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Summer 2006.osec.ch
The U.S. Food IndustryOpportunities and Challenges for Swiss Companies.
H. E. Butt Grocery Co. 10,422 272 276 H.E. Butt Food Store, H.E.Butt Central Market
Super Valu, Inc. 8,633 619 617 Save A Lot, Cub Foods, Shoppers Food Warehouse
Winn-Dixie Stores, Inc. 7,092 563 943 Winn-Dixie, Save Rite
Store Format Store Size (sqft)
Ann. Sales ($ million)
Number of SKUs
SKUs (Stock-Keeping Units)
Traditional Store Formats
Conventional Supermarket 25,800 7.8 22,000 Full line of dry groceries, canned food, meats, produce and non-food items. Annual sales reach a minimum of $2 million.
Superstore 40,000 20.0 25,000 Full line of dry groceries, canned food, meats, produce. May include in-store banking, video rental, florist shop.
Food/Drug Combo 55,700 22.0 52,000 Combination food store and full-line drug store under one roof, common check-out. One third of space is reserved for non-food items.
Limited Assortment Supermarket N/A N/A <2,000 Smaller than conventional format with very limited services.
Other (Small Grocery) Stores <5,000 <2.0 N/A Small corner grocery store with limited selection of staples and other convenience foods.
Specialty/Gourmet Retailers N/A N/A N/A Stores specializing in a specific food category, e.g. ethnic/international, health focused or organic, locally grown or produced.
Non-Traditional Formats
Supercenters 170,000 51.0 N/A High volume hybrid format of a supermarket/drug-store combination and discount store. Includes grocery products,(typically 40%; nonfood items, electronics, sporting goods. Banking, dry cleaning, restaurants, etc.
Wholesale Club 135,000 50.0 N/A A membership retail/wholesale hybrid with a limited variety of products in a warehouse environment. 60% to 70%general merchandise, health/beauty care products. Grocery makes balance. Merchandise and grocery sold in bulk.
Dollar Stores N/A N/A N/A Often found in urban areas or strip malls; traditionally sell staples and knickknacks. Now they sell 20% to 80% grocery and consumable items at aggressively low prices.
Convenience Stores 3,000 N/A N/A Compact, drive-to store offering a limited line of high convenience items, dry groceries, small selection of perishables (dairy and prepared foods) and nonfood items. >50% sell gasoline and fast food. Long opening hours, easy access.
Drug Stores N/A N/A N/A Prescription-based drug store with at least 20% of total sales from consumables, general merchandise and seasonal items.
Figure 8: Traditional and Non-
Traditional Store Formats.
Note: Store Size, Annual Sales
and Number of SKUs present
Averages of the respective
Store Formats.
(Sources: Willard Bishop
Consulting and ERS/USDA).
SKU = Stock-Keeping Units, i.e.
items kept in stock.
14 The U.S. Food Industry 15The U.S. Food Industry
that are used together by the consumer are being rearranged and
featured in the same aisles, for example breakfast foods such as ce-
reals, syrups and pancake mixes are grouped together. More than two
thirds of supermarkets hold cooking demonstrations in their stores for
their patrons to be able to taste various foods and expand their coo-
king talents. Natural and organic foods may be placed in the center of
the store instead of locating them around the periphery of the store. It
should be noted though that such rearranging of products may affect
the manufacturers and the cost for slotting fees. More self-scanning
stations address the customer’s time issues.
Traditional supermarkets have also begun to look at new concepts
and experiment. “Finding One’s Niche” has become most important
in their search for their identity. New store formats and concepts are
their latest approach to migrate away from the “middle position” to
strengthen their position and keep a competitive edge.
• Safeway of Pleasanton, California changed its identity and rebran-
ded itself in 2004 by launching its new Lifestyle concept. Safeway
embarked on a year long marketing campaign that highlighted its
new Lifestyle stores which feature a large selection of natural and
organic foods, an impressive selection of perishables, a full-service
meat counter, bakery, floral design center and a sushi and olive bar.
142 Lifestyle stores opened their doors in 2004 and plans for ano-
ther 300 were ready to open closely thereafter. Lifestyle stores allow
for flexibility to give the individual store locations room to tailor their
assortments to their particular location. Safeway also launched its
own private label brand to create a proprietary experience nowhere
else found. Safeway’s Lifestyle stores are able to compete with
upscale and supercenters as well.
• Supervalu built new stores that offer low-price natural/organic
product and represent direct competition to the high priced natu-
ral/organic stores of Whole Foods and Wild Oats Markets. These
new stores operate under the name Sunflower Market. The first
Sunflower Market opened its doors in January 2006.
Figure 16: Annual Sales of Specialty Food Importers by Channel
(Source:Mintel/Market Tools)
According to Specialty Food Magazine, distributors are the preferred
sales channel of importers. More than 50% of all imported specialty
food products go to market through a network of distributors; one
third is shipped directly to retailers.
4.5. Trendspotting.Across America the leading and most successful Chefs are focusing
on their customers, what they order, what they eat and what they dis-
like on a daily basis. Aside from their talents, their closeness to their
clientele is the key to their success and their being the indiscriminate
trend spotters in the U.S. food scene.
Food trends that will establish themselves often start on the West
Coast and move eastwards according to food marketers’ observa-
tions. Seattle, Portland and San Francisco are the leaders in disco-
vering what may be next on the restaurant scene. Well-known food
journalist, culinary expert and chef Nick Zukin, is one of the trend
spotters who is at home in the world of gourmet dining, where a
strong demand in fine food paired with the highest level of service
has been manifesting itself for some time. He talks about the newest
observations and developments in the Northwest corner of the U.S.,
which also happens to be the birth place of Starbucks and James
Beard2.
Chef Zukin mentions that Portland is adopting Chef Alice Walker’s
2 The James Beard Foundation is a national not-for-profit organization based in New York City. The organization is dedicated to fostering and furthering the practi-ce and appreciation of the culinary arts in America. The James Beard Foundation Awards are the nation’s preeminent honors for culinary professionals.
20 The U.S. Food Industry 21The U.S. Food Industry
simple dishes that often feature organic, locally grown ingredients of
highest quality, and also that Caribou Coffee Company, recently ra-
ted number one for its Columbian coffee, has created a culinary R &
D facility. Its current Chef Kurt Stiles, together with food scientists,
manufacturers and technologists, has the task to create aseptically
packaged (shelf-stable) products for its mass retail and upscale gour-
met stores. Chef Stiles predicts that shelf-stable products are the
future and consumers will learn to accept aseptically packaged pro-
ducts (source: Prepared Foods).
Chef Zukin also points to the trend of artisan foods. A growing num-
ber of individuals turn their passion for gourmet food into a business.
Across America, artisan shops open their doors and offer their cli-
entele products that range from the finest handmade bakery goods
and confectionery to savouring pates and gourmet cheeses with ex-
citing new tastes. For example, Harvest Moon is a domestic washed-
rind cow’s milk cheese which tastes like Pont L’Eveque, and Cocoa
Cardona is a semi-soft goat’s milk cheese rubbed with cocoa. Only
ingredients of impeccable quality are being used.
Alice Walker, executive chef and owner of famous Chez Panisse in
Berkeley, California, uses only the purest and freshest ingredients for
her menus at her top restaurant. She has been a strong supporter of
farmers’ markets and sustainable agriculture. In 1996 she established
Chez Panisse Foundation to help support cultural and educational
programs to foster a deeper connection to growing, cooking and sha-
ring food. (Walker was one of the founders of the Edible Schoolyard
program to establish healthy eating habits at schools). Walker is also
the author and co-author of several cookbooks including a children’s
story and cookbook, and was the recipient of the James Beard
Humanitarian Award in 1997.
Jean-Georges Vongerichten, the “Enfant Terrible” of modern
French cooking was born and raised near Strasbourg, France, and is
one of the leading chefs on an international scale. His culinary vision
and bold approaches to innovation have consistently set new stan-
dards and turned him into a superb trendspotter. The opening of his
restaurant Jean-Georges in the Trump International Hotel & Tower
in New York earned him an immediate four-star review and several
of the most prestigious awards. In one single year he received three
James Beard Awards.
Chef Thomas Keller originally from Southern California has been
known for his innovation and dedication to the culinary scene. His
restaurant acquisitions included one of the top restaurants in the
U.S., the French Laundry in Yountville in the heart of Napa Valley,
in 1994. Recently he opened Bouchon (Artisan) Bakery, also in
Yountville, California. Keller has also moved closer to the world of
wines. Modicum, a Napa Valley Cabernet wine, was developed with
The French Laundry’s influence. His French Laundry Cookbook has
brought him national and international recognition and many awards.
Chef Norman Van Aken has been following America’s evolution in
its eating habits and cooking methods for decades. He is the crea-
tor of Nuevo Latino cuisine, a blending of European “haute cuisine”
with South American and Caribbean Islands elements. He was also
a recipient of the James Beard Award. Van Aken owns Norman’s
Restaurant in Coral Gables, Florida. His observations confirm a con-
tinuing and growing interest and demand in ethnic foods and innova-
tive cuisine with exotic flavors.
4.6. Products.
Alternative/Energy DrinksThis category of mostly carbonated drinks contains a combination
of caffeine, sugar and specific ingredients such as ginseng, guarana,
inositol, vitamins B6 and B12 to provide quick bursts of energy. It dif-
fers from sports drinks that are meant for recovery after a strenuous
workout. Energy Drinks have been readily adopted by the “on-the-
go” consumer and Generation Y. They are also very popular as a
mixer in alcoholic beverages at home parties as well as in night clubs.
The company that launched this type of beverage was Red Bull; it has
remained the market leader. Pepsi offers two brands in this category,
so does Cadbury Schweppes. This market is expected to reach $2
billion in the not too far distance (ACNielsen– Trends).
CheeseArtisan and farmstead cheeses are and remain a favorite food of the
American consumer. In 2004 per capita consumption was 31.2 lbs,
an all-time high, and sales climbed to $11.9 billion. Cheese is an all-
time favorite food and growth is expected to continue. Unusual tasty
ready-touse grated cheeses and ethnic-style cheese blends find their
way into the kitchen to add pizzazz to a bland menu. Americans di-
ning out upscale have become accustomed to the cheese course
as a unique ending of a meal. This trend has been rapidly expanding
into home entertaining and casual dining. Cheeses are perceived as
a natural and healthful food item and the latest introduction has come
in the form of organic cheeses and cheeses that feature exciting new
flavors. Artisan cheeses are enjoying steady growth, further supported
by chefs creating menus with the finest foods available and a rise in
regional cuisines. Consumers have also discovered the use and con-
venience of natural cheese spreads and uniquely flavored cheeses in
sandwiches or served as a snack. Their choice ranges from Brie to
smoked Cheddar, aged Gruyere, to piquant aged Provolone and Tete
de Moines. New variations feature rinds rubbed with smoked paprika,
cumin, coriander, cocoa or cinnamon.
YogurtYogurt is in great demand. It is sold in multipacks, individual cups,
liquid form and squeeze tubes for spoon-free eating. While most top
brands of various dairy products have been experiencing a healthy
growth rate, yogurt has experienced dynamic sales showing a 7.7%
growth rate within the past year and a continued upward trend is
expected. Promotions are based on better-for-you, probiotic bac-
teria, fiber, vitamins and minerals. Products are made appealing to
adults in general, to baby boomers and kids in particular. Cultured
dairy products are staples in the daily diet and in meal preparation of
the Hispanic population. Organic Stonyfield Farm has been moving
towards the top faster than any other brand. One of their new pro-
ducts is YoBaby, a spoonable yogurt line for small children, as well as
a drinkable variation for infants and toddlers (Mintel). Yoplait Original
is the market leader, while private label yogurts take second positi-
on. Yogurt and yogurt drinks have established themselves as healthy
snacks for the wellness conscious consumer and manufacturers are
making sure that all demographics are taken into account. Growth for
2006 is expected in the 5% to 7% range.
