Monday 12 July 2010

Brands and Obesity: How Do Innovation and Regulation Fit In?

There has been increasing discussion about the role that government can, or should play, in promoting innovation, including a blog post on this site here. Most of these efforts, both at the institutional and academic levels, are characterized by the tendency to equate innovation with high tech start-ups in general, and patent activity in particular.

While there is undoubtedly value in viewing the interrelationship between government action and innovation in this way, the narrow focus of such an approach has the result of missing a broader set of government activities that can affect innovation in other, unexpected ways. Innovation need not only mean patents and high tech, and intellectual property need not only mean patents.

One such example can be found in a recent article that appeared in the 19 June issue of The Economist ("Good and Hungry: The Changes Facing Fast Food"). Here, innovation is about the challenges arising from increasing public concern regarding obesity in the population. In particular, it is about changes to the information appearing on the menu of fast food restaurants and the role that both government action and restaurant brands may play in connection with these changes.

The main thrust of the aricle described the attempts of the fast food industry to struggle with the double challenge of the recession and increasing criticism of the nutritional value of the usual fast food fare. Toward the end of the article, there was a brief consideration of how government regulation might also impact on the fast food industry. In that connection, the article referred to a bill passed earlier this year by the U.S. Congress, which requires restaurant chains of a certain size to indicate on their menus the calory count of their items. The article continued:
"A study by the National Bureau of Economic Research, which tracked the effects on Starbucks of a similar calorie-posting law in New York City in 2007, found that the average calorie count per transaction fell 6% and revenue increased 3% at Starbucks stores where a Dunkin' Donuts outlet was nearby-- a sign, it is said, that menu-labeling could favor chains that have more nutritious offerings. In order to avoid other legislation in America and elsewhere, fast-food companies will have to continue innovating."
What is interesting here is that the relationship between the regulation and the
competitive advantage of the two brands. We are not told in the article whether there was a drop in the average calorie count per transaction at the Dunkin' Donuts outlets that were paired in the study. Assuming that there was a drop in the average calorie count, this suggests that, despite the fact both chains attempted to meet at least some of the criticism regarding the nutritional value of their respective menus, Starbucks seems to have gotten the better of it at the till.

If that is the case, then this further suggests that the Starbucks brand took advantage of the fact that, on a relative basis, it is anyway perceived as offering a less weight-inducing fare than its Dunkin' Donuts competitor. When, to this existing relative perception in favor of Starbucks, there is added a public policy preference for nutritious menus, the relative advantage of the Starbucks brand is enhanced. This is so, even if on absolute basis, both the Starbucks and Dunkin' Donuts menus reveal innovative steps to satisfy the public demand for more nutritious menus.

The upshot is that the regulation arguably conferred a commercial benefit to the Starbucks brand, even if it was intended to be competitor-neutral. This is the result, even if the changes/ innovations to the Dunkin' Donuts menu are shown to have a greater effect on the nutritional value of is menu than the changes of Starbucks to its menu (which may or may not be the case).

In such a situation, the closing comment in the quote above from The Economist--"In order to avoid other legislation in America and elsewhere, fast-food companies will have to continue innovating"---may not be entirely true. For Starbucks, at least, continuing innovation by Dunkin' Donuts in this direction may have the effect of eroding the comparative advantage of the Starbucks brand from the point of view of perceived nutrition. Innovation, if mandated by further regulation, might then end up conferring an advantage to Dunkin' Donuts. What regulation in the name of innovation giveth, such innovation and regulationm ay ultimately taketh way. It certainly will be interesting to follow this development.

No comments:

Post a Comment