Nutrition labels have negative effect on small companies, study shows

June 2, 2005, as reported by 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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