Chocolate and Non-Chocolate ConfectioneryPremium & Gourmet chocolate represents approximately 10% of the
confectionery segment and typically contains as much as 80% cocoa
solids compared to low-cost chocolate generally consisting of 50%
to 70% sugar. The savvy consumer has discovered premium and
gourmet treats for special moments of indulgence, be it organic, non-
organic or natural. Dark chocolate has become the favorite after the
publication of studies pointing to its health benefits such as its antioxi-
dant and heart-healthy vasolidation effects. According to Packaged
Facts, chocolate confectionery sales accounted for $15.1 billion in
2004. Organic chocolate sales took the lead and are estimated at a
growth rate of 30% on an annual basis. Non-chocolate confections
reached $7.8 billion, up 1.6%. Non-traditional shapes, smaller, bite-
size, and taste are key market drivers together with attractive “on-
the-go” packaging. Products specifically for kids have been gaining
market share. It should be noted however that the non-chocolate
segment showed diminishing sales in 2004 compared to previous
years and further decline is expected due to consumers’ mounting
dietary concerns.
Super Premium and Premium Ice Cream, Frozen Desserts and Frozen NoveltiesThe U.S. is the world leader in the production of ice cream and fro-
zen desserts. The USDA’s published figures show an annual produc-
tion of 1.6 billion gallons in 2004. Despite health consciousness, the
American consumer has continued to associate ice cream with indul-
gence and has shown little interest in light (50% less fat) ice cream.
Dreyer, one of the four top domestic ice cream manufacturers, has
been the only success story with their technological breakthrough
of “slow churned”, making light ice cream that rivals in taste any
full fat premium or super premium ice cream. According to Mintel
International, over 90% of U.S. households purchase at least 4 quarts
of ice cream per month on average.
Ice cream and frozen desserts constitute a $21+ billion market; this
includes retail (approximately one third of total sales) as well as food
service channels. Frozen novelties were purchased at a 20% higher
rate by households with children. Growth in this mature market de-
mands constant innovation. Private label has been gaining market
share with supermarkets and mass merchandisers discovering the
value of ice cream sales. Private label sales projections suggest a
growth rate of 7% through 2008.
Natural/Organic/VegetarianOrganic and natural foods have expanded phenomenally and are joi-
ning the upscale world of gourmet with unique products and new tas-
tes. They are as well gaining market share in school vending machines
thanks to Stonyfield Farm partnering with distributor United Natural
Foods Inc. and school and university communities. Organic products
offered in the vending machines range from yogurt to smoothies, soy-
milk, chocolate and string cheese. Natural products include pita and
soy chips, nuts and an assortment of snacks. Functional foods come
in with fortified yogurt and yogurt drinks, cereals with heart-health
claims and products specifically formulated for women to name a few.
With more retailers having adopted vegetarian foods into their seg-
ments, sales have risen sharply. Growing variety, interesting tastes
and a welcome menu change for the healthconscious consumer en-
sure this trend to continue.
CondimentsAs there are no clear guidelines what condiments encompass, Mintel
came up with their own definition (in order of market share): condi-
ments comprise sauces, mustards and horseradish, jams, jellies and
spreads, salad dressings and (olive) oils. The time-pressured two-
income households have been integrating the use of condiments in
their daily meals and in entertaining. The higher educated consumer
shows an eagerness to expand his culinary knowledge and exhibits a
passion for handmade unusual products. Convenience and creative
applications have been winning forces. Mintel’s research revealed an
18% increase in sales between 1998 and 2003 alone. The $3.2 billion
market holds promise for further robust growth through innovation,
bold flavors and attractive packaging. Global and regional influences
are guiding this segment and organic and artisanal products have
been rapidly gaining market share.
22 The U.S. Food Industry 23The U.S. Food Industry
SnacksSnack foods are the daily companion of the U.S. consumer and their
purchase parameter ranges from gas stations to food stores, movie
theaters all the way to the most upscale specialty and gourmet stores.
Snacks can consist of a healthy energy bar, dried fruits, a handful of
nuts and raisins, but it can also include a range of other foods such
as a small serving of cheese, chips, pretzels, patés or a small frozen
item such as pizza. Sales of sweet and salty snacks grew at a 4% rate
in the past two years and reached sales of approximately $27 billion
according to Packaged Facts.
Among the consumers’ favorites are healthy (low in sodium and ab-
sence of saturated fats) high-protein and fiber-rich nuts including the
more expensive almonds. Conventional snacks are experiencing a
transformation away from containing unhealthful ingredients, espe-
cially transfats. Snack producing companies are accentuating posi-
tives in nutritional labeling and are experimenting with variety, adding
ethnic components and new flavors. Small-batch, conveniently pa-
ckaged gourmet snacks featuring new unusual flavors are a winner
and are driving growth.
Whole GrainsNew studies have revealed the benefits of lowering the risk of heart
disease and reducing weight by intake of whole grains. The consumer
including health-conscious parents are looking for high quality, tasty
whole grain crackers with zero partially hydrogenated oils content
(transfats linked to heart disease). Whole grain and organic cookies
are climbing the list of favorites at a fast rate. According to Mintel/
SPINS, sales for natural and organic cookies have shown a 51%
increase within the past year. Products in this category range from
the traditional whole grain breads and buns to innovative whole grain
cookies, waffles, brownies, pizza dough and tortillas. Whole grain
product sales accounted for $4.79 billion in 2004 and are predicted
to reach approximately $7.5 billion by 2009.
at $1.7 billion (Source: Standard & Poor’s). Institutions comprise all
noncommercial establishments such as schools, colleges, hospi-
tals and extended care facilities, vending areas, plants and offices,
correctional facilities and transportation (trains, cruise ships, and air-
planes) and others. Of those, clubs, sporting and recreational camps
and transportation were estimated to show the highest growth rate
with 5.2% and 9.5% respectively.
This report will concentrate on the commercial side and focus on
high-end restaurants.
Estimated projections for the U.S. foodservice industry show a growth
rate of 5% for the industry as a whole as well as for the commercial
sector in particular.
5.2. Restaurants.Continued rising household income and the convenience of eating
out with a large number of reasonably priced restaurants to choose
from is solidifying the fact that eating out remains an integral part of
daily life in the U.S. According to the National Restaurant Association
the restaurant industry experienced solid revenue growth in 2004.
Operators of high-end restaurants in tourist areas also profited from
a favorable currency exchange, as the weak dollar made vacationing
in the U.S. more desirable. Nevertheless, supply shortages caused
by diseases (BSE) and severe weather spurred wholesale food price
increases by 5%. This price hike was much higher than in preceding
years and, together with rising energy costs, severely impacted pro-
fits. As a consequence many restaurants were forced to raise their
menu prices to ease margin pressure.
The restaurant industry defines two main segments: full-service re-
staurants and limited service (fast food) restaurants which again
are divided into chains and independents (the Nation’s Restaurant
News, an industry trade magazine). Currently there are an estima-
ted 294,000 independent restaurants and 234,000 chains in the U.S.
Together, they represent approximately 72% of all restaurants nation-
wide and they also claim approximately 58% of revenues and half of
all patrons’ visits. Independent restaurants have the most locations in
the Northeast. The Southeast U.S. is predominantly chain-oriented,
and the West favors Asian and Mexican cuisine.
The publicly traded companies dominating the restaurant industry
range from fast-food operators (McDonald’s Corporation, Wendy’s
By Claudine M. Haeni, Swiss Business Hub USA
5.1. General.The commercial and institutional food industry in the U.S. is com-
monly referred to as the foodservice industry. In 2005 the foodservice
industry as a whole accounted for an estimated $486.1 billion in sa-
les. According to the U.S. Department of Agriculture food away from
home as a percentage of total food expenditures has steadily risen,
from an estimated 26% in 1960 to nearly 50% in 2004. Forecasts
predict that by 2010 more than 53% of every food dollar will go to-
wards food consumed away from home. This figure is supported by
economic trends and mounting time pressure resulting from a rise in
Figure 25: Top Three Functional Food Categories in the U.S. in 2005
in U.S. Dollar Billion (Source: Natural Food Merchandiser July 2005)
7.2. Definition and Regulations.
Functional Foods are foods or dietary components that may provi-
de a health benefit beyond basic nutrition. They usually exceed the
minimum daily nutritional requirements of an individual. They can be
a conventional whole food in its natural state or a novel food where
a specific ingredient was increased, or in some instances decrea-
7. The Functional Food Sector.sed, or removed. Examples of whole foods are fruits and vegetables
and grains which are naturally high in content of phytochemicals and
common examples of fortified or enhanced foods include
• Cereal and bread with added isoflavones
• Fruit juices with herbs that have alleged immuno-enhancing pro-
perties such as Echinacea
• Margarine with added phytosterols to reduce cholesterol
• Salad dressing with omega-3 polyunsaturated fatty acids.
The eating habits of two thirds of American consumers are affected
by concerns about weight as well as health issues foremost heart di-
sease, diabetes and osteoporosis. Fortified products promote health
benefits such as “Calcium helps build strong bones”. They do not
claim to prevent disease.
The term “functional food” is often used synonymously with the term
nutraceutical. For the purposes of this report, both shall be used here
to mean the same, although nutraceuticals are more correctly defined
as parts isolated or purified from foods and sold in medicinal forms
(powders, tablets or capsules). Examples are seaweed as a purified
marine source or ginseng powder derived from pressed plants. While
the U.S. Food and Drug Administration (FDA) has defined any spe-
cific food used for the prevention or treatment of disease as drugs,
the 1999 Nutraceutical Research and Education Act has defined nu-
traceuticals as a separate regulatory category which permits health
claims previously reserved for drugs only. As a rule, however, no
claims may be made without adequate scientific evidence.
The most well established and scientifically sound approach to la-
beling and marketing a functional food is through the use of FDA
approved health claims delineated by law under the Nutrition Labeling
and Education Act (NLEA) of 1990. The health claims authorized un-
der the NLEA are statements that describe a relationship between a
food substance and a disease or other health-related condition, i.e. a
“risk reduction” relationship. The law mandates that a health claim be
authorized in the labeling of FDA regulated products only if significant
scientific agreement among qualified experts exists about the validity
of the relationship described in that claim. Under the NLEA, compa-
nies petition the FDA to consider new health claims. Thirteen NLEA
health claims authorized by the FDA currently exist. Substantial clini-
cal efficacy and documentation are an important part of a company
petition submission to the FDA.
A provision in the FDA Modernization Act of 1997 (FDAMA) provi-
des an additional expedited process for manufacturers to use health
Specialty food distributors do not focus on natural and organic
foods but specialize in foods like foreign goods, ethnic foods, hard-
to-find gourmet items, kosher and various organic foods that may not
be available in the major supermarkets. The margin of these distribu-
tors averages about 32%.
6.8. The Foodservice Segment.
The food service segment currently accounts for approximately 4% of
total organic sales. Predictions call for an annual growth rate of 20%.
Organic menu offerings enjoyed an increase of 9% in 2005 and the
use of organic ingredients increased by 12% with meat, poultry, salad
greens, vegetables, legumes and breads being the most popular.
A survey conducted by Restaurants & Institutions in 2005 re-
vealed that 50% of the establishments have registered an increase in
orders for organic menu items within the past two years. In the fine
dining segment, almost two thirds offer organic menus. A fair number
of these restaurants make their purchases through local farmers and
co-ops to obtain the highest quality of products possible and simulta-
neously support local organic produce, dairy and meat farmers. The
restaurants’ patrons are willing to pay a premium for organic menus
and enjoy the frequent changes of the menus that come with the
seasonal availability of the various products.
In the institutional food service segment a certain number of opera-
tors for universities and colleges aim at offering 100 percent orga-
nic menus. Restaurant chains like O’Naturals and Panera have been
following suit, but their menu schedules are challenged by frequent
shortages of supplies.
According to a survey conducted by Natural Food Network the gene-
ral industry consensus is that organic products are going to be sold
everywhere within the next two decades and that the average U.S.
household will not only buy organic food, but also reach for organic/
natural personal care products, household cleaning agents and or-
ganic clothing.
34 The U.S. Food Industry 35The U.S. Food Industry
claims if such claims are based on current published authoritative
statements from pre-defined federal scientific bodies. These bodies
include only those “with official responsibility for public health pro-
tection or research relating to human nutrition” such as the national
Institutes of Health, the Centers for Disease Control and Prevention,
and the National Academy of Sciences.
7.3. Consumption Trends.Food Business News Magazine released the results of an on-line sur-
vey conducted by The International Food Information Council (IFIC)
in November 2005 to gain insight into consumers’ attitudes toward
food for health. Of the 1,060 participants (age 18 up), 83% confirmed
their interest in expanding their knowledge and only 5% showed no
interest.
