As discussed in part 1 of this two-part series, the food and beverage industry is expected to see regulatory and legislative changes on multiple fronts in 2017. But industry observers also anticipate an active year in U.S. courts and in the boardrooms of domestic and international food and beverage companies.
Food Labeling Issues on the Horizon
2017 looks to be another important year for food labeling for at least three reasons.
First, the industry continues to await U.S. Food and Drug Administration guidance and/or rulemaking on important subjects such as how to define terms like “natural” and “healthy” on food labels. The comment period on use of the term “natural” in food labeling closed in May 2016 after over 7,500 comments were received. The comment period on use of the term “healthy” in food labeling has been extended to April 26, 2017. When the FDA hands down guidance on these terms, which could be at some point in 2017, the industry will likely have increased clarity on how and when it is appropriate to use “natural” and “healthy” on food labels. This clarity will be welcome as it will provide a bright-line and consistency for the industry and will likely reduce the number of food labeling class actions based on these particular claims.
Second, class actions targeting food labeling continued to generate headlines in 2016 and will no doubt do so again in 2017. While the number of new cases filed in 2016 plateaued since 2015, activity in these cases slowed down substantially as many cases were stayed pending FDA guidance and rulemaking discussed above or because of the pendency of appeals in other food labeling class actions. In fact, very few decisions on class certification were even handed down in 2016, and most of those were denials. Instead, the key fights in these cases appear to have shifted to appellate courts on issues such as ascertainability and what kinds of damages need to be shown at the class certification stage. In 2017, these issues will continue to bubble up to the appellate courts, and the U.S. Supreme Court may even have opportunities to weigh in on these issues. In addition, cases with new targets such as slack fill, “made in the USA” claims, premium ingredients, overall effect of the packaging, trans fat, absence of particular ingredients, and “craft” claims continue to be filed. With so many cases stayed in 2016 and the pace of new claims continuing at past levels, 2017 could be a very busy year for food labeling class actions if the stayed cases move forward.
Third, the passage of the National Bioengineered Food Disclosure Standard by Congress in July 2016 was one of the most significant labeling events of the year. The legislation requires food manufacturers to disclose information related to genetically modified organisms (GMOs), but more importantly preempted state GMO labeling laws that had been passed in states such as Vermont, Connecticut, and Maine. Pursuant to this new federal law, the USDA has two years to implement specifics, including determining the amount of GMOs that would trigger disclosure and whether digital disclosure methods are workable. By the end of 2017, this time period will be nearly closed, so the lion’s share of the work on these issues will likely be accomplished this year. The industry will be keeping a close eye on these developments in 2017.
Food and Beverage Mergers Expected to Rise in 2017
Unlike 2015, which saw a record number of merger and acquisition transactions, 2016 proved to be a slower year for M&A activity for a variety of industries, including the food and beverage sector. A recent study by Donnelley Financial Solutions found that as of the end of Q3 2016, global deal volume had fallen by 20 percent year-over-year. This slowdown in M&A activity was due largely to political uncertainty in the United States and Europe resulting from the United Kingdom’s Brexit vote and the U.S. presidential election. Now that the Brexit vote and U.S. presidential election have passed, many market observers expect to see a significant uptick in M&A activity in 2017.
While analysts expect the fintech and financial services industries to lead the way in M&A activity for 2017, the food and beverage industry will likely also see a rise in deal flow. Several large food and beverage transactions that commenced in 2016 are expected to continue into 2017. Danone SA’s $12.5 billion acquisition of Denver-based organic food producer WhiteWave is slated to close in the first quarter of 2017 pending final regulatory approval. Coca-Cola Co. and AB InBev announced in December that they have reached an agreement to sell AB InBev’s 54.5 percent equity stake in Coca-Cola Beverages Africa to Coca-Cola Co. for $3.15 billion, and Japanese food company Sumitomo Corporation and Irish banana giant Fyffes plc recently reached an agreement pursuant to which Sumitomo will acquire Fyffes for $798 million.
Additionally, market watchers expect the trend of large food companies pursuing strategic acquisitions of smaller, organic and other health-conscious food companies, such as Danone’s acquisition of WhiteWave, to continue into 2017. Analysts attribute this trend to the fact that these smaller companies tend to be highly innovative in ways that larger food producers are not and, more importantly, have deep brand loyalty making them attractive acquisition targets. Many of these smaller companies that were ripe for acquisition in 2016 avoided going to the market because of 2016’s political volatility. Now that the political climate has settled, there may be an increase in acquisitions of smaller, middle-market, health-conscious food companies by larger brands.
Finally, although the Federal Reserve recently voted to increase interest rates, rates are still relatively low and the cost of capital is still cheap. As a result, strategic and financial buyers will continue to be able to obtain acquisition financing on attractive terms. Public equity markets have also risen significantly, increasing the likelihood that companies will pursue initial public offerings and other public offerings in 2017.
Taken together, all of these factors suggest that 2017 may see a significant uptick in M&A activity in the food and beverage industry.
EU Antitrust/Competition and Regulatory Issues Ahead
Unfair Trading Practices
The European Commission (EC) has long been monitoring so called unfair trading practices (UTPs) in the food supply chain, but has to date decided not to propose any EU regulation in the area. For those who may be affected by legislation, continuous monitoring of the situation remains essential. This follows a June 2016 resolution of the European Parliament, which called for the EC to put forward proposals, given that in its view the initiatives taken so far have not been effective. In addition, a December 2016 meeting of the High Level Forum for the Better Functioning Food Supply Chain concluded that there is a “need to tackle the issue and take action in 2017.”
The shape and timing of the U.K.’s exit from the EU remains unknown. Nevertheless, companies active in the food and beverage sector in the EU should be preparing for the change. Many companies have already begun risk identification and assessment to analyze the potential impact on their businesses and the steps they need to take now.
New Rules Governing the Agri-Food Sector
On May 6, 2013, the EC proposed a “landmark package” to update the rules governing the agri-food sector in the EU. This included a proposal on official controls. The new rules in this area are expected to go into effect in the first quarter of 2017. They will be applicable by 2020.
The status of the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and U.S. is uncertain following the election of President-elect Donald Trump (not to mention the Brexit vote). The TTIP has been intended to be more than a traditional trade agreement, since the two sides were aiming at regulatory cooperation, convergence and harmonization across all sectors. The food and beverage sector is a crucial part of the discussions, and it is unlikely that there will be an overall agreement if an agreement relating to the sector cannot be reached.
Competition/Antitrust Law Enforcement
In 2012, a report by the European Competition Network (the group of competition/antitrust law regulators in the EU, including the EC and national regulators) showed that strong enforcement of competition rules in the food sector had helped operators access supplies and markets and helped consumers enjoy lower prices. Since then, the EC and national regulators have carried out a number of investigations concerning food and beverage products. In 2017, further competition law enforcement in the food and beverage sector (including agriculture) can be expected across the EU. Companies should ensure that their competition/antitrust compliance programs are up to date.