VENEZUELAN SUBSIDIARY

I should like to point out the effect of restrictive legislation which we have encountered through one of our foreign subsidiaries. We have a Venezuelan subsidiary which manufactures and markets ready-to-eat cereal in Venezuela. Food package labeling in Venezuela is rigidly controlled. All labels must be submitted to the Secretary of Public Health for approval before they are used, and no label may be changed without previous authorization.

This regulation has imposed additional burdens on our subsidiary's operations without any corresponding benefit to the consumer. We find that it takes 4 to 6 weeks to get a label approved, and the delay in our packaging and labeling. approval discourages innovation and improvement in our packaging and labeling. It is also our experience that labels submitted for approval have been exposed to competition while under consideration by government officials. That makes the risk of change too great.

We believe the excessive degree of regulation has made our efforts to increase cereal consumption in Venezuela less effective.

We think packaging regulation in Venezuela has worked to the disadvantage of consumers by restricting the growth of consumption which could, in time, make possible price reductions to consumers.

EFFECT OF STANDARD NET WEIGHTS

Section 3(c) authorizes the Secretary to promulgate regulations establishing reasonable weights in which cereal is to be distributed. In the testimony in 1961 and 1963 hearings, the economies made possible by packing a number of different products in packages of the same size were discussed. Products which were mentioned were biscuits and crackers. canned peaches, spaghetti and others.

The same economies are available in cereal. Kellogg Co. uses one size of package for six and one-half ounces of Special K high protein cereal, ten ounces of Sugar Frosted Flakes, ten ounces of Pep Wheat Flakes, and fourteen ounces of Raisin Bran.

By putting a number of different cereals in the same sized package, we are able to make one packing line do the work of many without making changes in the machinery between runs on different products. The economies are considerable.

In 1963, we estimated it would require an additional $3 to $6 million to produce the same volume of cereals, depending on the standardized weights or volumes prescribed by the regulation. We now estimate that we would have to spend $4,360,000 in capital expenditures and incur additional operating costs of $2,050,000 a year, not counting the added depreciation, to achieve compliance with a standard net weight regulation.

For

This is why net weights come out occasionally in fractions of ounces. instance, if we want to take advantage of the economies of using this package size for Special K, we can either label it "7 ounces," in which case we are going to regularly have short-weight packages which is both illegal and bad business; or we can label it "6 ounces." fill the package and underclaim the contents, which would be a misrepresentation; or we can honestly label it "61⁄2 ounces." We think this last choice, the honest one, is the only way.

Another package size is used for seven diffrent products ranging from 5 ounces of our newest product, Corn Flakes and Bananas, to 18 ounces of Bran Buds. I brought along one of the carton board sheets on which we have printed cartons and made the cuts and creases necessary for forming the cartons.

As you can see we have printed cartons for 8-ounce Cocoa Krispies, 18-ounce Bran Buds, and 1-pound All-Bran—all in one operation. Because the cartons are all the same size, the cartons fit together with a minimum of waste. By putting three different cereal cartons on this sheet we are able to get longer runs on our presses which is necessary to efficient operation.

We have had some experience in other countries which indicates the effect of a requirement that all packages be of specified standard weights.

We have subsidiary companies operating in both South Africa and Mexico. Both subsidiaries were organized about the same time. Each operates a cereal plant, both of which were built and put into service around 1952. The plants are roughly comparable in size, and the packing facilities in the two plants, with two packing lines for family-size packages in each plant, have the same capacity and are essentially the same.

A South African law requires cereal to be distributed at retail only in packages of certain specified weights. Mexico does not. As a result, while in Mexico it takes only 3 different package sizes to put out 9 different product sizes for family cereal packages, it takes 6 different package sizes to put out 12 different product sizes in South Africa.

We are able to keep the number of package sizes to six in South Africa only by packing one product in a package which is too small and which causes undesirable crushing of the product in distribution, and by packing other products in packages which are too large for the quantity of cereal packed in them.

There are many more occasions in South Africa when the line is down while changes are made to run a different package size. Each time the line is stopped, efficiency suffers and productivity decreases.

For example, in 1964 it took 89 man-hours of packing-room labor at the Mexican plant to pack 1,000 cases of 24 packages each. To accomplish the same thing at the South African plant took 134 man-hours of packing-room labor, or 51 percent more.

Requirements of mechanical labor in the South African packing room were much higher also. A substantial proportion of this is attributable to the need for a greater number of packing line changes.

The South African plant required 4.89 man-hours of mechanical labor to produce 1,000 pounds of food, while the Mexican plant required only 1.41 manhours of mechanical labor, less than one-third of that required by the South African plant-to produce the same volume of cereal.

EFFECT OF STANDARDIZATION OF PACKAGES

We believe that the standardization of package sizes and shapes inhibits the development of improved packaging.