Below figures show the results of ACNielsen’s twice-yearly global
online consumer survey, the largest with over 21,100 participants
worldwide. The survey conducted in November 2005 gives insight
into consumers’ choices of certain regularly bought functional foods
in the U.S. and globally.
Functional Food Purchased Regularly % U.S. % Global Average
Whole Grain, high Fiber Products 50 40Cholesterol reducing Oils and Margarines 36 31Fruit Juices with added Supplements/Vitamins
29 29
Yogurts with Acidophilus Cultures/Probiotics
21 25
Milk with added Supplements/Vitamins 25 18Bread with added Supplements/Vitamins 24 17Fermented Drinks containing good Bacteria
4 16
Soy Milk 8 14Cereal with added Folate 14 11
Figure 26: Percentage of Consumers who regularly buy Functional
Foods; by Key Category (Source: ACNielsen)
Disease-specific foodsAccording to the Food Marketing Institute, 40% of shoppers sought
out health and nutrition information in 2003 and frequently turned to
health professionals for advice on diets for specific health problems.
This trend has continued.
Since heart disease and maintenance of proper cholesterol level
rank among the most pressing health concerns in the U.S., choles-
terol lowering foods and beverages are appearing on retail shelves.
Coca Cola’s Heart Smart juice contains plant sterols while PepsiCo’s
Tropicana Essentials Healthy Heart orange juice is based on a nu-
trient bundling of potassium, vitamins B-6, B-12, C, E and foliate.
Especially geared toward women are soymilk products fortified with
vitamin A, C, E and omega-3s plus extra calcium.
Health claims for fish, plants and nut-based omega-3s have sparked
an upsurge in products containing Omega-3 such as Anchor’s Heart
Wise Omega-3 milk. Other heart-healthy drinks include White Wave
Silk’s Omega-3 fortified cholesterol-lowering soy milk. Healthy oils are
marketed by Heart Beat Foods’ Smart Balance Natural blend of ca-
nola, soy and olive oil fortified with vitamin E and Omega-3.
Calpis Company’s AmealPeptide™, designed to lower blood pres-
sure, addresses prehypertension which afflicts about 45 million
Americans. AMP-Activated Protein Kinase, by ABIC International
Consultants, is an enzyme believed to have a role in regulating appe-
tite and body weight.
Diabetics are likely to see an increasing variety of low-carb and
sugar-free products. South West Co. has added a low-carb dairy
milk drink to its line of health drinks which is ultra-filtered to remo-
ve lactose. Chromium Picolinate as food additive has recently been
petitioned with the U.S. Food and Drug Administration (FDA) to be
recognized as, among other claims, reducing insulin resistance and
Type 2 diabetes.
Significance of IngredientsConsumers are increasingly interested in learning about health-
enhancing food ingredients. The U.S. dairy industry has embarked
on ambitious programs to raise the awareness of consumers of the
health-enhancing effects of dairy products in reducing osteoporosis,
obesity and diabetes.
Other ingredients which are being promoted are marine-based
Omega-3 fatty acids, docosahexaenoic acid (DHA), and essential fat-
ty acids (EFA) from nuts, flaxseed and cranberries. Omega-3 and EFA
top the list of most-asked-for ingredients in the specialty supplement
category. Infant formulas fortified with DHA and Omega-3 make up a
rapidly growing segment of the functional ingredient market.
Additional functional food elements are lutein and zeaxanthan offe-
red by Roche, glucosamine and condroitin in ready-to-drink teas by
various suppliers and various teas fortified with peppermint, licorice,
or chamomile.
Functional Ingredients in DrinksSince 2003 Americans may have bought more bottled water than
beer or coffee. An especially fast-growing category of water is “ener-
gy water”, such as Hansen’s Energy Water containing ginseng, tau-
rine, vitamin B, electrolytes and glucose are a fast-growing catego-
ry of water. Figure 27 shows the consumer preferences for various
beverages.
Ajinomoto launched Amino Vital Ready-to-Drink as a single-serve
sports water and, a powder mix. Fruit water and soy water are being
marketed as well. Single-serve sparkling fruit juices are also showing
strength in the market.
Beverage PercentJuice fortified with Vitamins & Minerals 56Water fortified with Vitamins & Minerals 39Flavored Water 36Tea fortified with Herbals 34Tea fortified with Vitamins & Minerals 32Juice fortified with Herbals 27Drinkable Yogurt 26Bottles/Canned Smoothies 26Soy Beverages 25Water fortified with Herbals 22Organic Beverages of any type 21
Figure 27: Consumer Preferences for various Beverages
(Source: The Hartmann Group 2003)
Figure 28: Top Energy Drinks by Brand (52
Weeks October 2, 2005) (Source: IRI,
Inc. 2006)
Energy DrinksDespite strong gains for the past several years, the energy drinks
category shows no signs of slowing down. Targeted marketing pri-
marily addresses the young party-going crowd with these stimulant
drinks. The majority of these energy drinks contain more than 100
milligrams caffeine per 12 ounce container plus herbal extracts and
dietary supplements which makes them more potent than a 12 ounce
cup of coffee that contains on average 200 milligrams caffeine. This
has sparked some controversy and discussion among physicians.
Sales for 2005 topped $390 million according to Information
Resources, Inc. (IRI). Adding in sales at convenience stores and gas
stations, the two major sales channels for the young crowd, as well
as other outlets not tracked by IRI, and the category well surpasses
this figure.
Sales of non-aseptic energy drinks in food, drug and mass merchan-
dise outlets jumped a whopping 69.4% in 2005, while sales of non-
aseptic sports drinks surged 20.9% (IRI, 2006). A major reason for
this growth is that the energy drink category has expanded to include
all demographics, not just young males. A segment of the populati-
on catching the attention of energy drink marketers is women. Coca
Cola’s sugar-free Tab Energy will be offered in midsized 10.5 ounce
cans, available both individually and in four-packs.
Coca Cola’s flagship energy drink Full Throttle, which has been on the
market less than one year but already holds the category’s number
7 spot, is also expanding its reach among women as well as calorie-
conscious men with the launch of a sugar free version in later 2006.
A survey conducted by IRI for the 52 weeks between October 2004
and October 2005 provided the following results on sales of the top
Brand Dollar Sales (thousands)
% Change to prior Year
Market Share
% Change to prior Year
Red Bull 213,249 53.4 54.4 (5.7)Rockstar 37,391 89.5 9.5 1.0Monster Energy 36,999 192.6 9.4 4.0Sobe Adrenaline Rush 20,298 40 5.2 (1.1)AMP 18,851 40.4 4.8 (1.0)SoBe No Fear 17,347 93.8 4.4 0.6Full Throttle 16,956 N/A 4.3 4.3Rip It 2,652 860.8 0.7 0.6Hansen’s Lost Energy 2’454 156.9 0.6 0.2SoBe Lean 2,383 N/A 0.6 0.6
36 The U.S. Food Industry 37The U.S. Food Industry
energy brands in the U.S.
Natural energy sodas are rapidly growing in popularity as well.
Examples are Blue Sky’s Blue Energy Soda fortified with ginseng,
caffeine, guarana and all-natural colors and flavorings. American
National’s Ginseng Rush, also a sparkling soda, is geared especially
to athletes. Fitonat USA’s Phosphor is an instant energy drink pa-
ckaged in single-shot-sized bottles. The active ingredients are added
with the twist of the cap for instant maximum energy.
The following figures project sales of functional (fortified) beverages
Promotional spending is on the increase both as a percentage of
gross sales (17.3% in 2003 up from 14% in 1999) and as a percenta-
ge of total marketing spending (54% in 2003 up from 49% in 1996).
Procter & Gamble and Kraft Foods were the leaders among manufac-
turers, Wal-Mart Stores Inc. on the part of retailers.
“Slotting allowance“typically refers to a lump-sum, up-front payment
by a food manufacturer to have its products placed on supermar-
ket shelves. This payment by manufacturers to persuade channel
members to stock, display and support „new“ products may also be
spread out in a series of installments, and in some instances, manu-
facturers provide free cases of new products to help gauge consu-
mer demand. Although common, slotting fees are neither uniformly
requested nor offered.
The most common allowances are for new products - so-called new
product introduction fees. Others that are sometimes also referred to
as slotting allowances may include fees for premium product place-
ments, such as on eye-level shelves or special displays; fees to have
products remain on shelves - pay-to-stay allowances; or fees to be
paid if a product fails.
The slotting fee cost varies depending on numerous factors, such
as whether the supplier has a proven track record, whether consu-
mer testing has been carried out, whether the product is carried by
competitors in the same market, and whether the supplier has a well-
thought-out advertising program. The amount can be as small as se-
veral hundred dollars to have a product introduced in a single store to
many thousands of dollars for a chain-wide promotion.
Frozen foods, together with dry grocery, beverages, household main-
tenance products, and snacks are especially the subject of slotting
allowances. On the other hand, fresh meat and seafood, produce,
and deli were only subject to „light“ usage of slotting allowances. In
addition, direct store delivery bypassing the retailer’s warehouse may
entitle the manufacturer to a reduced or entirely waved slotting fee
as the retailer thereby avoids the cost of warehousing, distribution
and stocking. This points to the importance of close supply chain
management.
In many cases slotting allowances are commingled with other pro-
motional allowances for product displays and demonstrations, cou-
pons, introductory discounts per unit. With many retailers receipt of a
slotting fee does not guarantee any particular shelf placement except
that the product is given an opportunity to gain exposure.
The amount of slotting fee varies by region, retail type and product.
While retailers are hesitant to disclose both the existence and amount
of such fees, they can be assumed to range from a low of $50 for
fresh bakery products due in part to direct-store delivery and $10,000
per grocery item.
Loyalty ProgramsFood retailers use loyalty marketing program, also known as frequent
shopper programs, savings clubs or reward-card discounts to identify
their best customers and reward them with discounts on groceries.
About 40% of food retailers offer loyalty programs. Most of these pro-
grams are free although some retailers charge a one-time fee to be-
come a member. Retailers without such programs include supercen-
ters, warehouse clubs outlets, limited assortment and other stores,
which offer every-day low prices. Many successful programs enable
retailers to customize their offering to the interest and preferences of
individual customers.
Stores use the data gathered through these programs to
• Identify the promotions that appeal most to various customer
groups, e.g. discounts or rebates for price conscious shoppers;
convenience food and delivery services for busy shoppers;
• Reduce the shelf space devoted to slow moving items in order to
stock the products that customers prefer; 5 ACNielsen
48 The U.S. Food Industry 49The U.S. Food Industry
From the standpoint of promotions, a category management per-
spective strives to achieve the following:
• attract new users to the category increasing penetration for the
category
• encourage existing users of the category to buy more and thus
increase their weight of purchase
• encourage all users to buy more often increasing their frequency
of purchase
Safeway, one of the largest grocery retail chains, provides instructions
to suppliers in its Supplier Handbook as to the process of presenting
new products to the company which make it clear that the category
managers have prime responsibility for acceptance or rejection of the
product. In order to be considered as a supplier a new applicant
must purchase the ACNielsen New Item Information Package which
allows Safeway to make decisions quickly about the product’s “fit”
with other items in the category under which it is classified based on
the Safeway Merchandising Identification Code (SMIC).
Safeway reviews the categories on a specific schedule which involves
item placement and selection. Space allocation (percent of cubic feet)
is paid for by the vendor (see slotting fees).
8.17. Food Packaging.
Retail trends indicate that perishable foods comprise over 50 per cent
of all foods and, therefore, must be packaged in either gas permea-
ble or re-closable packaging to avoid spoilage, so the food will last
from the manufacturer to the table. Even non-perishable, dry foods
need to have an extended shelf life. Retailers prefer at least a year‘s
storage on shelves to meet their requirements for non-perishable dry
food packaging.
The growth in hi-tech packaging is a significant development for the
food and drink industry. It appears that about 99.8% of all food and
beverage items are at one time encased in some sort of packaging,
and that food and beverage packaging is accountable for two-thirds
of the $120-billion U.S. packaging industry.
A relatively new concept in food packaging is active packaging. This
sector includes oxygen scavengers, moisture controllers and ethylene
absorbers to help reduce the pathogens and gases that contribute to
food spoilage. The food and drink market represented $2.4 billion of
the total $5.9 billion dollar active packaging market in 2003.
