December 24, 1998

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

Module 2: Industry Survey

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Executive Summary

1. Introduction

As the second 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 food-industry survey was carried out. The objectives of the survey were to assess the impacts of the change in the definition of fat-free on industry product-development, sales, marketing, investment, job-creation and export activities. (The first component of the project was a market survey carried out by ACNielsen; see Module 1).

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

Working collaboratively with 10 food-industry associations, a questionnaire was developed and mailed to 274 food-processing companies in Canada (these associations will be sent this draft report for review and comment). In addition, a sample of five companies known to have an interest in the fat-free issue were interviewed in more depth.

3. Findings

3.1 Response Rate

For this type of survey, the response rate was excellent: 72 (26%) of the 274 firms that were sent the questionnaire responded to it.

3.2 Extent to Which the Fat-Free Claim is Being Used

The majority of respondents (51%) said they do not use the claim fat-free on any of their products. Firms in the meat/poultry/seafood business (65%) were the most likely to say none of their products are labeled fat-free.

In order of frequency, reasons mentioned for not using the claim on fat-free or potentially fat-free products were: consumers know some products are naturally fat-free and no claim is necessary; slowing or non-existent market demand; cost/feasibility hurdles in relation to packaging, labeling, marketing and/or advertising; and technical or regulatory barriers to product development.

In an interview, one company representative indicated his/er firm has opted to continue using the claim ultra low fat on some of its products to avoid the packaging/labeling costs of re-labeling these products fat-free; especially since, in their view, while there is still considerable room for growth in the fat-free category, the crest of the wave in the market has passed. Furthermore, this firm contends that for some products known to contain fat, consumers accept the claim ultra low fat more readily than fat free.

Still, a large number of respondents – 27 in all (38%), indicated that at least some of their products that would qualify for the claim fat-free are labeled as such. The manufacture/marketing of fat-free-labeled products did not appear to be related to a firm's ownership (Canadian versus foreign), size or percentage of sales exported, nor to whether a firm conducts R&D in Canada.

In personal interviews, representatives of two firms said the new definition of fat-free makes it possible to clearly identify fat-free or nearly fat-free products to consumers in simple language that they notice, and can quickly and easily assess. On the other hand, two other firms said they strongly believe that the new definition of fat-free is misleading to consumers and should not be used.

3.3 General Market Effects

The largest percentage of respondents (49%) said the market for fat-free products has grown somewhat in Canada; a further 6% said it has grown significantly. Seventeen percent said the market has remained the same, while 8% said it has declined somewhat.

The most frequently mentioned growth categories for fat-free were dairy products, followed by snack foods, bakery products, salad dressings/mayonnaise and luncheon meats.

Representatives of two different firms, each of whom was interviewed in the industry survey, said they believe that by waiting so long to change its definition of fat-free Canada missed the big growth period in the market – had the definition been changed 18 months to 5 years earlier, there would have been many more fat-free products developed and marketed in Canada, and companies would have been able to take more advantage of marketing opportunities and experience more growth in sales. Nevertheless, both these firms believe there is still a consumer need and demand for fat-free-labeled products and that the market for them will continue to grow.

The vast majority (77%) of respondents said fat-free is somewhat or very effective as a marketing tool.

One of the firms interviewed said they had used the claim ultra low fat, but switched to fat-free when the definition was changed because they found the meaning of ultra low fat was confusing to consumers – people tended to perceive it as a synonym for low-fat or lite. This firm found the marketability of its products improved immensely upon changing the claim to fat-free.

3.4 General Business Effects

Fifty-four percent of respondents to this survey said the change in the definition of fat-free has had a neutral or no effect on their business in Canada. However, 33% said that the change has had a somewhat or very positive effect. Among those respondents with some fat-free-labeled products on the market, the percentage attributing a somewhat or very positive effect to the change in the definition rose to 63%. Only two firms said they have experienced a somewhat negative effect. None said they have experienced a very negative effect.

