Industry Committee on Oct. 17th, 2006

[Gemma Zecchini]

I think in terms of employment numbers, they have stayed constant. I don't think we've seen huge shedding. We've seen some plant closures because of the inability to win a North American product mandate. So we have seen that. But that's certainly not something we're seeing every month or every week. This is something we see fewer than ten times in a year.

If that would help the committee to understand the employment situation, I think we have a list of member companies by riding and employment. I think nine members of this committee actually have food manufacturing companies in their ridings.

[The Chair, Conservative, James Rajotte]

Okay.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. McTeague for five minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you for being here today.

I must acknowledge it's been a few years since I was dealing with this committee. In that period of time, I recall doing a considerable amount of work in the area of food and consumer products. So I take it your organization is relatively new, or have you been around for quite some time?

[Gemma Zecchini]

We've been around since the 1940s, since before the Food and Drugs Act.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

And whom do you represent? Who are some of the major companies that you would represent?

[Gemma Zecchini]

We represent about 80% of what's on the grocery shelf. So we've got big giant companies like McCain. We obviously have all of the multinationals like Nestlé, Procter and Gamble, Unilever, Kraft, PepsiCo, and Coca-Cola. But we also have some of the Canadian companies: Janes Family Foods, and Dr. Oetker. It's really a combination.

We probably don't have a huge proportion of the smaller food processors; it's mostly medium to large.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

You may be able to anticipate my interest here, because there is something that has not been mentioned. It's something that manufacturers in my riding have raised in the past, and it hasn't had a lot of play in terms of the overall perspective of food manufacturers. It is the issue of there being very few players left to which to sell your products. It seems to me that if you have only two dominant players in Canada who actually sell groceries in this country, both of them demanding various trade allowances--slotting fees or shelf space--that would be inefficiency, and only those who have the deep pockets would be able to sell. Those who may have an innovative product or an efficient product would not be able to get it onto the shelf, unless they were prepared to pay these premiums.

The Americans have gone through a fairly substantial study and have tried to discourage this situation through a number of pieces. We know--although my information is somewhat dated as it's at least three years old--that on a per square foot basis, American consumers get more variety and diversity in foods than Canadians do, and some have attributed this to this measure.

In terms of manufacturing, how much of a disincentive is there to me, if putting my product on the shelf at a certain eye level requires my paying charges that may not be the result of efficiency, but that may keep me from being able to financially afford to get on the very shelves I need to get on to stay viable as a manufacturer, unless of course I go to a no-name brand....

[Gemma Zecchini]

It's certainly a challenge. I am not sure it's a total disincentive, but the consolidation in the retail sector has certainly been a challenge for brand-name food manufacturers. Of course, at the same time you've seen a proliferation of private label or no-name brands. In fact, Canada is probably the second largest market for no-name brands, and that reflects consolidation. At the same time, you're also seeing the expansion of mass merchandise retailers getting into food. So in Canada, for example, we will see Wal-Mart opening up superstores with a fairly large food component.

Regarding your point about getting squeezed on your margins, when you have a few giant players that have the ability to really squeeze supply chains, there is always a downward pressure on costs. So whether it's getting the price you pay to get your product on the shelf or getting squeezed by the very few people who can actually put your product on the shelf to keep your prices low, that obviously has a dampening effect. And that's why it's so important when you're facing that kind of pressure to have some avenue to grow where you can actually get out of that sort of price commodities cycle and actually make value-added products that consumers will actually pay a premium for.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

How do I do that if I can't market while I have to put maybe 20% to 30% of my overall costs toward a payment fee or schedule? That makes it impossible for me to commit and become cost-competitive. I can understand if Procter and Gamble and Unilever have the money to spend on a per SKU basis, but I'm wondering what that does for innovation. What does it do for manufacturers if they want to bring out something new, if they have to in fact provide a new trade allowance in order to get their product on board?

I understand your concerns about regulation and the need for better capital depreciation, but I'm not going to be in business if I can't get my product to market, unless I give in or I sell over, of course, which perhaps explains the concentrated nature of the industry you represent. And I say so respectfully. I'm just trying to figure out how a food processor in Canada manages if, at the outset, they have to pay for an inefficient listing to stock their product on the shelf. That has absolutely nothing to do with innovation or efficiency.

[Gemma Zecchini]

I guess the answer to your question is that listing fees are obviously a challenge and are part of the cost of doing business. Some manufacturers will be able to absorb the cost of doing business more easily than others.

If you're a small manufacturer, part of the problem you're referring to is how you get on the shelf anyway, regardless of what the listing fee is. Do you have enough brand power to actually even get there? Those are some of the realities you face in an industry in which the retail sector is very consolidated, so I understand your point there.