Controlled packaging includes aseptic and retort packages, modi-
fied air packaging (MAP) and biodegradable packaging. Annual sales
9. Marketing Agreements and Strategic Partnerships.By Daniel A. Wuersch, Wuersch & Gering LLP
9.1. In General.
In addition to understanding the regulations of the Food and Drug
Administration (FDA) discussed in Chapter 10 and the import regula-
tions discussed in Chapter 11, when entering the U.S. markets Swiss
food manufacturers need to consider other legal issues that can de-
termine the success of marketing food products in the U.S. and limit
the risks associated with a failure of these efforts. These issues in-
clude the risks associated with tort liability for health risks posed by
food products, commercial risks, the high cost of litigation and the
tax implications of doing business in the U.S. To reduce these risks to
a manageable level, respect for the complex legal environment and
careful planning is required.
Like Switzerland, the U.S. constitution established a federal system
in which the 50 states (and the District of Columbia) maintain consi-
derable autonomy. Certain areas of the law fall both within the scope
of authority and jurisdiction of the federal and the state governments,
including income tax laws, unfair trade laws and anti-trust laws,
trademark law. Other areas are exclusively governed by federal law
(e.g. patent or copyright law) or state law (e.g., contracts and general
tort law). Thus, 52 legal systems can govern the marketing of food
products in the U.S., each with a multitude of potentially applicable
statutes, regulations, and court decisions.
Because food products are targeted to reach a large group of con-
sumers, companies may be subjected to lawsuits in several states. If
a food product poses a health risk to consumers, a company can be
sued in a so-called class action in which a plaintiff can sue on behalf
of all members of the class of consumers harmed by the defective
product. These class actions are a powerful tool in the hands of a
lawyer who represents the class on a contingency basis. Through
the multiplication effect of the class, even relatively modest damages
inflicted on a single consumer can become a multi-million dollar pro-
blem for the manufacturer of the defective product. Recently, federal
legislation restricted the ability of lawyers to shop for a sympathetic
forum in state courts in class actions on behalf of consumers located
in different states.
9.2. Marketing Arrangements.
Swiss companies can either actively market their products in the U.S.
on their own, or through intermediaries, including agents, distributors
or resellers. These intermediaries can either be independent third par-
ties or related parties, such as joint ventures or subsidiaries. Agents
are independent contractors who solicit sales of products or services
of a domestic or foreign company for a commission, typically calcu-
lated as a percentage of gross or net sales. Distributors and resellers
purchase goods or services from a manufacturer or service provider,
and then resell them at a mark-up to other distributors, wholesalers
or retail customers.
Sometimes there are several legally significant relationships between
a manufacturer and its intermediaries. E.g., a distribution agreement
can include elements of an agency relationship for certain products,
and an agreement to provide services for the manufacturer (e.g., trai-
ning customers, or organizing promotions at trade shows or in retail
outlets).
Marketing through a U.S. Subsidiary or BranchIn certain circumstances, it can be beneficial to establish a physi-
cal presence in the U.S. to more effectively market products. Often,
this decision is made once a certain market penetration threshold
has been achieved. If a foreign company is marketing its products
through employees in the U.S., a subsidiary is generally necessary
to avoid income tax consequences for the foreign parent in the U.S.
For Swiss companies, a subsidiary in the form of a corporation, rather
than a branch (or a subsidiary in the form of a transparent entity for
tax purposes), typically is the desirable form for a physical presence in
the U.S. Otherwise, the Swiss parent company may directly become
subject to taxation in the U.S. Prior to forming a U.S. subsidiary and
structuring its relationship with the Swiss parent, the impact of rules
of international taxation contained in the Internal Revenue Code of
1986 (including the transfer pricing regime pursuant to Section 482),
and the Swiss-U.S. Income Tax Treaty of October 2, 1996 should first
be understood.
of this sector reached $13 billion last year, or approximately 17 per
cent of the entire U.S. food packaging industry. MAP/CAP packaging
is the fastest growing sector with an average annual growth rate of
13.6% over the next five years.
The reason for this seems to be that flexible packaging is 75% to 90%
lighter than rigid packaging, easier to compact, and take less room in
landfills. Aseptic juice boxes for example make up approximately 9%
of the juice market but comprise only 3% of the waste.
There has been a significant change in the canned food market. Metal
cans are declining and being outperformed by flexible packets or car-
tons, such as Saupiquet’s diced tuna in a Doypack, manufactured by
Thimonier.
A major growth sector is packaging that caters to consumers with
limited time for food preparation. One innovation on display at the
show is the Plastobreiz tray, a transparent sealable microwaveable
tray for omelet’s or fresh ready-made food.
Environmentally friendly biodegradable packaging is another growth
area, reflecting consumer and retailer awareness of the issue of waste
disposal. A large number of packaging firms are launching products
made of 100% recycled materials, and their biodegradable inks are
also increasingly evident on the market.
And finally, new packaging ideas have been developed in response
to growing food manufacturer fears about food safety and tampering.
Packaging is likely to perform a key role in establishing and maintai-
ning consumer confidence.
50 The U.S. Food Industry 51The U.S. Food Industry
restricted from publishing any confidential information (e.g., recipes,
marketing plans, financial projections) or from using the confidential
information for its own purposes. To ensure the enforceability of a
confidentiality agreement, the information covered must be descri-
bed as precisely as possible and may not include non-confidential
information. Because damages resulting from the violation of a confi-
dentiality agreement are difficult to prove, confidentiality agreements
should specify that injunctive relief is available to remedy any violation
of the agreement.
Under U.S. rules of civil or criminal procedure and certain laws and
regulations, confidential information may, however, be required to be
disclosed to third parties or governmental authorities. In order to avo-
id a violation of a confidentiality agreement, confidentiality agreements
typically permit the disclosure of confidential information in these
circumstances.
Consulting AgreementsDuring the evaluation and market development phase, it may become
necessary to hire consultants in the U.S. Consultants typically perform
services for a time-based flat fee, performance based compensation
or a combination of the foregoing. Generally, the terms of consulting
agreements should permit an easy termination of the relationship and
clear milestones that define the expected results. Consultants should
be bound by a confidentiality agreement (which can either be part
of the consulting agreement or a stand-alone agreement), and the
consulting agreement should specify that any work product created
by the consultant belongs to the client. Depending on the circum-
stances, an exclusivity and possibly a non-compete clause may be
appropriate elements of a consulting agreement.
9.5. Marketing Agreements.
Purchase and Sale AgreementsAgreements for the sale or delivery of food products to U.S. resellers
or customers are generally governed by UCC Art. § 2. Therefore, limi-
tations of implied warranties must follow the UCC Art. 2 rules as men-
tioned before. UCC Art. 2 also contains a special rule, Rule § 2-207,
for “battle of the forms,” i.e., situations where the general terms of a
seller and those of a buyer contradict each other. Under the common
law “mirror image” rule, a valid contract can only be formed if offer
and acceptance are identical (i.e. the mirror image of each other).
Under the UCC rule, an acceptance which contains terms that are
different from those contained in the offer can lead to a valid contract
if the new terms do not materially alter the offer and the offer did not
expressly limit the acceptance to the terms of the offer. To avoid being
bound by unexpected terms, general terms and conditions should
9.3. Contract and Tort Issues.
Contract and Tort Law in the U.S.The law on contracts and torts is state law. Except for Louisiana, all
states and the District of Columbia follow the English common law
tradition, in which case law (court decisions), rather than statutes,
traditionally determined the law. Despite its roots in the English com-
mon law, the case law is often supplemented (but not replaced) by
statutes (e.g., New York General Obligations Law of April 23, 1963
(“GOL”); California Commercial Code, effective as of January 1, 1965;
Chapter 106 of the General Laws of Massachusetts). An important
statute, which has been adopted by all states (with certain excep-
tions and modifications) is the Uniform Commercial Code (UCC), a
uniform statute drafted by the National Conference of Commissioners
on Uniform State Laws in partnership with the American Law Institute
(see www.nccusl.org). In its Article § 2 (which was not adopted by
Louisiana), the UCC establishes the rules applicable to contracts for
the sale of goods. The U.S. is also a party to several treaties that
can apply to a contract between a Swiss and a U.S company (e.g.
the Vienna Convention on the International Sale of Goods (“CISG”) of
1980). Tort law is still mostly governed by case law.
The conflict of law rules of states determines which state law applies
to a contract or a tort matter between residents of different states
(or foreign countries). These rules generally permit the parties to a
contract to select the law that shall govern their relationship. In the
absence of a choice of law by the parties, courts will decide which law
has the “most significant relationship” with the contract in question.
In the case of a tort claim, the most significant relationship is typically
with the state in which the tort has been committed.
In a contract, the parties may also choose the courts or arbitration fo-
rum that have jurisdiction over any disputes arising in connection with
their contract. Otherwise, the jurisdiction of the various state courts
is determined by the so called “long-arm” statutes of the states, and
by the jurisdictional provisions of the Rules of Civil Procedure for the
federal courts. According to these rules, the federal courts have juris-
diction in contract disputes between a U.S. and a foreign company
if the amount in dispute exceeds $75,000. In contract disputes, al-
ternative dispute resolution (such as arbitration or mediation) is often
used to resolve contract disputes. Arbitration rules that are well es-
tablished include those of the American Arbitration Association (AAA)
and, for international contracts, the rules of the International Chamber
of Commerce (ICC).
Contractual Risk AllocationBecause there is no uniform statutory law that regulates all aspects of
contract law, and contracts are interpreted strictly based on the lan-
guage in a written agreement (parole evidence rule), American con-
tracts tend to be longer and more comprehensive than their European
counterparts. Despite the understandable desire to keep contracts
“short and simple,” Swiss companies should be aware of the risks
that can result from an incomprehensive contract with a U.S. busi-
ness partner.
Most commercial risks can be freely allocated to either party to a con-
tract. However, there are limitations. For example, common law does
not permit a party to deny responsibility for willful misconduct or gross
negligence. In addition, while liability for statutory or tort liability can
be limited vis-à-vis a contract party, these limitations are not effective
vis-à-vis third parties.
Implied Covenants and WarrantiesA contract party may not only be liable for commitments and re-
presentations expressly made in a contract, but also for implied
covenants and warranties. UCC Art. 2 in particular provides that in
every contract for the sale of goods there is an implied warranty that
title to the goods is transferred to the buyer. In a contract for the
sale of goods by a merchant, implied warranties of merchantability
and fitness for a particular purpose are deemed to be given, except
where these warranties are conspicuously disclaimed with language
prescribed in UCC Art. 2.
Tort ClaimsA tort claim can be brought against a food manufacturer if it can
be shown that a food manufacturer negligently caused damages to
resellers or consumers in the U.S. (e.g., because it permitted a food
product to be contaminated in an unsanitary environment). In addi-
tion, a tort claim can also be brought against the manufacturer of
a food product without proving negligence (strict liability) if the ma-
nufacturer brought the food product into circulation despite known
health risks and without adequate warnings (e.g., carcinogenic food
additives). Compliance with the requirements promulgated by the
FDA or the USDA does not protect a manufacturer from this type of
liability. If many consumers are (potentially) harmed, a manufacturer
may, under certain circumstances, be sued in a so called class action
by one consumer on behalf of the entire class of affected consumers.
9.4. Exploring and Evaluating Market Opportunities.Confidentiality AgreementsEntering into a confidentiality agreement with a potential business
partner in the U.S. is a necessity before any serious discussions are
held on a future cooperation. Otherwise, the potential partner is not
contain such a limitation. Large U.S. companies typically require strict
adherence to their terms of purchase or sales. Delivery and price
terms are essential elements of any purchase and sale. When using
trade terms, such as INCOTERMS, food exporters should be aware
of the fact that certain of these terms may have a slightly different
meaning in domestic U.S. law.
Agency AgreementsAs briefly described earlier, an agent is retained to solicit offers from
U.S. buyers (or licensees) in consideration of a commission. The
amount and type of commission varies greatly, depending on the pro-
duct, the expected volume, exclusivity and other factors. When struc-
turing agency agreements, it is important to create incentives for the
agent to maximize the sales for the principal. This can be achieved by
a tiered commission-structure, based on sales volume and including
penalties for an agent’s failure to reach a minimum sales level (e.g.,
loss of exclusivity in a particular territory, reduced commissions, etc.)
