Recent industry innovations improving the safety
of the Nation’s
meat supply range from new pathogen tests, high-tech equipment,
and supply-chain management systems to new surveillance networks.
Innovation, along with diffusion of innovation
through imitation, helps lower the cost of safe food and increase consumer
choice. With innovation, consumers can better choose the level of safety they
desire.
Though food safety and food safety innovations are desirable, meat processors
face special challenges that weaken their incentives to invest in food safety
improvements. Some restaurant chains and large retailers are encouraging processors
to overcome these challenges. These large, savvy meat and poultry buyers are
setting and enforcing safety standards and creating markets for food safety.
As a result, they are driving increases in food safety investments throughout
the meat supply chain.
Incentives for Innovation Relatively Weak for Food Safety
In research conducted for well over half a century, economists have found that
appropriability, the ability to control and exploit the benefits of an innovation,
plays a key role in innovation. A firm will invest in food safety innovation
only if it expects to reap benefits, such as an increase in sales, price premiums
for safer foods, improved brand equity, consumer loyalty, lower recall costs,
and reduced liability (see box, “How Is Innovation
Defined?”).
How
Is Innovation Defined?
Innovation is all the activities that result in new products or new production
methods. It is all the scientific, technological, organizational, financial,
and commercial activities necessary to create, implement, and market
new or improved products or processes. Innovation takes two forms: product
innovation and process innovation.
A product innovation is the development and commercialization
of a product with improved performance characteristics.
Product innovation tends to expand consumer choice. More
product choice allows more consumers to find products that
better match their particular set of tastes and preferences,
thereby expanding consumer welfare. For example, pre-washed
lettuce, baby carrots, and green ketchup have expanded
consumer choice and well-being.
This welfare-increasing effect of product innovation is not guaranteed,
however. Product innovations that become the industry or regulatory standard
may ultimately reduce, not increase, product differentiation and consumer
welfare. For example, some cities prohibit sales of unpasteurized milk
to protect consumers from pathogens in unpasteurized milk. However, this
regulation eliminated consumers’ choice to buy raw milk.
A process innovation is the development or adoption of a new or significantly
improved production or delivery method. Process innovations may be technological
or organizational, involving changes in equipment, human resources, working
methods, or any combination of these. Process innovation tends to make
production more efficient. Some or all of these efficiency gains may
be passed on to consumers in the form of lower prices.
The distinction between product and process innovation for food safety
is not clear cut. Food safety process innovations often lead to product innovations—safer
foods—not just the same level of safety at less cost. Ultra-high-temperature
heating (UHT) and irradiation are two process innovations that have created
product innovations: safe, shelf-stable juices and milks in convenient
boxes in the case of UHT, and safer spices and meat patties in the case
of irradiation. Even such processing changes as properly refrigerated
trucks, lot coding, lay-date stamping on eggs, pathogen testing, and
instant-read thermometers all lead to safer final products, blurring
the line between process and product innovation.
Unfortunately, meat producers have had difficulties appropriating the benefits
of food safety innovation because improved food safety is a difficult attribute
to market to consumers. For the most part, food safety is a credence attribute,
meaning that consumers cannot evaluate the existence or quality of the attribute
before purchase, or even after they have consumed the product. Consumers
cannot usually determine whether a food was produced with the best or worst
safety procedures, or whether a food poses a health risk. For example, consumers
cannot detect by sight, smell, or price whether a raw egg is contaminated with Salmonella.
Food companies have successfully marketed a long list of products involving
credence attributes. For example, companies advertise their organic, dolphin-safe,
and nongenetically engineered products and have developed a number of ways,
such as third-party certification, to verify these credence claims. Surprisingly,
in the food safety area, producers have been slow to adopt these verification
mechanisms or to advertise their good safety records.
One reason may be that in advertising their good safety records, and thereby
disclosing the poorer safety records of their competitors, firms also disclose
general food facts that may alarm consumers. Firms may fear that consumers
will not react positively to claims like “our Salmonella count
is 50 percent less than the leading brand.” Meat producers may decide
that though such advertising could differentiate them from poorer quality
producers, any overt mention of safety risks could drive customers away.
In addition, firms may want to avoid specific safety guarantees that could
expose them to greater liability. Food
safety is not easy to guarantee, particularly in the case of pathogen contamination.
While careful producers can greatly reduce their risks, even they can undergo
a food safety problem. Deviations from planned procedures, uncertainty regarding
input contamination, equipment malfunction, personnel factors, pathogen grow-back,
and sampling variability all contribute to the potential for safety breaches.
When a batch of Odwalla apple juice was made from apples that had fallen to
the ground, contrary to company policy to use apples fresh off the tree, the
deviation caused the 1996 E. coli O157:H7 outbreak.