Our new bowl package for individual servings, which consists of a plastic disposable bowl with a removable top, is an example of this. I have a few here. You can see the convenience. All you have to do is take off the top and there's your cereal ready in a disposable bowl. We have great hopes for this package among users such as airlines and campers where convenience is paramount. If standard shapes had been required, the standard shape of the cereal package would probably have been rectangular. Before introducing this new shape package we would have had to persuade the Secretary to change the regulations. With notice in the Federal Register, hearings, and the other usual preliminaries we would have incurred considerable expense involving time, and more seriously, publicity before the legal path for this different package shape could have been cleared.

All of our competitors would have had a clear idea of what our plans were. Consequently, whatever advantage we might have gained from a desirable innovation would have geen greatly reduced and, perhaps, lost altogether. This assumes that the Secretary will allow such a package. It is possible that the Secretary, applying the "rational comparison" test of section 3(c), would allow no deviation from the standard package. The risks of package development would greatly reduce the incentive for any cereal company to improve its packaging.

In my earlier comments, I described the wide variation in cereal products, even though the cereal industry encompasses a relatively narrow spectrum of products as compared with the canned fruit and vegetable industry or the bakery industry.

Even so, writing standards for package sizes and shapes, for servings, for net weight statements, for package size designations, and for illustrations on cereal products is a tremendous task to ask of any agency.

The Food and Drug Administration is already under the heavy burden of enforcing the Hazardous Substances Act and the Food, Drug and Cosmetic Act with the Food Additives Amendment of 1958 and the Color Additives Amendment of 1960 and the Drug Amendments Act of 1962. We think that adding the obligation to promulgate standards for foods, drugs, and cosmetics under this bill will seriously prejudice the enforcement of the existing law.

For these reasons and the reasons suggested by the other witnesses, I feel that S. 985 is both unnecessary and unwise, and I urge the committee not to approve it.

Senator LAUSCHE. We will hear Melville Ehrlich, attorney on behalf of Potato Chip Institute International.

48-222-65--23

STATEMENT OF MELVILLE EHRLICH, ATTORNEY, ON BEHALF OF POTATO CHIP INSTITUTE INTERNATIONAL

Mr. EHRLICH. Senator Lausche, my name is Melville Ehrlich, appearing as counsel for the Potato Chip Institute International.

In the interest of saving time, and so as not to duplicate at length either the testimony of other witnesses or my filed statement, I will merely state briefly a summary of our reasons for opposing the proposed bill.

We do not quarrel with the objective of the bill, to prevent deception of consumers by requiring plain, legible, and honest labeling, but we do object to the extent of the powers granted, and we believe that this bill is neither necessary nor proper to accomplish such an objective. Summarizing our major reasons for opposition to the bill, they are: 1. Permitting administrative standardization of weights, or size, or both can have an extremely limiting effect on manufacturers who strive to give the consumers what they want. Administrative judgment should not be substituted nationally or regionally for consumer preferences in the market place on which a product stands or falls.

2. There are certain magic prices at which commodities move freely, such as 5, 10, 29, or 39 cents, and other prices at which they move slowly. If a cost changes drastically, something must give, either weight or price.

Standardization of weights prevents changes in package sizes, except after what might be lengthy administrative proceedings. In a seasonal commodity, such an administrative change, even if the applicant were successful, could come too late.

For example, last year potato chippers paid in the range of $1.25 to $1.50 per hundredweight for potatoes. This year the potato price jumped from $3.50 to $4 per hundredweight and even higher. If the industry had to apply to an administrative agency, which might well be tied up with hundreds or thousands of other applications, and even if the industry were eventually successful, the relief could be too late for this crop season, and what the situation will be next crop season nobody yet knows.

3. Any administrative action to standardize factors such as size, weight, or serving would necessarily have to be done on a commodityby-commodity basis. An army of additional personnel would be required to investigate, hold hearings, make decisions, and prepare amendments, or the delays would be so serious the whole program would bog down.

If a manufacturer even wanted a new size, he would have to give public notice of his plans to all of his competitors. The manufacturer should be entitled to determine the sizes on which he will risk his capital in meeting a consumer preference and the consumer should be free to accept or reject his size. An administrator should not be put in the position of having the power to determine what a manufacturer may offer and to determine whether there is a consumer need or a consumer preference for it.

4. The advantages of this bill to consumers are highly doubtful and may well be out-balanced by disadvantages. The vocal minority of consumers who have testified on this and predecessor bills demonstrates that they have no real understanding of the problems involved

or the financial consequences to them of the things that they, themselves, request.

For example, when they ask for products in even ounces, they overlook that this would require different sizes for each item, different packaging lines, inventories of different package sizes, and inventories of different shipping container sizes. All of these create additional costs, which must inevitably go into consumer prices.

5. Finally, when we start with the oft-repeated premise that most manufacturers are honest and most packages are honest, we need only deal with a comparatively few fringe companies or products. These can be dealt with under existing law.

