this publication, we use the term distribution channel. The main middlemen in the distribution channel are as follows. Food distributors purchase products from a manufacturer or from another distributor and sell and distribute the products to retailers, foodservice companies, and other distributors. Food brokers act as food manufacturers’ representatives and facilitate sales between manufacturers and retailers. They do not take ownership or physical possession of products. Food wholesale distributors are very similar to distributors, but they do not perform as many services, such as stocking and managing retail shelves. Foodservice distributors and brokers are similar to retail brokers and distributors, except that they focus on servicing foodservice customers. Self-distributing retailers are large retailers, such as Albertsons, Fred Meyer, Safeway, and Wal-Mart, who have their own distribution centers. Manufacturers deliver directly to these centers. The retailer then distributes the product to individual retail stores. This system accounts for roughly 34 percent of distribution centers in the U.S. A new food product can take one of several paths to reach the consumer. Distribution options depend on the product, the market, the type of retail establishment, and the manufacturer’s sales skills. Some manufacturers reach the consumer directly by selling products at farmers’ markets. Others use elaborate distribution methods involving several brokers and distributors. Many manufacturers do not have the skills or the time to promote and sell their new product. For them, the use of food distributors and brokers is the only way to obtain distribution. Most foods go through a distribution channel to reach the end consumer, whether that consumer is a shopper in a retail grocery store or a diner at a fine restaurant. The conventional distribution path for a packaged food product is from manufacturer to broker to distributor to retailer. This path can vary greatly depending on the product, the target markets, and the manufacturer. In general, more perishable foods, such as fresh seafood, have fewer handling exchanges from the producer to the consumer, than, say, a packaged product such as jams and jellies. USA FOOD & BEVERAGE MARKET STUDY

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Many requirements, such as UPC codes, nutritional labeling, and product packaging, must be satisfied before distributing a product. One of the first activities is to determine a product’s target market. This includes identifying the geographic area, retail markets, and consumers that will make up your core market.

18.2. OTHER DISTRIBUTION ISSUES Technology New technologies and management systems are adopted every year in the food retailing and distribution industries. The goal is to create a more efficient, cost-effective, and responsive distribution channel. Management systems play a huge role in maintaining product integrity and distribution efficiency. Manufacturers need to be aware of these new technologies and management strategies. If your product or business isn’t ready for the technology (e.g., correct packaging, labeling, software compatibility), it could be left behind. The following are a few technologies that have been adopted or are being developed for use in the food distribution industry. Electronic data interchange (EDI) is a substitute for paper invoicing, instead using electronic resources such as e-mail and the Internet. Continuous replenishment uses shared computer networks between retailers and suppliers to view inventory at any time. Sometimes called “just-in-time” inventory or supply management. Electronic consumer response (ECR) is a demand-driven replenishment system designed to link all parties in the distribution channel to create a massive flow-through distribution network. Replenishment is based on consumer demand and point-of-sale information. Radio frequency identification (RFID), an automated radio signal identification, is used by food distributors and retailers for inventory purposes. RFID allows identification of merchandise while materials are being handled and in transit. Using RFID technology, along with ECR, helps retailers and distributors reduce costs and increase efficiency. Product movement Most food is distributed via trucks, owned either by the manufacturer, distributor, or a third-party transport company. Large retailers, such as Albertsons and Fred Meyer, have centrally located distribution centers. It usually is up to the manufacturer to have products delivered to the distribution center. From there, the retailer transports products to individual stores. Efficiency is key in moving products through the food distribution channel, not only for cost reasons, but also for perishability and damage control reasons. Produce and other perishable food products must be moved to the end consumer as quickly as possible, and preferably with minimal handling. The more times a product is handled, the greater the chance that it will be damaged. Maintaining the product’s quality throughout the distribution channel is a goal and challenge for producers Traceability Due to recent food scares, such as mad cow disease, avian flu virus, E. coli outbreaks, and salmonella infections, consumers, as well as government agencies, are being more careful in regard to food handling. Traceability systems are used not only for food safety, but also to address issues such as bioterrorism and consumers’ rights to know. Policy makers are studying the possibility of making traceability systems mandatory. Stay informed about current food safety concerns, especially those that might impact your production or sales. Packaging Packaging is a major consideration. Because many retailers use uniform shelving and layouts in all their stores, they can accept only products with conforming package shapes. Visit retailers and look at the competition’s packaging. Whether it be a box, bottle, or jar, the size and shape needs to fit the retailer’s shelf. A bottle that is too tall may not fit on the shelf, while one that is too short or narrow will create undesirable “empty space”

18.3. MARKETING STRATEGIES New U.S. food and beverage product introductions in retail outlets, as tracked by Datamonitor, have followed an upward trend since the early 1990s, exceeding those of nonfood grocery items in most years. In response to competition from Wal-Mart and other nontraditional food stores, supermarkets have increased their product choices. USA FOOD & BEVERAGE MARKET STUDY

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Figure 42: New Product Introductions of Consumer Packaged Goods, 1992-2010

Between 2008 and 2009, the number of new food and beverage products in retail outlets fell from 22,561 to 19,029, following a decline from the previous year-to-year period (from 23,838 in 2007 to 22,561 in 2008). The 2008-2009 decline marked the first consecutive year-to-year reduction in new food product introductions since 2002, and only the third such decline since 1993. The trend since 2007 in new food and beverage product introductions falls below the trend in nonfood grocery items. As credit conditions have tightened, retailers have found that eliminating certain products could increase sales and profits, due in part to reducing inventories. In addition, the recession has prompted consumers to seek familiar products and avoid impulse buying. To appeal to bargain-seeking customers who want to simplify their shopping trips as well as purchase familiar products, retailers reduced the number of products introduced. In response, some manufacturers reduced their product lines. In 2010, however, the number of new food and beverage products rebounded to 21,528, though still remaining below nonfood product introductions. In 2010, food categories with the largest shares of overall new product introductions included candy, gum, and snacks; beverages; condiments; and processed meat. However, from 2006 to 2010, the share of new candy, gum, and snack product introductions declined, while the share of new fruit and vegetables, dairy products, and cereals increased. Figure 43: New food and beverage product introductions, 2006-2010

New food and beverage product introductions, 2006-2010 2006 2007 Total New products 19,883 23,838 Type of product Candy, gum, and snacks Beverages Condiments USA FOOD & BEVERAGE MARKET STUDY

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Percent of total 29.7 29.3 24.7 18.9 7.5 11.2

2008

2009

2010

22,561

19,029

21,528

26.6 23.1 8.7

25.5 21.3 9.7

25.8 21.0 8.8

Processed meat Fruit and vegetables Meals and entrees Dairy Bakery foods Pasta and rice Baking ingredients Cereals Desserts Baby food Soups Meal replacements and special diet foods

7.9 5.1 5.3 5.4 3.7 3.1 3.3 1.8 0.9 0.4 0.9 0.3

8.7 4.9 6.4 4.8 3.5 3.8 3.4 1.7 1.1 1.0 0.9 0.4

8.5 5.1 6.6 4.7 3.9 4.0 3.6 1.6 0.9 1.0 0.8 0.3

7.2 6.5 6.7 4.8 4.5 4.2 3.0 1.8 1.6 1.3 1.0 0.4

7.8 6.9 6.2 5.9 4.4 4.2 3.1 2.0 1.2 1.0 1.0 0.4

Source: Datamonitor Advertisements touting a product's attributes are conveyed on packages and in supporting literature. Based on new product tags or claims (such as "organic") tracked by Datamonitor, over 100 U.S. food and beverage new product claims or tags were identified in 2010. Health and convenience-related attributes accounted for 8 of the top 10 claim categories, and these 8 claims accounted for one-third of all new product claims. Four categories, including "natural," "organic," "single serving," and "fresh," have ranked among the top 10 claims in every year since 2001. Figure 44: Number of new product introductions in the top 10 product claim categories for 2003 to 2010

Number of new product introductions in the top 10 product claim categories for 2003 to 20101 Tag or claim2 2003 2004 2005 2006 2007 2008 2009 2010 Number Natural 1,380 1,364 1,596 1,664 2,335 2,123 1,894 2,145 Premium 1,589 1,546 2,071 2,645 3,552 3,362 2,336 1,800 Private label 428 275 290 414 734 740 810 1,600 Single serving 1,127 1,103 1,264 1,399 1,553 1,523 1,344 1,462 High687 707 759 805 922 994 758 986 vitamins/minerals No gluten 159 175 239 250 397 466 552 876 No preservatives 578 547 545 586 850 807 758 870 Organic 559 533 668 738 1,110 1,042 775 822 Fresh 556 597 690 700 952 918 799 808 Low/no fat 656 607 639 608 683 620 543 709 Total new product 16,374 17,629 19,261 20,459 26,263 25,012 22,483 25,640 claims Percent of total Natural 8.4 7.6 8.3 8.1 8.9 8.5 8.4 8.4 Premium 9.7 8.8 10.8 12.9 13.5 13.4 10.4 7.0 Private label 2.6 1.6 1.5 2.0 2.8 3.0 3.6 6.2 Single serving 6.9 6.2 6.6 6.8 5.9 6.1 6.0 5.7 High4.2 4.0 3.9 3.9 3.5 4.0 3.4 3.8 vitamins/minerals No gluten 1.0 1.0 1.2 1.2 1.5 1.9 2.5 3.4 No preservatives 3.5 3.1 2.8 2.9 3.2 3.2 3.4 3.4 Organic 3.4 3.0 3.5 3.6 4.2 4.2 3.4 3.2 Fresh 3.4 3.4 3.6 3.4 3.6 3.7 3.6 3.2 Low/no fat 4.0 3.4 3.3 3.0 2.6 2.5 2.4 2.8 USA FOOD & BEVERAGE MARKET STUDY

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1Does

not include associated stock keeping units (SKUs, or variations in size and form). According to Datamonitor, the SKU count may produce erroneous results because a single new product introduction can have multiple SKUs, and each of these SKUs may or may not have certain package tags. 2A new product may have multiple tags or claims. Source: Datamonitor In 2010, "no gluten" and "low or no fat" claims replaced "quick" and "no- or lowtransfat" products in the top 10 claim categories. "No gluten" claims ranked among the top 10 claims for the first time. In addition to controlling celiac disease, other benefits that consumers attribute to gluten-free products are that they are generally healthier, of higher quality, and helpful in managing weight. In 2010, 876 "no gluten" products were introduced, compared with 466 in 2008, 250 in 2006, and 159 in 2003. "Low or no fat" product claims moved into the top 10 claim categories for the first time since 2006. Private-label products, or store brands, cracked the top 10 claims for the first time in 2007, an increase of over 75 percent from 2006. In 2010, store brands increased twofold over the previous year (2009) and ranked third among all new product claims, accounting for 6.2 percent of new product launches. As retailers have become more adept at creating profitable store brands, these brands have expanded at a faster pace than more expensive national brands. More consumers have turned to privatelabel foods in the face of the economic downturn and higher gas prices. Demand has also risen due to other factors, such as increasing food-price inflation and the marketing efforts of retailers. Profit margins of store-brand items are, on average, 10 percentage points higher than those of national brands. Store brands can also add to retailers' individuality by offering something new and different, as products are limited to their respective stores. Current Marketing Scenario While it is imperative for all manufacturers of new food products to devote great effort toward developing sound strategies for price, promotion, and product, the ultimate key to the success of the new item is distribution. Without product availability at the retail level, the best laid marketing strategies will go for naught. Unfortunately, a number of market forces are working in concert to make achieving distribution for new items an onerous task at best. Furthermore, the situation is worse for the smaller manufacturer, who finds itself competing against industry giants (many of which were formed through mergers and acquisitions), and battling slotting fees the largest players pay to retailers for shelf space. New food products are being introduced at the rate of over 15,000 items per year. This number includes a broad spectrum of "new" products, ranging from genuine innovations (e.g., an item that launches a new category), to me-toos (copycat products), line extensions, and "new-and-improved" products. Retailers are thus in a constant state of new product review. A limiting factor to the retail acceptance of new products is that the modern supermarket can stock only 25,000 to 30,000 different items. Thus, if no item were too sacred to be discontinued, a store could conceivably rollover its product mix every two years. Given the existence of established, successful brands, this extreme case is highly unlikely to occur. Furthermore, since no vacant shelf space sits in stores waiting for new products to appear, a new item must seize space from competing products. Finite shelf spaces, plus firmly entrenched brand leaders, make the supermarket shelf an enviable piece of "real estate" for the new product marketer. Although the retailer is forced to accept only a small portion of the new items available to it, new products serve several important functions. New products serve to enhance the retailer's "product," per se, which includes the overall product array, atmosphere, pricing strategy, location, etc. New items also allow the retailer to foster its own image of being an innovator and retain consumer interest by carrying recentlyissued products. Finally, new products force the retailer to frequently evaluate the performance of its product mix and weed-out the mediocre sellers, thereby helping stimulate short-term sales and inventory turnover. Manufacturers have numerous reasons for introducing so many new products. For example, new products represent an investment in the future of the firm, such that an investment today will yield profits in the months to come. New items are also seen as a way to retain consumer interest in the company's product line, with the result being many line extensions and product improvements appearing on the shelves. Manufacturers also use new items to improve their competitive position in a product category, and to attract attention to the firm. Finally, new product introductions are seen as a way to replace other USA FOOD & BEVERAGE MARKET STUDY

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products that have moved into the late maturity or decline stages of the product life cycle, thereby helping keep the company in its own maturity stage. While both retailers and manufacturers rely on new products for various competitive reasons, the new product represents additional expenses for both parties. For example, retailers face added costs in inventory control and handling, warehousing, data processing, shelf space alignment, and item pricing. Manufacturers must absorb the costs of new product development, sales efforts, and advertising, as well as the overall risk of the item being a failure. An analysis of ten small public food producers showed marketing spending ranged from a low of 3.2% to a high of 7.7%, with an average of 4.4%. One new market entrant, a manufacturer of all-natural, vitamin enhanced drinks had marketing spending of 67.7% of revenue. Sales and advertising spending for the small food producers averaged 6.1%. Given the level of concentration amongst the largest food manufacturers, one might conclude that channel power resides with the manufacturers. This, however, is not the case. Despite being highly fragmented, the retailers play the dominant role in the channel. While appearing to be fragmented at the national level, at the local level they are far from fragmented. A common occurrence is for three or four chains to dominate a local market, with several independents also in operation. Thus, at the local level, it is manufacturers that appear to be fragmented, while the retailers appear to be highly concentrated. With channel power in the hands of the retailers at the local level, the retailer is now empowered to demand concessions from manufacturers. This has occurred with the appearance of slotting fees. A slotting fee is a payment from the manufacturer to the retailer for "slotting" the product on the shelves. The fees can vary across markets and product categories, but usually range between $1,000 and $4,000 per item per supermarket chain. Retailers argue that the fees cover the costs of entering new product information in computers, finding space in the warehouse, redesigning store shelves, and notifying individual stores about the latest new product entry. Furthermore, retailers contend that they were forced to demand these payments because of the steady stream of new products. National distribution for a new product can thus be very high for the manufacturer. One industry consultant claims that, in order to achieve national distribution, slotting fees between $1 million and $3 million must be paid. Of the amount manufacturers spend on consumer and trade promotions, over one half is spent on slotting fees. Despite the high cost of getting a new item to market, the large manufacturers pay willingly, absorbing the slotting fee as just another business expense. Problems Confronting Small Manufacturers Clearly, the victim of new product proliferation and exorbitant slotting fees is the small manufacturer. The large manufacturer actually benefits from slotting fees, because it helps eliminate competition from smaller firms. In the end, it is the consumer who pays the price, in the form of reduced new item entries from firms unable to afford the cost of getting their product in stores. In many cases, the small firm is simply unable to match the slotting fees paid by their larger competitors. Slotting fees for national distribution, in some instances, may even exceed total company sales revenues. Furthermore, even if the small firm is able to afford slotting fees, they run the risk of grocers developing private label imitations of the new item. Thus, in addition to paying slotting fees, the small firm must also have the cash resources to invest in substantial advertising and promotion in order to block any competitive moves by the retailers. Another problem for the small manufacturer is that it likely has little or no reputation and/or track record. This presents a problematic situation, because the manufacturer, in seeking to build reputation, is halted because it has no reputation. While the large manufacturers have solid reputation bases, and can afford to augment their reputation with additional advertising, the small firm is often unable to affect this variable. A third problem is the small firm’s inability to cover large market areas, despite the fact that the retail grocery market is highly fragmented. This problem is actually a set of constraints: limited production capacity, few or no distribution channels, strained financial capacity to support production and inventory, and a small sales force. The firm's size and lack of resources limit its ability to enter the national market and compete directly with the large manufacturers.