Finally, some meat producers may not invest in producing safer food because
they lack technical expertise, or know the probability of getting caught as
the cause of a foodborne disease outbreak is low. For example, an individual
consumer who becomes ill after eating contaminated ground beef cannot be certain
that the hamburger caused the illness. The 1- to 5-day lag between ingestion
and illness makes it difficult to know with certainty which of the multitude
of foods eaten in this time period was responsible. This uncertainty reduces
the risk of detection for firms with lax safety procedures.
Channel Captains Create Markets for Food Safety
What has happened in the last decade to spur food safety innovation? Foremost
are the stringent requirements for pathogen control demanded by large meat
and poultry buyers like Jack in the Box, Red Lobster, and many foreign buyers.
These buyers have successfully created markets for food safety through their
ability to enforce safety standards with testing and process audits, and to
reward suppliers who meet safety standards and punish those who do not. These
companies are referred to as “channel captains”—savvy buyers
who monitor food safety up and down their supply chain. Through contracts with
these channel captains, meat
and poultry processors are better able to appropriate the benefits of their investments
in new food safety technologies.
Two case studies and a national survey of meat and poultry plants illuminate
the role of these savvy buyers in creating a market for food safety and driving
innovation.
Innovative Pathogen Detection Program Meets Buyers’ Requirements
After the deaths of several children in the 1993 outbreak of E. coli O157:H7
caused by contaminated ground beef, Jack in the Box canceled all its contracts
with hamburger patty suppliers, required new food safety assurances, and asked
the meat companies to work with them to ensure the safety of their hamburger
patties. Texas American Foodservice Corporation was one of two companies to
answer this challenge. Texas American, a large supplier of hamburger patties
to fast food chains, developed a system for sampling and testing ground beef
and hamburger patties for microbial pathogens. Texas American collaborated
with the pharmaceutical firm DuPont, which had developed a superior system
for detecting E. coli O157:H7 as the cause of human illness. The DuPont
detection system uses Polymerase Chain Reaction (PCR) technology, which is
faster and more reliable than traditional microbiological testing methods.
Texas American and DuPont worked together to apply the PCR testing technology
to ground beef.
Texas American also developed a sampling protocol for the new system. Sampling
protocols are critical to the
management of pathogen risk because while testing every product is not economically
feasible, enough product must be tested to manage risk to an acceptably low
level. Texas American tests samples at three locations in the plant: incoming
beef trim, ground beef at the final grind head, and hamburger patties. Samples
are taken at 15-minute intervals and suppliers are notified if any pathogens
are detected. In addition, the temperature of incoming beef trim must be 40
degrees Fahrenheit or less, and all beef trim must be ground within 5 days
after the carcass is broken into steaks, roasts, and trim. Random tests verify
the efficacy of Texas American’s sanitation procedures.
The emergence of technically proficient buyers and the development of a market
for safer hamburger patties have allowed Texas American to benefit from its
food safety investments. Texas American evolved from being a commodity producer
dependent on the spot market to a contract supplier. A contract supplier knows
how much product is to be delivered by set dates and can plan its inventory
and production schedule accordingly. This shift has allowed Texas American
to improve its operational efficiency through better planning for capacity
utilization, capital investment, spending plans, and other business activities.
Texas American has also been able to use its expertise in pathogen control
to attract new customers. Texas American estimates that 25-30 percent of its
new sales between 1998 and 2001 occurred because of its superior safety record.
Equipment Innovation Requires a Buyer and Collaboration
The development and commercialization of Frigoscandia’s beef
steam pasteurization system illustrates the
ripple effect that the emergence of food safety markets can have on the entire
supply chain—all the way down to equipment manufacturers.
In 1993, Frigoscandia Equipment, a Swedish refrigeration company, designed
a system to reduce the level of microorganisms, particularly pathogens, on
the surface of meat carcasses using steam. The use of steam to kill pathogens
was not new, but its application to sides of beef was. A stainless steel cabinet
is installed at the end of the slaughter line, just before the sides of beef
(hanging from an overhead rail) enter the chiller. Within the cabinet, a blanket
of steam kills pathogens on the surface of the beef. The clean beef then enters
the chiller. From the chiller, the beef will be cut up into steaks, roasts,
and trimmings for hamburger.
To reduce marketing risk and better tailor the invention to the needs of
the beef industry, Frigoscandia Equipment partnered with Excel, the second
largest
U.S. beef packing company. With Excel’s expertise in operating beef packing
plants, the innovation could be tested in high-speed, large plants to create
a commercially viable new technology. Frigoscandia and Excel then asked Kansas
State University microbiologists to independently test the pathogen-reducing
performance of the equipment. The Kansas State team found that steam pasteurization
was the most effective control method of those studied in reducing pathogenic
bacteria on surfaces of freshly slaughtered beef.