In personal interviews, three firms said that under the previous definition of fat-free, in certain product categories such as cheese, ice cream and meats, it was impossible to formulate products with good taste and mouth feel. Under the new definition, it is possible to formulate palatable “fat-free" products.

Smaller firms were less likely to indicate that the change in the definition of fat-free has had a positive effect on them; only 14% said they have experienced somewhat or very positive effects. This is in contrast to 37% and 46% of medium- and large-sized firms.

Dairy firms (66%) and companies in the biscuit/bakery/confectionery/snack-food business (50%) were the most likely to say the change in the definition of fat-free has had a somewhat or very positive effect on them. Six firms said the change has had a very positive effect on their business: two dairy, one bakery/biscuits, one confectionery, one other processed food products, and one meat. One meat firm experienced very positive effects; however overall, firms in the meat/poultry/seafood industry (20%) were the least likely to have felt somewhat or very positive effects.

3.5 Specific Business Effects

3.5.1 Sales

Twelve respondents said fat-free-labeled products make up less than 1% of their overall sales. Eight firms, however, reported fat-free-product sales that were considerably higher than that (5-35% of overall sales). Five of these firms were Canadian-owned and three were subsidiaries of multi-nationals.

Of the 27 respondents who said at least some of their products were labeled fat-free, 55% said their sales had increased somewhat or significantly since the definition of fat-free was changed; 22% said their sales had remained the same, and 4% said sales had declined somewhat.

One of the company representatives interviewed said holding true to his/er company's principle of not using the claim fat-free has reduced the firm's market share in comparison to competitors.

The percentage of firms who said sales had increased somewhat or significantly was higher for medium-sized companies (66%). Dairy firms (85%) and firms in the biscuit/bakery/confectionery/snack foods business (64%) were more inclined to say their sales had increased somewhat or significantly, than firms in the processed fruits/vegetable (29%) and other food products (20%) businesses. A lower (than the survey average) percentage of the firms in the meat business (40%) also said their sales had increased somewhat or significantly.

In personal interviews, two firms said that, in their view, foreign-owned firms are probably experiencing "first-mover advantages" in the marketplace. Because fat-free is a research-driven category, the new definition has enabled subsidiaries of multinationals to build on the innovations, R&D and expertise already attained by their U.S. parent firms. These companies have been able to follow the lead of their parent firms, using their learnings as a basis for modifying their formulae in Canada. Moreover, with the parent firm already having done the early/basic research, the Canadian subsidiaries can make their research more effective. This reduces these firms' relative costs and enables them to get more products into the marketplace sooner at a better price.

Yet, a larger percentage of the Canadian-owned firms (57%) than the foreign-owned firms (43%) surveyed said their sales of fat-free products had increased somewhat or significantly. Moreover, while 19% of Canadian-owned companies said their sales of fat-free products had increased significantly, none of the foreign-owned firms said their sales had increased significantly.

The biggest sales-growth areas for fat-free products, as seen by survey respondents, were:

• Dairy products(e.g., yogurt, sour cream, skim milk, egg nog, and frozen yogurt)
• Confectionery products(e.g., fruit snacks, jellied boxed confections, hard candies)
• Ready-to-eat shelf-stable puddings
• Snack foods(e.g., pretzels)
• Dehydrated soups and stock mixes
• Processed fruit products
• Luncheon meats and wieners

In this survey, increases in the number and sales of fat-free products after the definition change tended to be attributable to both existing products given a fat-free claim because they became qualified for it after the definition change, and new or re-formulated products; however a higher percentage of the growth in reported sales seemed to be coming from new product development/re-formulation than from simple re-labeling.

Reported growth in sales of fat-free-labeled products tended to be mostly incremental. Six respondents said overall sales had increased by the full amount of the fat-free product-sales increase. Five said that overall sales had increased, but a small percentage of non-fat-free product sales were eroded. Only one said overall sales did not increase at all.