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Another problem is the small firm’s inability to support much in research and development. This hinders the company's ability to develop unique and innovative products that may attract the attention of retailers. This leaves the small firm with the prospects of trying to introduce new items that are often not substantially different from similar items made by large firms. From all appearances, the small firm often faces insurmountable odds when trying to get distribution for its new items. From the retail side, the small firm is seen as inexperienced and unlikely to be reliable. On the manufacturing side, they are seen as only a potential market threat that should not be taken very seriously. Strategies for SMEs Example of an SME’s Marketing Costs (Activities): Marketing Costs. These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year, and are expensed as incurred. We participate in a coupon programs such as Sunday Free Standing Inserts (FSIs), digital marketing and coupon programs and Social Media including Facebook, Twitter and Google advertising. We use a national Public Relationship firm to promote all of our brands throughout the year targeting newspapers, magazines, web sites, bloggers, television and radio stations. We are a national co-sponsor of American Rivers, a leading conservation organization protecting and restoring America’s rivers. We are allowed to use the American Rivers mark on packaging and printed materials as well as directly promote products to members and river cleanup volunteers. Our marketing programs also include selective event sponsorship designed to increase brand awareness and to provide opportunities to mass sample branded products. Also included in selling, general and administrative expense are costs and fees relating to the execution of in-store product demonstrations with club stores or grocery retailers. The cost of product used in the demonstrations, which is insignificant, and the fee we pay to the independent third party providers who conduct the in-store demonstrations, are recorded as expense when the event occurs. Product demonstrations are conducted by independent third party providers designated by the various retailer or club chains. During the in-store demonstrations the consumers in the stores receive small samples of our products, and consumers are not required to purchase our product in order to receive the sample. Market characteristics inherent in food marketing dictate that the small manufacturer employs alternative strategies. Rather than presuming the ability to compete head-on, the small firm needs to use different techniques that will allow it to gradually build a reputation and amass financial and corporate resources. Following are several possible strategies for the small food manufacturer. 1. Product Uniqueness Even in the absence of research and development activities, the small firm can make its new product at least appear to be unique, by way of packaging, flavors, etc. For example, Clearly Canadian flooded the market with flavored waters that imitated other items, but the distinctive blue bottles set it apart from the rest. Jolt Cola, a product in a category dominated by two giants, positioned its product on the unlikely attributes of caffeine and sugar, and worked its way onto supermarket shelves. If these two products had entered the market without any distinction from competing items, they likely would not have been accepted by the trade. A second reason for stressing product uniqueness is that it can help avoid the private label imitator problem discussed above. This would make the new item less attractive to retailers that may want to augment their own line of house brand products. 2. Alternative Channels of Distribution Rather than focusing on traditional distribution channels (i.e., supermarkets), the small firm should consider seeking distribution in other outlets that sell food, but which have markedly different business goals and strategies. For example, an emerging force in food retailing is the warehouse club, in which patrons pay annual membership fees for the privilege to choose from an array of products and sizes that are seldom seen in such combinations elsewhere. These stores, which usually only stock 3,000 to 4,000 different items, are focused more on high volume and a product array that will attract customers, rather than carrying the "traditional" brands. Slotting fees have not become a problem in this distribution channel, thereby opening the door to opportunity for small manufacturers. Such was the case for a small winery in Amarillo, TX, that persuaded Sam's Club, on a regional basis, to carry its wines at a time when supermarkets were reluctant to add another wine to their liquor department.

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Another alternative channel is convenience stores, whose operating strategy is to provide a limited selection of product categories and brands, with the major focus on convenience. Given the C-stores' emphasis on having just the essential products, rather than specific brands, a small manufacturer could use this channel as a way to build initial distribution for its product. 3. Direct Distribution A third option is to consider operating a retail store for the exclusive purpose of distributing their product. Many wineries utilize their own retail shops and tasting rooms as the only retail distribution of their product. Dairy products (e.g., ice cream) are currently being delivered to the home, while the brand is unavailable in any store. C. Ramirez and Sons, a Hereford, TXbased manufacturer of chips and salsas, has its own restaurant adjacent to their factory. Arrowhead Mills, a health-food manufacturer also located in Hereford, has its own retail outlet store on site. While direct marketing and factory outlet stores may not be the most efficient means of distributing one's products, they can be effective while the firm is still small. 4. Niche Marketing Rather than aim for the modal tendencies of a market, where there are likely numerous large competitors, a firm could carefully select a niche that is currently underserved. This certainly limits the firm's ability to ever grow to national prominence, but it does not necessarily preclude the possibility of high profitability and returns on investment. 5. Local and Regional Efforts The small firm must recognize its inherent weaknesses, and, rather than trying to operate at a national level, should instead focus on local and regional markets as a way of getting established and building equity in the firm. Given that the retail market is already fragmented into numerous local and regional chains, this strategy fits nicely with the nature of the market. Blue Bell Ice Cream is a brand that has expanded slowly through the state of Texas, and built a loyal customer base. In an already saturated product category, they patiently built a consumer and trade base that now affords them greater opportunities in other markets. 6. Like-Sized Retailers Small grocers are in about the same position vis-a-vis larger stores as are the small manufacturers. These small stores often have only 25-to-50 percent of the retail space and product mix that their larger competitors possess. Furthermore, they are seldom the recipients of the slotting fees paid by manufacturers, which instead go to the larger chains. Thus, the small store must seek out competitive advantage in a way that will not strain their resources. The small manufacturer and the small stores could have a symbiotic relationship, with the former achieving distribution for its product, and the latter enhancing its product mix. 7. Point-of-Purchase Displays Rather than spending large sums of money on slotting fees, the small firm could provide retailers with inexpensive, yet effective, P-O-P displays that would aid selling efforts by the store. These could take the form of free-standing aisle units, shelf extenders, etc. 8. Consignment Selling Offering to sell product to retailers on consignment significantly lowers the retailer's risk of carrying the item, except for the opportunity cost of not stocking something else. With ownership risks removed, the retailer would not have to be concerned with unwanted inventory. While consignment selling adds an element of uncertainty to the manufacturer's sales, this type of concession may be necessary in order to get the product on the shelf. Small food manufacturers face an uphill battle in distributing their new products. Given the nature of the competition and the market at large, different strategies are required. The goal of the small manufacturer is to build sufficient market experience at the local and regional level so that they can eventually move into the national market. The above strategies are well-suited to the small firm's resources and capabilities, and should allow it to function efficiently at a level commensurate with the company's size.

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18.4. ROUTE TO MARKET CONSIDERATIONS Step 1. Test the waters Many new food manufacturers introduce their product at small, local retail markets. This is a great way to test the waters. Many small retailers like to help new local businesses. These retailers are also a valuable resource for advice on pricing, packaging, and promotions. Starting locally gives you an opportunity to tweak your product, packaging, and promotions. Step 2. Hire a broker While some new food manufacturers have the skills to sell successfully, most do not. A broker can help you with this job. Securing a broker takes time, money, and effort. Aside from initial sales to small retailers, brokers are the first “sale” a manufacturer must make. You must convince the broker that your product is viable and profitable. For a broker, the costs and energy required to launch a new product are great. On average, brokers will take a 3 to 5 percent commission. Step 3. Find a distributor Distributors purchase, inventory, transport, and sell products to retail accounts that the manufacturer has set up. They also assist in gaining new retail accounts. Distributors act as logistics experts for food distribution. Markups can range from 10 to 35 percent of the wholesale price, depending on the product, category, distributor, and retail customer. Finding the right distributor is key. Many distributors sell to specific types of retailers. If you are targeting a specific type of retailer, it is wise to choose a primary distributor for that retailer. If you’re using a broker, the broker often will help gain the attention of appropriate distributors. Having a detailed and well-thought-out plan for your product will help you secure a distributor. Many requirements must be met before a distributor will consider your product. Make sure you understand them and do your homework ahead of time. Step 4. Secure retail accounts Even with a broker and/or a distributor secured, your selling role isn’t over. You must now work alongside your broker to make the crucial sales to retailers. Choosing the right retail accounts is crucial. All retailers are different and have different requirements. It is important to know the retailers. Do research and know who’s competing in your product category. New food businesses usually find it best to start small for financial and logistical reasons. Oregon is a great place to start a food business. Many retailers, mainly small independent stores and chains, support local food manufacturers. Pricing your product correctly is crucial to its success. The price should reflect the product’s perceived value to the consumer. Consumers won’t purchase a more expensive product unless its perceived value is greater. Consider the competition’s price on the retail shelf. Visit stores and view the competition; note prices and how package size relates to price. Many new manufacturers are unsure of how to calculate margins and markups, or they might not understand the difference between the two. Manufacturers must understand how the retail food dollar is broken up from producer to retailer, as each takes a percentage. When calculating profits, consider all your costs, not just the costs to produce the product. Additional costs include promotions, transportation, and slotting fees. A slotting fee is a fee that retailers charge manufacturers to cover the costs of putting a product in their warehouse and on their shelf. These fees also cover the risk assumed by the retailer when taking on new products. Slotting fees vary depending on the product, region, and amount of required shelf space. Slotting fees usually consist of payments to the retailer, but they also can include discounts and free merchandise. These fees range from $100 to several thousands of dollars. They can be a flat rate across a chain or vary by store. Since larger manufacturers have larger promotion budgets, they are more able to afford slotting fees; smaller manufacturers often have a hard time paying these fees. Slotting fees can be negotiable if there is a demand for the product and it has local recognition.

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18.5. MARKETING AGREEMENTS AND STRATEGIC PARTNERSHIPS By Daniel A. Wuersch, Wuersch & Gering LLP

In General In addition to understanding the regulations of the Food and Drug Administration (FDA) and the import regulations, when entering the U.S. markets Swiss food manufacturers need to consider other legal issues that can determine the success of marketing food products in the U.S. and limit the risks associated with a failure of these efforts. These issues include the risks associated with tort liability for health risks posed by food products, commercial risks, the high costs of litigation and the tax implications of doing business in the U.S. To reduce these risks to a manageable level, respect for the complex legal environment and careful planning is required. Like Switzerland, the U.S. constitution established a federal system in which the 50 states (and the District of Columbia) maintain considerable autonomy. Certain areas of the law fall both within the scope of authority and jurisdiction of the federal and the state governments, including income tax laws, unfair trade laws and anti-trust laws, trademark law. Other areas are exclusively governed by federal law (e.g. patent or copyright law) or state law (e.g., contracts and general tort law). Thus, 52 legal systems can govern the marketing of food products in the U.S., each with a multitude of potentially applicable statutes, regulations, and court decisions. Because food products are targeted to reach a large group of consumers, companies may be subjected to lawsuits in several states. If a food product poses a health risk to consumers, a company can be sued in a so-called class action in which a plaintiff can sue on behalf of all members of the class of consumers harmed by the defective product. These class actions are a powerful tool in the hands of a lawyer who represents the class on a contingency basis. Through the multiplication effect of the class, even relatively modest damages inflicted on a single consumer can become a multi-million dollar problem for the manufacturer of the defective product. Recently, federal legislation restricted the ability of lawyers to shop for a sympathetic forum in state courts in class actions on behalf of consumers located in different states.

Marketing Arrangements Swiss companies can either actively market their products in the U.S. on their own, or through intermediaries, including agents, distributors or resellers. These intermediaries can either be independent third parties or related parties, such as joint ventures or subsidiaries. Agents are independent contractors who solicit sales of products or services of a domestic or foreign company for a commission, typically calculated as a percentage of gross or net sales. Distributors and resellers purchase goods or services from a manufacturer or service provider, and then resell them at a mark-up to other distributors, wholesalers or retail customers. Sometimes there are several legally significant relationships between a manufacturer and its intermediaries. E.g., a distribution agreement can include elements of an agency relationship for certain products, and an agreement to provide services for the manufacturer (e.g., training customers, or organizing promotions at trade shows or in retail outlets). Marketing through a U.S. Subsidiary or Branch In certain circumstances, it can be beneficial to establish a physical presence in the U.S. to more effectively market products. Often, this decision is made once a certain market penetration threshold has been achieved. If a foreign company is marketing its products through employees in the U.S., a subsidiary is generally necessary to avoid income tax consequences for the foreign parent in the U.S. For Swiss companies, a subsidiary in the form of a corporation, rather than a branch (or a subsidiary in the form of a transparent entity for tax purposes), typically is the desirable form for a physical presence in the U.S. Otherwise, the Swiss parent company may directly become subject to taxation in the U.S. Prior to forming a U.S. subsidiary and structuring its relationship with the Swiss parent, the impact of rules of international taxation contained in the Internal Revenue Code of 1986 (including the transfer pricing regime pursuant to Section 482), and the Swiss-U.S. Income Tax Treaty of October 2, 1996 should first be understood.