After receiving acceptance of the technology from USDA’s Food Safety
and Inspection Service (FSIS) in 1995, Frigoscandia Equipment began marketing
its equipment. To keep competitors from selling “knockoffs,” Frigoscandia
secured four patents. Frigoscandia benefited from its innovation with strong
sales.
By 1997, Excel had installed the equipment in all its beef slaughter plants,
and IBP, the largest beef packer in the U.S. announced its intent to install
the equipment in its plants. Excel benefited from its early collaboration with
Frigoscandia by positioning itself as a leader in food safety and enjoying
an increase in beef sales and contracts.
A National Survey Confirms the Importance of Buyer Specifications
Both case studies indicate the importance of channel captains in creating markets
for food safety and spurring
innovation. But how widespread is this phenomenon in the U.S. meat and poultry
industry?
A national survey of U.S. meat and poultry slaughter/processing
plants was conducted by researchers from ERS and Washington State
University (see “Market
Incentives Raise Food Safety Bar” in this issue). The
survey contained 40 questions about food safety technologies and
practices in five broad categories: equipment, testing, dehiding
(for cattle slaughter plants), sanitation, and plant operations
(see box, “Plant Managers Queried
About Safety Procedures”).
Plant Managers Queried About
Safety Procedures
Almost 1,000 plant managers or food safety officers responded to the ERS/Washington
State University survey. Forty questions covered food safety protocols, investments,
and recent changes in response to market conditions or to the 1996 Pathogen Reduction/HACCP
regulations. Sample questions from each of the five categories follow:
Equipment. Does the plant use a steam
carcass pasteurizer, such as
Frigoscandia’s?
Testing. Does the plant conduct more
tests than required by Federal
regulation and, in particular, does it test raw or cooked product for E. coli O157 or Listeria?
Dehiding. Does the plant use an air
exhaust system vacuum or
other system that creates negative air pressure around the carcass in
the dehiding area?
Sanitation. How often are drains sanitized?
Plant operations. Are employees offered
incentives, such as gifts
or compensation, for detecting and reporting possible sources of
contamination or unsanitary conditions?
An index from zero to one was created to rate the use of food
safety technologies and practices across meat and poultry plants.
Plants earned higher ratings
if they reported sophisticated food safety equipment, conducted more extensive
pathogen testing, or employed more intensive cleaning operations. The data
reveal wide variability in food safety practices among U.S. plants.
Food safety index scores are considerably higher in all five
safety categories for beef companies that face buyer specifications
for pathogen control than for those that do not. For example, plants
that said their products must meet stringent buyer requirements,
including foreign buyers, had scores of 0.77 for testing, while
those that did not had scores of 0.35. The results
support what was learned in the two case studies. Buyers who pay a premium
or guarantee sales for higher safety standards enable suppliers to benefit
from investments in food safety technologies.
In all five categories, the food safety index score is markedly higher for
beef companies that export than for those that do not, suggesting that foreign
buyers are imposing food safety requirements and acting very much like large
domestic buyers. Differences in the index scores are larger for equipment,
testing, and dehiding technologies than for sanitation and plant operations.
Channel Captains Benefit, Too
The emergence of large, technically proficient buyers is helping to create
markets for food safety and spur food safety innovations. The question remains
as to why some fast food restaurants and large retailers have adopted the role
of channel captains, monitoring the safety of products up and down the hamburger
supply chain. Why have they taken on the added expense of testing and audits?
The major, name-brand fast food restaurant chains and large retailers are able
to appropriate some of the benefits of their investments in food safety because
of enhanced reputations for safe food. Maybe even more importantly, though,
these firms benefit from their investments through a reduced risk of being
associated with a foodborne illness outbreak. This is doubly important for
restaurants that tend to have higher risk of liability than others in the meat
supply chain because they are more easily
identified than others in the chain and because they are responsible for final
food preparation. In addition, restaurant and retail chains have much to lose
if identified as the source of an outbreak, namely their large investments
in brand name equity.
Could Government Provide Additional Incentives?
The success of the fast food restaurants and other channel captains in stimulating
innovation reveals the importance of information for safety performance. All
channel captains require their suppliers to provide testing and/or other evidence
that food safety
standards have been met.
Government policy targeted at increasing information on safe and unsafe producers
may help spur innovation. The Federal Government, for example, could post
more food safety information about the performance of individual plants and
their products, enabling consumers and commercial buyers to compare safety
records. Government-approved “Enhanced Food Safety” labels would
be an additional cue to consumers. This information increases the visibility
of food safety innovators, allowing them to appropriate the benefits of their
investments.
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