For manufacturers, as I said, listing fees are one cost of doing business. There is a whole host of costs of doing business. At some point, you look at the whole market and you ask yourself if you're able to bring in higher value-added products. Can you commercialize those? What are the listing fees? What are the prices you can get for them? Once you add all those up, then you make a decision that you will produce this in Canada or you will not product it in Canada.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Would it be fair to say, then, that the issue of manufacturing in this industry must also be taken hand in hand with the issue of listing fees and other trade allowances? That's really my point.

Thank you.

[The Chair, Conservative, James Rajotte]

Is that a question to me?

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Yes, it's to you, Chair. You're going to be writing a report here, and I just wanted to make sure that's the spirit of what I've just heard.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

Mr. Van Kesteren.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you so much for coming out.

As you mentioned, I am one of those who has a plant in my riding, the Heinz plant, which has been there since 1905, I think. We had the opportunity to tour that plant, and the innovation is remarkable. They spoke about some of the things you spoke about too, some of those frustrations. As a multinational, especially a company being owned by a United States company, it was a concern of theirs too that the regulations you talked about were increasingly being a burden for them.

It's interesting. When you made your recommendations, you had the normal recommendations of lower taxes, capital gains, and those things, but repeatedly you gave us a picture of something that's somewhat unsettling, and that's what's happening in Health Canada. Can you give us some specific instances, some examples of some of the frustrations you receive right now, today? I don't know if anybody has asked you that question.

[Gemma Zecchini]

Why don't you take that one, Blake?

[Blake Johnston]

Thank you very much.

I'll give you two concrete examples, in a very quick way, that speak to the lost opportunity for our sector, and also for the health of Canadians and for the agricultural sector as well.

There's a Canadian-owned company that developed a fiduciary process to isolate what's called plant sterols, which are from the outside of soybeans. They're sometimes made from pulp and paper products as well. These are food additives that are used in the European Union and in the United States. They are both approved in the European Union and the United States, and they have a health claim on them. They lower the risk of cardiovascular disease if taken in very small amounts.

Large multinationals, such as Unilever and Dannon, have used entire product lines in Europe and the United States to deliver these to the population. They have such a wide acceptance that European insurance companies have started to rebate their policyholders who eat margarine containing plant sterols as part of their normal diet. They rebate their insurance costs for life insurance. They're a $300-million-a-year Canadian business, in the United Kingdom alone. In Canada, they're not approved for use as a food additive.

So we have a Canadian company that developed a fiduciary process to make plant sterols out of residue from pulp and paper. They had to invest in the United States. They built a manufacturing plant in Texas, of all places, and they sell their product around the world. But because Health Canada has yet to approve plant sterols for use as a food additive and approve them for a health claim, they can't even commercialize their own product in Canada. That's example number one.

The plant sterols that Unilever uses in Europe are made from soybeans.The implications of that are that at a time when Ontario soybean farmers are certainly looking for another avenue to sell their product, we can't commercialize that technology in Canada.

So the implications of the lack of a framework around health claims, and in this instance the lack of regulatory approval for the food additive, have repercussions both throughout the agricultural and value chain and also to us as manufacturers. There are numerous examples of that--hundreds of them--across the system.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

That's very helpful.

I have two other things.

Has Minister Strahl said anything in public about the frustrations you're experiencing right now with Health Canada?

[Blake Johnston]

I'm sorry, has the minister said anything publicly? Well, we've met with Minister Strahl and his officials on an ongoing basis since he's been sworn in. His department is focused right now on the next round of agricultural policy, the APF II, which is the federal-provincial envelope that will fund agriculture in this country for the next five years. Certainly, there are a number of discussions happening at that level about the need to integrate food policy so that Agriculture Canada is focused on results.

We talk about the silo issue we experience. Agriculture Canada has been a champion of our industry, but the regulations lie at Health Canada. So it's the connection. Do we have a food policy in this country, and what needs to happen for the light bulb to go? If we want to help primary producers, if we want to retain employment and grow the functional food industry from our sector and improve the health of Canadians, we need to coordinate across departments. And it comes to regulatory issues.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Finally, the last question.

We're talking a lot about free trade with Korea. Has there been an impact study with that type of free trade arrangement with Korea? Have you done a study?

[Gemma Zecchini]

No, we haven't. We have not. But I think the issue was raised before. Given the failure of the Doha Round, Canada is going to have to look at how we enter into multilateral or bilateral trade agreements and where the advantages are for us in doing so.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to our last questioner, who is Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you. This will likely be my last question. It concerns free trade. How has your industry been affected by Health Canada's ban on the use of certain pesticides on products, whereas other countries use the same products and the food thus produced still manages to make its way into Canada quite easily. Increasingly, we have by-products that cost more than products from other countries. These countries use low quality products and chemicals and they face no restrictions at the border.

What difference does this make? Certainly there is an impact on prices. How does this affect your industry?