Wary Consumers Push FDA to Revamp Food-Additive Rules

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How safe are energy drinks?
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By Toni Clarke

New York -- Amid growing public concern over the safety of additives in products ranging from caffeinated energy drinks to industrial chemicals in food containers and water bottles, the U.S. Food and Drug Administration is under pressure to reexamine its rules, and there are signs it may do so.

It has been more than half a century since U.S. regulations governing food additives were last revised. In that time, the number of chemicals in the food supply has risen from fewer than 2,000 to an estimated 10,000, many of which are never reviewed by the FDA because companies and their advisers have declared them to be safe.

Under loose regulations created more than 50 years ago to help companies avoid lengthy delays in getting food additives approved, the FDA created a list of products considered "generally recognized as safe."
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Companies can either petition to get their ingredients affirmed safe by the FDA, or they can declare them safe based on their own research or that of hired consultants. The FDA has the option to challenge such declarations but has rarely done so.

"Our system really puts the onus on us to prove harm," FDA Commissioner Margaret Hamburg said at the Reuters Health Summit in New York. "It's perhaps a time to look at what the legal framework looks like and what opportunities there are now to ask and answer questions in new ways because of advances in science and technology."

"We are an agency with a wonderful history, but many of our laws are rooted in a different historical era," Hamburg said. "An important question to ask is, would this be a good time to look at this issue again?"

According to research by the Pew Charitable Trusts' food additives project, which is conducting a three-year investigation into food additive regulation, 1,000 chemicals have been self-affirmed by industry as generally recognized as safe without notice to the FDA.

Another 2,000 chemicals have been declared generally recognized as safe by the Flavor and Extracts Manufacturers Association, which submits information to the FDA, though the FDA doesn't review it, according to Pew, bringing to about 3,000 the number of chemicals in the food supply never reviewed by the FDA.

Caffeine, when contained in cola-type drinks, was declared decades ago to be a generally recognized as safe product in cola-type beverages. Yet the agency hasn't challenged companies to prove the safety of caffeine in other products or other beverages -- including those whose levels exceed the 71 milligrams in each 12 ounces typically contained in soda.

One 8.4 fluid ounce can of Red Bull Energy Drink contains 80 milligrams of caffeine, according to its website. Twelve ounces of Red Bull contain 114 milligrams of caffeine.

Last year Democratic Senators Dick Durbin of Illinois and Richard Blumenthal of Connecticut called on the FDA to respond to concerns about the effect on children of caffeine in energy drinks.

Between January 2004 and October 2012, the FDA identified 21 reports of heart rate abnormalities, vomiting, convulsions and other medical problems, some life-threatening, in people who had drank Red Bull. But Hamburg said the events aren't sufficient to warrant regulatory action "at the present time."

"There is not a clear linkage of exposure to caffeine and the adverse events reported," she said, adding that the agency will continue to monitor energy drinks and that further examination of the underlying science "may merit action going forward."

Wary Consumers Push FDA to Revamp Food-Additive Rules
Operating margin: 15%
 Revenue: $1.2 billion
 Market share: Greater than 50%
 Industry: Consumer electronics

Garmin is a navigation device company, focusing on GPS technology. By far, the most profitable of the company's five divisions on a dollar basis (though other divisions have better margins) is the automotive/mobile group, which makes and sells Garmin's GPS units. This segment accounted for 55% of the company's sales in 2012 -- $221 million in operating profit on $1.5 billion in revenue. 

Much of the segment's success was due to Garmin's nüvi product line, which accounted for 43% of the company's total revenue in 2012. Garmin is by far the largest participant in the GPS market, with over a 50% market share, according to Consumer Reports.
Operating margin: 23.6%
 Revenue: $2.3 billion
 Market share: 11.8% (U.S.)
 Industry: Packaged foods and meats

Folgers is owned by the J.M. Smucker Company, which reported sales of $5.5 billion in 2012. Of those sales, $2.3 billion came from coffee. The company's U.S. retail coffee unit, of which Folger's is the top-selling brand, reported an operating margin of 23.6%, which is down from 27.8% in 2011 and 28.5% in 2010. We estimate that Folgers has an operating margin of at least that. The brand is the market leader for instant coffee in the U.S., commanding an 11.8% market share as of 2012. However, this is down from 13.2% in 2011. J.M. Smucker cut the price of coffee by 6% in 2012, which will affect the bottom line for both its Folgers brand and Dunkin' Donuts-licensed coffee.

