Differentiated Product Marketing

SYSTEMS OF PRODUCT IDENTIFICATION Voluntary Traceability Motivations: Differentiate and market foods with subtle or undetectable quality attributes Facilitate traceback for food safety and quality Improve supply-side management Government-Mandated Traceability Motivations: Facilitate and monitor traceback to enhance food safety Enhance consumer information about food safety and quality Protect consumers from fraud and producers from unfair competition Protect domestic producers

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Voluntary Traceability Differentiate and market foods with subtle or undetectable quality attributes “Credence” attributes: Characteristics that consumers cannot discern even after consumption Content attributes: Affect actual physical properties of product, but difficult for consumers to perceive Process attributes: Concerned with production process, usually cannot be detected even with specialized testing equipment Credence attributes may prompt some firms to segregate or establish IP and traceability systems—in fact, where attribute testing is not possible, IP and traceability may be the only way to differentiate these attributes. Some firms may differentiate production by establishing separate product lines within the same plant or by sequencing production and thoroughly cleaning production facilities between differentiated product batches. Other firms may dedicate a whole plant to the production of one specific product line. Firms that produce foods with process attributes by contracting with ingredient suppliers for commodities with particular attributes have, de facto, established traceability and IP systems. For example, firms that market dolphin-safe tuna segregate (sometimes exclusively buying dolphin-safe tuna) and keep records of their transactions.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Voluntary Traceability Differentiate and market foods with subtle or undetectable quality attributes Firms sometimes resort to third-party entities to validate claims about quality attributes Examples: Good Housekeeping Institute American National Standards Institute (ANSI), Underwriters Laboratories (UL) Council of Better Business Bureaus International Organization for Standardization (ISO) Government inspectors A fundamental issue faced by a firm producing a product differentiated by a credence attribute is how to establish market credibility. Third parties offer four primary services to help verify quality claims: establish product quality standards and/or traceability standards; test products, and/or review traceability documentation to verify that traceability and/or technical standards have been met; provide certification that standards have been met; and report violations of standards. • The Good Housekeeping Institute sets product standards and provides consumer guarantees for a wide range of goods, including foods. • The American National Standards Institute (ANSI) facilitates development of voluntary private-sector standards for a wide range of products. • Underwriters Laboratories (UL) provides standards and certification, primarily for electrical appliances. • The Council of Better Business Bureaus works with the National Advertising Review Board to investigate questions of truth and accuracy in national commercial advertising. • ISO is a worldwide federation of national standards bodies, promotes the development of standardization and international standards for a wide range of products Governments can also provide voluntary third-party verification services. For example, to facilitate marketing, producers may voluntarily abide by government established and monitored commodity grading systems.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Voluntary Traceability Differentiate and market foods with subtle or undetectable quality attributes Facilitate traceback for food safety and quality Traceability helps producers reduce time to identify and remove contaminated foods from production lines and/or from market, before food item reaches consumers Firms want to avoid the association of their brands with safety hazards or compromised quality. Most food processors put coded information on food packaging to facilitate product identification. The struggle to control BSE in cattle in the United Kingdom has warranted the development of various traceability systems to document the distribution of beef products. One example is the traceability system adopted by an Irish supermarket which uses DNA testing capable of tracing meat to animal of origin rather than to farm or herd.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Voluntary Traceability Differentiate and market foods with subtle or undetectable quality attributes Facilitate traceback for food safety and quality Improve supply-side management Traceability helps manage product flows and track retail activity Bar codes are composed of a series of numbers detailing standard information on type of product and manufacturer (the UPC code), and a series of numbers assigned by the manufacturer to nonstandard production or distribution details. The original UPC system has combined with technological advances and e-marketing to spur the development of integrated systems that code, track, and manage wholesale and retail transactions. For example, a few big retailers such as Walmart and Target have created proprietary supply-chain information sys-tems that their suppliers must adopt. In other cases, firms establish systems to link suppliers and buyers. For example, UCCnet, which is a subsidiary of the Uniform Code Council, has developed an inte-grated system to standardize and automate information systems across a supply chain. Vegetable and fruit farmers routinely tag their produce crates to record location and date of harvest. This information aids in inventory management at the packinghouse and in tracking shipments.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Mandatory Traceability Facilitate and monitor traceback to enhance food safety Mandatory traceability enables authorities to identify sources of food contamination/hazards and contain risks faster

SYSTEMS OF PRODUCT IDENTIFICATION Motivations for Mandatory Traceability Facilitate and monitor traceback to enhance food safety Enhance consumer information about food safety and quality If producers are not providing as much information about safety/quality as consumers desire, mandated traceability may allow consumers to choose food products better matching their preferences Note that if markets produce all the information that consumers are willing to pay for, mandatory traceability systems would be superfluous and introduce unwarranted costs.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations of Mandatory Traceability Facilitate and monitor traceback to enhance food safety Enhance consumer information about food safety and quality Protect consumers from fraud and producers from unfair competition By enforcing traceability, the government may assure consumers and competitors that firms claiming to sell products with credence attributes can substantiate their claims If firms are not required to establish proof that credence attributes exist, some may try to pass off standard products as those having credence attributes, in order to gain price premiums. No mandatory traceability would be necessary for conventional foods because consumers typically are not willing to pay more for these foods.

