Industry Trend Analysis - Limited Risk Of EU Action On Dual Food Standards - OCT 2017

BMI View : The EU will conduct further research into dual food quality standards in response to the concerns of Eastern European members, but the findings are unlikely to lead to disruptive policy intervention for now . That said, a radical overhaul of food quality standards could lead to significant shifts in demand patterns , constituting a n unlikely but significant medium-term risk to our consumption forecasts.

There are significant differences between Western and Eastern Europe when it comes to the content and quality of identically branded food products. Two separate studies were conducted in 2016, one by the Hungarian food safety authority, NEBI, and the other by the Slovakian Agriculture Ministry in collaboration with the SVPS (the State Veterinary and Food Administration). These studies tested a range of food products sold in the EU - including dairy, meat, fish, chocolates, baked goods, cheese and drinks - and collected information on the content of meat, fats, proteins, sweeteners and food colouring in those same products. Significant differences were found between identically branded products in Western and Eastern European markets, which are described in further detail below. The perception that lower-quality products are being 'dumped' on Eastern European markets has caused significant controversy, implicating a number of major brands, including: Manner, Ferrero , Bahlsen, Coca-Cola, Tchibo, and Nestle.

Purchasing Power Drives Food Quality Offering
Food, sales, EURmn per household
Sources: BMI/National Statistics

European demand for a number of essential agricultural commodities is currently structured by differentiated production methods across the region. To cite some examples from the research:

  • Leibniz biscuits sold in Poland were found to contain a mixture of butter (5%) and palm oil (a cheaper alternative), whereas the same biscuits in Germany contained only butter (12%).

  • Coca-Cola sold in Slovakia, Hungary, Bulgaria and Romania is made with isoglucose, a corn-based substitute for regular sugar (sacharose). The German and Austrian equivalents are made with sugar.

  • Own-brand sausages sold in the Czech Republic by Kaufland was found to have more fat and less pork than the same meat sold in Germany.

  • K-Classic toasted bread was found to have 59% whole grain flour content in Germany and only 19% in the Czech Republic.

Aggregate EU demand for high-quality ingredients is by implication weighed down by the use of low-cost substitutes like palm oil and isoglucose in a number of Eastern European countries.

Dual food standards are not illegal under current EU regulations, but Eastern European Member States will continue voice their grievances at EU level, for political reasons. EU law does not require the same recipe for identically-branded products, allowing food companies to vary their production processes depending on consumer preferences, local purchasing power and available sourcing options. There have hitherto been no complaints regarding food safety or product labelling associated with the controversy on dual food quality standards. However, the issue has been discussed at a high level by the Agriculture Ministers of the Visegrad Group (Czech Republic, Hungary, Poland and Slovakia) and was successfully pushed onto the agenda of the EU Summit, the highest diplomatic level in EU affairs. The European Commission has agreed to conduct further research on the issue, and will be doing so in a climate of increasing anti-EU sentiment, especially in Poland and Hungary ( see articles: ' Rogue Poland As Growing Dilemma For EU ' ; ' Orban Raising Populism To Ensure 2018 Victory ').

Risk Of Policy Boost To Eastern European Consumption
Consumption Of Sugar (LHS) And Butter (RHS) ('000 tonnes)
Source: BMI

EU policy response is likely to focus on 'light-touch' policy solutions such as greater corporate transparency, but the risk of a more interventionist approach remains. Some Eastern European countries are pushing for EU legislation that would require identical recipes or ingredients for identically-branded products across the single market. Mandatory harmonisation is likely to face strong resistance in Brussels, on the grounds that current differences result from consumer preferences. However, a more interventionist policy response is possible, and could shift the structure of demand across the EU market. Harmonisation would most certainly converge towards Western European standards, placing upward pressure on demand for high-quality ingredients like sugar, dairy and Arabica coffee, and downward pressure on demand for lower-quality substitutes like palm oil, isoglucose and Robusta.

Policy change would accelerate ongoing increases in demand patterns, as opposed to disrupting the trend. The above trends would fast-track changes to consumer preferences that we have already identified as one of our agriculture megatrends: 'Consumer Awareness and Food Regulations On The Rise' (See 'Agriculture Megatrends To 2050: The Issue Of Food Security'). Specifically, we forecast increasing consumer awareness and heightened food regulations to occur gradually, as consumer purchasing power increases. In the short term, such changes could put pressure on food manufacturers' margins, given the cost of higher-quality ingredients, or the revenue losses associated with reduced servings and/or price hikes.