December 30, 1998

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

Module 1: Supermarket Survey

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Executive Summary

1. Introduction

As the first of a two-component approach to assessing the impacts to date of the June-1997 harmonization of Canada's definition of fat-free with that of the U.S., a supermarket survey was carried out by ACNielsen. The objectives were to assess the impacts of the change in the definition of fat-free on the number and types of fat-free products on the Canadian market; the extent to which new fat-free products have been introduced; trends in the volume and value of sales of these fat-free products (by category); and trends in the number, volume and value of sales of fat-free products that are imported versus made in Canada. (The second component of the project was an industry survey; see Module 2).

The food industry had been (and may still be) divided on the fat-free issue. Those firms in favor of the change saw it as an opportunity because it would allow them more flexibility in the development and marketing of fat-free products. 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 fat-free offered them a huge market growth opportunity.

Those against the change in the definition of fat-free said it would be "dishonest" and could reduce brand credibility with consumers. They were also concerned about more competition from U.S. imports. 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.

2. Methodology

ACNielsen was commissioned to collect and report on supermarket data on fat-free products in two phases, as follow:

1. A survey of 140 grocery stores across Canada to obtain an inventory of fat-free-labeled products on the Canadian market, along with an indication of whether each product was a product of Canada or imported.
   
   
2. Linking of items in the fat-free inventory to ACNielsen's existing product-description and sales-volume/value databases; identification of which products were new to the marketplace since June 1997 when the new definition of fat-free took effect in Canada; provision of sales data, including share and value trends, for the sum of fat-free-labeled products in aggregate and separately within their respective food categories (comparative annual basis for the 52 weeks before and after June 1997).

Subsequent to receiving the data from ACNielsen, the Food Bureau analyzed it further to draw out answers to the questions about the impacts of the change in the definition of fat-free.

3. Findings¹

3.1 Number, Sales Volume and Value of Fat-free-Labeled Products

According to the supermarket survey, as of September 1998, there were 798 fat-free-labeled stock-keeping-units (SKUs) on the Canadian market – 109 were private-label, and 689 were brand-name products manufactured by 111 firms of a broad cross-section of types and sizes.

Fat-free-labeled items were found in 13 of the 23 four-digit Standard Industrial Classifications (SICs). The majority (42%) were in the milk and other dairy products categories (perhaps because skim milk can be used as a basis for many dairy products), followed by other food products² (25%), confectionery (9%), canned/preserved fruits and vegetables (9%), prepared flour mixes/cereal products (8%), bread/bakery products (3%), meat products (2%), biscuits (1%), snack foods (1%), and dry pasta, seafood and frozen fruits/vegetables (<1% each).

In the categories in which they were found, fat-free-labeled SKUs represented 2.6% of all SKUs(fat-free and non-fat-free), 6.4% of the overall sales by volume and 5.5% by value (July97-June98). ³ Sales of fat-free products totaled $468.7million. By both volume and value of sales, the top three categories were other dairy products (in which fat-free-labeled products represented 14.9% of sales by volume and 9.4% by value), prepared flour mixes and cereal products (14.2% of sales by volume and 15.6% by value) and other food products (10.7% of sales by volume and 7.7% by value).

3.2 Change in the Number, Sales Volume and Value of Fat-Free-Labeled Products Since the Change in the Definition of Fat-Free

3.2.1 All Fat-Free Products

According to this survey, growth in the number of fat-free-labeled SKUs in the year after the change in the definition of fat-free was about 50%. Growth in sales by volume was 38% and real growth in sales by value (adjusted for inflation) was 18%. Growth in sales volume and value was greatest for other dairy products. This was followed by snack foods, then meat products, then bread/bakery and confectionery products. Even with the dairy data excluded, growth in the number of fat-free-labeled SKUs was 42%, in sales by volume 12%, and in real sales by value 8%.

In the categories in which they were found, growth of fat-free-labeled items (as measured by the number of SKUs, sales volume and sales value), significantly exceeded that of the categories overall. Of the 111 firms found to be manufacturing fat-free-labeled products for the Canadian market, 87 (78%) experienced an increase in overall sales of their fat-free products and 24 (22%) experienced a decrease.

According to ACNielsen ⁴ , as a share of the retail prepackaged food market overall, products bearing any type of nutrient-content claim (e.g., fat-free, light, calorie-reduced, etc.) remained the same (13.7%) over the period July96-July97 to July97-July98. However, in many categories, these better for you products outperformed their regular counterparts. Moreover, in many categories, the fat-free-labeled products outperformed both regular products and better for you products.

While the market for many fat-free products is growing in Canada, to date the category shares held by a number of selected fat-free products (e.g., cream cheese, pourable and spoonable salad dressings, cottage cheese, yogurt and sour cream), have not reached the levels they had achieved in the U.S. market in the mid-1990s.

3.2.2 New Fat-Free Products

Of the 798 fat-free-labeled SKUs found on the market, 531 existed before the definition change (but many of them may not have been labeled fat-free before), whereas 267 were new. Fifty-four of these were private-label; the remaining 213 were brand-name products manufactured by a cross-section of company types and sizes. Sixty (54%) of the 111 firms manufacturing and/or marketing fat-free products had introduced new products.

The majority (44%) of new fat-free-labeled items were in the other dairy products category, followed by other food products (19%), canned/preserved fruits and vegetable products (10%), and prepared flour mixes and cereals (8%).