SYSTEMS OF PRODUCT IDENTIFICATION Motivations of Mandatory Traceability Facilitate and monitor traceback to enhance food safety Enhance consumer information about food safety and quality Protect consumers from fraud and producers from unfair competition Protect domestic producers Mandatory traceability to identify domestically produced vs. imported foods may allow domestic producers to command a premium

SYSTEMS OF PRODUCT IDENTIFICATION Examples of Mandatory Traceability Certified Organic Country-of-Origin Labeling (COOL) Age verification for Japan Grass-fed beef Naturally raised livestock

SYSTEMS OF PRODUCT IDENTIFICATION Examples of Mandatory Traceability Certified Organic Products Products grown and processed according to USDA’s national organic standards and certified by USDA-accredited State and private certification organizations Organic Foods Act of 1990 established national standards for organically produced commodities Organic growers must have to be certified under USDA’s National Organic Program A person may sell or label an agricultural product as organically produced only if product has been produced and handled in accordance with National Organic Program

SYSTEMS OF PRODUCT IDENTIFICATION Examples of Mandatory Traceability Certified Organic Products

SYSTEMS OF PRODUCT IDENTIFICATION Examples of Mandatory Traceability Certified Organic Products Total U. S. organic industry sales around $9 billion in 2002. Annual growth rate exceeding 20%

SYSTEMS OF PRODUCT IDENTIFICATION Country-of-Origin Labeling (COOL) 2002 Farm Act Retailers must ensure verifiable audit trail COOL not required for foods that are ingredients of processed food items Foodservice establishments exempt from COOL “Unknown origin” label not allowed Was to become mandatory Sept 30, 2004 Delayed until Sept 30, 2006 Delayed again until Sept 30, 2008

SYSTEMS OF PRODUCT IDENTIFICATION Country-of-Origin Labeling (COOL) Disagreement on how to implement Presumed US Make importers label Anything not labeled is presumed to be US Verifiable audit trail Move the product with a signed affidavit Keep records to back up claim if audited Regardless of cost at farm level there is a cost beyond the farm gate to segregate and document

NAIS is NOT COOL COOL is an amendment to the 1946 Agricultural Marketing Act Retailers inform all consumers Sec of Ag cannot implement traceback NAIS (National Animal Identification System) Animal health surveillance Confidential system, only federal veterinarians

The Proposed NAIS System National Database USDA Required Feedlot Packer Auction Barn Cow/Calf Producer Third Party Database Potential Industry Use

SYSTEMS OF PRODUCT IDENTIFICATION ISO, Greek for “equal” International standard for quality systems In a nutshell: Say what you do Do what you say Document it with records

SYSTEMS OF PRODUCT IDENTIFICATION Age verification for Japan Japan will accept 20 months or less Two methods to confirm age Physiological maturity A40 Production records Need records to export variety meat Based on ISO principles

Age verification for Japan Signed affidavits alone are not sufficient to qualify cattle for the EV Program for Japan. Cattle must be approved either through an approved USDA Process Verified Program or QSA Program. These Programs require supplier evaluations and re-evaluations.

Age verification for Japan Quality Management System A written management system that must address: Documentation Requirements Management Responsibility Resource Management: Production of Product Measurement, Analysis and Improvement: Record Requirements

Age verification for Japan Producer Requirements Records to validate age Procedures – Farm or Ranch Plan Written management plan Records to validate activities Must be repeatable Producer is evaluated by company and/or USDA to verify conformance.

Age verification for Japan Management Plan Describe operation/farm Define practice What is done Who does it and how are they trained How is it recorded Where are the records

Product v. Process Certification Tighter product specification Sorted by processor Process specification How it is produced Role of and return to producer????

Commodity v. Product Commodity Products Undifferentiated Perfectly competitive markets Products Differentiated Monopoly - Workable competition Niche Market, branded, labeled, etc

Motivation Commodity market Product markets Price takers Cost driven Long-run P=minimum ATC Product markets Price makers Costs not as important Potential for sustained higher profit margins

Commodity system Extremely efficient Challenges Co-mingling from many sources Consumers signals not transmitted Little incentive to improve because benefits not passed through to producer Expand to capture economies of size

Product system How to differentiate? Managed supply chain Allows traceback to producer Restricts production Focus on quality

Procedures Why is the product different? How it is produced Where it is produced What is produced What it includes What it doesn’t include Develop marketing around the difference

Procedures Limit production and access to control supply Can’t look like price fixing to regulators Geographical restrictions Swiss cheese Champaign Trade secret Emphasis on quality Traceability to verify

Farmer-Owned Brands Hayes and Lence Parma Ham Restricts area where ham can be cured Claim unique climate and winds Restricts breeds and regions where hogs can be produced Italian hog prices averaged $7.44 more than German hogs 1999-2001

Farmer-Owned Brands Hayes and Lence Vidalia Onions Selected region in south Georgia Used existing state law to restrict area State-owned trademark Premiums of $.30-$.34 per pound First spring sales are 30-50% higher

Iowa 80 Beef Minimum Certification Requirements Verified to be sired by a 100% Angus bull. Source verified to the farm of birth using an identification system Fed in an Iowa feedlot for a minimum of 180 days. Fed a high-concentrate ration that totals at least 75 percent corn or corn co-products over the feeding period. Age verified and processed at 18 months of age or less. USDA grades upper one-third Choice or Prime.

Commodity v. Product Commodity Minimum requirements Anonymous No product or price differentiation Profits tied to low cost of production Product Product specifications Traceback and accountable Product and price differentiation Profit tied to costs and ability to protect higher prices