That high profitability is even more impressive given that it was earned in a highly competitive market niche, vying against brands like Maxwell House and Starbucks.
Operating margin: 24%
 Revenue: $2.3 billion
 Market share: 15.1%
 Industry: Packaged foods and meats

The Mead Johnson Nutrition Company primarily sells infant formula and nutritional products for children, and formula accounted for 59% of its total sales in 2012. The vast majority of that came from Enfamil, one of the best-selling infant formula brands in the U.S. The product comes in several varieties designed for babies with different types of feeding problems, intolerances and nutritional needs.

According to Crain's Chicago Business, Mead Johnson had the second largest market share in infant formula as of mid-2012: 15.1%. The company was also the leader in the rapidly growing Chinese formula market. The company's operating margin in fiscal 2012 was 22.3%. We estimate Enfamil has a margin of at least 24%, thanks to the higher retail prices it can command due to its strong brand, as well as lower production costs due to economies of scale.
Operating margin: 25%
 Revenue: $14.3 billion
 Market share: 41.9%
 Industry: Soft drinks

Coca-Cola and Diet Coke were the two most popular sodas in the world as of 2011, Diet Coke having recently surpassed Pepsi to become the second-most popular soft drink in the U.S. Overall, trademark Coca-Cola products accounted for approximately 48% of all case sales of finished products sold by the company in fiscal 2012.

Given that Coke's finished products unit, which includes the Coca-Cola brand, accounted for 62% of total revenue for the company, Coca-Cola trademark drinks accounted for roughly 30% of the company's total revenue. Overall, the Coca-Cola Company reported 2012 sales of $48 billion and an operating profit of 22.4%. We estimate that the tremendous sales of the company's flagship brand push its operating margin to 25%. BrandZ reports that Coke is the world's sixth most valuable brand name, with an estimated value of $74.3 billion.
Operating margin: 26.7%
 Revenue: $1.9 billion
 Market share: 37.2%
 Industry: Soft drinks

Monster Beverage Corporation had net sales of roughly $2.1 billion in fiscal 2012, with an operating income of $551 million. According to market research company Symphony IRI, in the 52 weeks ending February 24, Monster-branded energy drinks accounted for 37.2% of the market, just behind rival Red Bull. In that period, the company sold approximately 1.2 billion cans of its Monster-branded products, including almost 776 million cans of its original Monster beverage. Because Monster-branded drinks accounted for 92.3% of total company revenue, we have treated the company's 26.7% operating margin as a proxy for the energy beverage.

However, business isn't entirely a fairy tale at Monster. The company has recently faced criticism and legal troubles, including a wrongful death suit and a Food and Drug Administration report that linked several deaths to Monster Energy beverages.
Operating margin: 30%
 Revenue: $19.0 billion
 Market share: 42.6%
 Industry: Tobacco

Marlboro cigarettes are sold by Altria Group in the U.S., and elsewhere by Philip Morris International -- which Altria spun off roughly five years ago. Marlboro branded cigarettes have made both companies extremely profitable. Altria's sales of smokeable products totaled roughly $22.8 billion in its most recent full year. That figure accounted for 90% of total company revenues, and 85% of units sold were Marlboros. Altria's smokeable products unit has an operating profit of 28%. Because Marlboro is the company's strongest and best-selling brand, it is 24/7's estimate that costs to produce those cigarettes are lower than the company's discount cigarette lines. As a result, we estimate that Marlboro has an operating margin of at least 30%. BrandZ calculates that Marlboro is the world's seventh most valuable brand at $73.6 billion.
Operating margin: 40%
 Revenue: $80.5 billion
 Market share: 20.9%
 Industry: Computer hardware

The iPhone is by far the most successful product Apple sells. Of the company's $156.5 billion in 2012 worldwide sales, $80.5 billion came from iPhones. Apple sold more than 125 million units last year, a 73% increase over 2011. In contrast, Apple sold 58.3 million iPads that year, generating just $32.4 billion in gross revenue. Each iPhone is far more profitable than each iPad, the company's second best-selling product. According to documents released as a result of the patent lawsuit between Apple and Samsung, Apple's gross margins on the iPhone were between 49% and 58% from April 2010 to April 2012, nearly double those of the iPad. This is partly because wireless carriers subsidize the iPhone heavily -- an average of $425 apiece, according to a recent Stifel Nicholaus analysis. Based on the available data, we calculate the iPhone's profit margin is 40% -- even higher than Apple's overall 35.3% margin.
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