Because the agency relationship may not be clear to a customer (or
the general public), the agreement should clearly define the role of the
agent and specify that the agent is not authorized to commit the prin-
cipal or make unauthorized representations on its behalf. Otherwise,
the principal could become liable for unauthorized promises or war-
ranties made by the agent to third parties. The agent, on the other
hand, risks that it will likely be first in the line of fire, if problems with
a product result in liability claims in the U.S. Agents therefore have a
legitimate interest in limiting their liability to acts for which they can
reasonably be held responsible and in securing the support of the
principal in defending such claims (including indemnification for its
costs and damages).
Distribution AgreementsThe issues arising in connection with distribution agreements are in
many respects similar to those discussed with respect to the agent.
As in an agency agreement, a distribution agreement should contain
restrictions on the representations and warranties that a distributor
is authorized to make vis-à-vis its customers. On the other hand, a
distributor will have liability concerns similar to those aforementioned.
However, distribution agreements can create additional issues under
applicable intellectual property law and federal anti-trust law. Because
a distributor will use the intellectual property rights of a Swiss manu-
facturer (including its trade marks and patent rights), the issues dis-
cussed should be considered when structuring the relationship with
a U.S. distributor. Antitrust issues raised include possible prohibited
price fixing, and exclusion of third parties from competition.
52 The U.S. Food Industry 53The U.S. Food Industry
The supplier, on the other hand, is interested in being excused from
performing its obligations in the event it becomes unable or com-
mercially unreasonable to adhere to the terms of the contract and in
limiting its liability for the use of the supplied material or components
to the maximum extent possible.
Packaging AgreementsAn agreement regarding the outsourcing of the packaging of its
food products for the U.S. market (whether to a U.S. or non-U.S.
packaging company) should specify the labeling requirements and
contain unambiguous instructions for handling and packaging the
product. If any contamination occurs during the packaging process,
it is important that the manufacturer can show that the contamination
would not have occurred, had the packaging company followed the
manufacturer‘s guidelines.
Joint VenturesJoint ventures can be formed for purposes of developing, manufac-
turing, or marketing food products. Contrary to the agreements dis-
cussed so far, the common denominator of all types of joint ventures
is the achievement of a common purpose by two or more parties
through a joint decision making process. Joint ventures can be mere
contractual arrangements among parties or take the form of legal en-
tities operated for the common purpose of the joint venture. The deci-
sion making process, supervision and monitoring of the joint venture’s
activities, ownership and protection of intellectual property and the
rights and obligations of the parties in the event of a break-up or sale
of the joint venture (or interests therein) are key issues that should be
addressed in a joint venture arrangement. Because unincorporated
joint ventures are generally treated as partnerships for tax purposes,
Swiss companies should consider that, absent a proper structure,
their participation could subject them to U.S. taxation.
Licensing of Intellectual PropertyThere are different types of licensing agreements, depending on
the type of intellectual property being licensed (patents, copyrights,
trade- or service marks, or trade secrets). Because patent and copy-
right license are rarely of interest to food manufacturers, the following
discussion is limited to licenses of trade marks and trade secrets.
Licensing of Trademarks Trademarks can be created under federal or state law. Under the fe-
deral Lanham Act, trademarks used to distinguish products can be
registered in the U.S. Patent and Trademark Office. Through regis-
tration, the owner of the mark is permitted to use the ® symbol in
connection with the registered mark. Use of the ® symbol without a
valid registration is prohibited in the U.S. (the “TM” symbol - ™ may
be used with unregistered marks). A trademark registration is prima
facie evidence of the exclusive ownership of a mark. However, both
under the Lanham Act and under state law, rights in trademarks or
service marks can also be created through the simple use of a mark
in commerce.
A trademark license should define (1) the territory within which the
licensee has the right to use the trademark, (2) the scope of the
licensee‘s rights (exclusive/non-exclusive use), and (3) the time period
during which the licensee may exercise these rights. Although the life
of a trademark is not limited, the owner of a trade or service mark can
lose its right (or the value of its mark) if the registration is not renewed,
the mark is no longer used in commerce or the owner of the mark
permits the use of the mark by unauthorized persons or in a manner
that diminishes the value of the mark. Therefore, a license agreement
must permit the licensor to monitor the quality of the goods that the
licensee sells under the licensor’s mark, and the licensor must in fact
exercise its control rights. The licensor can also lose the protection of
its mark if the license does not provide that all goodwill created in the
mark by the licensee inures to the benefit of the licensor.
A trademark license can either be a separate agreement or be inclu-
ded in another agreement (e.g., agency or distribution agreement).
Licensing of Know-How and Trade SecretsThe issues that must be addressed in licenses of know-how or trade
secrets are similar to those previously discussed. It is important to re-
member that the protected know-how is secret at all times during the
term of the license. Moreover, the nature of the protected information
needs to be carefully defined in the license agreement. Because the
confidential information is revealed to the licensee for the purpose of
a commercial activity, the transfer of the knowhow or trade secrets,
the scope of authorized users, the duty to maintain the information
confidential, and the return of the confidential information at the end
of the license term should be clearly regulated in the agreement. A
know-how license does not need to have a time limitation. However,
the publication of confidential information or the loss of its value may
make a know-how license unenforceable.
Legal Aspects of Marketing to RetailersA particularity of marketing food products to retailers, in particular
supermarkets, is the so called slotting fees. Slotting fees are product
placement fees that manufacturers are to pay to retailers, and some-
times to wholesalers, for shelf-space (“slots”). These fees can be tied
to performance or flat fees (see Chapter 8). While there is controversy
regarding the influence that these fees may have on competition, they
are not illegal. Slotting fees can take the form of an upfront cash fee, a
service fee for stocking or promoting the goods, a discount or a rent
for floor space (in particular where a supermarket vendor is permitted
to put its own display into a store).
Supermarket chains also typically have guidelines or handbooks that
vendors are expected to follow. These guidelines are incorporated
into the purchase contract by the supermarket‘s purchase order and
can cover shipping and delivery requirements, safety requirements,
coding, shelf-life and penalties for non-compliance.
9.6. Cooperation with U.S. Companies.
Manufacturing AgreementsRather than exporting a food product that is manufactured in
Switzerland, a food manufacturer may manufacture the product lo-
cally in the U.S. (if this does not diminish the value of the „Swiss
made“ product) either in a subsidiary or through a third-party manu-
facturer under a manufacturing agreement. Because the Swiss ma-
nufacturer makes valuable intellectual property and know-how availa-
ble to the U.S. toll manufacturer, manufacturing agreements raise
many of the issues previously discussed. In addition, maintaining the
quality of the manufactured products, adherence to manufacturing
guidelines, timely delivery (and payment), compliance with regulatory
requirements and a fair allocation of the liability are primary concerns
that need to be addressed in these agreements. Allocating the risk
associated with product liability can become tricky in manufacturing
agreements. Depending on the nature of the cause of liability, both
the principal and the manufacturer can be liable for damages resulting
from defective products.
Supply AgreementsIn a supply agreement, the customer is primarily concerned with se-
curing the timely supply of raw material or product components at
the desired quality and the allocation of liability to the supplier for
damages resulting from defective or inadequate material supplied.
54 The U.S. Food Industry 55The U.S. Food Industry
10.4. Bringing a Food to Market in the U.S. III: Food Labelling.The labeling of foods while appearing relatively straightforward can be
quite complex depending on the food, its ingredients, and any repre-
sentations made about the food. All of the nuances to food labeling
cannot be covered in this summary. The basic labeling components
will be covered in this review. Note that there are a number of excep-
tions and exemptions which may apply under given circumstances.
Statement of IdentityThe food label on the principal display panel must bear a statement
of the food’s identity, i.e., name. The name could be one established
by regulation, the common or usual name for the food or a descriptive
term which accurately describes the food’s basic character. Flavor
labeling may also be required as part of the food’s name should the
nature of the food’s ingredients so require.
Net ContentsThe principal display panel must also have a declaration of the net
contents by weight, count or volume, or a combination of these de-
pending on the nature of the food: solid, viscous or liquid. There are
detailed regulations on the placement and type-size of the declaration.
Nutrition LabelingVirtually all packaged foods for retail sale must have nutrition labeling.
The format and content are spelled out in the regulations. The key to
determining the content of the nutrition panel is the serving size. FDA
regulations have extensive rules regarding how a food’s serving size
is to be determined.
Ingredient DeclarationThe general requirement is that each ingredient must be listed in its
descending order of predominance by weight by its common or usu-
al name. Many exceptions exist so the regulations need to be refe-
renced for specific requirements.
Health, Nutrient Content and Structure/Function ClaimsGenerally, there are three types of health related claims permitted for
foods under the FFDCA, FDA’s regulations and enforcement policies.
These are health, nutrient content and structure/function claims.
Following is a discussion of these claims.
Health claimsHealth claims describe a relationship between a food, food compo-
nent, or dietary supplement ingredient, and reducing the risk of a
disease or health-related condition. There are three ways by which
10. Regulation of Food by the Food and Drug Administration (FDA).By John Lemker, Bell, Boyd & Lloyd, LLC, Chicago
10.1. Introduction.
Regulatory JurisdictionThe authority to regulate food in the U.S. falls within the jurisdiction of
various federal, state and local agencies. The principal federal agen-
cies are the Food and Drug Administration (FDA) which is a com-
ponent of the Department of Health and Human Services and the
Food Safety and Inspection Service (FSIS) and Animal Plant Health
Inspection Service (APHIS), both of which are in the Department of
Agriculture6.
FSIS regulates meat, poultry and egg products and APHIS is res-
ponsible to ensure that imported products do not introduce pests
or other threats to domestic plants and animals. The focus of this
summary is with FDA regulatory authority which extends to all foods
except for the authority given to FSIS over meat, poultry and egg
products. FDA has some jurisdiction over these foods but they are
primarily regulated by FSIS.
FDA OrganizationThe Center for Food Safety and Applied Nutrition (CFSAN) is the
organization within FDA which is responsible for implementing the
FDA’s authority over foods. It regulates substances used in foods,
implements compliance programs for enforcement and develops re-
gulations for virtually all aspects of FDA’s responsibilities for ensuring
foods are safe and properly labeled.
The FDA’s district offices are the primary enforcement arm of the FDA.
The import officers who review all imported foods are assigned to
the district offices. There are many other components of the FDA but
CFSAN and the districts are the ones most involved in the implemen-
tation of FDA’s jurisdiction over foods.
The Definition of Food under the Federal Food Drug and Cosmetic Act (FFDCA)Basically, the term food includes all articles which are used as food by
man or animals and includes the components of food. This appears
straightforward but the interpretation of the definition by FDA and the
courts has expanded this meaning beyond the usual understanding.
The scope of term food includes food contact articles if any subs-
tance migrates from the contact article to the food. This would in-
clude food packaging materials and even such items as pottery and
eating utensils. All ingredients of foods and their components are
“foods” and subject to the same legal requirements.
The following section will discuss briefly the basic considerations
which are involved in developing, packaging, manufacturing, labeling
and importing a food for distribution in the U.S.. It is an overview of
the matters which need to be considered in manufacturing and labe-
ling foods which are in compliance with the laws of the U.S.
10.2. Bringing a Food to Market in the U.S. I: Categorization of a Food.The initial determination is to identify the category of food into which
the product belongs. This is basic and may be self-evident but ac-
curately identifying the category or type of food is important. One
major reason is that for many, but not all, foods FDA has established
pursuant to its statutory authority, standards of identity for various
foods. For example, many cheeses have standards of identity. Also,
chocolate products have standards.
A standard of identity generally describes the food, prescribes as-
pects of its composition and ingredients and also includes some la-
beling requirements.
If a manufacturer wants to produce and distribute a food for which
a standard of identity exists, the manufacturer must comply with the
standard. In addition, there are other regulations which apply to spe-
cific types of foods, such as quality standards and special food cate-
gories, as example, infant formula and dietary supplements.
An important first step is to determine if the product is subject to
any specific rules applicable to composition, ingredients, labeling or
manufacturing requirements in addition to the generally applicable
regulations.
10.3. Bringing a Food to Market in the U.S. II: Food Composition and Ingredients.All of the ingredients of a food must either be generally recognized
as safe under the law or otherwise specifically approved for use by
the responsible governmental agency, usually FDA. FDA has issued
many regulations listing ingredients which may be used in foods and,
in some instances, has placed restrictions on their use. These restric-
tions could be on the foods in which the ingredients may be used
and/or their levels of use in a particular food.