18.6. 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 USA FOOD & BEVERAGE MARKET STUDY

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roots in the English common law, the case law is often supplemented (but not replaced) by statutes (e.g., New York General Obligations Law of April 23, 1963 (“GOL”); California Commercial Code, effective as of January 1, 1965; Chapter 106 of the General Laws of Massachusetts). An important statute, which has been adopted by all states (with certain exceptions and modifications) is the Uniform Commercial Code (UCC), a uniform statute drafted by the National Conference of Commissioners on Uniform State Laws in partnership with the American Law Institute (see www.nccusl.org). In its Article § 2 (which was not adopted by Louisiana), the UCC establishes the rules applicable to contracts for the sale of goods. The U.S. is also a party to several treaties that can apply to a contract between a Swiss and a U.S company (e.g. the Vienna Convention on the International Sale of Goods (“CISG”) of 1980). Tort law is still mostly governed by case law. The conflict of law rules of the states determine which state law applies to a contract or a tort matter between residents of different states (or foreign countries). These rules generally permit the parties to a contract to select the law that shall govern their relationship. In the absence of a choice of law by the parties, courts will decide which law has the “most significant relationship” with the contract in question. In the case of a tort claim, the most significant relationship is typically with the state in which the tort has been committed. In a contract, the parties may also choose the courts or arbitration forum that have jurisdiction over any disputes arising in connection with their contract. Otherwise, the jurisdiction of the various state courts is determined by the so called “long-arm” statutes of the states, and by the jurisdictional provisions of the Rules of Civil Procedure for the federal courts. According to these rules, the federal courts have jurisdiction in contract disputes between a U.S. and a foreign company if the amount in dispute exceeds $75,000. In contract disputes, alternative dispute resolution (such as arbitration or mediation) is often used to resolve contract disputes. Arbitration rules that are well established include those of the American Arbitration Association (AAA) and, for international contracts, the rules of the International Chamber of Commerce (ICC). Contractual Risk Allocation Because there is no uniform statutory law that regulates all aspects of contract law, and contracts are interpreted strictly based on the language in a written agreement (parole evidence rule), American contracts tend to be longer and more comprehensive than their European counterparts. Despite the understandable desire to keep contracts “short and simple,” Swiss companies should be aware of the risks that can result from an incomprehensive contract with a U.S. business partner. Most commercial risks can be freely allocated to either party to a contract. However, there are limitations. For example, common law does not permit a party to deny responsibility for willful misconduct or gross negligence. In addition, while liability for statutory or tort liability can be limited vis-à-vis a contract party, these limitations are not effective vis-à-vis third parties. Implied Covenants and Warranties A contract party may not only be liable for commitments and representations expressly made in a contract, but also for implied covenants and warranties. In particular, UCC Art. 2 provides that in every contract for the sale of goods there is an implied warranty that title to the goods is transferred to the buyer. In a contract for the sale of goods by a merchant, implied warranties of merchantability and fitness for a particular purpose are deemed to be given, except where these warranties are conspicuously disclaimed with language prescribed in UCC Art. 2.

Tort Claims A tort claim can be brought against a food manufacturer if it can be shown that a food manufacturer negligently caused damages to resellers or consumers in the U.S. (e.g., because it permitted a food product to be contaminated in an unsanitary environment). In addition, a tort claim can also be brought against the manufacturer of a food product without proving negligence (strict liability) if the manufacturer brought the food product into circulation despite known health risks and without adequate warnings (e.g., carcinogenetic food additives). Compliance with the requirements promulgated by the FDA or the USDA does not always protect a manufacturer from this type of liability because to date, not all courts have recognized such a defense. 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.

Exploring and Evaluating Market Opportunities Confidentiality Agreements

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Entering into a confidentiality agreement with a potential business partner in the U.S. is a necessity before any serious discussions are held on a future cooperation. Otherwise, the potential partner is not restricted from publishing any confidential information (e.g., recipes, marketing plans, financial projections) or from using the confidential information for its own purposes. To ensure the enforceability of a confidentiality agreement, the information covered must be described as precisely as possible and may not include non-confidential information. Because damages resulting from the violation of a confidentiality agreement are difficult to prove, confidentiality agreements should specify that injunctive relief is available to remedy any violation of the agreement. Under U.S. rules of civil or criminal procedure and certain laws and regulations, confidential information may, however, be required to be disclosed to third parties or governmental authorities. In order to avoid a violation of a confidentiality agreement, confidentiality agreements typically permit the disclosure of confidential information in these circumstances. Consulting Agreements During the evaluation and market development phase, it may become necessary to hire consultants in the U.S. Consultants typically perform services for a time-based flat fee, performance based compensation or a combination of the foregoing. Generally, the terms of consulting agreements should permit an easy termination of the relationship and clear milestones that define the expected results. Consultants should be bound by a confidentiality agreement (which can either be part of the consulting agreement or a stand-alone agreement), and the consulting agreement should specify that any work product created by the consultant belongs to the client (see 4.4(b) below). Depending on the circumstances, an exclusivity and possibly a noncompete clause may be appropriate elements of a consulting agreement.

Marketing Agreements Purchase and Sale Agreements Agreements for the sale or delivery of food products to U.S. resellers or customers are generally governed by UCC Art. § 2. Therefore, limitations of implied warranties must follow the UCC Art. 2 rules mentioned in 2.3 above. UCC Art. § 2 also contains a special rule, Rule § 2-207, for “battle of the forms,” i.e., situations where the general terms of a seller and those of a buyer contradict each other. Under the common law “mirror image” rule, a valid contract can only be formed if offer and acceptance are identical (i.e. the mirror image of each other). Under the UCC rule, an acceptance which contains terms that are different from those contained in the offer can lead to a valid contract if the new terms do not materially alter the offer and the offer did not expressly limit the acceptance to the terms of the offer. To avoid being bound by unexpected terms, general terms and conditions should contain such a limitation. Large U.S. companies typically require strict adherence to their terms of purchase or sales. Delivery and price terms are essential elements of any purchase and sale. When using trade terms, such as INCOTERMS, food exporters should be aware of the fact that certain of these terms may have a slightly different meaning in domestic U.S. law. Agency Agreements As briefly described under 1.2 above, an agent is retained to solicit offers from U.S. buyers (or licensees) in consideration of a commission. The amount and type of commission varies greatly, depending on the product, the expected volume, exclusivity and other factors. When structuring agency agreements, it is important to create incentives for the agent to maximize the sales for the principal. This can be achieved by a tiered commission-structure, based on sales volume and including penalties for an 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 principal or make unauthorized representations on its behalf. Otherwise, the principal could become liable for unauthorized promises or warranties made by the agent to third parties. The agent, on the other hand, risks that it will likely be first in the line of fire, if problems with a product result in liability claims in the U.S.. Agents therefore have a legitimate interest in limiting their liability to acts for which they can reasonably be held responsible and in securing the support of the principal in defending such claims (including indemnification for its costs and damages). Distribution Agreements The issues arising in connection with distribution agreements are in many respects similar to those discussed with respect to the agent under 4.2 above. As in an agency agreement, a distribution agreement should contain restrictions on the

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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 discussed under 4.2 above. However, distribution agreements can create additional issues under applicable intellectual property law and federal anti-trust law. Because a distributor will use the intellectual property rights of a Swiss manufacturer (including its trade marks and patent rights), the issues discussed under 4.4 below 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. Licensing of Intellectual Property There are different types of licensing agreements, depending on the type of intellectual property being licensed (patents, copyrights, trade- or service marks, or trade secrets). Because patent and copyright license are rarely of interest to food manufacturers, the following discussion is limited to licenses of trademarks and trade secrets. Licensing of Trademarks Trademarks can be created under federal or state law. Under the federal Lanham Act, trademarks used to distinguish products can be registered in the U.S. Patent and Trademark Office. Through registration, the owner of the mark is permitted to use the ® symbol in connection with the registered mark. Use of the ® symbol without a valid registration is prohibited in the U.S. (the “TM” symbol - ™ may be used with unregistered marks). A trademark registration is prima facie evidence of the exclusive ownership of a mark. However, both under the Lanham Act and under state law, rights in trademarks or service marks can also be created through the simple use of a mark in commerce. A trademark license should define (1) the territory within which the licensee has the right to use the trademark, (2) the scope of the 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 included in another agreement (e.g. agency or distribution agreement). Licensing of Know How and Trade Secrets The issues that must be addressed in licenses of know-how or trade secrets are similar to those discussed under 3.1 above. It is important to remember that the protected know-how is secret at all times during the term of the license. Moreover, the nature of the protected information needs to be carefully defined in the license agreement. Because the confidential information is revealed to the licensee for the purpose of a commercial activity, the transfer of the know-how 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 Retailers A particularity of marketing food products to retailers, in particular supermarkets, is the so called slotting fees. Slotting fees are product placement fees that manufacturers are to pay to retailers, and sometimes to wholesalers, for shelf-space (“slots”). These fees can be tied to performance or flat fees. 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.

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Cooperation with U.S. Companies Manufacturing Agreements Rather than exporting a food product that is manufactured in Switzerland, a food manufacturer may manufacture the product locally in the U.S. (if this does not diminish the value of the "Swiss made" product) either in a subsidiary or through a thirdparty manufacturer under a manufacturing agreement. Because the Swiss manufacturer makes valuable intellectual property and know-how available to the U.S. toll manufacturer, manufacturing agreements raise many of the issues discussed under 3.1 and 4.4 above. 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 iability, both the principal and the manufacturer can be liable for damages resulting from defective products. Supply Agreements In a supply agreement, the customer is primarily concerned with securing the timely supply of raw material or product components at the desired quality and the allocation of liability to the supplier for damages resulting from defective or inadequate material supplied. The supplier, on the other hand, is interested in being excused from performing its obligations in the event it becomes unable or commercially unreasonable to adhere to the terms of the contract and in limiting its liability for the use of the supplied material or components to the maximum extent possible. Packaging Agreements An agreement regarding the outsourcing of the packaging of its food products for the U.S. market (whether to a U.S. or nonU.S. packaging company) should specify the labeling requirements and contain unambiguous instructions for handling and packaging the product. If any contamination occurs during the packaging process, it is important that the manufacturer can show that the contamination would not have occurred, had the packaging company followed the manufacturer's guidelines. Joint Ventures Joint ventures can be formed for purposes of developing, manufacturing, or marketing food products. Contrary to the agreements discussed so far, the common denominator of all types of joint ventures is the achievement of a common purpose by two or more parties through a joint decision making process. Joint ventures can be mere contractual arrangements among parties or take the form of legal entities operated for the common purpose of the joint venture. The decision making process, supervision and monitoring of the joint 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

18.7. EXPLORING AND EVALUATING MARKET OPPORTUNITIES Confidentiality Agreements Entering into a confidentiality agreement with a potential business partner in the U.S. is a necessity before any serious discussions are held on a future cooperation. Otherwise, the potential partner is not restricted from publishing any confidential information (e.g., recipes, marketing plans, financial projections) or from using the confidential information for its own purposes. To ensure the enforceability of a confidentiality agreement, the information covered must be described as precisely as possible and may not include non-confidential information. Because damages resulting from the violation of a confidentiality agreement are difficult to prove, confidentiality agreements should specify that injunctive relief is available to remedy any violation of the agreement. Under U.S. rules of civil or criminal procedure and certain laws and regulations, confidential information may, however, be required to be disclosed to third parties or governmental authorities. In order to avoid a violation of a confidentiality agreement, confidentiality agreements typically permit the disclosure of confidential information in these circumstances. Consulting Agreements

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During the evaluation and market development phase, it may become necessary to hire consultants in the U.S.. Consultants typically perform services for a time-based flat fee, performance based compensation or a combination of the foregoing. Generally, the terms of consulting agreements should permit an easy termination of the relationship and clear milestones that define the expected results. Consultants should be bound by a confidentiality agreement (which can either be part of the consulting agreement or a stand-alone agreement), and the consulting agreement should specify that any work product created by the consultant belongs to the client (see 4.4(b) below). Depending on the circumstances, an exclusivity and possibly a noncompete clause may be appropriate elements of a consulting agreement.

18.8. MARKETING AGREEMENTS Purchase and Sale Agreements Agreements for the sale or delivery of food products to U.S. resellers or customers are generally governed by UCC Art. § 2. Therefore, limitations of implied warranties must follow the UCC Art. 2 rules mentioned in 2.3 above. UCC Art. § 2 also contains a special rule, Rule § 2-207, for “battle of the forms,” i.e., situations where the general terms of a seller and those of a buyer contradict each other. Under the common law “mirror image” rule, a valid contract can only be formed if offer and acceptance are identical (i.e. the mirror image of each other). Under the UCC rule, an acceptance which contains terms that are different from those contained in the offer can lead to a valid contract if the new terms do not materially alter the offer and the offer did not expressly limit the acceptance to the terms of the offer. To avoid being bound by unexpected terms, general terms and conditions should contain such a limitation. Large U.S. companies typically require strict adherence to their terms of purchase or sales. Delivery and price terms are essential elements of any purchase and sale. When using trade terms, such as INCOTERMS, food exporters should be aware of the fact that certain of these terms may have a slightly different meaning in domestic U.S. law. Agency Agreements As briefly described under 1.2 above, an agent is retained to solicit offers from U.S. buyers (or licensees) in consideration of a commission. The amount and type of commission varies greatly, depending on the product, the expected volume, exclusivity and other factors. When structuring agency agreements, it is important to create incentives for the agent to maximize the sales for the principal. This can be achieved by a tiered commission-structure, based on sales volume and including penalties for an 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 principal or make unauthorized representations on its behalf. Otherwise, the principal could become liable for unauthorized promises or warranties made by the agent to third parties. The agent, on the other hand, risks that it will likely be first in the line of fire, if problems with a product result in liability claims in the U.S.. Agents therefore have a legitimate interest in limiting their liability to acts for which they can reasonably be held responsible and in securing the support of the principal in defending such claims (including indemnification for its costs and damages). Distribution Agreements The issues arising in connection with distribution agreements are in many respects similar to those discussed with respect to the agent under 4.2 above. 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 discussed under 4.2 above. However, distribution agreements can create additional issues under applicable intellectual property law and federal anti-trust law. Because a distributor will use the intellectual property rights of a Swiss manufacturer (including its trade marks and patent rights), the issues discussed under 4.4 below 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. Licensing of Intellectual Property There are different types of licensing agreements, depending on the type of intellectual property being licensed (patents, copyrights, trade- or service marks, or trade secrets). Because patent and copyright license are rarely of interest to food manufacturers, the following discussion is limited to licenses of trade marks and trade secrets. USA FOOD & BEVERAGE MARKET STUDY

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Licensing of Trademarks Trademarks can be created under federal or state law. Under the federal Lanham Act, trademarks used to distinguish products can be registered in the U.S. Patent and Trademark Office. Through registration, the owner of the mark is permitted to use the ® symbol in connection with the registered mark. Use of the ® symbol without a valid registration is prohibited in the U.S. (the “TM” symbol - ™ may be used with unregistered marks). A trademark registration is prima facie evidence of the exclusive ownership of a mark. However, both under the Lanham Act and under state law, rights in trademarks or service marks can also be created through the simple use of a mark in commerce. A trademark license should define (1) the territory within which the licensee has the right to use the trademark, (2) the scope of the 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 included in another agreement (e.g., agency or distribution agreement). Licensing of Know How and Trade Secrets The issues that must be addressed in licenses of know-how or trade secrets are similar to those discussed under 3.1 above. It is important to remember that the protected know-how is secret at all times during the term of the license. Moreover, the nature of the protected information needs to be carefully defined in the license agreement. Because the confidential information is revealed to the licensee for the purpose of a commercial activity, the transfer of the know-how 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 Retailers A particularity of marketing food products to retailers, in particular supermarkets, is the so called slotting fees. Slotting fees are product placement fees that manufacturers are to pay to retailers, and sometimes to wholesalers, for shelf-space (“slots”). These fees can be tied to performance or flat fees. 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.

18.9. COOPERATION WITH U.S. COMPANIES Manufacturing Agreements Rather than exporting a food product that is manufactured in Switzerland, a food manufacturer may manufacture the product locally in the U.S. (if this does not diminish the value of the "Swiss made" product) either in a subsidiary or through a thirdparty manufacturer under a manufacturing agreement. Because the Swiss manufacturer makes valuable intellectual property and know-how available to the U.S. toll manufacturer, manufacturing agreements raise many of the issues discussed under 3.1 and 4.4 above. 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.