The remedy proposed is too drastic for the illness. It is like amputating an arm to remove a pimple on a finger. The fact that the administrative agencies don't win every case they now prosecute is no indication that a new law is needed which gives them more power and the courts less power. It is rather an indication that the agencies are not always right and should not be made prosecutor, judge, and jury. To summarize, it is our considered opinion that the proposed bill is far too drastic, it is unnecessary, in that its mandatory requirements can be met by enforcement of existing laws, its authorized administrative rulings are unreasonable and unwarranted in extent, it stifles the initiative which has made our economy the greatest the world has ever seen and the alleged benefits to the consumers, the supposed beneficiaries of the legislation, may be nonexistent and may even be outweighted by disadvantages and higher costs resulting in higher consumer prices.

And, Senator Lausche, in view of some of the discussion here today, may I add just a few words on the relationship of the Food and Drug Act and the Federal Commission Act to the present proposed act.

The proposed act authorizes regulations divided into two groups, one a mandatory group and second a discretionary group. The mandatory group is essentially what the Food and Drug law says today. I don't think we need anything new on that subject.

Again I repeat, just because once in a while the Food and Drug Administration or the Federal Trade Commission loses a case doesn't mean that we need new laws. It means that either the courts are sometimes right and the Agency is wrong, or if we say the courts are always wrong and the Agency always right, we are casting discredit on our judicial system. It is a good thing to have the courts come into the picture, when a manufacturer "bonafidely" thinks he is right and the Agency thinks he is wrong and sometimes the courts have held the Agency to be wrong. But they don't have to enact a lot of new laws because of that. When you come to the discretionary powers, these go far beyond what the Food and Drug laws cover today, and this is the crux of the objection by all of the manufacturers whom I have heard testify.

It is no answer to me at least in my opinion to hear statements made by committee members or by anybody else saying—

But the agencies would never do a thing like that. You are worrying about something that may never happen.

This is no answer. If they are not going to do it, in my opinion, they should not have the power to do it. The many, many cases that are

coming up in court, not on a question of whether an agency has some powers which it is not using, the cases come up on the question of whether an agency is exceeding the powers that it has. Powers have a tendency not to remain unused. If they are not going to use these powers, they should not have the powers. If they are going to use these powers, God help us.

Thank you, sir.

Senator LAUSCHE. Thank you very much. (Prepared text follows:)

TESTIMONY OF MELVILLE EHRLICH, COUNSEL ON BEHALF OF POTATO CHIP INSTITUTE INTERNATIONAL

My name is Melville Ehrlich and my address is 919 Eighteenth Street NW., Washington, D.C. I am appearing as counsel for the Potato Chip Institute International.

The Potato Chip Institute International, 940 Hanna Building, Cleveland, Ohio, is a nonprofit trade association of manufacturers of potato chips.

The Institute and its members, in common with numerous other industries, are strongly opposed to S. 985 for many reasons.

We

We understand it to be the position of the supporters of the bill that its major objective is to prevent deception of consumers by requiring plain, legible, and honest labeling. We do not quarrel with this objective. But we believe that this bill is neither necessary nor proper to accomplish such an objective. are in complete agreement with many other industries and with the testimony of other witnesses to the effect that these objectives can readily be achieved by enforcement of present laws, particularly the Food, Drug, and Cosmetic Act and the Federal Trade Commission Act.

We do not wish to burden the record by repeating testimony on this point. However, we do wish to point out that in passing the Federal Trade Commission Act the Congress deliberately omitted any attempt to precisely define unfair competition or deception. The Congress enacted its prohibitions in general, rather than specific terms, in order to cope with new situations as they arise. We are in agreement with the Congress that this is a sounder approach than any attempt to particularize, commodity by commodity.

In order to accomplish its alleged main objective, the bill authorizes administrative action which, in our view, goes much further than is necessary or warranted. We refer specifically to such administrative action as standardization of weights and sizes, definition of servings, submission of samples of product or containers used or to be used and similar details.

We are aware that provision is made for notice to be given or even for administrative hearings to be held for enactment or amendment of such commodity regulations. We are also aware, however, of the force of administrative rulings even when tested in the courts. We are particularly concerned with the criteria for enacting regulations, which are stated as being necessary.

"*** to establish or preserve fair competition between or among competing products by enabling consumers to make rational comparison with respect to price and other factors, or to prevent the deception of consumers as to such products, ***"

What, for example, must be the extent of the deception? How many consumers and what degree of intelligence must be deceived? Other important factors are not included in these criteria, such as burdens on manufacturers, deprivation of innovations, inconvenience to the public, and additional costs which will inevitably be passed on to the consumers even when the great majority of consumers are not being deceived.

Despite any alleged administrative safeguards, we strongly oppose the necessity of desirability of administrative action permitted by this bill, on five major grounds:

1. Standardization of weights or sizes or both can have an extremely limiting effect on manufacturers who strive to give the consuming public what it wants. Consumers have varying preferences and needs. These preferences vary between consumers and between areas. We believe that an administrative official in Washington should not have the authority to say what weights