Unfortunately, not all ingredients permitted in foods are covered by a
regulation. Many ingredients which are recognized as safe may not
have a specific rule identifying them.
However, every color added to a food must be used in accordance
with a specific regulation. If there is no regulation for the color, it may
not be used in a food.
Pesticides present in foods are also specifically regulated. The U.S.
Environmental Protection Agency establishes the tolerances for pesti-
cide residues in or on food and FDA enforces those residue limita-
tions. If an unapproved pesticide is used on a food, it causes the food
to be adulterated.
Chemical contaminants in an ingredient can cause a product to be
in violation of the law. Purity of ingredients is important. For example,
excess levels of lead or mercury in foods have resulted in enforce-
ment actions against the food or company.
Even though a food substance, color additive or pesticide residue
may be authorized in other countries, they may not be legal in the
U.S. A thorough review of each ingredient is required to ensure it
is permitted. An example is herbal products. While many herbs are
widely used, FDA has objected to the use in traditional foods of some
herbs, although their use in dietary supplements has been tolerated.
Reasoning being that there is a different regulatory standard used for
determining the acceptability of ingredients used in traditional foods
compared to the dietary ingredients used in dietary supplements.
In addition to actual ingredients, some processing procedures such
as irradiation are also subject to regulatory limits under food additive
regulations.
Each ingredient needs to be evaluated for its acceptability in a parti-
cular food.6 The Department of Treasury has jurisdiction over the labeling of most alcoholic beverages
56 The U.S. Food Industry 57The U.S. Food Industry
The percentage of organic content and the certifying agent seal or
mark may be used on the principal display panel.
Products with less than 70 percent organic ingredients cannot use
the term “organic” anywhere on the principal display panel. They may
identify the specific ingredients that are organically produced on the
ingredients statement.
Any product labeled as organic must identify each organically produ-
ced ingredient in the ingredient statement.
The name and address of the certifying agent of the final product
must be displayed on the information panel of the label.
AllergensThe “Food Allergen Labeling and Consumer Protection Act of 2004”
(the “Amendments”) amended the FFDCA to address specifically the
labeling of certain allergens present in foods.
Generally, the new amendments defined the term “major food aller-
gens,” required their labeling, provided procedures for exemptions
and eliminated some labeling exemptions which existed in the FFDCA
that manufacturers relied upon to avoid labeling certain ingredients. A
major food allergen is defined in the law as follows:
‘(qq) The term ‘major food allergen’ means any of the following:
‘(1) Milk, egg, fish (e.g., bass, flounder, or cod), Crustacean shellfish
(e.g., crab, lobster or shrimp), tree nuts (e.g., almonds, pecans, or
walnuts), wheat, peanuts, and soybeans.
‘(2) A food ingredient that contains protein derived from a food speci-
fied in paragraph (1), except the following:
‘(A) Any highly refined oil derived from a food specified in paragraph
(1) and any ingredient derived from such highly refined oil.
‘(B) A food ingredient that is exempt under paragraph (6) or (7) of
section 403 (w).’.
An important provision of the amendments which assist in understan-
ding their scope is Section 203(a)(4), which provides:
Notwithstanding subsection (g), (i), or (k), or any other law, a flavoring,
coloring, or incidental additive that is, or that bears or contains, a
major food allergen shall be subject to the labeling requirements of
this subsection.
health claims may become eligible to be used on a label or in labe-
ling for a food or dietary supplement: 1) FDA may issue regulations
authorizing health claims for foods and dietary supplements after re-
view of the scientific evidence submitted in health claim petitions if
it meets the rigorous criteria for authorization; 2) health claims can
be based on an authoritative statement of a scientific body of the
U.S. government or the National Academy of Sciences, a health claim
notification to FDA is required prior to use; and 3) FDA, in response
to court decisions has provided for qualified health claims where the
level of the scientific evidence is not sufficient enough for FDA to issue
a regulation.
• Authorized Health Claims. The FFDCA provides for health claims
used on labels that characterize a relationship between a food, a
food component, dietary ingredient, or dietary supplement and risk
of a disease (for example, “diets low in saturated fat, total fat and
cholesterol may reduce risk of heart disease”), provided the claims
are authorized by an FDA regulation and meet the requirements of
that rule.
• Health Claims Based on Authoritative Statements. Another
way to obtain approval for the use of a health claim on foods is
through a successful notification to FDA of a health claim based
on an “authoritative statement” from a scientific body of the U.S.
Government or the National Academy of Sciences.
• Qualified Health Claims. Under FDA’s enforcement discretion, it
permits the use of qualified health claims when there is evidence
for a relationship between a food, food component, or dietary sup-
plement and reduced risk of a disease or health-related condition.
In these cases, the evidence is not sufficient to meet the standard
required for FDA to issue a health claim regulation. Qualifying lan-
guage is included as part of the claim to indicate that the evidence
supporting the claim is limited. The qualified claims are available for
use on any food or dietary supplement product meeting the condi-
tions specified in the authorization letter.
Nutrient Content Claims
The FFDCA and FDA’s regulations permit the use of label statements
that characterize the level of a nutrient in a food (i.e., “fat free,” “low
cholesterol”) if they are made in accordance with the requirements of
the regulations. Nutrient content claims describe the level of a nutrient
in the product, (i.e., high in vitamin C) or they compare the level of a
nutrient in a food to that of another food, (i.e., 30% fewer calories
than our regular chocolate).
Structure/Function ClaimsStructure/function claims describe the role of a nutrient or dietary in-
gredient intended to affect normal structure or function in humans, for
example, “calcium builds strong bones.” In addition, they may cha-
racterize the means by which a nutrient or dietary ingredient acts to
maintain such structure or function, or they may describe general well-
being from consumption of a nutrient or dietary ingredient. The manu-
facturer is responsible for ensuring the accuracy and truthfulness of
these claims; they are not pre-approved by FDA, although for dietary
supplements they must be submitted to FDA. They must be truthful
and not misleading and supported by adequate substantiation.
Organic ClaimsThe National Organic Program (NOP) is administered by the U.S.
Department of Agriculture (USDA) and is intended to assure that
organic foods are produced, processed, and certified to consistent
national organic standards. The labeling requirements of the program
apply to raw, fresh products and processed foods that contain orga-
nic ingredients. Foods that are sold, labeled, or represented as orga-
nic have to be produced and processed in accordance with the NOP
standards.
Except for very small operations, farm and processing operations
that grow and process organic foods must be certified by USDA-
accredited certifying agents. A certified operation may label its pro-
ducts or ingredients as organic and may use the “USDA Organic”
seal.
Labeling requirements are based on the percentage of organic ingre-
dients in a product.
Products labeled as “100 percent organic” must contain (excluding
water and salt) only organically produced ingredients.
Products labeled “organic” must consist of at least 95 percent orga-
nically produced ingredients (excluding water and salt). Any remaining
product ingredients must consist of nonagricultural substances ap-
proved on the National List or non-organically produced agricultural
products that are not commercially available in organic form.
Products meeting the requirements for “100 percent organic” and
“organic” may display these terms and the percentage of organic
content on their principal display panel.
The USDA seal and the seal or mark of involved certifying agents may
appear on product packages and in advertisements.
Processed products that contain at least 70 percent organic ingre-
dients can use the phrase “made with organic ingredients” and list
up to three of the organic ingredients or food groups on the principal
display panel.
The exemptions for flavor, colorings and incidental additives were re-
scinded by the amendments with respect to those which are, bear or
contain a major food allergen. Only highly refined oils from the listed
foods have been exempted under the amendments.
Basically, if a food bears or contains a major food allergen at any level
from direct or indirect addition, it needs to be noted on the label.
10.5. Manufacturing Food.
The law, as implemented by FDA, requires that food be made in ac-
cordance with “Good Manufacturing Practices” (GMPs). FDA has
regulations which describe in a general manner GMPs for food.
However, certain foods which are deemed to present a higher risk to
health if not properly processed have specific regulations that apply
to some or all aspects of their manufacture.
For example, specific regulations exist for low-acid foods, acidified
foods, seafood products, vegetable and fruit juices, infant formula
and bottled water. Regulations for other foods are proposed or under
consideration.
Also, FDA has issued guidance documents regarding the production
and processing of certain foods, such as fresh produce. Although
they are not regulations, they influence the interpretation of what fac-
tors are important in processing these foods.
The HACCP (Hazard Analysis Critical Control Point) concept is impor-
tant in the manufacturing of foods in the U.S. The hazards in manu-
facturing a food are identified and specific controls are developed to
prevent their occurrence.
10.6. Bioterrorism Law.
In response to concerns about a potential terrorist attack on the food
supply, Congress amended the FFDCA to increase the FDA’s ability
to obtain information regarding persons engaged in the food business
and products imported into the U.S., and to take prompt enforcement
action if products may present a serious health threat. Major aspects
of the new authorities include establishment registration, prior notice
for imported foods, administrative detention and recordkeeping.
These new authorities will be briefly reviewed. Each is the subject of
detailed regulations. Prior Notice is covered in the section concerning
imported food and customs requirements.
58 The U.S. Food Industry 59The U.S. Food Industry
RegistrationDomestic and foreign facilities that manufacture, pack, or hold food
for human or animal consumption in the U.S. are required to register
with the FDA. A domestic facility must register whether or not food
from the facility enters interstate commerce. A foreign facility must de-
signate a U.S. agent (for example a facility’s importer or broker), who
must live or maintain a place of business in the U.S. and be physically
present in the U.S., for purposes of registration.
There are a number of exceptions listed in the regulations. Registration
is not required if a foreign facility manufactures/processes, packs, or
holds food and sends it to another foreign facility for further manu-
facturing/processing or packaging before the food is exported to the
U.S., only the second foreign facility is required to register. However,
if the second foreign facility performs only a minor activity, such as a
putting on a label, both facilities would be required to register. Also,
any foreign facility that packs or holds food after the last foreign ma-
nufacturer/processor of the foods must register.
Administrative DetentionFDA may detain an article of food it if poses a serious hazard.
Detained product may be held for up to 30 days pending the resolu-
tion of the allegations upon which the detention order was issued or
further enforcement action.
RecordkeepingFDA has issued a rule requiring the establishment of records which
will permit it to track the distribution of foods for the purpose of re-
moving them form sale or use in the event they pose a risk of serious
adverse health consequences to humans or animals. The records
that must be kept are those that are needed to permit the FDA to
identify the immediate previous sources and immediate subsequent
recipients of food, including its packaging. Generally, the people and
companies subject to the requirement are those domestic persons
that manufacturer, process, pack, transport, distribute, receive, hold
or import food and persons that transport food in the U.S. Except for
those foreign persons who transport food in the U.S., foreign estab-
lishments are exempt.
10.7. Enforcement.
FDA has a wide range of enforcement action’s it can use to prevent
violations or remove violative product from distribution. These include
administrative and formal measures.
For imports, if a product appears to be in violation of the law, FDA can
detain it and require the importer to demonstrate the food complies
with the law, correct the violation, re-export the product, or destroy
it. If a product is admitted into the country prior to FDA detecting a
violation, FDA can issue regulatory correspondence, usually entitled
as a “Warning Letter,” seeking voluntary corrective action including a
recall. If the response is not satisfactory, FDA could seek to seize the
product, enjoin the manufacturer or criminally prosecute the respon-
sible company and individuals.
Voluntary corrective action, including recalls, is the most frequently
used form of enforcement action. Also, for imports, FDA may place
product on the automatic detention list which can prevent or substan-
tially disrupt a person’s ability to import the food.
11. Importing into the USA.By Paul S. Anderson, Partner, Sonnenberg & Anderson
11.1. General Background.
The importation of products into the U.S. is regulated by, and through,
the U.S. Department of Homeland Security, Bureau of Customs and
Border Protection (“Customs” or “CBP”). The purpose of this chapter
is to briefly describe the structure of CBP and its operations, and to
identify the most common issues of interest to food importers. The
following comprises a brief synopsis only and is designed to provide
a basic knowledge of importing requirements. Many issues may arise
which require fine technical distinctions or fall within grey areas of
the law. It is highly recommended that an importer take the time to
obtain expert advice prior to the importation of any product so as to
minimize potential problems and to make its importation program as
cost effective as possible.