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Supply Agreements In a supply agreement, the customer is primarily concerned with securing the timely supply of raw material or product components at the desired quality and the allocation of liability to the supplier for damages resulting from defective or inadequate material supplied. The supplier, on the other hand, is interested in being excused from performing its obligations in the event it becomes unable or commercially unreasonable to adhere to the terms of the contract and in limiting its liability for the use of the supplied material or components to the maximum extent possible. Packaging Agreements An agreement regarding the outsourcing of the packaging of its food products for the U.S. market (whether to a U.S. or nonU.S. packaging company) should specify the labeling requirements and contain unambiguous instructions for handling and packaging the product. If any contamination occurs during the packaging process, it is important that the manufacturer can show that the contamination would not have occurred, had the packaging company followed the manufacturer's guidelines. Joint Ventures Joint ventures can be formed for purposes of developing, manufacturing, or marketing food products. Contrary to the agreements discussed so far, the common denominator of all types of joint ventures is the achievement of a common purpose by two or more parties through a joint decision making process. Joint ventures can be mere contractual arrangements among parties or take the form of legal entities operated for the common purpose of the joint venture. The decision making process, supervision and monitoring of the joint 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 (see 1.3 above).

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19. Challenges and Opportunities for Swiss Food Suppliers

ITEM

OPPORTUNITIES

CHALLENGES

Market Size

The total retail market is massive, with 250,000 outlets (grocery stores, wholesale clubc, C stores, etc.) had revenue of $1,250 billion in 2012. Although economic and industry growth are projected to be slow, specialty segments of the food & beverage industry will have robust growth. Companies with innovative products, brands and packaging which match consumer trends in heath & wellness, natural, freshness, etc. should do well. The specialization of the food distribution system enables Swiss manufacturers to target specific regions, demographic groups and consumers with distinct characteristics. Through its cultural, demographic and geographic diversity, the U.S. market offers opportunities for nearly any type of food and beverage product – from mass market to hyper-specialty.

The diversity of the U.S. (geographic, cultural tastes, ethnicity and demographics) and size of the market.

Growth

Competition

Distribution

Marketing

Retailers

Private Label

Sales by the 20 largest food retailers totaled $418.0 billion, accounting for 64% of U.S. grocery store sales. The long term trend shows an increasing concentration of sales among the largest retailers. U.S. retailer food brands, i.e. private label brands, are on track to achieve market penetration of between 25% and 30% in the next decade.

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The economy faces slow growth and consumers are shopping for bargains. Generic store brands are growing in market share while higher-priced name brands have suffered from slower sales. Competition is fierce. The entire food industry, from growing to processing to retailing, is an extremely competitive field where profit margins are typically low. The food distribution system in the U.S. is complex. Many players - including middlemen - produce, manufacture, transport, distribute, market, and sell every type of food product imaginable. The marketing of even a single food product can be a complicated process involving many producers and companies. A daunting task for Swiss companies can be to decide upon the correct strategy for the 4 Ps (product, price, promotion and place) of the marketing mix. Swiss companies must determine their target market(s) and the most effective retail channels for them, such as traditional, C store, drugstore, specialty, gourmet, organic, local, and others. Retailers are wielding increasing power over manufacturers, competing successfully and often winning against branded products, earning consumer trust in terms of pricing, quality, image and value.

ITEM

OPPORTUNITIES

CHALLENGES

Organic

The U.S. organic market is substantial and growing rapidly, with projected CAGR approaching 10% through 2016, at which time the market size is projected to be $46.5 billion.

Consumer Trends

Key consumer lifestyle trends present opportunities for Swiss companies: 1. Chefs as food educators 2. Purity, freshness, simplicity 3. Customized diets based on personal nutrition 4. Good vs. bad ingredients 5. Snacks with balanced nutrients 6. Social eating issues Leading industry trends include: 1. Traceability/tracking 2. Food safety 3. New customers 4. New products 5. Cost of goods and selling prices

In Feb 2012, an U.S. – EU Organic Equivalence Agreement was signed in in which the EU will recognize US organic products as equivalent to those in the EU and vice versa. Since Switzerland is not in the EU, this could pose a challenge for Swiss companies seeking to sell organic products in the U.S. However, the USDA has begun discussions with Switzerland about a similar equivalency agreement. The challenge is in knowing which are long-term trends and which are short-term trends or fads, and the ability to quickly respond in order to capitalize on them. A local partner is essential to do so, given the distance (geographic and cultural) Swiss companies are from the U.S. market

Industry Trends

Imports

A substantial number of food & beverage products on the U.S. market are imported. Swiss products – the most well known of which are cheeses and chocolates - enjoy an excellent reputation for quality and innovation.

Food Culture

The growing movement in globalization of American food culture, due to: 1. Changing dynamics of society 2. Exposure to global cuisines

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A key differentiator for Swiss companies would be the ability to demonstrate superior track records in traceability and food safety. Swiss products could fulfill the need for new products and help retailers acquire new customers, but may face difficulties with the higher cost of imported products. Imported products must comply with stringent regulations from FDA and EPA on everything from labelling to nutritional analysis and manufacturing plant registration. Importing can be a complicated process, fraught with unexpected delays and tariffs and compliance with new regulations. The challenge is to embrace this trend by commercializing Swiss products in the U.S. – perhaps adapting them to American tastes – while retaining a uniquely Swiss image. [Evidence the meteoric rise of Chobani Greek style yogurt, which in 5 years rose from a regional manufacturer to command 47% of the $6 billion U.S. Greek yogurt market.]

20. How to enter the market 20.1. IMPORTING INTO THE USA By Paul S. Anderson, The Anderson Law Firm, LLC 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 gray areas of the law. It is highly recommended that an importer take the time to obtain expert advice prior to the importation of any product so as to minimize potential problems and to make its importation program as cost effective as possible. Informed Compliance and Reasonable Care The Customs Modernization and Informed Compliance Act (“Mod” Act) was signed into law in 1993 and introduced the concept of “informed compliance” whereby Customs and the importing community would share the responsibility of administering the U.S. Customs laws. This “informed compliance” concept places an affirmative burden on importers to exercise reasonable care in the discharge of their responsibilities relating to the importation of merchandise. An importer must exercise reasonable care in all facets of the importing process, including the manner in which it describes, classifies and values imported merchandise. “Reasonable care” means that an importer will act reasonably, and with knowledge of the facts and its legal obligations. The concepts of informed compliance and reasonable care permeate all aspects of Customs administration and enforcement Customs and Border Protection Structure Customs’ basic structure involves CBP Headquarters in Washington DC; the National Import Specialist Division (NIS) in New York; and the numerous local ports throughout the country where the merchandise actually is presented to Customs for clearance. Headquarters sets policy, has oversight of security procedures, and issues rulings and decisions through the Office of Regulations and Rulings (OR&R). Port Directors are in charge of the local ports and this is where the day-to-day importing activity occurs. The NIS’s in New York provide supervisory 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 information so that they can properly examine the classification and value of imported merchandise. In addition, import specialists administer quotas, make determinations on country of origin markings, check documents for accuracy and completeness, and perform many other similar day-to-day tasks. Oral advice from an import specialist is not binding on Customs and generally can be changed at any time. Importers may obtain a binding ruling from Customs by submitting a request in writing, along with a sample of the merchandise, to Customs Headquarters or to the National Import Specialist in New York City. Greater detail concerning the ruling process is set forth later in this chapter. Inspectors are Customs personnel who actually examine the merchandise prior to release into the Customs territory of the U.S.. Importers typically do not have much contact with inspectors unless a problem arises with the clearance of the merchandise. Even then, the problem more than likely would be brought to the 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 examines the merchandise to ensure that it is in compliance. It should be noted that only a small percentage of all merchandise imported into the U.S. is physically examined by an inspector.

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Special agents are not involved in routine Customs matters. Rather, special agents almost always work on suspected Customs law violations. Therefore, a telephone call or visit from a special agent is a serious matter and an importer should immediately contact Customs counsel if such an event occurs. Current Regulatory Environment Compliance with the Customs laws is of utmost importance in today’s environment where security considerations are paramount. Much of the focus in terms of CBP resources since September 11, 2001 has focused in the area of security generally, and CBP has promulgated many new programs designed to make compliance more efficient yet also meet heightened security considerations. The Customs regulations change quite rapidly and it is important to keep abreast of all new developments. Although there are many new security initiatives, the program currently in the forefront is the Customs and Trade Partnership Against Terrorism (C-TPAT) program wherein importers receive certain benefits including reduced cargo inspections when they are certified as a C-TPAT participant. The C-TPAT program and its impact upon food importations is discussed later in this chapter. CBP enforces the regulations of many other governmental agencies and acts as the primary enforcement arm for the application of such regulations to imported products. With respect to food products, CBP enforces the regulations of the Food and Drug Administration (FDA), U.S. Department of Agriculture (USDA) and the Federal Trade Commission (FTC). Basic Customs Considerations Customs duties are generally determined on an ad valorem basis, meaning that the amount of duties owed will depend upon the duty rate applied and the value placed upon the imported merchandise. The duty rate to be applied to imported merchandise is determined by its tariff classification and country of origin. Customs duties may also be specific, i.e., 10¢ each, or may be a compound rate of ad valorem and specific duties. Tariff Classification and Duty Rates There are over 12,000 separate subheadings in the Harmonized Tariff Schedules of the U.S. (HTSUS) under which imported merchandise may be classified. In order to determine the proper classification of imported merchandise within the HTSUS, an importer must be familiar with the General Rules of Interpretation (GRI) of the HTSUS. In many instances, an article may seem to fit exactly within a tariff provision and yet not be properly classified under that tariff provision. The 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 particular tariff item is more specific than another; the common meaning of a tariff item; the principal use of an item; and the component make-up of the item. There are also many special programs allowing for reduced duties or importation free of duty. Many of the programs involve imports from developing countries such as the Generalized System of Preferences (GSP), Caribbean Basin Initiative (CBI), and other programs. Of course Switzerland does not qualify as a developing country, but Swiss companies may produce products in developing countries and ship them directly to the U.S. which may qualify for duty-free treatment under such a program. There are also many bilateral agreements providing for duty-free treatment such as the U.S. – Israel Free Trade Agreement, U.S. – Chile Free Trade Agreement, and others. There is also the North American Free Trade Agreement (NAFTA) which involves duty-free treatment for qualifying articles between Mexico, U.S. and Canada. Again, Switzerland is not a party to any of these free trade agreements, but it is possible to manufacture products within these countries and qualify for duty-free treatment upon importation into the U.S. if the technical requirements are met. Customs Valuation of Imported Merchandise Customs valuation can be a very complicated area, and one which can have a major effect on Customs duties. A common mistake made by importers is believing that imported merchandise always will be valued (appraised) at the transaction price, or the price actually paid for the merchandise by the importer. In fact, most appraisements are made based upon transaction values. However, Customs may use other methods of valuing imported merchandise such as deductive value or computed value. These methods may require the importer to provide costs, expenses and detailed accounting information in order to satisfy Customs as to the correct appraised value of the imported merchandise. Special rules also apply where merchandise is brought into the U.S. on a consignment basis and is not sold to a purchaser in the U.S. until a later time. Alternative methods of appraisement generally apply in related party transactions or consignment situations.

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An importer is free to structure a transaction to take advantage of the Customs laws. Some importers employ buying agents whose commissions are non-dutiable items. Other favorable structures involve the utilization of the “first sale rule” which involves sales through a middleman, who in turn sells to a U.S. importer, yet entry is made at the first sale (price to the middleman) level. Certain legal requirements must be met in order to utilize these structures and they are not automatically available. Finally, it should be noted that although most appraisements are made based upon the invoice price on the commercial invoice to the importer, amounts for freight and insurance are non-dutiable items and should be broken out separately if included in the invoice price to ensure that they are not included in dutiable value. Country of Origin Marking All merchandise of foreign origin imported into the U.S. must be marked with the country of origin. The Customs marking requirements in Section 304 of the Tariff Act of 1930 are as follows: Every article of foreign origin (or its container) imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such manner as to indicate to an ultimate purchaser in the U.S. the English name of the country of origin or the article. There are many exceptions to the above rule, so an answer to any country of origin marking question must take into account the particular product involved and the manner in which the good is imported and used. In general, goods imported into the U.S. must be marked in a conspicuous manner with the English name of the country of origin. In order for the marking to be considered conspicuous, it must be legible, easily found and read without difficulty. Goods must be marked in such a manner as to indicate the country of origin to the ultimate purchaser in the U.S.. The ultimate purchaser is generally the last person in the U.S. who will receive the article in the form in which it is imported. Failure to properly mark an imported article to indicate its country or origin can result in a special 10% ad valorem marking duty, demands for redelivery to Customs, and accompanying liquidated damages, or other penalties. Invoicing Invoices presented to Customs must be properly prepared and meet regulatory requirements. The commercial invoice should show the port of entry to which the merchandise is destined; the name of the party to which the merchandise is sold and the place from where shipped; a detailed description of the merchandise, in English, including the name by which each item is known, the grade or quality, marks, numbers and symbols under which they are sold by the seller; the quantity of merchandise; the purchase price of each item; the currency in which the transaction is made; and all charges itemized by name and amount including freight, insurance, commissions, coverings, costs of packing, and related expenses. Entering Merchandise into the U.S Importers typically utilize licensed Customhouse brokers to assist in the entry of merchandise into the U.S.. A Customhouse broker is licensed by CBP and files the appropriate documentation with Customs to obtain release of the merchandise and to effect payment of duties. A Customhouse broker is distinguished from a freight forwarder in that a freight forwarder performs the service of arranging for the transportation of merchandise from point A to point B, but is not licensed to transact Customs business with CBP or file entry documentation. Many companies frequently are both Customhouse brokers and freight forwarders. It is possible for an importer to file entry documentation itself, 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, importer, type of merchandise, tariff classification, value and related information. The information is submitted electronically through the ABI (Automated Broker Interface) system. CBP will then issue a release of the merchandise or indicate that there is a problem and that additional information is needed. For shipments of products subject to FDA requirements, appropriate information is electronically transmitted by the broker. FDA will then notify the broker whether the merchandise may proceed or not, as the case may be. A CF 7501 will then be filed by the broker which is known as an “Entry Summary” and which provides all information concerning the calculation of duties, asserted tariff classification items and related information, and also the payment of duties. An entry summary must be filed within 10 business days from the date of entry. In the event that the imported merchandise is not granted a “May Proceed” notice by FDA, the merchandise may be subject to detention procedures as set forth below.