An interview with one firm suggested that it may be too early for companies to tell how much their new and re-labeled fat-free products will increase in sales; nevertheless this particular firm is indeed expecting an incremental increase. Another firm said there are separate market segments for fat-free versus lite-type products, and there is a strong need and demand for both types. Both markets have been growing; in fact, this firm said “better-for-you" products, including fat-free, are out-performing their regular counterparts in most cases. Yet at the same time, this firm contends that sales of regular products have not been eroded significantly by sales of fat-free products. On the other hand, one of the firms that does not use the claim fat-free (because they believe it is misleading to consumers) said holding true to this principle has hurt its sales; but however misleading the claim may be, they say their competitors have found it to be successful.

3.5.2 Trade

Only two respondents indicated that their exports of fat-free-labeled products increased after the definition was changed. It appears that few were exporting fat-free products at all, either before or after the change in the definition of fat-free.

The number of respondents importing fat-free labeled products to Canada from a parent or other firm was small. Only three (all subsidiaries of multinationals) said that their imports in this regard have increased (somewhat) since the definition change.

3.5.3 Investment

Of the 27 firms indicating that they manufacture/market at least some fat-free-labeled products, most said they had made only minor investments in product R&D (41%), packaging/labeling (41%), and advertising/marketing (37%) since the definition of fat-free was changed. Furthermore, the vast majority of these respondents indicated that they had made no investments whatsoever in construction (85%) or plant/equipment (74%).

However, nine (33%) respondents said they had made moderate or major fat-free-related investments. Six of these firms were Canadian-owned and three were subsidiaries of multinationals. Two were small (annual sales of under $50million), five medium-sized (sales of $50-$250million), one large (sales of $250million to $1billion) and one very large (sales greater than $1billion).

The firms making moderate or major investments in fat-free seem to be dominated by those in the dairy sector, although there were also firms in the confectionery, other food products, meat products, snack foods, and prepared flour/cereal mixes business.

Overall, four firms (18%) said they had made moderate or major investments in product R&D, seven (30%) in packaging and labeling, and six (27%) in advertising and marketing. None said they had made any investments in construction, although one said they had made major investments in production equipment. The majority of these firms said the investments they have made were fully or mostly incremental.

Those respondents who had made major or moderate fat-free-related investments tended to give more positive responses with regard to the effect the change in the definition of fat-free has had on their firm, the growth of the fat-free product market, and the effectiveness of fat-free as a marketing tool. Furthermore, these firms are using the claim fat-free on more of their products that qualify for it and tend to have experienced growth in sales.

One of the firms interviewed said they have invested heavily in additional new and re-formulated product R&D, packaging/labeling, and marketing/advertising. Another company interviewed, however, indicated that its fat-free related investments have been minor, and have involved mainly packaging changes and R&D work; nevertheless, this firm said these investments would not have taken place had the definition of fat-free not been changed. The firm has not actively promoted its new fat-free products, but is relying on the fat-free claim itself to boost sales. They are confident of success. Another company representative who was interviewed also indicated that his/er firm's fat-free related investments since the definition change have been minor, mostly packaging/labeling changes and some promotional investments; much of the R&D work had already been done.

One of the company representatives interviewed said his/er firm has pulled back on investments because holding true to his/er company's principle of not using the claim fat-free has reduced the firm's market share in comparison to competitors.

3.5.4 Jobs

Only two firms indicated that the fat-free change has resulted in any job creation in their firms. One said there are fifteen, and another four new jobs in their firms since the change in the definition of fat-free. The first firm said all of its fat-free-related jobs and the second said none of its jobs would have been created, had the definition of fat-free not been changed. One firm in the survey (in the prepared flour/cereal mixes and/or prepared cereals business) said it was able to preserve jobs (three) because of the change in the definition of fat-free. None of the respondents indicated that any jobs were lost in their firm because of the change in the definition of fat-free.

