Market and Business Impacts of the New
Definition of Fat Free in Canada,
14 Months Post-Introduction

Summary, Observations
and Conclusions

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1. Background and Introduction

1.1 The Market

In recent years, consumer interest in health and nutrition has escalated and increased the demand for healthful food products in the marketplace. Aging baby-boom populations and a trend toward self-care in relation to chronic-disease prevention and management are fueling this demand.

In the mid-1990s, fat content was a key food-selection criterion among North American consumers. In its 1996 Shopping for Health survey, the Food Marketing Institute reported that 72% of U.S. shoppers decided to start buying a food they had not previously purchased or used before, specifically because of its fat content. This included categories like milk, margarine, cheese, yogurt, cereals, potato chips, vegetables, breads and grains, and soups. The same survey showed that Americans were using label information, such as nutrient-content claims, to avoid higher-fat foods they had purchased before. In Canada, a 1994 survey by the National Institute of Nutrition showed that fat was also the number-one nutrition concern among Canadians — 50% were very concerned about it and 32% were somewhat concerned. The survey showed that to lower their fat consumption, 43% of Canadians were buying lower-fat food products.

Some say, however, that consumer interest in fat has now reached a plateau and that the market for healthful foods has changed in recent years. Fat was important to consumers in the mid-1990s, but may be less so now. Consumers appear to be more interested in other issues, such as saturated fat, mono-unsaturated fat, calcium, freshness, energy management and convenience, balanced with taste and other health benefits. Instead of purchases being driven by low-fat claims, consumers are seeking products that help them feel energetic and attractive, as well as products that have specific disease-preventive or risk-management benefits.

As reported in a New York Times article (Summer 1998), “when Nabisco fat-free crackers and cookies hit supermarkets in the U.S., sales zoomed, peaking at about $490 million in 1995. But more recently, sales have slumped amid fierce competition and complaints about the taste. In general, consumption of artery-friendly foods has trailed off over the last couple of years with only about 13.3% of snack foods falling into the better for you categories. That figure was down from 15.3% in 1996, though it had risen steadily in the previous six years. Only about 11% of the cookies consumed in the U.S. in the second half of 1997 were fat-free or low-fat. The decrease is mainly attributed to a matter of taste and the findings that consumers are willing to accept a little bit more fat in pursuit of better taste.”

Frito-Lay claims success with its fat-free chips made with Olestra (a no-fat, no-calorie fat replacer permitted in the U.S. but not in Canada), but sales are slowing. In the U.S., “the product WOW [chips] dollar sales went from $41.4 million for the four weeks ended May 24, 1998 to $35 million for the four weeks ended June 21, 1998, suggesting the product may not be an instant home run and new brands appear to be cannibalizing other better for you snacks.” (Dow Jones News/IFT Daily News, June 1998).

According to a recent DataMonitor report, there is a consumer backlash to counting calories and grams of fat, which is driving new product launches in North American and Western European food markets. Manufacturers are launching more indulgent and luxury products than low and light items. Indulgent and luxury foods accounted for 450 of the 2,983 new innovative products launched globally in 1997.

Nevertheless, despite what appears to be a slowing of growth in demand, according to DataMonitor low and light foods are still holding strong in the new products arena; they accounted for 442 of the 2,983 new innovative products launched globally in 1997. So while market growth may be slowing, there is still a market for fat-free products and undoubtedly, still room for growth. By mid-1998, more than 10 million servings of products made with Olestra had been tried by consumers in the U.S. and the response has been ardent. U.S. companies continue to develop and market fat-free products — Nabisco is now test marketing its Ritz and Wheat Thins crackers made with Olestra. In Canada, too, the market for many products bearing nutrient-content claims continues to grow; ACNielsen data show that better for you products are out-performing their regular counterparts in most cases. And there is still a consumer interest in fat. In a recent survey (National Institute of Nutrition, 1997), 44% of Canadians polled said they were very concerned about fat in their diet. While this number was down from the 50% observed in 1994, it is still significant.