Informed Compliance and Reasonable CareThe Customs Modernization and Informed Compliance Act (“Mod”
Act) was signed into law in 1993 and introduced the concept of “in-
formed compliance” whereby Customs and the importing communi-
ty would share the responsibility of administering the U.S. Customs
laws. This “informed compliance” concept places an affirmative bur-
den on importers to exercise reasonable care in the discharge of their
responsibilities relating to the importation of merchandise. An impor-
ter must exercise reasonable care in all facets of the importing pro-
cess, including the manner in which it describes, classifies and values
imported merchandise. “Reasonable care” means that an importer
will act reasonably, and with knowledge of the facts and its legal ob-
ligations. The concepts of informed compliance and reasonable care
permeate all aspects of Customs administration and enforcement.
Customs and Border Protection StructureCustoms’ basic structure involves CBP Headquarters in Washington
DC; the National Import Specialist Division (NIS) in New York; and the
numerous local ports throughout the country where the merchandise
actually is presented to Customs for clearance. Headquarters sets
policy, has oversight of security procedures, and issues rulings and
decisions through the Office of Regulations and Rulings (OR&R). Port
Directors are in charge of the local ports and this is where the day-to-
day importing activity occurs. The NIS’s in New York provide supervi-
sory guidance with respect to classification decisions at the outlying
local ports so as to ensure consistency throughout the country.
CBP has several levels of personnel with which an importer should be
familiar. The most frequent point of contact will be the local import
specialists who are Customs officials responsible for monitoring
merchandise imported into the U.S. Import specialists request infor-
mation so that they can properly examine the classification and value
of imported merchandise. In addition, import specialists administer
quotas, make determinations on country of origin markings, check
documents for accuracy and completeness, and perform many other
similar day-to-day tasks.
Oral advice from an import specialist is not binding on Customs and
generally can be changed at any time. Importers may obtain a binding
ruling from Customs by submitting a request in writing, along with
a sample of the merchandise, to Customs Headquarters or to the
National Import Specialist in New York City. Greater detail concerning
the ruling process is set forth later in this chapter.
Inspectors are Customs personnel who actually examine the
merchandise prior to release into the Customs territory of the U.S.
Importers typically do not have much contact with inspectors unless a
problem arises with the clearance of the merchandise. Even then, the
problem more than likely would be brought to the importer’s attention
through the import specialist. An inspector ensures that merchandise
that is presented for entry matches that described in the commercial
invoices, checks for country of origin markings, and otherwise exami-
nes the merchandise to ensure that it is in compliance. It should be
noted that only a small percentage of all merchandise imported into
the U.S. is physically examined by an inspector.
Special agents are not involved in routine Customs matters. Rather,
special agents almost always work on suspected Customs law vio-
lations. Therefore, a telephone call or visit from a special agent is a
serious matter and an importer should immediately contact Customs
counsel if such an event occurs.
Current Regulatory EnvironmentCompliance with the Customs laws is of utmost importance in today’s
environment where security considerations are paramount. Much of
the focus in terms of CBP resources since September 11, 2001 has
focused in the area of security generally, and CBP has promulgated
many new programs designed to make compliance more efficient
yet also meet heightened security considerations. The Customs re-
gulations change quite rapidly and it is important to keep abreast of
all new developments. Although there are many new security initiati-
ves, the program currently in the forefront is the Customs and Trade
60 The U.S. Food Industry 61The U.S. Food Industry
also the North American Free Trade Agreement (NAFTA) which invol-
ves duty-free treatment for qualifying articles between Mexico, U.S.
and Canada. Again, Switzerland is not a party to any of these free
trade agreements, but it is possible to manufacture products within
these countries and qualify for duty-free treatment upon importation
into the U.S. if the technical requirements are met.
Customs Valuation of Imported Merchandise Customs valuation can be a very complicated area, and one which
can have a major effect on Customs duties. A common mistake made
by importers is believing that imported merchandise always will be
valued (appraised) at the transaction price, or the price actually paid
for the merchandise by the importer. In fact, most appraisements are
made based upon transaction values. However, Customs may use
other methods of valuing imported merchandise such as deductive
value or computed value. These methods may require the importer to
provide costs, expenses and detailed accounting information in order
to satisfy Customs as to the correct appraised value of the imported
merchandise. Special rules also apply where merchandise is brought
into the U.S. on a consignment basis and is not sold to a purchaser
in the U.S. until a later time. Alternative methods of appraisement ge-
nerally apply in related party transactions or consignment situations.
An importer is free to structure a transaction to take advantage of the
Customs laws. Some importers employ buying agents whose com-
missions are non-dutiable items. Other favorable structures involve
the utilization of the “first sale rule” which involves sales through a
middleman, who in turn sells to a U.S. importer, yet entry is made at
the first sale (price to the middleman) level. Certain legal requirements
must be met in order to utilize these structures and they are not au-
tomatically available. Finally, it should be noted that although most
appraisements are made based upon the invoice price on the com-
mercial invoice to the importer, amounts for freight and insurance are
non-dutiable items and should be broken out separately if included in
the invoice price to ensure that they are not included in dutiable value.
Country of Origin MarkingAll merchandise of foreign origin imported into the U.S. must be
marked with the country of origin. The Customs marking require-
ments in Section 304 of the Tariff Act of 1930 are as follows:
Every article of foreign origin (or its container) imported into the U.S.
shall be marked in a conspicuous place as legibly, indelibly, and per-
manently as the nature of the article (or container) will permit in such
manner as to indicate to an ultimate purchaser in the U.S. the English
name of the country of origin or the article.
Partnership Against Terrorism (CTPAT) program wherein importers re-
ceive certain benefits including reduced cargo inspections when they
are certified as a C-TPAT participant. The C-TPAT program and its
impact upon food importations is discussed later in this chapter.
CBP enforces the regulations of many other governmental agencies
and acts as the primary enforcement arm for the application of such
regulations to imported products. With respect to food products,
CBP enforces the regulations of the Food and Drug Administration
(FDA), U.S. Department of Agriculture (USDA) and the Federal Trade
Commission (FTC).
11.2. Basic Customs Considerations.Customs duties are generally determined on an ad valorem basis,
meaning that the amount of duties owed will depend upon the duty
rate applied and the value placed upon the imported merchandise.
The duty rate to be applied to imported merchandise is determined
by its tariff classification and country of origin. Customs duties may
also be specific, i.e., 10¢ each, or may be a compound rate of ad
valorem and specific duties.
Tariff Classification and Duty RatesThere are over 12,000 separate subheadings in the Harmonized Tariff
Schedules of the U.S. (HTSUS) under which imported merchandise
may be classified. In order to determine the proper classification of im-
ported merchandise within the HTSUS, an importer must be familiar
with the General Rules of Interpretation (GRI) of the HTSUS. In many
instances, an article may seem to fit exactly within a tariff provision
and yet not be properly classified under that tariff provision. The GRI’s
are to be consulted in all cases and are applied in sequential order.
Factors affecting tariff classification include whether the product is
specifically defined in the Section or Chapter Notes; whether the item
is provided for specifically in a particular tariff item; whether a particu-
lar tariff item is more specific than another; the common meaning of a
tariff item; the principal use of an item; and the component make-up
of the item.
There are also many special programs allowing for reduced duties or
importation free of duty. Many of the programs involve imports from
developing countries such as the Generalized System of Preferences
(GSP), Caribbean Basin Initiative (CBI), and other programs. Of
course Switzerland does not qualify as a developing country, but
Swiss companies may produce products in developing countries and
ship them directly to the U.S. which may qualify for dutyfree treatment
under such a program. There are also many bilateral agreements pro-
viding for duty-free treatment such as the U.S. – Israel Free Trade
Agreement, U.S. – Chile Free Trade Agreement, and others. There is
There are many exceptions to the above rule, so an answer to any
country of origin marking question must take into account the parti-
cular product involved and the manner in which the good is imported
and used. In general, goods imported into the U.S. must be marked
in a conspicuous manner with the English name of the country of
origin. In order for the marking to be considered conspicuous, it must
be legible, easily found and read without difficulty. Goods must be
marked in such a manner as to indicate the country of origin to the
ultimate purchaser in the U.S. The ultimate purchaser is generally the
last person in the U.S. who will receive the article in the form in which
it is imported. Failure to properly mark an imported article to indicate
its country or origin can result in a special 10% ad valorem marking
duty, demands for redelivery to Customs, and accompanying liquida-
ted damages, or other penalties.
Invoicing Invoices presented to Customs must be properly prepared and meet
regulatory requirements. The commercial invoice should show the
port of entry to which the merchandise is destined; the name of the
party to which the merchandise is sold and the place from where
shipped; a detailed description of the merchandise, in English, in-
cluding the name by which each item is known, the grade or quality,
marks, numbers and symbols under which they are sold by the seller;
the quantity of merchandise; the purchase price of each item; the
currency in which the transaction is made; and all charges itemized
by name and amount including freight, insurance, commissions, co-
verings, costs of packing, and related expenses.
11.3. Entering Merchandise into the U.S.Importers typically utilize licensed Customhouse brokers to assist
in the entry of merchandise into the U.S. A Customhouse broker
is licensed by CBP and files the appropriate documentation with
Customs to obtain release of the merchandise and to effect payment
of duties. A Customhouse broker is distinguished from a freight for-
warder in that a freight forwarder performs the service of arranging for
the transportation of merchandise from point A to point B, but is not
licensed to transact Customs business with CBP or file entry docu-
mentation. Many companies frequently are both Customhouse bro-
kers and freight forwarders. It is possible for an importer to file entry
documentation himself, however, it is generally recommended that a
Customhouse broker be utilized.
The entry process begins with the Customhouse broker submitting
a Customs Form (CF) 3461 to Customs which indicates the basic
information concerning the merchandise including the shipper, im-
porter, type of merchandise, tariff classification, value and related in-
formation. The information is submitted electronically through the ABI
(Automated Broker Interface) system. CBP will then issue a release of
the merchandise or indicate that there is a problem and that additio-
nal information is needed. For shipments of products subject to FDA
requirements, appropriate information is electronically transmitted by
the broker. FDA will then notify the broker whether the merchandise
may proceed or not, as the case may be. A CF 7501 will then be filed
by the broker which is known as an “Entry Summary” and which pro-
vides all information concerning the calculation of duties, asserted ta-
riff classification items and related information, and also the payment
of duties. An entry summary must be filed within 10 business days
from the date of entry. In the event that the imported merchandise is
not granted a “May Proceed” notice by FDA, the merchandise may be
subject to detention procedures as set forth below.
It is also possible to utilize a Customs Bonded Warehouse or Foreign
Trade Zone (FTZ) regarding entry of merchandise. Merchandise may
be entered into a Customs Bonded Warehouse upon the filing of an
appropriate warehouse entry. Duties on the merchandise will not be
deposited until the product is withdrawn from warehouse for con-
sumption into the U.S. Merchandise may be inspected, repacked,
stored, and similar treatment, but may not be processed or manufac-
tured in a bonded warehouse and then brought into the U.S. In the
case of processing or manufacturing, such a product must be expor-
ted. Merchandise can also be brought into a Foreign Trade Zone, and
again, duties are not paid until merchandise is withdrawn for entry
into the U.S. A Foreign Trade Zone requires special permission but
allows for greater flexibility and freedom of manufacture, production
or manipulation.
QuotasNumerous types of quotas on imported merchandise are administe-
red through CBP. Quotas cover a wide range of products and have
traditionally been evident in the importation of food products and tex-
tiles. Quotas are generally of two types, 1) absolute quotas and 2)
tariff rate quotas. Absolute quotas are quantitative amounts that
are set for a specific period of time (usually one year) wherein impor-
ted products may be brought into the U.S. only up to those specific
limits. Allocations are generally made by specific country, and there
are also allocations for “all other countries” not receiving the specific
allocation. Once the limitations have been reached for the particular
time period in question, no more imports of those products will be
allowed in the U.S. Tariff rate quotas allow a specific quantity of
merchandise to be imported at a lower duty rate. However, once the
quantitative limitation has been reached, rather than prohibiting any
further importations during that year the products in excess of the
quota amount will be assessed a higher duty rate for imports made
62 The U.S. Food Industry 63The U.S. Food Industry
to receive a refund of any excess Customs duties paid. In order to do
so the importer must file a protest with Customs within 180 days from
the date of liquidation of the entry7.7 A protest contesting a decision
by Customs is filed at the local port where entry was made and gene-
rally the decision is also made there. In some cases, further review of
the protest by Customs Headquarters may be requested. The decisi-
on by Headquarters in such a case, referred to as an AFR (Application
for Further Review), in effect will also act as a binding ruling as to
the issue. It is also possible to request a ruling from Headquarters
where entry has been made but the entry has not yet been liquidated.
