Study: Nutrition Labels Can Hurt Food Industry Competition

DURHAM, N.C. -- Although their goal is to answer the information needs of shoppers, standardized nutrition labels might have an adverse effect on market competition, by helping big CPG companies gain a greater edge on their smaller rivals, a new Duke University study contends.

The study, conducted by academics at Duke's Fuqua School of Business, concluded that the standardized food label disclosures resulting from the Nutrition Labeling and Education Act (NLEA) of 1990 played a role in a higher percentage of companies with low market share exiting various food categories, after the law took effect in May 1994.

The researchers additionally found that leading food industry players had a greater edge in product distribution after May 1994.

"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," noted marketing professor Christine Moorman, who conducted the study along with associate professor Carl F. Mela, and Ph.D. candidate Rex Du.

The study analyzed grocery-store food sales before and after the NLEA became effective, using 1993 and 1995 supermarket data on 29,374 food firms collected by Information Resources Inc.'s Infoscan service. In addition, researchers looked through 1991, 1993, and 1995 sales data on the 2,186 firms published in IRI's Supermarket Review. They controlled for other factors by checking supermarket data over several years; and also studied nonfood categories not subject to the NLEA's requirements as a comparison.

The study concludes that major food companies benefited disproportionately from the law, perhaps because their superior financial resources, brand awareness, customer knowledge, and distribution power allowed them to anticipate and respond more rapidly and effectively to the new information-disclosure requirements. As a result, these bigger firms had a significantly lower tendency to leave various food categories than their smaller rivals did; and the big CPG companies showed a much greater tendency to increase their distribution levels, to the detriment of smaller, less-well-equipped companies.

The overall cost to the food industry of changing about 250,000 food labels was $1.4 billion to $2.3 billion, the researchers said.

"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 study's authors said. They encouraged policy makers to "piece together the consumer, brand, and firm effects of standardized information disclosure" to understand the full effect on consumers, including the potential brands that might be lost; the possible changes in product price, taste, and nutrition; and the longer-term impact on companies entering and leaving the market.

Surprisingly, the study uncovered scant evidence of price increases by larger food makers after the NLEA took effect, even as the bigger firms used their greater size, resources, and number of relationships to boost their distribution power and fewer smaller companies remained as competitors. Moorman attributed this to the fact that the food industry titans remain in stiff competition.

"Our findings indicate that regulation is an important external event that can be the death knell for some firms," said the researchers in the study. "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."

The authors of the study concluded that policy makers should continue their efforts to promote healthy market competition, but they need to examine how their policies could affect firms of various sizes, and try to compensate for those effects.

The researchers additionally suggested bigger companies should not get involved in the formulation of regulations, as often occurs; or that, when possible, policy makers should allow smaller firms equal access to the regulation-drafting process or exempt more of them from the regulations.

The study, which was funded by research grants from the National Science Foundation and the Marketing Science Institute, appears in the spring issue of the journal "Marketing Science," a publication of the Institute for Operations Research and the Management Sciences (INFORMS), an international scientific society with 10,000 members dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government and academia.
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