Discussion Paper

Voluntary GM-Free Labelling

April 2003

Previous Page / Table of Contents / Next Page

4.Why Become Involved in a Labelling System?

• 4.1 Overview
• 4.2 Consumer Expectations
  • 4.2.1 Transaction Costs
  • 4.2.2 Meaningful Information
  • 4.2.3 Consumer Confidence
• 4.3 Industry Expectations
  • 4.3.1 Benefits
  • 4.3.2 Risks
  • 4.3.3 Costs

Summary

To be successful, a labelling system will need to meet various consumer and industry expectations or "drivers".

Consumer Expectations

• That the labelling system has low transaction costs (this is the cost to the consumer in obtaining information, including costs incurred should the transaction "go wrong" in some way).
• That meaningful information is provided (in a form that is easy to understand and provides for low transaction costs).
• That consumers can place confidence in the source of information - for example, through:
  • specifications and requirements to support "GM-free" claims
  • consumer participation and representation.

Industry Expectations

• That for a voluntary "GM-free" labelling system to be successfully developed ... industry benefits (competitive advantage, increased profit, market penetration) ... must outweigh the risks (not meeting consumer demand, lacking credibility, being inconsistent with legislation) ... and costs (market research, development, marketing and verification).

4.1 Overview

To be successful, a labelling system for GM-free food must meet the expectations of both consumers and industry. These expectations, or "drivers", can be used as a yardstick against which proposals for developing a labelling system can be assessed. The remaining sections of this paper develop the various options for how elements of a voluntary GM-free labelling system might work, including some of the factors that need to be taken into account to satisfy the consumer and industry "drivers" that are discussed below.

4.2 Consumer Expectations

Central to the Royal Commission's recommendation was that, in addition to the information provided by Standard 1.5.2, there was a continuing demand by some consumers for information about whether a food resulted from a genetic modification process, or contained any GM material whatsoever. This might be for environmental, ethical, religious or other reasons.

In deciding how best to meet this demand, the consumer-information principles discussed below need to be considered.

4.2.1 Transaction Costs

Transaction costs are the time and effort expended by the consumer to become informed. They include:

• the costs of obtaining the information needed for the transaction
• the immediate costs involved in undertaking the transaction and the costs that arise as a consequence of the transaction - including monitoring, and redress and enforcement (should the transaction subsequently "go wrong" in some way).

This definition of transaction costs does not include the monetary cost to the consumer of purchasing a product.

Consumers obtain information on products in order to avoid a "bad deal". A consumer's decision on whether to gather information on a product is based on the value of that information relative to the cost of obtaining and processing the information. Consumers may, therefore, either avoid products with high transaction costs or decide not to gather all the information needed for an informed decision if it comes at too high a cost.

The existence of an "information gap" in the operation of Standard 1.5.2 suggests that transaction costs for consumers who wish to purchase "GM-free" food are high, as consumers demanding "GM-free" food need to seek additional information about a product or supplier. A single standardised label, supported by background information that is accessible to the consumer, may best meet consumer demand on the grounds that it will have lower transaction costs. This is because consumers confronted with a standardised label need to familiarise themselves with the label only once. Conversely, consumers faced with a range of individual supplier labels face higher transaction costs, because of the relative time and effort involved in understanding each of them.

4.2.2 Meaningful Information

To make informed purchasing decisions, consumers need meaningful information that is conveyed in a manner that minimises their transaction costs. Disclosing technical information can be difficult. For example, in response to consumer concern about the health effects of non-ionising radiation from mobile phones, telecommunications companies are looking to supply the specific absorption rate (SAR) of different models of phones. But the SAR number provided is a peak value - mobile phones only operate at this level when the cellular signal is weak. To be made meaningful, it needs to be disclosed alongside additional information that informs consumers about this.

Information about genetic modification is also complex. Technical information on why it is difficult to determine whether a food is "GM-free" needs to be conveyed in a way that is meaningful for consumers.

4.2.3 Consumer Confidence

Although the Fair Trading Act requires that information supplied in trade to consumers is accurate, consumers individually and generally are likely to hold perceptions about the integrity of the information source. Perceptions, warranted or unwarranted, can be expected to have an influence on purchasing decisions.

Perceptions are likely to be positive where consumers have confidence in the source of information. Confidence in a labelling system can be generated where:

• consumers participate in the development of a labelling system
• consumers are represented in decision making
• the decision-making process is transparent
• a trusted group or agency supports the label, such as the Heart Foundation's support for "Pick the Tick" labels
• a set of specifications underpins the labelling system, for example requirements could be set for the use of identity preservation systems to help validate suppliers' claims.

4.3 Industry Expectations

Industry can be expected to respond to consumer demand for "GM-free" information where the benefits of providing a label outweigh the risks, and costs.

4.3.1 Benefits

Suppliers labelling food as "GM-free" will benefit where it results in a relative increase in profit. This may be achieved through:

• Competitive advantage - where there is an unfulfilled demand for information in a segment of the market, labelled foods may have a competitive advantage over unlabelled foods.
• Premium prices - consumers wanting an assurance that their food is "GM-free" may be prepared to pay a premium price for this information.
• Market penetration - the development of a standardised label used collectively would spread development costs across suppliers wishing to meet consumer demand for information on "GM-free" food. A standardised label also would receive greater exposure in the market, as it would be displayed on a larger number of products.

4.3.2 Risks

The risks of labelling food as "GM-free" stem from the possibility that the information disclosed:

• Does not meet consumer expectations - consumers do not respond to the label, and so there is the risk that competitors will develop alternative labels to meet consumer demand. Suppliers will need to ascertain the exact scope of the demand, and the consumer's willingness to pay for the information. There may be a demand by some consumers for information that assures them that a food is absolutely "GM-free". Others may accept a lesser assurance, for example, a "best endeavour to be GM-free" label.
• Lacks credibility - consumers may choose not to purchase the product on the basis that information on the label is too difficult to understand or is not substantiated; it may be seen as advertising or puffery.
• Is inconsistent with the legislative environment - it might, for example, contravene the Fair Trading Act.

4.3.3 Costs

Labelling a product as "GM-free" will impose additional costs on the supplier, whether the label is developed independently by a single supplier or through the use of an industry-wide label. Such costs will reflect:

• market research
• development and marketing
• verification to ensure that the label is accurate and meets fair-trading requirements.

The extent to which suppliers will pass increased costs on to consumers will depend on factors such as their size, the competitiveness of the market, and the premium that consumers are prepared to pay for GM-free labelled food.