1.2 The U.S. Experience with Fat-Free

On January 6, 1993, in the final publication of its regulations implementing the Nutrition Labeling and Education Act of 1990 (NLEA), the U.S. Food and Drug Administration (FDA) introduced criteria for the claim fat-free. To bear this claim on the label, food products were to contain less than 0.5g fat per reference amount and per labeled serving of food. In August 1989, the FDA had announced a major initiative to take a new look at food labeling as a tool for promoting sound nutrition for the nation's consumers; in large part, this initiative was also in response to consumer demand (see Annex 1). Although the use of nutrient content claims was being examined as part of this initiative, there was no regulatory definition for fat-free or other terms describing the fat content of foods in place prior to the NLEA rules published in 1993.

Food companies in the U.S. were able to take advantage of the new definition of fat-free at a time when market demand was high. They developed many products with the fat-free claim, and the market for these products soared. The 1996 Shopping for Health survey showed that the percentage of U.S. consumers who said they used low-fat or fat-free salad dressings, ice cream, crackers, cookies and cake went up significantly in 1996 compared to 1995. Furthermore, in 1996 almost 75% of U.S. consumers reported buying low-fat or fat-free salad dressings; almost 60% low-fat or fat-free ice cream, crackers and mayonnaise; over 50% low-fat or fat-free cookies, sour cream, cheeses, and chips; and over 30% low-fat or fat-free cake. According to ACNielsen data, in 1996 fat-free products constituted an 8.6 to 47.0% share by volume of the U.S. prepackaged food market, depending on the product category. This represented an increase of 5.0 to 46.3% over 1994, again depending on the category.

Category Shares for Selected Fat-Free Products on U.S. Market

Category	Selected Fat-Free Products on the U.S. Market: Share of Category by Volume
Category	1994	1996	Change (%)
Process cheese slices	9.9	10.4	+5.0
Cream cheese	11.2	12.3	+9.8
Pourable salad dressings	23.8	25.5	+7.1
Spoonable salad dressings	5.6	8.6	+53.6
Cottage cheese	12.8	15.7	+22.7
Yogurt	45.8	47.0	+2.6
Sour cream	13.8	15.9	+15.2
Ready-To-Eat Pudding	26.8	39.2	+46.3
Source: ACNielsen

1.3 The Canadian Experience with Fat-Free

For many products, particularly those with a serving size of less than 100g (e.g., salad dressings, luncheon meats, cheese slices, biscuits, breads, cereals, various snack foods, confectionery products, etc.), the U.S. definition of fat-free adopted in 1993 was considerably more lenient than Canada’s definition of not more than 0.1 g fat per 100g or per 100mL of food. While it was possible to develop and market products that met the stricter Canadian definition (and many companies did), the U.S. definition enabled companies there to do more.

From the early to mid-1990s, many firms in Canada lobbied the government to harmonize Canada’s definition of fat-free with that of the U.S. Some said they were getting large numbers of requests from Canadian consumers who had seen fat-free products in U.S. advertisements and/or U.S. supermarkets. These Canadian companies, which were “pro” harmonization, saw it as an opportunity. They felt it would give them more flexibility in the development and marketing fat-free products in Canada. As well, they believed it might facilitate an increase in exports and reduce costs by allowing firms to use the same product formulations for both the Canadian and U.S. markets. Furthermore, they said that a single North American message would be clearer for consumers and make the development of advertising “creative” easier for businesses. These firms believed that adopting the U.S. definition of fat-free offered them a sizeable, incremental market-growth opportunity, and that it would strengthen the Canadian food industry by fostering investment in new product development and technology. Jobs would also be created.

On the other hand, there were firms in Canada that were against a change in the definition of fat-free. They said there were a number of “cons” to harmonization. First, it would be “dishonest” and could reduce brand credibility with consumers. Second, they were concerned about more competition from U.S. imports, as well as the potential for lost jobs in Canada. Some firms said they would require lead time for product development and operationalization, should the U.S. definition of fat-free be adopted in Canada.

It was against this backdrop that, effective June10, 1997, Canada indeed moved to harmonize its definition of fat free with that of the U.S. Health Canada based the decision on consultations with stakeholders, a review of the U.S. and proposed Codex definitions, the results of consumer research, and the estimated economic and trade impact.