In such an instance the appropriate mechanism is referred to as a
“Request for Internal Advice”.
11.4. Food and Drug Administration (FDA) Requirements Enforced by Customs / The Bioterrorism Act of 2002.CBP acts as the first level of scrutiny with regard to imported products
and their compliance with FDA regulations. Adulteration, labeling and
other traditional FDA issues are discussed in the chapter involving
FDA requirements. The passage of the Public Health Security and
Bioterrorism Preparedness and Response Act of 2002 (“Bioterrorism
Act” or BTA) has particular relevance with regard to imports. The ba-
sic elements of the Bioterrorism Act are as noted below.
RegistrationThe Bioterrorism Act requires that any facility, domestic or internatio-
nal, that manufactures, processes, packs or holds food for animal or
human consumption in the U.S. must register with the FDA. The ra-
tionale behind this requirement is to ensure that the FDA can quickly
locate and neutralize faulty food processors in the case of delivered or
accidental contamination of food. Basic information such as compa-
ny name, address, trade names, food product categories, and name
and contact information are required to be submitted in the registrati-
on. Importantly, for foreign facilities that have no physical presence in
the U.S., a U.S. based agent must be designated.
Prior NoticeThis section of the BTA requires that prior notice of the arrival of mer-
chandise at the first U.S. port of entry must be provided to Customs
and FDA. The data that must be included in the prior notice provi-
ded is the country from which the article originates; country from
which the article is shipped; the anticipated U.S. port of arrival; the
Customs entry type and date; all carriers involved in transporting
the article; the firm name and address in each instance; the email
through the balance of the calendar year. Allocations of quota are
subject to negotiation and change on a regular basis. Certain require-
ments are present as regards the entry procedures so that Customs
can adequately account for all products subject to quota. Depending
upon the type of product involved, there may be different documen-
tary requirements.
There are currently quotas on a wide range of products including
beef; dairy products including milk and cheese; raw sugars; other
sugar containing products; various types of chocolate; certain types
of mixes and doughs; ice cream; animal feed; and mixed condiments
and seasonings. Switzerland generally falls into an “all other” alloca-
tion on most quotas as opposed to receiving a specific amount. An
exception to this involves the importation of certain Swiss and other
types of cheese. It is critical that any potential quota applicability be
determined well ahead of time as many quotas fill quickly and it may
be extremely difficult to obtain a quota allocation and appropriate
documentation.
Rulings by Customs and Administrative ContestAs previously mentioned, an importer may obtain protection and as-
surance that its tariff classification, method of valuation, or country of
origin marking methodology is correct in the form of a binding ruling
from Customs. Binding rulings are prospective in nature and provide
a written decision from Customs as to any of those issues noted
above. A ruling may be obtained from the National Import Specialist
in New York and these rulings frequently may be secured within 30
days. Rulings from the NIS in New York are limited to simple classi-
fication issues. For other issues including valuation, more complex
classification issues, and country of origin determinations, a ruling
may be obtained from CBP Headquarters in Washington, D.C. These
rulings take longer to process and can be secured within 120 days,
but often take longer. In each case, a ruling will give predictability to
an importer as to dutiable consequences of its transactions. A ruling
may be revoked or modified but such an occurrence is relatively infre-
quent and generally would not apply on a retroactive basis.
It is also possible to obtain decisions from Customs on matters con-
tested administratively. Most of the methods employed depend upon
whether or not an entry has been “liquidated”. An importer should
note that money paid to Customs at the time of shipment clearance is
only a deposit of estimated duties. The final accounting for Customs
duties occurs at liquidation of an entry which may occur months or
even years after goods are released by Customs. An importer has a
right to contest a determination by Customs regarding an entry and
address, telephone and fax numbers; and the registration number
and standard carrier abbreviation code. Prior notice of imported
foods must be received electronically by FDA through the Automated
Broker Interface (ABI) or via the Prior Notice System Interface (PNSI)
no more than five days before arrival in the U.S. Further, it must be
received no fewer than two hours before arrival by land via road; four
hours before arrival by air or land via rail; and eight hours before arri-
val by water. All shipments, regardless of value, must meet the prior
notice requirements unless exempted. Products that are exempted
from prior notice requirements are personal food or gifts accompa-
nying an individual; merchandise that is exclusively subject to U.S.
Department of Agricultural jurisdiction such as meat, poultry and egg
products; homemade goods shipped as gifts; food items shipped by
a diplomatic pouch; foods normally subject to the Bioterrorism Act
that are included in shipments of household goods; and noncon-
sumption samples for testing only.
Records MaintenanceThe BTA also requires the maintenance of records to allow for the
identification of immediate previous sources and immediate sub-
sequent recipients of food to help the FDA track food quickly and
more efficiently should a potentially hazardous shipment be released.
Persons that must establish and maintain records include domestic
persons in the U.S. that manufacture, process, pack, transport, dis-
tribute, receive, hold or import food; foreign persons that transport
food; and persons who place food directly in contact with its finished
container. It should be noted that foreign persons who do not trans-
port food in the U.S. are excluded from these regulations.
Records that must be maintained by non-transporters of food relate
to the identity of the immediate non-transporter’s previous sources,
whether foreign or domestic, including the name of the firm, address,
telephone number, type of food, date received, quantity and type of
packaging and immediate transporter source. Also, this same infor-
mation must be provided for an immediate non-transporter’s subse-
quent recipients of all foods released. The term “transporter” includes
persons who have possession, custody, or control of an article of
food in the U.S. for the sole purpose of transporting the food. It also
includes foreign persons that transport food in the U.S. regardless
of whether a foreign person has possession, custody or control for
the sole purpose of transporting it. Records to be kept in this re-
gard include those with names of the transporter’s immediate pre-
vious source and the transporter’s immediate subsequent recipient;
the origin and destination points; the date shipment received and
date released; number of packages; description of freight; route of
movement during the time the food was transported; and transfer
points. The records must be retained depending on the type of food
and whether the record keeper is a transporter or non-transporter, for
anywhere from six months to two years. Customs records must be
kept for five years. Records must be readily available and accessible.
DetentionThe BTA gives authority to the FDA to detain any shipment if it has
“credible evidence or information indicating that the article of food
presents a threat of serious adverse health consequences or death to
humans or animals”. An article of food may be detained regardless of
the size and value of the item. Should a food shipment be detained,
a detention order will be issued by FDA. The detention order must be
approved by the FDA district director at the local port and all relevant
parties will be notified. Detained food may be transferred to a secure
area as determined by the FDA. A detention order is valid for a ma-
ximum period of 30 days. If the FDA terminates a detention order or
if the detention period expires, an authorized FDA representative will
issue a detention termination notice releasing the article of food to any
person who received the detention order. If the FDA does not issue
a detention termination notice and the detention period expires, the
detention order is deemed terminated.
The detention order must have a detention order number, hour and
date of the order, identification of the detained article of food, de-
tention period involved, statement that the article of food identified
is detained for the period shown, a general statement of reasoning
behind why the food is being detained, the name of the authorized
FDA representative who approved the order, and the address and
location of where the article of food is to be detained. The detention
order may require the detained food to be marked and labeled that in
fact it has been detained Also, a detention order may be appealed as
to the reason for the detainment.
A distinction must be drawn between Administrative Detention un-
der Section 304(h) and Section 801(a) of the Federal Food Drug and
Cosmetic Act. As noted, Section 304(h) gives the FDA authority to
detain food where it has credible evidence or information that the ar-
ticle of food presents a threat of serious adverse health consequence
or death to humans or animals. On the other hand, a detention under
Section 801(a) focuses on whether the article of food 1) appears to
have been safely produced, packed and held; 2) contains no conta-
minants, illegal additives or residues; and 3) is properly labeled. As a
result, the standards of detention differ, with Section 304 detentions
requiring “credible evidence of serious adverse health consequences
or death. A detention under Section 801 will result in a document
referred to as “Notice of Detention and Hearing”. FDA has stated that
it will primarily use Section 304(h) for domestic shipments and not as
a tool to stop imports.7 Ninety days has been the traditional statute of limitation for filing an administ-rative protest but the law has recently been changed so that entries made after December 18, 2004 are now subject to a 180 day limitation period.
64 The U.S. Food Industry 65The U.S. Food Industry
PenaltiesUnder the U.S. Customs laws it is unlawful to enter, introduce or att-
empt to enter or introduce any merchandise into the U.S. by means
of a material false statement or omission, whether by fraud, gross
negligence, or negligence. The amount of penalty imposed depends
upon the level of culpability, but can be quite severe. If Customs de-
termines that an importer fraudulently evaded duties, it may assess
a penalty up to the amount of the U.S. domestic value of the mer-
chandise. If Customs determines that an importer violated Customs
laws because of gross negligence, it may impose a penalty of up to
four times the loss of Customs duties and up to two times the loss
of Customs duties for ordinary negligence. When a violation of the
Customs laws has occurred, an importer may avoid the imposition of
the harsh penalties described above by filing a prior disclosure or a
petition to mitigate penalties. A prior disclosure is a detailed explana-
tion of the circumstances and factors resulting in a false statement or
material omission which is filed by an importer before an investigation
commenced, or without knowledge of an investigation.
Importers also need to be aware of the additional sizable penalties
which may be imposed for failing to keep and present proper records.
Under this law, the duty to maintain Customs records is extended to
any owner, importer, consignee, importer of record, entry filer, or any
other party who is involved in such import related activity. Customs
has compiled a list of records which must be maintained for five years
(the “(A)(1)(A)” list), but importers should also take care to keep related
business documents for the same period of time.
11.5. Customs – Trade Partnership Against Terrorism(C-TPAT) and Re-lated Security Compliance Issues.
Security considerations have been at the forefront of the CBP agenda
since the September 11, 2001. Many programs relate to developing
greater security at ports in the U.S. and major ports throughout the
world, and other programs pertain to container security and supply
chain security considerations. The Customs – Trade Partnership
Against Terrorism (C-TPAT) is the major initiative by CBP in strengthe-
ning security considerations as regards importers, Customs brokers,
freight forwarders and ocean transportation intermediaries, and mo-
des of transportation along the supply chain. The program has recei-
ved increasing acceptance and all importers should at least consider
the possibility of participating in the program.
C-TPAT is a voluntary partnership between Customs and mem-
bers of the importing community. The program provides incentives
to join C-TPAT and encourages applications from those importers
who do business with other C-TPAT certified businesses. Because
the program is voluntary, in return for an importer’s participation and
demonstration that it meets or exceeds certain minimum security
requirements, Customs offers incentives to the importer such as re-
duced cargo inspections, an assigned account manager, access to
the C-TPAT membership list, and eligibility for account-based pro-
cess with CBP. The application process requires 1) preparation of
the C-TPAT Supply Chain Security Profile; 2) electronic submission of
the profile and 3) assessment and verification of the importer’s actual
processes.
An importer must conduct an assessment of its international supply
chain. The “supply chain” for C-TPAT purposes is defined as from
point of origin (manufacturer/supplier/vendor) through the point of
distribution in the U.S. CBP has mandated specific security criteria.
Not all the criteria will apply in all cases and Customs personnel have
indicated that each submission is evaluated on a case-by-case basis
taking into consideration specific risk factors such as the country of
origin or transshipment. Customs states that the C-TPAT program re-
cognizes the complexity of international supply chains and endorses
the application and implementation of security measures based upon
“risk analysis”.
The following measures are mandatory: Written procedures for selec-
ting business partners; container security; physical access controls;
procedures regarding documentation processing; security training
and threat awareness; physical security; and information technology
security. The C-TPAT program continues to progress and be sub-
ject to additional revisions. Potential participants should consult with
knowledgeable experts as to future changes in the program and the
advisability of participation.
Since 1907, the food industry has relied on FPA for government and