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It is also possible to utilize a Customs Bonded Warehouse or Foreign Trade Zone (FTZ) regarding entry of merchandise. Merchandise may be entered into a Customs Bonded Warehouse upon the filing of an appropriate warehouse entry. Duties on the merchandise will not be deposited until the product is withdrawn from warehouse for consumption into the U.S.. Merchandise may be inspected, repacked, stored, and similar treatment, but may not be processed or manufactured in a bonded warehouse and then brought into the U.S.. In the case of processing or manufacturing, such a product must be exported. Merchandise can also be brought into a Foreign Trade Zone, and again, duties are not paid until merchandise is withdrawn for entry into the U.S.. A Foreign Trade Zone requires special permission but allows for greater flexibility and freedom of manufacture, production or manipulation. Quotas Numerous types of quotas on imported merchandise are administered through CBP. Quotas cover a wide range of products and have traditionally been evident in the importation of food products and textiles. Quotas are generally of two types, 1) absolute quotas and 2) tariff rate quotas. Absolute quotas are quantitative amounts that are set for a specific period of time (usually one year) wherein imported products may be brought into the U.S. only up to those specific limits. Allocations are generally made by specific country, and there are also allocations for “all other countries” not receiving the specific allocation. Once the limitations have been reached for the particular time period in question, no more imports of those products will be allowed in the U.S.. Tariff rate quotas allow a specific quantity of merchandise to be imported at a lower duty rate. However, once the quantitative limitation has been reached, rather than prohibiting any further importations during that year the products in excess of the quota amount will be assessed a higher duty rate for imports made through the balance of the calendar year. Allocations of quota are subject to negotiation and change on a regular basis. Certain requirements are present as regards the entry procedures so that Customs can adequately account for all product subject to quota. Depending upon the type of product involved, there may be different documentary requirements. There are currently quotas on a wide range of products including beef; dairy products including milk and cheese; raw sugars; other sugar containing products; various types of chocolate; certain types of mixes and doughs; ice cream; animal feed; and mixed condiments and seasonings. Switzerland generally falls into an “all other” allocation on most quotas as opposed to receiving a specific amount. An exception to this involves the importation of certain Swiss and other types of cheese. It is critical that any potential quota applicability be determined well ahead of time as many quotas fill quickly and it may be extremely difficult to obtain a quota allocation and appropriate documentation. Rulings by Customs and Administrative Contest As previously mentioned, an importer may obtain protection and assurance that its tariff classification, method of valuation, or country of origin marking methodology is correct in the form of a binding ruling from Customs. Binding rulings are prospective in nature and provide a written decision from Customs as to any of those issues noted above. A ruling may be obtained from the National Import Specialist in New York and these rulings frequently may be secured within 30 days. Rulings from the NIS in New York are limited to simple classification issues. For other issues including valuation, more complex classification issues, and country of origin determinations, a ruling may be obtained from CBP Headquarters in Washington, D.C. These rulings take longer to process and can be secured within 120 days, but often take longer. In each case, a ruling will give predictability to an importer as to dutiable consequences of its transactions. A ruling may be revoked or modified but such an occurrence is relatively infrequent and generally would not apply on a retroactive basis. It is also possible to obtain decisions from Customs on matters contested administratively. Most of the methods employed depend upon whether or not an entry has been “liquidated”. An importer should note that money paid to Customs at the time of shipment clearance is only a deposit of estimated duties. The final accounting for Customs duties occurs at liquidation of an entry which may occur months or even years after goods are released by Customs. An importer has a right to contest a determination by Customs regarding an entry and 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 entry.1 A protest contesting a decision by Customs is filed at the local port where entry was made and generally the decision is also made there. In some cases, further review of the protest by Customs Headquarters may be requested. The decision by Headquarters in such a case, referred to as an AFR (Application for Further Review), in effect will also act as a binding ruling as to the issue. It is also possible to request a ruling from Headquarters where entry has been made but the entry has not yet been liquidated. In such an instance the appropriate mechanism is referred to as a “Request for Internal Advice”. 1

Ninety days has been the traditional statute of limitation for filing an administrative protest but the law has recently been changed so that entries made after December 18, 2004 are now subject to a 180 day limitation period. USA FOOD & BEVERAGE MARKET STUDY

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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 (“Bioterrrorism Act” or BTA) has particular relevance with regard to imports. The basic elements of the Bioterrorism Act are as noted below. Registration The Bioterrorism Act requires that any facility, domestic or international, that manufactures, processes, packs or holds food for animal or human consumption in the U.S. must register with the FDA. The rationale behind this requirement is to ensure that the FDA can quickly locate and neutralize faulty food processors in the case of delivered or accidental contamination of food. Basic information such as company name, address, trade names, food product categories, and name and contact information are required to be submitted in the registration. Importantly, for foreign facilities that have no physical presence in the U.S., a U.S. based agent must be designated. Prior Notice This section of the BTA requires that prior notice of the arrival of merchandise at the first U.S. port of entry must be provided to Customs and FDA. The data that must be included in the prior notice provided is the country from which the article originates; country from which the article is shipped; the anticipated U.S. port of arrival; the Customs entry type and date; all carriers involved in transporting the article; the firm name and address in each instance; the e-mail address, telephone and fax numbers; and the registration number and standard carrier abbreviation code. Prior notice of imported foods must be received electronically by FDA through the Automated Broker Interface (ABI) or via the Prior Notice System Interface (PNSI) no more than five days before arrival in the U.S. Further, it must be received no fewer than two hours before arrival by land via road; four hours before arrival by air or land via rail; and eight hours before arrival by water. All shipments, regardless of value, must meet the prior notice requirements unless exempted. Products that are exempted from prior notice requirements are personal food or gifts accompanying an individual; merchandise that is exclusively subject to U.S. Department of Agricultural jurisdiction such as meat, poultry and egg products; homemade goods shipped as gifts; food items shipped by a diplomatic pouch; foods normally subject to the Bioterrorism Act that are included in shipments of household goods; and nonconsumption samples for testing only. Records Maintenance The BTA also requires the maintenance of records to allow for the identification of immediate previous sources and immediate subsequent recipients of food to help the FDA track food quickly and more efficiently should a potentially hazardous shipment be released. Persons that must establish and maintain records include domestic persons in the U.S. that manufacture, process, pack, transport, distribute, receive, hold or import food; foreign persons that transport food; and persons who place food directly in contact with its finished container. It should be noted that foreign persons who do not transport food in the U.S. are excluded from these regulations. Records that must be maintained by non-transporters of food relate to the identity of the immediate non-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 information must be provided for an immediate non-transporter’s subsequent recipients of all foods released. The term “transporter” includes persons who have possession, custody, or control of an article of food in the U.S. for the sole purpose of transporting the food. It also includes foreign persons that transport food in the U.S. regardless of whether a foreign person has possession, custody or control for the sole purpose of transporting it. Records to be kept in this regard include those with names of the transporter’s immediate previous 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 recordkeeper 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.

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Detention The BTA gives authority to the FDA to detain any shipment if it has “credible evidence or information indicating that the article of food presents a threat of serious adverse health consequences or death to humans or animals”. An article of food may be detained regardless of the size and value of the item. Should a food shipment be detained, a detention order will be issued by FDA. The detention order must be approved by the FDA district director at the local port and all relevant parties will be notified. Detained food may be transferred to a secure area as determined by the FDA. A detention order is valid for a maximum period of 30 days. If the FDA terminates a detention order or if the detention period expires, an authorized FDA representative will issue a detention termination notice releasing the article of food to any person who received the detention order. If the FDA does not issue a detention termination notice and the detention period expires, the detention order is deemed terminated. The detention order must have a detention order number, hour and date of the order, identification of the detained article of food, detention period involved, statement that the article of food identified is detained for the period shown, a general statement of reasoning behind why the food is being detained, the name of the authorized FDA representative who approved the order, and the address and location of where the article of food is to be detained. The detention order may require the detained food to be marked and labeled that in fact it has been detained. Also, a detention order may be appealed as to the reason for the detainment. A distinction must be drawn between Administrative Detention under Section 304(h) and Section 801(a) of the Federal Food Drug and Cosmetic Act. As noted, Section 304(h) gives the FDA authority to detain food where it has credible evidence or information that the article of food presents a threat of serious adverse health consequence or death to humans or animals. On the other hand, a detention under Section 801(a) focuses on whether the article of food 1) appears to have been safely produced, packed and held; 2) contains no contaminants, illegal additives or residues; and 3) is properly labeled. As a result, the standards of detention differ, with Section 304 detentions requiring “credible evidence of serious adverse health consequences or death. A detention under Section 801 will result in a document referred to as “Notice of Detention and Hearing”. FDA has stated that it will primarily use Section 304(h) for domestic shipments and not as a tool to stop imports. Penalties Under the U.S. Customs laws it is unlawful to enter, introduce or attempt to enter or introduce any merchandise into the U.S. by means of a material false statement or omission, whether by fraud, gross negligence, or negligence. The amount of penalty imposed depends upon the level of culpability, but can be quite severe. If Customs determines that an importer fraudulently evaded duties, it may assess a penalty up to the amount of the U.S. domestic value of the merchandise. If Customs determines that an importer violated Customs laws because of gross negligence, it may impose a penalty of up to four times the loss of Customs duties and up to two times the loss of Customs duties for ordinary negligence. When a violation of the Customs laws has occurred, an importer may avoid the imposition of the harsh penalties described above by filing a prior disclosure or a petition to mitigate penalties. A prior disclosure is a detailed explanation of the circumstances and factors resulting in a false statement or material omission which is filed by an importer before an investigation commenced, or without knowledge of an investigation. Importers also need to be aware of the additional sizable penalties which may be imposed for failing to keep and present proper records. Under this law, the duty to maintain Customs records is extended to any owner, importer, consignee, importer of record, entry filer, or any other party who is involved in such import related activity. Customs has compiled a list of records which must be maintained for five years (the “(A)(1)(A)” list), but importers should also take care to keep related business documents for the same period of time. Customs – Trade Partnership Against Terrorism (C-TPAT) and Related Security Compliance Issues Security considerations have been at the forefront of the CBP agenda since the September 11, 2001. Many programs relate to developing greater security at ports in the U.S. and major ports throughout the world, and other programs pertain to container security and supply chain security considerations. The Customs – Trade Partnership Against Terrorism (C-TPAT) is the major initiative by CBP in strengthening security considerations as regards importers, Customs brokers, freight forwarders and ocean transportation intermediaries, and modes of transportation along the supply chain. The program has received increasing acceptance and all importers should at least consider the possibility of participating in the program.

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C-TPAT is a voluntary partnership between Customs and members of the importing community. The program provides incentives to join C-TPAT and encourages applications from those importers 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 reduced cargo inspections, an assigned account manager, access to the C-TPAT membership list, and eligibility for account-based process with CBP. The application process requires 1) preparation of the C-TPAT Supply Chain Security Profile; 2) electronic submission of the profile and 3) assessment and verification of the 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 recognizes the complexity of international supply chains and endorses the application and implementation of security measures based upon “risk analysis”. The following measures are mandatory: Written procedures for selecting business partners; container security; physical access controls; procedures regarding documentation processing; security training and threat awareness; physical security; and information technology security. The C-TPAT program continues to progress and be subject to additional revisions. Potential participants should consult with knowledgeable experts as to future changes in the program and the advisability of participation. The United States requires significant dedication, commitment, persistence, aggressiveness and resources. The relative maturity and intense competition within the food and beverage market has led to customers having come to expect significant aftersales service and incentives. The keys to success in the market include a great product, a significant investment of time and money, capacity to supply at competitive prices and a willingness to assimilate into the United States business culture. Swiss companies are recommended to approach the market by regions as the United States is diversified in size, format and consumer. As local brokers, agents and distributors are located across the country it is advisable for Swiss companies to investigate their potential broker / agent / distributor’s client list, portfolio, size of sales team, margin expectations, location in relevant market, expertise, warehouse or dropproduct, prior to assigning their representatives in the market. It may be viable to adopt a private label strategy if your brand is not known in the United States, as costs are extremely high to build a brand in the market. Entering the U.S. market is a strategic business decision that requires preparation, planning and excellent execution to achieve the desired success. These 6 key steps are the same for every foreign investment into the US, but more particular to European companies who may have a tendency to underestimate their importance. 1. Full awareness of the differences between Europe and the US 2. Launched the project after meticulous preparation 3. Considered the project as Business Strategic and provided Executive backing 4. Backed the venture with sufficient funds for success 5. Defined a great Value Proposition for the market 6. Brought the right partners on board early Many European companies enter the US domestic market on a limited budget. That is a mistake. Prospective clients in their decision process to replace established domestic competition compare all your touch points with the reigning players in the market. Touch points are products, people, proposed pricing, marketing collateral, etc… that should send the same consistent quality message. Selling imported goods within the U.S. can be a lucrative business opportunity. High demand imported food and beverage products represent a significant market opportunity. If you are interested in importing and selling overseas goods into the U.S. market, you will need to do your research regarding both the country of export and the country of import. Here are some business and regulatory tips to guide you through the process of selling imported goods in the U.S.

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Exporting food and beverage products into the United States is a full-time venture, and one that can be extremely challenging for the unprepared manufacturer. As discussed, the U.S. market is very large, but the sheer size of the market gives some indication of the competitiveness that manufacturers face when trying to position their product. In today‟s global economy, Swiss manufacturers must be prepared to commit to an export program – which may or may not involve a U.S. partner (importer, distributor, licensee, joint venture or M&A partner), and invest accordingly. The first and most obvious step in this process is performing a company assessment, as outlined below. Having this infrastructure in place is critical for success.

20.2. COMPANY ASSESSMENT        

International sales experience? English language capabilities? Streamlined customer service? Phone, fax & e-mail? Strong domestic sales? Sufficient capacity to target international sales? Working capital to focus on international sales? Competitive products & defined target market? Working capital to grow brand?

20.3. COMPETITIVE, CUSTOMER AND MARKET LANDSCAPE ASSESSMENT Conducting a competitive landscape analysis is one of the most important steps a manufacturer can take when deciding whether or not to pursue the U.S. market. Manufacturers should identify who their competition would be in the U.S. market, and highlight as much information about their products as possible, including:        

Varieties available and packaging/size Retail price points How often they are on promotion Retail point-of-sale support What stores are they sold in What regions of the country do they focus on What trade shows do they attend What brokers and distributors do they work with

There are obvious differences between marketing food and beverage products domestically and in the United States. First and foremost, is the need to understand the customer. A product‘s marketability will depend largely on the target demographic. As discussed above, the U.S. market is not one, solitary entity, but rather a collection of sub-sectors, each with different requirements and product norms. Most notably, one of the most common differences involves payment terms. In the United States, potential buyers will expect the manufacturer to fund the entire cost of production. Letters of credit, irrevocable or otherwise, are almost impossible to come by. Additionally, in most cases, potential buyers will expect the first order to be on consignment (good paid for only after they are sold into retail), in order to grow the market. Remember, that a manufacturer‟s distribution model, including all brokers, distributors and retailers, are part of the sales channel. Each of them has a monumental task of placing the manufacturer‟s products in as many retail outlets as possible. Since most of these players work on either commission or on a percentage of sales, they are not making any money until a sale is consummated. The manufacturer must be willing to support the effort, and that support usually comes in the form of free goods, attractive initial payment terms or financial backing.

20.4. BRANDING Developing a brand for a specialty food product is perhaps the most important aspect of product development, as it becomes the public face of both the manufacturer and the product itself. When developing a brand for specialty food products, it is important to note a few key questions, including: What is the most important thing you want to say about your product? USA FOOD & BEVERAGE MARKET STUDY

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      

Who are you communicating with? What is the corporate culture you are trying to convey? Are consumers familiar with the product type? What tone or attitude do you want to convey? Will consumers know how to use this product? What history or information do you want to share? What would the consumer like to see?

These are all critical questions, because the manufacturer wants to create a brand that is not only true to their own corporate identity, but also one that is marketable and appealing to the consumers they are trying to reach. Again, doing a competitive analysis is critical, if only to see what everyone else‟s brands look like and how this one can be different. Developing a brand, from a label to a website to a social media page is intense, and should be handled with care from the beginning. It is important to remember that this “brand” is all most consumers will ever know about a manufacturer, and perhaps even the country of origin. For the United States market, it is important to make note of some consumer perceptions about brands. A high-priced product should look nicer than a low-priced product. U.S. consumers have a very jaded and limited view of the world, and will associate certain branding patterns with certain regions. Manufacturers should never include anything on their label that does not either help sell the product or is required by law. Finally, always remember to do the market research first. Different demographics will require and expect different brand strategies. Higher end, mainstream customers will expect to see a product that looks very different from one targeting a lower-end consumer or the Diaspora. Understanding the target customer will save lots of time and money when developing a brand.