3.6 Future Impacts

3.6.1 Investment

Approximately one-third of all respondents said they are not likely to make any fat-free-related investments in R&D, packaging/labeling, or advertising/marketing in the future. Furthermore, the majority said they are not likely to make investments in construction (63%) or plant/equipment (54%).

However, 42% percent of all respondents and 52% of respondents currently manufacturing/marketing fat-free-labeled products, said they are likely to make minor or moderate investments in R&D. Fifty-three percent said they expect to make minor or moderate investments in packaging/labeling. Six percent of respondents said they are likely to make major investments in marketing/advertising, and 32% said minor or moderate ones. Fourteen percent said they expect to make minor or moderate investments in plant/equipment in the future; one firm did say major plant/equipment investments are likely.

3.6.2 Jobs

A majority of respondents (58%) said there is no likelihood of the new definition of fat-free having any influence on job creation in their firm in the future. Firms that had already made moderate or major fat-free-related investments (44%) were the most likely to say they expect minor or moderate increases in the number of fat-free-related jobs in their firm in the future.

3.6.3 Trade

A majority of respondents (49%) said the new definition of fat-free will not likely result in increased exports in the future. Eighteen percent said they may incur minor or moderate increases. One of the firms interviewed was confident that there will be export opportunities for fat-free products in the near future.

None of the respondents indicated that major increases in their imports (i.e., from a parent or other firm) are likely, although one foreign-owned firm said moderate increases might occur and five said minor increases might occur.

4.O bservations and Conclusions

According to this survey, there appear to be many firms in Canada using the fat-free claim to market their products – 38% of those surveyed said they are using the claim. The vast majority, whether using the claim or not, believe that fat-free is effective as a marketing tool. Furthermore, most believe that the market for fat-free products has grown at least somewhat since the change in the definition of fat-free, particularly in the dairy products, snack foods, bakery products, salad dressings and luncheon meats areas.

While most of the firms surveyed say the actual change in the definition of fat-free has had a neutral or no effect on their business, one-third say it has had a somewhat or very positive effect on them. With the exception of two firms in the meat business, no-one said it has had a negative effect.

Among companies using the fat-free claim, more than half say their sales of fat-free-labeled products have increased, and this increase appears to be fully or mostly incremental.

Most of these firms have made only minor investments in product R&D, packaging/labeling, and advertising/marketing; and virtually none in construction or plant/equipment. However, a number of them (five Canadian-owned and three subsidiaries of multi-nationals) have indeed made moderate or major fat-free-related investments and, again, these appear to be incremental.

Medium-sized, Canadian-owned firms, particularly those in the dairy and biscuit/bakery/confectionery/snack foods business, seem to be the ones that have had the most success in the fat-free market to date. With some exceptions, companies in the meat/poultry/seafood business tended to be less positive.

According to this survey, the change in the definition of fat-free has neither increased companies' exports nor resulted in a significant increase in competition from imports. However, a minority of firms predict their exports will increase somewhat in the future.

A few new jobs seem to have resulted from the change in the definition of fat-free, but not many. There may be some new jobs created in the future; however, any increases are likely to be minor in the whole scheme of things. Fat-free is a research-driven category, though, and if changing the definition of fat-free has and continues to foster innovation and technology adoption by Canadian firms in the value-added food-processing industry, that probably bodes well for future industry competitiveness and job preservation. In a global marketplace, it is important to have firms that can satisfy Canadian demand for new products; otherwise, these demands will be satisfied by foreign innovators and early adopters (through imports).

In general to date, it appears that the effects of the change in the definition of fat free have been relatively small but positive. It has probably not been long enough for the full effects of the change in the definition of fat-free to have occurred. There are still firms in the early and late majority to enter the marketplace. Further research and tracking 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 Industry Survey has Shown 14 Months After the Change

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Date Modified: 2005-04-19		Important Notices
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