According to ACNielsen, during the 52-week period ending June 20, 1998, there were 8,999 new ⁵ food products introduced to the Canadian market as a whole. Fat-free items represented 3.0% of all new items introduced over this period. A full 18.4% of new items in the other dairy products category were fat-free labeled, 10.8% in the prepared flour mixes and cereal products category, 8.7% in the canned/preserved fruits and vegetables category, 6.5% in the milk category, 5.3% in the other food products category, 4.5% in the frozen fruits and vegetables category, and 4.2% in the confectionery category. On the other hand, new fat-free products in the meat products, biscuits, bread/bakery products, dry pasta and snack foods categories fell below the 3.0% represented by new fat-free items across all new items.

3.3 Country of Origin of Fat-Free-Labeled Products

3.3.1 All Fat-Free Products

Of the 798 fat-free-labeled items found on the Canadian market as of September1998, 638(80%) were manufactured in Canada and 160(20%) were imported. Furthermore, 90% of sales by both volume and value were represented by domestic product.

Most of the imported fat-free-labeled products were found in the canned/preserved fruits and vegetables category (75% by volume and 73% by value), frozen fruits and vegetables (100% by volume and value, but represented by only 1 SKU), and snack food category (100% by volume and value, but represented by only 1 SKU). There was also some import penetration in the bread/bakery products (22% by volume and 25% by value), other food products (20% by volume and 11% by value), confectionery (8% by volume and value), and prepared flour mixes and cereals (7% by volume and value) categories. Imports were not a significant factor in meat products, seafood, milk, other dairy products, biscuits or dry pasta.

Overall growth in domestic fat-free products after the definition change was roughly similar to that of imports in terms of both volume and value of sales. In meat products, seafood, milk, other dairy products, and prepared flour mixes and cereals, sales growth among domestic products was greater than for imports; however, in canned/preserved fruits and vegetables, biscuits, bread/bakery products, confectionery, and other food products, growth in the value of sales was greater among imports.

If the dairy categories (which make up 42% of the fat-free-labeled SKUs) are removed from the data, then overall, imported fat-free products grew more in volume and real value of sales than domestic products. Growth in the number of domestic fat-free SKUs seems to be almost keeping pace with that of imports; however with the dairy data excluded, sales of imports grew about 26% by volume and 18% by value during the year after the change in the definition, whereas sales of domestic products grew only 9% by volume and 6% by value.

3.3.2 New Products

The overall ratio of domestic to imported fat-free products was similar for the 531 fat-free-labeled products that existed before the change in the definition (again, many of these products may not have been labeled fat-free before) as for the 267 new products introduced in the year after the definition change. Eighty percent of the new fat-free SKUs were Canadian-made, whereas about 20% were imported. Moreover, Canadian-made products contributed 94% of the sales of new fat-free products by volume and 90% by value, while imports contributed only 6% of sales by volume and 10% by value.

4. Observations and Conclusions

According to this supermarket survey, there has been some significant growth in the number of fat-free-labeled products on the Canadian market (particularly in the dairy category), as well as in the volume and real value of sales of fat-free products. Fat-free products are being manufactured and introduced to the marketplace by a cross-section of types and sizes of firms. In most of the categories in which fat-free products are found, their growth (as measured by the number of SKUs, sales volume and sales value) exceeds that of regular products and products bearing other types of nutrient content claims. While the market for many fat-free products is growing in Canada, to date the category shares held by selected fat-free products has not reached the levels it had achieved in the U.S. market in the mid-1990s.

There have been a significant number (267) of new fat-free-labeled products introduced to the Canadian market during the year following the change in the definition of fat-free, mostly in the dairy category, followed by other food products, canned/preserved fruits and vegetables, and prepared flour mixes and cereals.

One hundred eleven firms are manufacturing/marketing fat-free products for the Canadian market; 60 (54%) introduced new products in the year following the definition change. Moreover, 78% of the firms manufacturing/marketing fat-free products for Canadian market had increased sales. While these two points do not necessarily imply that firms have invested in plant expansion, equipment or construction, they do suggest that firms have made investments in product R&D, packaging and labeling, and likely in advertising and marketing.

The majority (80%) of the fat-free products on the Canadian market are of domestic origin. Overall growth in domestic fat-free products after the change in the definition of fat-free was roughly similar to that of imports in terms of both volume and value of sales. Moreover, Canadian-made products contributed 90% of the value of sales of new fat-free products, while imports contributed only 10%. Nevertheless, in some categories, there are indications that sales fat-free imports are growing more rapidly than domestic products.

It has probably not been long enough for the full effects of the change in the definition of fat-free to have occurred. Further research and tracking (particularly of the rate of introduction and sales of new fat-free products by category and by country of origin), should be done in order to determine the medium and longer term effects.

Summary of Predicted Effects Before the Change in the Definition of Fat-Free, and What this Supermarket Survey has Shown 14 Months After the Change

1. It should be noted that the findings in this survey may not have occurred directly because of the changes in the definition of fat-free. Any conclusions can only be implied by virtue of the market situation before and a year after the definition change
2. "Other food products" include: salad dressings, desserts, sauces and condiments, seasonings, canned/frozen/fresh mixed dishes, etc.
3. Fat-free-labelled products represented 2.2% of the value of sales of all pre-packaged food-product categories tracked by ACNielson (i.e., both those categories with fat-free-labeled products and those without).
4. Better for You Performance Report, ACNielsen, 1997 & 1998
5. New products may include both completely new products and products that have undergone a description or format (e.g., size or flavor) change linked to a new Universal Product Code - UPC.

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Date Modified: 2005-04-19		Important Notices
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