20.5. PRICING, PROMOTION AND COMPETITIVENESS Nothing is more critical to the success of a specialty food product than the three “P‟s”: pricing, packaging and promotions. The first two involve meeting the competitive requirements of getting the products on to the shelf (i.e. convincing a buyer that these products are marketable and competitive). The last “P”, promotions, involves how you plan to get your products off the shelf (i.e. convincing consumers that they should buy your products instead of someone else‟s). Manufacturers must drive this process, as no broker, importer or distributor will ever put that much thought into a product they don‟t own outright. Manufacturers must also work closely with their importer, as discussed below, as the expenses for many of these initiatives described can and should be shared. There are, generally speaking, four main options when developing a pricing model, and the choices used will depend heavily on the type of product, desired market position and the results of a competitive landscape. The main options are: 1. 2. 3. 4.

Cost-Plus Pricing: this includes setting a price at the current product cost, including both cost of goods sold (COGS) and fixed costs, and volume of sales, plus a certain profit margin (typically not less than 25 percent). Target Return Pricing: involves setting a price to achieve a target Return-on-Investment (ROI). Value-Based Pricing: this involves pricing a product based on the value it creates for a customer. This is typically the most profitable form of pricing, though it rarely applies to food products. Psychological Pricing: this will include positioning, popular price points and fair, market value pricing.

Developing a pricing model will depend heavily on the competitive landscape prepared. Keeping into account the manufacturer‟s costs, profit margin (along with the profit margins of the importer, distributor and retailer), market position of a product will depend heavily on the competitive landscape. The shelves of U.S. retail outlets are packed with every type of product imaginable. Rows upon rows of BBQ sauce, juices, cookies, teas, and jams, to name but a few, line every aisle of every store. Looking at the stores as a whole, one realizes that the store is designed in a very precise, logical manner that does not deviate much from store to store. Fresh fruits and vegetables are always on the outside perimeter, as are meats, dairy and fresh baked goods. The center aisles are organized in a similar fashion, with frozen foods on one side, followed by house wares, pet foods, and then shelf-stable food products.

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All major supermarket chains in the United States, and elsewhere, use a software technology called “plan-o-gram”. Plan-ograms are created to maximize available shelf space and to group categories of products together to maximize consumer exposure. Manufacturers should be aware of this, and should also take note of where they imagine their products being placed, again, depending on their target demographic and competitiveness. When preparing to introduce a new product to the U.S. food and beverage industry, it is important to answer two simple questions: where does this product belong and who is going to buy it? When a buyer is looking at the product, these are the two exact questions they will be asking, and it is advised to all manufactures to have an elaborate answer. Getting on to the shelf is one thing - getting off the shelf is something else.

20.6. MARKET ANALYSIS A market study is the most straight-forward way of stressing the importance of conducting a proper market study and competitive landscape. Once a manufacturer understands the market, they will be in a much better position to determine whether or not their business model will work in the U.S. market. Some key points include:   

Analyze what other products are already in the market…how much they retail for, what the packaging looks like, what sizes they come in and how often they promote. Prepare a concise SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis for each competitive product, gathering information from buyers and consumers alike. Determine specifically what market segment to approach (i.e. high-end supermarkets in the Northeast), based on consumer demand for the manufacturers product category. As mentioned, the U.S. market is multi-faceted, and manufacturers need to know exactly where they fit in.

Information sources  Industry trade events  Distributor trade events  Trade Publications  Social Media

20.7. LOGISTICS Finding a proper importer is one of the most challenging and critical elements to the entire process of exporting specialty food products into the United States. It is, or rather, it should be, a partnership between the manufacturer and the import company. As large as the U.S. market is, it is highly recommended that a manufacturer use only one importer, unless the product offerings target very different demographics. The reason for this is that most importers maintain relationships with the same distributors and retail accounts, so having more than one organization representing the same brands is strongly discouraged. Selecting a reputable, connected importer is critical, as registering a new vendor with a distributor or retail chain is often difficult or impossible. Remember, this importer will be the manufacturer‟s only voice in the United States, so the mutual relationship is critical. Manufacturers should think of the importer as an extension of their own company, and should work with the importer to achieve the mutual goals set by both. Importers will expect involvement, whether in the form of promotions, slotting or trade show support, etc, and the manufacturer should receive monthly updates regarding sales, movement, targeted presentations and support needed. A poor relationship with an import company will do nothing except hurt the manufacturer‟s brand. It is highly recommended to do a good amount of research and development when pursuing an importer relationship. Manufacturers looking to export their specialty food products into the United States have a variety of options to choose from, including:

  

Sea freight Air freight Parcel post

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The U.S. food and beverage market represents a tremendous opportunity for manufacturers. Its sheer size, volume and acceptance of internationally-produced products make it one of the most appealing target markets in the industry. However, this volume comes at a price. The United States is also the most competitive specialty food market in the world. The rules are set, and are not flexible to interpretation. However, the advantage is that the processes of getting into the U.S. specialty food market, from both a legal and an industry standpoint, are straight forward. By adhering to the guidelines outlined in this report, Swiss manufacturers can more easily assess their readiness to enter into the U.S market. The need for manufacturers to understand the market, the demographic and the competitive landscape cannot be over emphasized. Armed with knowledge and understanding the U.S. specialty food market, manufacturers can enjoy the lucrative U.S. food and beverage market and further enhance the consumers’ appreciation of the cuisines, culture and products from their domestic market.

20.8. PRICING The following chart describes the channels and margins for companies when importing to the U.S. Figure 45: Channels and margins for companies when importing to the U.S.

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21. Summary In the U.S. food and beverage market today, the top 10 branded companies only control about 30% of the retail revenue. The rest of the revenue is produced by hundreds of other companies, focused on branded products, private label products, or both. Almost 40% of retail packaged food revenue stems from thousands of smaller branded businesses (< $140M annual revenue), among which are the emerging disruptors of tomorrow. These are often newer brands, but not always. The opportunities for growth include responding to the new economic , social and technological dynamics impacting the industry. Executives indicate that a key revenue driver over the next few years for the industry will be product innovations, both in services and in branding and promotion. A shift towards customer and supplier collaboration will allow for a better understanding of hte needs of consumers as wele as to help share potential risks, costs and rewards throughout the supply chain, and more importantly, accelerate the speed to market. Food and beverage companies also have an opportunity to leverage the change in U.S. demographics and focus on specialty trends, such as organic food and beverage products, ethnic foods, and products considered to help promote health and wellness. Companies taking advantage of these niche segments are hoping to help increase share-of-wallet and top line revenues in an otherwise slo-growth market. Leveraging the use of technology, such as cloud computing, business intelligence tools, and social media could be a strategic way of gathering information to refine customer segmentation and marketing efforts. In addition to providing visibility to customer insight, access to such data is providing executives with insight to help optimize operating models and rationalize portfolios, as well as revealing information related to new markets and pricing strategies. Key priorities for companies in the industry will be to create a customer-facing organization through value differentiation, growth, innovation, and improved channel management. Also, companies will need to streamline and standardize key processes such as creating an optimized supply chain while implementing effective risk management practises. The companies that will succeed in the long run will be those that have a true understanding of who their customers are and what they want, as well as those who develop a strong brand that provides clear positioning in the market and differentiation in the eyes of the consumer. The dynamic nature of the U.S. food and beverage industry - changing consumer trends, proposed government regulations, new companies, and new product and service offerings - challenges organizations to remain competitive. Savvy industry executives can help their companies thrive amid these conditions by better understanding the markets in which they operate, benchmarking other organizations for best practices and strategies, and relying on outside resources for skills beyond their core capabilities.

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22. Authors of this Study David A. Warar is CEO of Global Strategy, Inc., an international business development consulting firm he established in 2001. Global Strategy provides consulting services for market entry, partnering, open innovation and market research for the private sector, government and research institutions. In his early career, he assumed leadership roles in R&D, marketing and business development with a multinational pharmaceutical company. Following that, he was Vice President of a Chicagobased consulting firm, where he built their life science, energy and other sector practices. He has consulted with companies throughout North America, Latin America, Europe, Middle East and Asia Pacific in markets including Life Science, Medical and BioPharma; Food & Beverage; IT and Telecom; Electronics; Cleantech; Advanced Materials; Nanotech; Optics & Photonics; Advanced Manufacturing; Packaging, and others. Dave holds an Honors MBA in International Marketing and International Finance from Loyola University and a B.A. in Biological Sciences from University of Delaware. Global Strategy is a boutique consultancy providing customized business development services to companies (startups to multinationals), trade organizations, research institutes and government agencies. Its focus and expertise are the formulation and implementation of international business development and go-to-market strategies, executed through supplier-vendor, distribution, license, subsidiary establishment, joint venture, and M&A activities, and by producing actionable business intelligence and market research. Consulting solutions offered include the following:    

Open innovation (external product and technology) search Market development Partner search Business research (market research and competitive intelligence)

Paul S. Anderson of The Anderson Law Firm, LLC in Chicago has over 35 years experience in dealing with Customs and international trade issues. He is admitted to the Bar in Illinois, 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 and Customs and International Trade Bar Associations, Chicago, 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 Vice President from 1985 to1987. 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, a JD from Illinois Institute of Technology/Chicago-Kent College of Law and attended University of the Pacific, McGeorge School of Law, European Programs (graduate program in international legal studies based in Salzburg, Austria). Dr. Daniel A. Wuersch is the managing partner of Wuersch & Gering LLP, an international boutique law firm with 28 lawyers in New York. His practice focuses on corporate law, mergers & acquisitions, corporate finance and strategic partnerships and marketing agreements. Mr. Wuersch 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 and his LL.M. degree from the Georgetown University Law Center, Washington, D.C. in 1991. Mr. Wuersch is admitted to practice in the State of New York, before the United States District Court for the Southern District of New York, and in Switzerland. Prior to founding Wuersch & Gering LLP in 1997, Mr. Wuersch practiced international corporate and securities law with Fried, Frank, Harris, Shriver & Jacobson and Morgan Lewis & Bockius in New York, as well as Homburger/Baker & McKenzie in Zurich, Switzerland. Mr. Wuersch has written and co-authored books and articles on United States and Swiss corporate and contract law and the law of the European Union. Mr. Wuersch is a frequent speaker on legal issues involving business activities of foreign companies in the United States. He is Chairman and a past President of the Swiss Society of New York, a member of the Chapter Board “Doing Business in USA” of the Swiss American Chamber of Commerce, and a member of the Board of Trustees of the Swiss Institute. Mr. Wuersch also serves on the European Alumni Advisory Board of Georgetown University Law Center.

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Appendix: Trade Events, Associations, and Publications TRADE EVENTS: Event: Date: Venue: Description: Web site: Event: Date: Venue: Description: Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

International Poultry Expo (IPE) January 20-22, 2013, January 28-30, 2014 Atlanta, GA The U.S. largest and the most-up-to-date, relevant information pertaining to the poultry and feed industry. Over 1,000 exhibitors. Over 25,000 attendees. www.ipe13.com Winter Fancy Food Show January 20-22, 2013, January 19-21, 2014 San Francisco, CA 17,000+ attendees discover more than 80,000 products featuring the world's finest foods and beverage from more than 1,300 exhibitors representing 35+ countries. www.specialtyfood.com MEAT Expo 2013 February 10-13, 2013 Las Vegas, NV North American Meat Association bolsters its various committee with forums. The forums feature a roster of high-powered speakers that bring knowledge and experience to bear on the issues covered by the committees. http://meatxpo.com

Web site:

Natural Products Expo WEST March 7-10, 2013 Anaheim, CA The leading showcase of all natural, organic products (including dietary supplements). Over 30,000 attendees. www.expowest.com

Event: Date: Venue: Description: Web site:

National Coffee Association Convention March 21-23, 2013, San Francisco, CA National Coffee Association (NCA) Annual Convention www.ncausa.org

Event: Date: Venue: Description:

International Cheese Technology Expo April 22-24, 2014 (every 2 year) Milwaukee, WI World's largest gathering devoted solely to the multi-billion dollar market for cheese and related dairy products. www.cheeseexpo.org

Web site:

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Event: Date: Venue: Description: Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description: Web site:

Supply Side West - International Trade Show & Conference April 30- May 2, 2013 New York, NY SupplySide MarketPlace 2013 brings together the buyers and sellers that drive the dietary supplement, food, beverage, personal care, cosmetic and animal nutrition marketplace. www.supplysideshow.com BevTech 2013 April 29- May 1, 2013 Fort Lauderdale, FL Enhance the promotion, development and dissemination of knowledge relating to the art and science of beverage technology for the non-alcoholic beverage industry. Focus areas of activity include, but are not limited to, beverage formulation, production, packaging, equipment and distribution. www.bevtech.org/bevtech-2013.asp National Restaurant Association Annual Show May 18-21, 2013 Chicago, IL Every year, over the course of four days, more than 1,800 suppliers and tens of thousands of buyers come together to make lasting connections that drive business profitability and shape the future of the restaurant, foodservice and hospitality industry. http://show.restaurant.org/Home International Wine, Spirits & Beer Event 2013 May 19-20, 2013 Chicago, IL The 2013 International Wine, Spirits & Beer Event will bring restaurant and hospitality industry buyers together with hundreds of established and emerging labels to connect and uncover ways that beverage alcohol can enhance menus and drive profitability. http://iwsb.restaurant.org/Home Sweets & Snacks Expo 2013 May 21-23, 2013 Chicago, IL Break through the clutter by attending the confectionery and snack industry's most successful, world class event. The Sweets & Snacks Expo is unrivaled in new product launches, business building solutions and innovations in merchandising. www.sweetsandsnacks.com/index.cfm Dairy-Deli-Bake Seminar & Expo June 2-4, 2013 Orlando, FL This is the largest show for the dairy, deli, bakery, and foodservice professional. The retail buyers, merchandisers, brokers, distributors, and manufacturers come from all over the world for this important buying and educational event. www.iddba.org World Tea Expo June 7-9, 2013 Las Vegas, NV The leading trade event with a robust confence that is focused on 100% on premium teas and related products. www.worldteaexpo.com

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Event: Date: Venue: Description: Web site:

Summer Fancy Food Show June 30 - July 2, 2013 New York, NY North America's largetest specialty food & beverage event. 2,400 exhibitors from 80+ countries. www.specialtyfood.com

Event: Date: Venue: Description: Web site:

IFT 13 (Institute of Food Technologies) July 13-16, 2013 Chicago, IL The largest collection of food ingredients, equipment, processing and packaging suppliers. www.am-fe.ift.org

Event: Date: Venue: Description: opportunities. Web site:

American Culinary Federation National Convention July 21-25, 2013 Las Vegas, NV jam-packed, five-day convention, offering exceptional educational programming and networking

Event: Date: Venue: Description:

In-flight Food Service Assn. Conference and Exhibition September 9-11, 2013 Anaheim, CA Hosted in Long Beach, California and co-located for the third consecutive year with the Airline Passenger Experience Association (APEX), the 2012 IFSA Annual Conference & Exhibition involved a significant increase in industry participation. Marketed as an airline “super show” and as the “industry event of the year,” the co-location offered opportunities for IFSA and APEX attendees to explore the many different products available to enhance the overall passenger experience. www.biofach-america.com

