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FDA Reader: Simplifying Food Regulation

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3rd Party Certification System and an Increasingly Self-Regulated Food Industry
 
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Introduction

My work as a consultant often entails teaching food manufacturers about 3rd party audits and supporting them to achieve certification so they can expand their sales opportunities. The story is often the same — my client has wholesale buyers lined up for their product, but the buyer won’t ink the deal until a 3rd party audit result is provided. While some clients can afford invest in the consulting fees and facility upgrades to meet achieve the private certification standards, other cannot make this investment. Their sales opportunities and growth will suffer until they can achieve that shiny gold star, the 3rd party certification.

This piece offers two claims about how the rising importance of private certification impacts the food industry. Under each heading, I explore some of the benefits and drawbacks experienced by various actors in the food industry, including food manufacturers, public health regulators, and consumers.


The private certification system has become the dominant mechanism by which food businesses are deemed sufficiently safe and high quality to be sold in mainstream markets.

At one time a government inspection report was a valuable indicator of a food manufacturer’s food safety and quality performance. Recently, the authority of these documents has declined while an audit report from a private certification body is a trusted symbol.

Pros: 

  1. 3rd party certifications are internationally accepted. Certification schemes transcend jurisdictional and national boundaries, creating global recognized standards of food safety and quality. This means that a food retailer with a catalog of international suppliers can verify the quality of their suppliers’ products without having to understand the food regulations of the country of origin. Instead, they simply ask their suppliers to align with one of the top certification schemes. This is an enormous convenience for wholesale buyers, who can trust 3rd party certification as a uniform standard of product quality, regardless of  the country of origin. 

  2. A food manufacturer can request and pass a 3rd party audit on their own schedule. If a beverage manufacturer is confronted with a huge sales opportunity that requires a 3rd party audit, they could feasibly schedule the audit, pass the audit and present that documentation to their retail partner in a matter of weeks. On the other hand, a food manufacturer may only be inspected by the FDA every few years. A well-established food producer may not have a government-issued inspection report when a prospective buyer requests it, or else the inspection report may be old enough that the buyer refuses to accept it.

Cons: 

  1. The central role of the 3rd Party Certification System creates a pay-to-play system. Procuring an expensive certification from one of several private certification schemes is a de facto requirement for selling food in mainstream markets. Whether supplying food to a major supermarket, a hospital, a university cafeteria, or a specialty outlet such as QVC or an airline caterer, these buyers will uniformly require 3rd party certification from their suppliers. A food manufacturer which is unable or unwilling to pay-to-play sacrifices the opportunity to participate in these major markets.

  2. A food manufacturer whose operations meet FDA requirements may still have to spend tens of thousands of dollars to achieve the exalted standards of the 3rd party certification scheme. Achieving 3rd party certification comes at a cost. While the audit itself may cost several thousands of dollars (by contrast, FDA registration and inspections are free), preparing for an audit will easily cost cost tens of thousands of dollars in consulting fees and facility upgrades.  This disproportionately hurts small-to-medium food producers and translates to higher food costs for consumers.

The dominance of the 3rd Party Certification System is contributing to a self-regulated food industry

Pros of Industry Self-Regulation: 

  1. The FDA cannot possibly keep up with the task of protecting the nation’s food supply. Despite a wealth of corrupt incentives, private-sector oversight generally supports the preservation of public health.  

  2. The standards set by 3rd party certification schemes typically exceed the standards published by government health agencies (e.g. the FDA). In turn, higher standards can translate to better consumer protection mechanisms and public health outcomes. 

  3. The private sector is a more effective enforcer of food availability than the government. For example, despite the clear illegality of CBD as a food ingredient, the FDA is entirely incapable of keeping CBD-containing items off of shelves. However, when Whole Foods implemented a no-CBD policy in September 2018, the products vanished from all store shelves.

Cons of Industry Self-Regulation:

  1. Industry self-regulation creates corrupt incentives (Ahem, financial collapse of 2009).

  2. Certification bodies (auditing firms) are supposed to be the referees, but their incentives are misaligned. When a certification body audits a food business, they are paid for that audit. If the firm passes the initial certifying audit, then a subsequent yearly audit is required for that food business to maintain certification with the scheme. By providing a passing score to an audit, a certification body nearly guarantees future income from subsequent audits — after all, why would a food business switch auditing firms if their current auditor is giving them passing grades?

    At the same time, the certification bodies have a negative incentive for providing a failing audit score — A food manufacturer would likely pursue the same audit from a different firm in hopes of finding a more lenient auditor who will provide a passing score.

  3. Individual certification schemes also face corrupt incentives — namely to stoke public uncertainty about the food supply and to build a massive food-safety-complex which further entrenches the necessity of private certification schemes and consultants.

    One way food certification schemes preserve their place in the food-safety-complex is by continuously updating their standards. The rhetoric here typically emphasizes the changing science of food safety and need for industry to align with these findings. The schemes don’t disclose the actual impact of these changes in terms of public health because they don’t have to —  both retailers and consumers are quick to accept any marginal improvement in our food supply. But, while a new food safety standard will be heralded as a landmark contribution to improved public health, the actual change might only take a tiny fraction of the food supply from “very safe” to “very very safe”.

    The impact on the food industry is less murky: food manufacturers have no choice but to upgrade their operations so that they can maintain their certification and their place on supermarket shelves. This may require hiring an “official” consultant dispatched by the certification scheme or additional audits to confirm that the latest standards have been faithfully implemented. These costs — easily tens of thousands of dollars per manufacturer — filter back up to the certification scheme.

    “Upgrading” their standards is the easiest way for a certification scheme to inject capital into their business and preserve their continued existence in the food industry. And over time a convenient macro-trend emerges: the standards of private and public regulations continue to diverge — with the private certification schemes requiring a much higher set of food safety and quality standards than the government.

    All else aside, when confronted with the choice between “more safe” and “less safe”, the consumer will always demand “more safe”. But it’s impossible to compare the two frameworks without a consensus about what is safe food?  Would you add a dollar to the price of yogurt if it meant reducing the chances of sickness from 1 in 10 million to 1 in 100 million?  The self-regulated food industry may have already made this choice for you. You’ll pay the extra dollar for the extra-safe yogurt because the supermarket refused to carry the “less safe” brand which only offers a 99.99999% assurance of product safety. Is this a valuable protection of public health or a sign that self-regulation in the food industry has gone too far?


 
 

Glossary of Terms:

Certification Scheme - The companies that write and maintain private certification standards (e.g. BRC, SQF)

Certification Body - the auditing firm which actually conduct the audit. An auditing firm may serve as a certification body for multiple certification schemes so that they can provide the type of certification that their client is seeking.

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