By John Carey Earlier this year, Swiss ingredient maker DSM Nutritional Products launched a "premium" Vitamin C. The marketing gambit: It comes from tidy Scotland instead of sprawling China, which provides 80% of the world's supply. But it was a tough sell. "We were struggling to get the price we thought was justified by the quality," says communications chief Alex Filz.
No more. Not after contaminated products from China ended up on supermarket shelves. Suddenly, "Not Made in China" has become a major selling point. DSM's Quali-C brand is flying out of its Scottish factory at more than double the price for bulk Vitamin C. "It's a tremendous business opportunity for us," says Filz (see BusinessWeek.com, 7/13/07, "China: Due for a Reality Check?").
In the midst of the imported food crisis, companies are finding clever ways to cash in. Some, like DSM, are playing the "not from China" card. Upscale New York grocery Fairway reassures consumers that none of its seafood is Chinese. Others see a growing business in making this global supply chain safer. One big player: IBM, which is pushing systems to trace the food supply from source to market. "Whenever there's a crisis, there will always be a silver lining for someone who can help alleviate whatever pain is out there," says crisis consultant Gene Grabowski, senior vice-president of Levick Strategic Communications.
Secaucus (N.J.) specialty dog food producer Freshpet found that silver lining. At the end of last year, it was selling its premium all-natural blend of meat and vegetables in a mere 200 stores. Most retailers said the idea was "interesting" but didn't bite, recalls co-founder Scott Morris.
Then pets began dying and, beginning in March, dozens of products were recalled because they might contain melamine from China, an industrial chemical. Freshpet threw out its only overseas ingredient, a protein component from Europe, and quickly ramped up its marketing. It printed big stickers for retailers to put on the refrigerator cases where its products are stocked, highlighting that the food was made daily with fresh, local ingredients. All of a sudden, the retailers who had given Freshpet the cold shoulder "started calling," says Morris. Now, roughly 1,000 stores offer its dog food, with another 1,000 coming by yearend. Projected 2007 sales have more than tripled to nearly $50 million. "Sometimes you're good--and you get lucky," he adds.
With today's global food supply, however, eliminating every particle from China is impossible for most major food companies. Even a simple product like a cereal bar contains ingredients from India, the Philippines--and China, which now supplies the bulk of the world's vitamins, apple juice, and other goods. "I think most people are surprised by the diversity of the sources," says ingredient consultant Peter Kovacs.
Instead, the latest woes have many food giants scrambling to ratchet up efforts to ensure the safety of imported ingredients. That's providing a big boost to a host of companies aiming to help with the task. While Kellogg's has long had systems in place to monitor its global food chain, for example, it has arranged additional third-party audits of its suppliers. Many companies are also broadening the list of things they're analyzing. "One of the reasons melamine slipped through is that no one knew to test for it," says Grabowski.
This increased scrutiny is good news to Gene Rider, North American consumer goods vice-president of Intertek Group PLC. Operating in 110 countries, with headquarters in London, the company offers a complete quality system for clients ranging from Kraft (KFT) Food Inc. and Unilever to Nike (NKE) and Microsoft Corp. (MSFT) Intertek will evaluate and train suppliers, test products, and provide other services. Since the latest bans and recalls, inquiries have more than doubled, says Rider. "Companies are increasingly asking to outsource their quality programs," he says. "It's tremendous for us."
IBM also sees a big opportunity in this market. One of the key steps to putting safe food on the dinner table is tracing the entire path of ingredients and products from fields and factories to grocery store shelves. Such a system sounds like a no-brainer, but in practice it's difficult, requiring sophisticated markers and software. "It's a global-information management problem," says Guy A. Blissett, head of consumer products at the IBM Institute for Business Value. The tech giant is trying to capitalize on that demand by providing the tracking tags and sensors to monitor shipments or processes, as well as the computers and software to make sense of it all.
Not only does such a system help boost safety and quality, says Blissett, it enables a company to offer up premium products. It's possible to document, for instance, that beef was grown without hormones, or that yogurt contains the advertised bacteria--and thus be able to charge a higher price.
Already, retailers overseas have found big profits by giving consumers just that kind of information. After outbreaks of Listeria bacteria and other tainted food in Europe, French hypermarket chain Carrefour created Quality Line products, which come from local farmers who have agreed to tough quality standards. The products are now offered in 15 countries and are increasingly popular. In Belgium, where feed contaminated by dioxin was fed to livestock, 98% of beef and 56% of pork carry the Quality Line stamp. Shoppers appreciate the extra assurance. "Whenever there is a crisis, our performance ends up being much better than that of competitors," says Roland Vaxelaire, director for quality, responsibility, and risk management at Carrefour in Paris.
For now, big U.S. chains are just beginning to move in that direction, with certified organic foods and produce labeled with the country of origin. But Blissett says a high level of interest is fueling his business. "Consumer product companies are realizing that, to be competitive, they need to have a robust traceability system." And IBM isn't just waiting for the market to develop. Recently it has tried aggressively to drum up customers with the help of a survey showing that nearly 40% of consumers are already changing what food they buy because of safety concerns.
In recent years, food producers have been under relentless pressure to buy ingredients at the lowest price. That, inevitably, led them to China. Now, says DSM's Filz, they increasingly are "moving away from decisions made just on price to something like a stamp or seal." No surprise then that DSM is creating such a seal, which would guarantee the quality, reliability, and traceability of its products. That's good for safety--and for DSM's business.
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With Michael Arndt in Chicago and Jennifer Schenker in Paris