Web site: Event: Date: Venue: Description: Web site: Event: Date: Venue: Description:

www.acfchefs.org/ACF/Events/Convention/ACF/Events/Convention/

BioFach America Organic Products Expo September 26-28, 2013 Baltimore, MD BioFach America - All Things Organic offers manufacturers and traders the opportunity to get to know the North American organic market better. Besides inspiring meetings at the trade show, www.biofach-america.com

Web site:

Natural Products Expo EAST September 25-28, 2013 Baltimore, MD The leading showcase of all natural, organic products (including dietary supplements). Over 30,000 attendees. www.expoeast.com

Event: Date: Venue: Description: Web site:

World Dairy Expo October 1-5, 2013 Madison, WI The show is the must attend event for everyone in the dairy industry. 65,000+ attendees www.worlddairyexpo.com

Event: Date: Venue: Description: Web site:

IBIE - International Baking Industry Expo October 6-9, 2013 Las Vegas, NV 20,000 baking professionals attend. The world's largest, most comprehensive trade event. 750+ exhibitors www.ibie2013.org

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Event: Date: Venue: Description: Web site:

InterBev 2013 TBD TBD American Beverage Association’s annual convention www.interbev.com/schedule/#

Event: Date: Venue: Description: Web site:

Fresh Summit International Convention & Exposition October 18-20, 2013 New Orleans, LA 21,000+ industry professionals from 61 countries and nearly 4,000 buyers, Fresh Summit delivered Global Connections, Consumer Insights, and Innovation Business Solutions. www.freshsummit.com

Event: Date: Venue: Description: Web site:

FNCE - Food & Nutrition Conference & Expo October 19-22, 2013 Houston, TX 350+ exhibitors www.eatright.org

Event: Date: Venue: Description: Web site:

Americas Food & Beverage Trade Show & Conference October 28-29, 2013 Miami Beach, FL The largest selection of foods and beverage from around the world catering to the taste of the Americas. 73,000 industry professionals attend. www.americasfoodandbeverage.com

Event: Date: Venue: Description: Web site:

International Dairy Show November 3-6, 2013 Chicago, IL (co-location of Process Expo) One event focus on business solutions for the dairy industry. 200+ exhibitors www.dairyshow.com

Event: Date: Venue: Description:

Process Expo November 3-6, 2013 Chicago, IL (co-location of International Dairy Show) Nation's leading equipment manufacturer at the nation's largest trade show event dedicated strictly to the food and beverage industry. 400+ exhibitors. 10,000+ attendees.naturl www.myprocessexpo.com

Web site: Event: Date: Venue: Description: Web site: Event: Date: Venue: Description:

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PLMA’s 2013 (Private Label Trade Show) November 17-19, 2013 Chicago, IL PLMA's 2013 Private Label Trade Show is the leading U.S. private label industry trade event. No show offers exhibitors an opportunity to meet as many buyers from as many retail channels. http://plma.com/showinfo/showinfo2013.html SOHO Expo 2013 December 5-8, 2013 Orlando, FL SOHO EXPO is produced by the The Southeast Natural Products Association (Southeast NPA) is the southeast region of Natural Products Association (formerly NNFA) (est. 1936) and serves Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Puerto Rico and the Virgin Islands. www.southeastnpa.org

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Event: Date: Venue: Description:

Web site: Event: Date: Venue: Description:

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International Hotel, Motel + Restaurant Show November 9-12, 2013 New York, NY Each year, more than 700 IHM+RS exhibitors present the most diverse collection of hospitality products and services under one roof. From high-end linens, in-room technology and amenities, to energy-efficient cooking equipment, and tableware, the IHM+RS presents thousands of new and innovative resources. www.ihmrs.com National Grocers Association Annual Convention February 9-12, 2014 Las Vegas, NV The annual four-day Show was one of the largest in NGA history, with over 2,700 in attendance including retailers, wholesalers and industry partners. The NGA EXPO brings independent grocers together with manufacturers of a wide variety of products and solutions. www.nationalgrocers.org/the-nga-show/the-nga-show---home/

Event: Date: Venue: Description: Web site:

Snack Food Association’s SNAXPO March 1-4, 2014 Dallas, TX

Event: Date: Venue: Description:

Food Marketing Institute’s Food Retail Show June 10-13, 2014 Chicago, IL The food retail industry's most-attended conference and exposition in North America. FMI2014 brings together over 12,000 industry-shaping professionals from 90 countries for four days of thought-provoking education, a dynamic show floor with 1,200+ exhibitors and countless opportunities to learn more about your customers. www.fmi.org/events-education/conferences-tradeshows

Web site:

www.sfa.org/events.php

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INDUSTRY ASSOCIATIONS: AACC – American Association of Cereal Chemists AACC International is a nonprofit organization dedicated to advancing the knowledge and understanding of cereal grain science through research leadership, education, superior technical service, and advocacy. 3340 Pilot Knob Road, St. Paul, MN 55121 Tel: +1 (651) 454-7250 Fax: +1 (651) 454-0766 Website: www.aaccnet.org Email: [email protected] ABA – American Beverage Association The American Beverage Association (ABA) is the trade association that represents America's non-alcoholic beverage industry. ABA was founded in 1919 as the American Bottlers of Carbonated Beverages, and renamed the National Soft Drink Association in 1966. Today the ABA represents hundreds of beverage producers, distributors, franchise companies and support industries. Together, they bring to market hundreds of brands, flavors and packages, including regular and diet soft drinks, bottled water and water beverages, 100 percent juice and juice drinks, sports drinks, energy drinks and ready-to-drink teas. 1101 Sixteenth St. NW, Washington, DC 20036 Tel: +1 (202) 463- 6732 Fax: +1 (202) 659-5349 Website: www.ameribev.org Email: [email protected] ABA - American Bakers Association ABA advocates on behalf of more than 700 baking facilities and baking company suppliers. ABA members produce bread, rolls, crackers, bagels, sweet goods, tortillas and many other wholesome, nutritious, baked products for America’s families. 1300 I Street NW, Suite 700W, Washington D.C. 20005 Tel: +1 (202) 789-0300 Website: www.americanbakers.org email: [email protected] ABI – American Beverage Institute The American Beverage Institute is a restaurant trade association dedicated to protecting the on-premise dining experience — which often includes the responsible consumption of adult beverages. 1090 Vermont Ave., NW, Suite 800, Washignton DC 20005 Tel: +1 (202) 463-7110 Website: www.abionline.org AFI – Association of Food Industries The Association of Food Industries Inc. is committed to developing programs that facilitate the business of its member companies, encourage free and fair trade, and foster compliance with US laws and regulations. 3301 Route 66, Suite 205, Bldg. C, Neptune, NJ 07753 Tel: +1 (732) 922-3008 Fax: +1 (732) 922-3590 Website: www.afius.org email: [email protected]

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AIWF – American Institute of Wine & Food The American Institute of Wine & Food is a national non-profit organization dedicated to advancing the understanding, appreciation and quality of wine and food through fun educational experiences in support of our signature Days of Taste® and Scholarship programs. 26384 Carmel Rancho Lane, Suite 200E, Carmel, CA 93923 Tel: +1 (831) 274-2493 Fax: +1 (831) 250-7641 Website: www.aiwf.org Email: [email protected] ALTA – Natural Products Association The Natural Products Association is the nation’s largest and oldest nonprofit organization dedicated to the natural products industry. NPA represents over 1,900 members accounting for more than 10,000 retail, manufacturing, wholesale, and distribution locations of natural products, including foods, dietary supplements, and health/beauty aids. NPA unites a diverse membership, from the smallest health food store to the largest dietary supplement manufacturer. 1773 T Street, NW, Washington, DC 20009 Tel: +1 (202) 223-0101 Fax: +1(202) 223-0250 Website: www.NPAinfo.org Email: [email protected] AMBA – American Malting Barley Association The American Malting Barley Association, Inc. (AMBA) Mission is to encourage and support production of an adequate supply of high quality malting barley for the malting and brewing industry and increase our understanding of malting barley. 740 North Plankinton Avenue Suite, 830 Milwaukee, WI 53203 Tel: +1 (414) 272-4640 Website: www.ambainc.org Email: [email protected] ANFP – Association of Nutrition & Foodservice Professionals Association of Nutrition & Foodservice Professionals (ANFP) is a national not-for-profit association established in 1960 that today has over 14,000 professionals dedicated to the mission of providing optimum nutritional care through foodservice management. 406 Surrey Woods Dr. St. Charles, IL 60174 Tel: +1 (630) 323-1908 Fax: +1 (630) 587-6308 Website: www.ANFPonline.org B&CMA – Biscuit and Cracker Manufacturers’ Association The Biscuit and Cracker Manufacturers’ Association (B&CMA) is a 112 year old international trade organization representing the entire spectrum of companies in the manufacturing of cookies and crackers and the suppliers to the industry. Our mission is to bring unparalleled education, training and networking opportunities to members of the B&CMA. 7 Torino Road, Manchester, NJ 08759 Tel: +1 (848) 227-3089 Website: www.thebcma.org Email: [email protected]

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Bionutrient Food Association The Bionutrient Food Association is a national association of voting members who agree to uphold the mission of the organization and advocate for vital soils, nourishing food and healthy people. BFA partners with Grower Members to develop and implement practices that will improve food quality while making their operations more lucrative and sustainable. BFA helps consumers identify, advocate for and locate bionutrient food. BFA advocates to retailers and wholesalers for the preferential placement and promotion of bionutrient food. Finally, BFA empowers public and private policymakers and investors to support the shift from the century-long paradigm of factory farming to one in which quality food is profitable, ecologically sustainable, tastier, and equally available to all. 670 West Napa Street, Suite B, Sonoma, CA 95476 Tel: +1 (707) 935-1468 Fax: +1 (707) 935-1672 Website: www.bbga.org Email: [email protected] Bread Bakers Gild of America Founded in 1993, The Bread Bakers Guild of America is a non-profit alliance of professional bakers, farmers, millers, suppliers, educators, students, home bakers, technical experts, and bakery owners and managers. 24 Hillsville Rd, North Brookfield, MA 01535 Tel: +1 (978) 257-2627 Fax: +1 (978) 277-6400 Website: www.bionutrient.org CFESA – Commercial Food Equipment Service Association The Commercial Food Equipment Service Association is the trade association of professional service and parts distributors. Founded in 1963, CFESA members promote the highest standards of professional service. With over 450 members representing all of North America, our members stock OEM parts-the best for any equipment-with access to an online inventory of millions of parts. CFESA Certified Technicians will deliver a higher first time fix rate, thereby keeping your downtime to a minimum. With nearly 3,000 CFESA Certified Technicians, there is a qualified technician in every area to get and keep your equipment up and always running. 2216 West Meadowview Road, STE 100, Greensboro, NC 27407 Tel: +1 (336) 346.4700 Fax: +1 (336) 346-4745 Website: www.cfesa.com FEDA – Foodservice Equipment Distributors Association Over the years, FNIC has continued to grow with added services and products to meet the needs of our users for reliable nutrition information. A major milestone occurred in 1995 with the launching of the FNIC Web site, greatly expanding FNIC's reach. In addition to the Web site overall, our most popular products are our Resource Lists and our Databases of Educational Materials. Our most popular services include our Ask A Question and lending services. Our special projects target specific user groups or subject areas. 2250 Point Boulevard, Suite 200, Elgin, IL 60123 Tel: +1 (224) 293-6500 Fax: +1 (224) 293-6505 Website: www.feda.com Email: [email protected] FIAE – Food Industry Association Executives The Food Industry Association Executives are a powerful network of local, state, regional and national food associations throughout the United States and Canada. They, in turn, represent over 95 percent of the grocery and food industry. As a professional organization, FIAE sponsors meetings, activities, publications and services to advance the knowledge and USA FOOD & BEVERAGE MARKET STUDY

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professionalism of the food industry association executive, and serves as a vehicle for the advancement of the food industry's agenda. 5657 W. 10770 North, Highland, Utah 84003 Tel: +1 (801) 599-1095 Fax: +1 (815) 550-1731 Website: www.fiae.net Email: [email protected] The Food and Beverage Association of America The Food and Beverage Association of America is dedicated to promoting and advancing friendly relations between members, encouraging continuing education, assisting in career growth, providing industry-related scholarships, and providing philanthropic support for critical social issues. 111 East 14th Street,Suite 390, New York, NY 10003 Tel +1 (212) 344 8252 Fax +1 (212) 504 9536 Website: www.fbassoc.com Email: [email protected] FPI – Foodservice Packaging Institute Established in 1933, the Foodservice Packaging Institute is the trade association for the foodservice packaging industry in North America. FPI's members include raw material and machinery suppliers, packaging converters, foodservice distributors and operators/retailers. 201 Park Washington Court, Falls Church, VA 22046 Tel: +1 (703) 538-3550 Fax: +1(703) 241-5603 Website: www.fpi.org FPSA – Food Processing Suppliers Association The Food Processing Suppliers Association is the trade association for suppliers to the food processing and packaging industry and the host of the largest and most affordable food processing trade show in the Americas. Our goal is to provide members with networking, marketing and educational opportunities and to help assure the future of the industry through charitable contributions and educational scholarships. 1451 Dolley Madison Boulevard, Suite 101, McLean, VA 22101-3850 Tel: +1 (703) 761-2600 Fax: +1 (703) 761-4334 Website: www.fpsa.org FSMA – Foodservice Sales & Marketing Association FSMA was incorporated in November 2003 by firms formerly associated with the International Foodservice Brokers Association/Association of Sales & Marketing Companies. The mission of FSMA is to promote sales and marketing agencies as the preferred method for suppliers to come to market: to be the national voice of the sales agency community; to advocate on behalf of sales agency interests, and to enhance relationships among suppliers, agencies, customers and other key stakeholders. 1810-J York Road #384, Lutherville, MD 21093 Tel: +1 (202) 293-1414 Fax: +1 (202) 293-1702 Website: www.fsmaonline.com Email: [email protected]

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GMA – Grocery Manufacturers Association There is a great national debate taking place about our food, and everyone has their own personal view of what and how they should eat. No matter where you fall in the debate, most Americans can support four national priorities: jobs, health, our children and helping those who may be less fortunate. 1350 Eye (I) Street NW, Washington, DC 20005 Tel: +1 (202) 639-5900 Fax: +1 (202) 639-5932 Website: www.gmaonline.org Email: [email protected] IAFP - International Association for Food Protection IAFP is an organization of 3,600 food safety professionals committed to Advancing Food Safety Worldwide® by providing members worldwide with a forum to exchange information on protecting the global food supply. 6200 Aurora Avenue, Suite 200W, Des Moines, IA 50322-2864 Tel: +1 (515) 276-3344 Fax: +1 (515) 276-8655 Website: www.foodprotection.org E-mail: [email protected] ICBA – International Council of Beverages Association The International Council of Beverages Associations (ICBA) provides a forum for the international beverage industry to convene and work on issues of mutual interest. ICBA promotes the harmonization of standards and policies concerning nonalcoholic beverages, and the assurance of the safety and quality of ingredients and manufacturing processes. 1101 16th Street, NW, Washington, DC 20036 Tel: + 1 (202) 463-6790 Fax: + 1 (202) 463-8172 Website: www.icba-net.org IDFA – International Dairy Foods Association The International Dairy Foods Association (IDFA), Washington, D.C., represents the nation's dairy manufacturing and marketing industries and their suppliers, with a membership of 550 companies within a $110-billion a year industry. IDFA is composed of three constituent organizations:  Milk Industry Foundation (MIF)  National Cheese Institute (NCI)  International Ice Cream Association (IICA) IDFA's 200 dairy processing members and their 175 divisions, subsidiaries, and joint ventures run nearly 600 plant operations, and range from large multi-national organizations to single-plant companies. 1250 H Street, NW, Suite 900, Washington, DC 20005 Tel: +1 (202) 737-4332 Fax: +1 (202) 331-7820 Website: www.idfa.org Email: [email protected] MAFSI – Manufacturer’s Agents Association for the Foodservice Industry MAFSI is a 63 year-old, professional trade association comprised of 270+ independent sales agencies and 220+ manufacturers of commercial foodservice equipment, supplies, tabletop and furniture. MAFSI represents over 2,000 sales and marketing professionals and manufacturing executives across North America and internationally who are a major force in the 10 billion dollar equipment, supply, tabletop and furniture segment of the foodservice industry. USA FOOD & BEVERAGE MARKET STUDY

