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June 2, 2005, as reported by just-food.com: Standardized food
labels have had the unintended effect of shooing small
companies out of various food categories. New research
shows that the Nutrition Labeling and Education Act
of 1990, while created with the intention of leveling
playing fields between large and small food manufacturers,
has weakened competition.
The study, conducted by researchers at Duke University,
found that the standardized food label disclosures created
by the Nutrition Labeling and Education Act of 1990
resulted in a higher percentage of companies with low
market share exiting various food categories after the
law took effect in May 1994. The researchers also found
that food industry leaders enjoyed a greater product
distribution advantage over their smaller rivals after
May 1994.
“The outcomes we observed would not necessarily
be expected when standardized information, like a label,
is infused into the marketplace,” Moorman said.
“We expected that label information would allow
firms to compete more honestly for consumers’
purchases, but instead we find an unintended loss of
small firms in food categories.”
The Duke research team analyzed grocery-store food
sales before and after the NLEA took effect, using 1993
and 1995 supermarket data on 29,374 food firms collected
by Infoscan, a service published by Information Resources
Inc.. In addition, researchers combed through 1991,
1993 and 1995 sales data on 2,186 firms published in
IRI’s “Supermarket Review.” They controlled
for other factors by looking at supermarket data over
several years and also studied non-food categories not
subject to the NLEA’s requirements as a comparison.
The authors found that leading food companies benefited
disproportionately from the legislation, perhaps because
their greater financial resources, brand awareness,
customer knowledge and distribution power enabled them
to anticipate and respond quicker and more effectively
to the new information-disclosure requirements. Given
these advantages, larger food firms showed a significantly
lower tendency to exit various food categories than
smaller food makers. For the same reasons, the category
giants also displayed a significantly greater tendency
to increase their distribution levels at the expense
of their smaller, less-endowed rivals.
In other words, the larger food manufacturers were
better positioned to take advantage of the government’s
mandated labeling process because they had a greater
ability to influence, plan, fund, make and promote the
regulatory changes. Overall, it cost the food industry
an estimated $1.4bn to $2.3bn to revamp approximately
250,000 food labels.
The authors note that public policies crafted to promote
healthy market competition may sometimes have the opposite
effect. The implication is that unless regulations are
drawn up very carefully, good intentions may end up
hurting the very consumers that the policies seek to
protect by leaving shoppers with fewer brand choices.
“Our findings imply that policy makers should
give greater consideration to the regulatory and industry
conditions under which firm heterogeneity influences
the impact of information disclosure,” the authors
wrote. They urge policy makers to “piece together
the consumer, brand and firm effects of standardized
information disclosure” to understand the full
impact on consumers, including the potential brands
that might be lost; the possible changes in product
price, taste and nutrition; and the longer-term effects
on companies entering and leaving the market.
The study uncovered little, if any, evidence of price
hikes by the bigger food manufacturers after the NLEA
went into effect, even though the larger firms leveraged
their superior size, resources and relationships to
boost their distribution power and fewer smaller firms
remained as competitors. Moorman credits this development
to the fact that the food industry giants remain in
intense competition.
“Our findings indicate that regulation is an
important external event that can be the death knell
for some firms,” the authors write. “Further,
our findings support the view that firms can make strategic
use of regulation. This suggests that firms should think
about the costs and benefits of regulation relative
to competitors, not in absolute terms.”
However, the authors believe that policy makers should
not abandon their efforts to promote healthy market
competition. Rather, they argue, regulators should look
more closely at how their policies might affect firms
of different sizes and try to compensate for those effects.
“Think about the differential effects across firms
and attempt to write policy that levels the playing
field,” Moorman advised.
The researchers also suggest that larger firms not
be allowed to help draw up the regulations, as often
happens. Or, when possible, policy makers could grant
the smaller firms equal access to the regulation-drafting
process or exempt more of them from the regulations.
The study was funded by research grants from the National
Science Foundation and the Marketing Science Institute.
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