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Our primary member is the factory sales’ representative agency whose role is to professionally market foodservice equipment, supplies, tabletop and furniture for their manufacturers, on a wholesale basis, and serve as the local factory branch office for the dealer and operator communities (see foodservice industry map at right). 1199 Euclid Avenue, Atlanta, GA 30307 Tel: +1 (404) 214-9474 Fax: +1 (404) 522-0132 Website: www.mafsi.org E-mail: [email protected] MWFPA – Midwest Food Processors Association, Inc. The Midwest Food Processors Association, Inc. is a trade association that advocates on behalf of food processing companies and affiliated industries in Illinois, Minnesota, and Wisconsin. Established in 1905 as the Wisconsin Canners Association, today the association represents a more diverse group of food processors on a variety of food issues. The primary role of MWFPA is to influence public policy and make the Midwest a great place for food processors to do business. The association's activities can be summarized in four words; advocate, educate, communicate, and facilitate. Go to Association Profile for more information. 4600 American Pkwy, Suite 210, Madison, WI 53718-8334 Tel: +1 (608) 255-9946 Fax: +1 (608) 255-9838 Website: www.mwfpa.org Email us: [email protected] NBBQ – National Barbecue Association Since 1991, NBBQA has been dedicated to supporting the barbecue industry and the people who love it. Our goals are to promote the recognition and image of the BBQ community, connect all facets of the industry, foster new business opportunities for our members and educate and inform the public about the art and enjoyment of great barbecue. Our legacy is one of shared strength, the strength of many perspectives focused on one passion. Our family of members is made up of many indusry segments, including restaurateurs, caterers, pitmasters, competitors, backyard enthusiasts, writers, vendors and suppliers. 455 S. 4th St., Suit 650, Louisville, KY 40202 Tel: +1 (888) 909-2121 Fax: +1 (502) 589-3602 Website: www.nbbqa.org Email us: [email protected] National Cherry Grower & Industries Foundation The National Cherry Growers & Industries Foundation (NCGIF) is a nonprofit corporation formed in 1948 for the purpose of having a unified effort from the processed cherry industry to lobby against excessive cherry imports. It then evolved that assessments were used for promotion of maraschino, canned and frozen cherries. 2667 Reed Road, Hood River, OR 97031 Tel: +1 (541) 386-5761 Fax: +1(541) 386-3191 Website: www.nationalcherries.com

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NAFEM– North America Association of Food Equipment Manufacturers The North American Association of Food Equipment Manufacturers (NAFEM) is a trade association of nearly 550 foodservice equipment and supplies manufacturers providing products for food preparation, cooking, storage and table service. 161 North Clark Street. Suite 2020. Chicago, IL 60601 Tel: +1 (312) 821.0201 Fax: +1(312) 821.0202 Website: www.nafem.org email: [email protected] NCA – National Confectioners Association Founded in 1884 in Chicago by representatives of 69 confectionery manufacturing firms, the National Confectioners Association (NCA) is one of the oldest, most respected trade associations in the world. The National Confectioners Association's Chocolate Council was founded in 2008 by members of the trade association who process cocoa and make chocolate. 1101 30th Street, NW, Suite 200, Washington DC 20007 Tel: +1 (202) 534-1440 Fax: +1 (202) 337-0637 Webiste: www.thestoryofchocolate.com Email: [email protected] NCCR – National Council of Chain Restaurants The National Council of Chain Restaurants (NCCR) is the leading trade association exclusively representing chain restaurant companies. For more than 40 years, the NCCR has worked to advance sound public policy that best serves the interests of restaurant businesses and the millions of people they employ. NCCR members include the country's most-respected quickservice and table-service chains. NCCR is a division of the National Retail Federation, the world's largest retail trade group. 325 7th Street NW, Suite 1100. Washington DC 20004 Tel: +1 (202) 783-7971 Fax: +1 (202) 737-2849 Webiste: www.nccr.net NPFDA – National Poultry & Food Distribution Association To promote the Poultry and Food Distributors, Processors, and Allied industries by bringing them together and providing a forum to foster long term business relationships. 2014 Osbourne Rd., Saint Mary's, GA 31558 Tel: +1 ( 770) 535-9901 or +1 (678) 850-9311 Fax: +1 (770)-535-7385 Website: www.npfda.org email: [email protected] NRA – National Restaurant Association The National Restaurant Association (NRA) is the largest foodservice trade association in the world—supporting nearly 500,000 restaurant businesses. In partnership with our state restaurant associations (SRA), we have more than 750 staffers working to empower all restaurant owners and operators to achieve more than they thought possible. 2055 L St. NW, Suite 700, Washington, DC 20036 Tel: +1 (202) 331-5900 Website: www.restaurant.org NFRA – National Frozen & Refridgerated Foods Association, Inc. The National Frozen & Refrigerated Foods Association (NFRA) is uniquely positioned as an all-industry trade association, representing the interests of every segment of the Frozen and Refrigerated Foods industry, including: USA FOOD & BEVERAGE MARKET STUDY

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Distributors International Local Associations Logistics Providers Manufacturers Regional Manufacturers Retailers/Wholesalers Sales Agents Suppliers

4755 Linglestown Rd., Suite 300, P.O. Box 6069, Harrisburg, PA 17112 Tel: +1 (717) 657-8601 Fax: +1(717 657-9862 Website: www.nfraweb.org email: [email protected] RFA - Refrigerated Food Association The Refrigerated Foods Association (RFA) is an organization of manufacturers and suppliers of prepared, refrigerated food products united by a common interest: to advance and safeguard the industry. 1640 Powers Ferry Road, Bldg. 2, Suite 200A, Marietta, GA 30067 Tel: +1 (770) 303-9905 Fax: +1 (770) 303-9906 Website: www.refrigeratedfoods.org e-mail: [email protected] SCAA – Specialty Coffee Association of America Established in 1982 by a small group of coffee professionals seeking a common forum to discuss issues and set quality standards for the specialty coffee trade, the SCAA is now the world's largest coffee trade association with nearly 3,000 company members. SCAA members can rightfully be credited for much of the growth and success the specialty coffee industry has experienced over the past twenty-five years. We invite you to view some of our most defining moments: 330 Golden Shore, #50, Long Beach, CA 90802 Tel: +1 (562) 624-4100 Website: www.scaa.org SFA – Snack Food Association SFA's governmental affairs team represents member companies' interests at the international, federal and state levels. SFA actively engages in the development of legislation and regulations that impact its members' ability to manufacture and market their products. 1600 Wilson Blvd., Suite 650, Arlington VA 22209 Tel: +1 (703) 836 4500 Fax: +1 (703) 836-8262 Website: www.sfa.org Email: [email protected]

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Soyfoods Association of North America Over the span of 20 years, the association has grown to more than 50 members. Currently, membership of SANA is comprised of large and small soyfoods companies, growers and suppliers of soybeans, nutritionists, equipment representatives, food scientists, and retailers. 1050 17th Street, N.W., Suite 600, Washington, DC 20036 Tel: +1 (202) 659.3520 Website: www.soyfoods.org email: [email protected] Specialty Food Association Specialty Food Association membership is grouped into four large classifications. These classifications are consistent with the structure of the specialty food industry. Find the Membership classification that best suits your business type and select "Learn More" to view requirements and benefits of each classification type 136 Madison Avenue, 12th Fl. New York, NY 10016 Tel: +1 (212) 482-6440 Website: www.specialityfood.com

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TRADE PUBLICATIONS Name: Publisher: Address: Tel: Fax: Website: Circulation:

Baking & Snack International – Trends & Technology for the industrial baking market worldwide Sosland Publishing Co. 4800 Main Street, Suite 100, Kansas City, MO 64112 +1 (816) 756-1000 +1 (816) 756-0494 www.bsimagazine.com Monthly

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Candy Industry – The Global resource, from manufacture to retailing BNP Medica 2401 W. Big Beaver Rd, Suite 700, Troy, MI 48084 +1 (847) 763-9534 +1 (847) 763-9538 www.candyindustry.com Monthly

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Cheese Market News Quarne Publishing, LLC PO Box 620244, Middleton, WI 53562 +1 (608) 831-6002 www.cheesemarketnews.com Monthly

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Fancy Food & Culinary Products – The gourmet products magazine for retailers Talcott Communications Corporation 233 N. Michigan Avenue, Suite #1780, Chicago, IL 60601 +1 (312) 849-2220 +1 (312) 849-2174 www.fancyfoodmagazine.com Monthly

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Food Business News – News, markets and analysis for the food processing industry Sosland Publishing Co. 4800 Main Street, Suite 100, Kansas City, MO 64112 +1 (816) 756-1000 +1 (816) 756-0494 www.bsimagazine.com Monthly

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Food Engineering BNP Media 2401 W. Big Beaver Rd, Suite 700, Troy, MI 48084 +1 (248) 362-3700 www.foodengineeringmag.com Monthly

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Name: Publisher: Address: Tel: Fax: Website: Circulation:

Food Ingredients Online – An information resource for industry professionals Atlantic Publishing Company 1210 SW 23rd Place, Ocala, FL 34471 +1 (352) 622-1825 +1 (352) 622-1875 www.foodingredientsonline.com Monthly

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Food Service Professional- Various kinds of Magazines or guidebooks Atlantic Publishing Company 1210 SW 23rd Place, Ocala, FL 34471 +1 (352) 622-1825 +1 (352) 622-1875 www.atlantic-pub.com Monthly

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Food Processing Magazine Omeda Communications 555 Huehi Road, Northbrook, IL 60062 +1 (847) 559-7360 www.foodprocessing.com Monthly

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Food Product Design – For product development professionals Virgo Publishing, LLC 3300 N Central Ave., #300, Phoenix, AZ 85012 +1 (480) 990-0819 www.foodproductdesign.com Monthly

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Food Quality – The science-based news magazine focused on quality, assurance, safety, and security in the food and beverage industry. Science Corporate 111 River Street, 9-01, Hoboken, NJ 07030 +1 (480) 419-1851 +1 (480) 718-7719 www.foodquality.com Monthly

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Functional Ingredients Penton Medica, Inc. 1166 Avenue of the Americas/10th fl, New York, NY 10036 +1 (212) 204-4200 http://newhope360.com/functional-ingredients Monthly

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Gourmet News - The Business Newspaper for the gourmet industry Oser Communications Group, Inc. 1877 N. Kolb Road, Tucson, AZ 85745 +1 (520) 721-1300 www.gourmetnews.com Monthly

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Name: Publisher: Address: Tel: Fax: Website: Circulation:

Gourmet Retailer Stagnito Media 570 Lake Cook Rd., Suite 310, Deerfiled, IL 60015 +1 (224) 632-8200 +1 (224) 632-8266 www.gourmetetailer.com Monthly

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Hotel F&B- Lodging food and beverage professionals in hotels, resorts, and casinos worldwide. Hotel Forum LLC 5455 N Sheridan Rd Apt 3602, Chicago, IL 60640 +1 (773) 728-4995 www.hotelfandb.com Monthly

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Kitchenware News & Housewares Review –Leading B-to-B publication covering the speciality kitchenware market. Oser Communications Inc. 1877 N. Kolb Road, Tucson, AZ 85715 +1 (520) 721-1300 www.kitchenwarenews.com Monthly

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KosherToday-Converting the business of Kosher food & beverage Diversified Business Communications 121 Free Street, Portland, ME 04101 www.koshertoday.com Monthly

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Manufacturing Confectioner- the worldwide business, marketing and technology journal of the candy, chocolate, confectionery, cough drop, and sweet baked goods industry. MC Publishing Company 711 W. Water Street, P.O. Box 266, Princeton, WI 54968 +1 (920) 295-6969 +1 (920) 295-6843 www.gomc.com Monthly

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Modern Baking – Magazine for baking professionals Penton Media, Inc. 330 N Wabash, Ste. 2300, Chicago, IL 60611 +1 (312) 840-8478 +1 (913) 514-3937 http://modern-baking.com Monthly

Name: Meat & Poultry – The business journal for meat and poultry processors Publisher: Sosland Publishing Co. Address: 4800 Main Street, Suite 100, Kansas City, MO 64112 Tel: +1 (816) 756-1000 Fax: +1 (816) 756-0494 Website: www.MeatPoultry.com Circulation: Monthly

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Name: Publisher: Address: Tel: Website: Circulation:

National Restaurant News- Leading source of foodservice industry news and information Penton Medica Inc. 1166 Avenue of the Americas, 10th Floor, New York, NY 10036 +1 (212) 204-4200 www.nrn.com Monthly

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Natural Foods Merchandiser Penton Medica Inc. 1166 Avenue of the Americas, 10th Floor, New York, NY 10036 +1 (212) 204-4200 www.newhope.360.com Weekly email update and monthly product showcase.

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Nutraceuticals World - Nutritional Outlook Snack Food & Wholesale Bakery Rodman Media 70 Hilltop Road, Ramsey, NJ 07446 +1 (201) 825-2552 +1 (201) 825-0553 www.nutraceuticalsworld.com Weekly email update and monthly product showcase.

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Prepared Food Network – Global new product introduction, culinary trends, ingredient technology. BNP Media 2401 W. Big Beaver Road, Suite 700, Troy, MI 48084 +1 (847) 405-4024 +1 (248) 283-6574 www.preparedfoods.com Monthly

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Tea&Coffee Trend Journal – The international voice of the tea and coffee industries Lockwood Publications, Inc. 3741 Crescent St., 2nd Floor, Long Island City, NY 11101 +1 (212) 391-2060 +1 (212) 827-0945 www.teaandcoffee.net Monthly

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World Grain – Grain and grain processing information Sosland Publishing Co. 4800 Main Street, Suite 100, Kansas City, MO 64112 +1 (816) 756-1000 +1 (816) 756-0494 www.teaandcoffee.net Monthly

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ExportHelp www.switzerland-ge.com/exporthelp [email protected] T 0844 811 812

Switzerland Global Enterprise Stampfenbachstrasse 85 CH-8006 Zürich T +41 44 365 51 51 Switzerland Global Enterprise Corso Elvezia 16 – CP 5399 CH-6901 Lugano T +41 91 911 51 35 Switzerland Global Enterprise Avenue d’Ouchy 47 – CP 315 CH-1001 Lausanne T +41 21 613 35 70 www.switzerland-ge.com

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