Food Safety: in A State of Transformation: Global Thematic Research

Global Thematic Research July 2016
Food Safety:
In a State of Transformation
Prepared by Cornerstone Capital Group for the

Investor Responsibility Research Center Institute
Authors
Michael Shavel, Global Thematic Research Analyst
Sebastian Vanderzeil, Research Analyst
Dehao Zheng, Research Associate Please see important disclosures at the end of this report.
We extend our thanks to Gail Hansen, a 30+ year food safety veteran, for her contributions
to this report. A veterinary epidemiologist by training, Hansen is Founder and Senior
Consultant at Hansen Consulting, LLC, a public health and animal policy consultancy that
assists government and non-government organizations on issues such as antibiotic
resistance, infectious disease, food safety, and animal welfare.
© 2016. The Investor Responsibility Research Center Institute (IRRC Institute or IRRCi).
The materials in this report may be reproduced and distributed without advance
permission, but only if attributed. If reproduced substantially or entirely, it should include
all copyright and trademark notices.
2
Table of Contents
Executive Summary ............................................................................................................... 4
Key Questions.................................................................................................................................................. 4
Which Factors Are Driving the Food Safety Conversation? ................................................... 4
What Can We Observe from Companies’ Disclosures? ........................................................... 5
How Can Investors Gain Exposure to Companies with Food Safety Revenues?............. 6
Shareholder Engagement - What Questions Should Be Asked?........................................... 6
Food Safety: Setting the Stage .............................................................................................. 7
What Is Food Safety? .................................................................................................................................... 7
Using History as a Guide .............................................................................................................................. 7
Food Safety’s Financial Impact .................................................................................................................. 8
Restaurants ............................................................................................................................................. 9
Jack in the Box (JACK) ................................................................................................................. 9
Yum Brands (YUM) .....................................................................................................................10
Chipotle (CMG) ............................................................................................................................11
Meat and Produce Companies .......................................................................................................12
Other Events .........................................................................................................................................13
Which Factors Are Driving the Food Safety Conversation? .................................................. 14
Behavioral and Demographic Shifts ......................................................................................................14
Regulatory Developments ........................................................................................................................18
Food Safety Modernization Act .....................................................................................................18
Globalization of Food Supply Chain ..............................................................................................20
Technological Innovation ..........................................................................................................................22
Supply Chain Technology .................................................................................................................22
Advanced Robotics .............................................................................................................................23
Genomic Technology .........................................................................................................................25
Bringing It Together: Food Safety Is in a State of Transformation .............................................26
Food Safety Disclosure Assessment..................................................................................... 28
Meat and Produce .......................................................................................................................................30
Diversified and Snack Foods.....................................................................................................................31
Transportation and Distribution .............................................................................................................32
Grocery Stores ..............................................................................................................................................33
Restaurants ....................................................................................................................................................34
Agricultural Products ..................................................................................................................................35
Observations for the Food Supply Chain .............................................................................................36
Restaurants ...........................................................................................................................................36
Transportation Divergence ..............................................................................................................36
Upstream vs. Downstream ..............................................................................................................37
Board Expertise ....................................................................................................................................37
Executive Compensation ..................................................................................................................38
Potential Growth Opportunities.......................................................................................... 39
Food Testing and Analysis .........................................................................................................................39
Supply Chain Technology ..........................................................................................................................40
Automation and Robotics .........................................................................................................................40
Appendix I – Regulatory Assessment................................................................................... 42
3
Executive Summary
A number of highly publicized food scares have swept through the global food chain in
recent years. Headlines include the outbreaks of E. coli and norovirus at Chipotle,
Salmonella linked to Foster Farms poultry, melamine adulterated infant formula in China,
and Salmonella-contaminated peanut butter leading to the imprisonment of the former
CEO of Peanut Corporation of America. These events highlight vulnerabilities in the food
safety chain that present opportunities and risks for investors.
To this end, the food industry is undergoing a transformation as it addresses food safety
risks in an increasingly global, complex supply chain. Food safety encompasses the
practices and conditions promoted across a food supply chain with the intention of
ensuring food quality and preventing contamination and foodborne illness.
In this report, we examine major food safety events that have affected publicly traded US
companies over the last 25 years. We identify the behavioral/demographic, regulatory,
and technological factors acting as catalysts for the food industry’s transition towards
increasingly proactive and innovative food safety strategies. To assess the opportunities
and risks associated with this transition, we evaluate the food safety practices of nearly
60 companies throughout the food supply chain. Data is aggregated at each level of the
supply chain and key findings are discussed.
We highlight three areas of food safety innovation for investors wishing to gain exposure
to the food safety theme: 1) Food testing and analysis; 2) supply chain technology; and 3)
automation and robotics. We present a list of 30+ companies that offer food safety
solutions and rate their level of exposure. We also offer industry-level observations that
may lead to additional avenues of inquiry.
Key Questions
Which Factors Are Driving the Food Safety Conversation?
Behavioral/demographic, regulatory, and technological forces are converging to
profoundly impact how companies approach issues of food safety.
From a behavioral/demographic perspective, companies are reassessing strategies to

meet shifting consumer preferences and populations. In the developed world, consumers
are demanding healthier, higher-quality food products as well as more pre-packaged and
ready-made options. In the developing world, rising incomes are driving demand for
animal protein, which may potentially lead to more foodborne illness, especially in
countries where quality control and regulatory oversight are lagging.
Globally, internet-enabled consumers are becoming increasingly aware of food safety

issues. They are demanding increased transparency from companies which face
reputational risk from negative publicity connected with product recalls or health
incidents. Meanwhile, consumer populations that are most susceptible to foodborne
illness — notably the very young and the elderly — continue to grow. This demographic
trend potentially increases the magnitude of outbreaks related to foodborne illnesses.
4
On the regulatory front, the Food Safety Modernization Act (FSMA) which passed in
2011 and is being implemented in stages until late 2017, has fundamentally shifted the
private sector mandate from that of reactive compliance (relying on production
standards and government monitoring of outbreaks) to that of proactive responsibility
(requiring food safety systems that actively address risks in the food supply chain). At the
same time, China is undertaking significant changes in food safety regulation, focusing on
problem areas such as baby formula, health foods, and online shopping. In addition, the
interaction of global regulatory systems — the US, the EU, China, and other players — is
set to increase, both with new trade agreements such as the Transatlantic Trade and
Investment Partnership (TTIP) and with ongoing linkages of global food systems.
Meanwhile, across the supply chain, technological innovations are changing the way
business is done. Cheaper, faster and more efficient computing hardware, improved
software and network connectivity, and advanced sensors are among the technologies
yielding new applications in food safety. Food companies are leveraging supply-chain
technology powered by the Internet of Things (IoT), advanced robotics, and cheaper and
more accurate gene sequencing technology. For proactive management teams, there is
abundant opportunity for greater efficiency and enhanced risk management.
What Can We Observe from Companies’ Disclosures?

Companies employ diverse governance and management systems in order to promote
food safety. In our research, we reviewed various mechanisms that may be part of a
company’s governance of food safety issues. Effective corporate disclosures explain a
company’s unique approach to managing these issues, and include both the overall
strategy and the specific provisions used to carry out the strategy.
We assessed the food safety governance of nearly 60 companies throughout the food
supply chain, aggregated our findings, and identified trends and potential risks. Our
assessment revealed:
Food safety expertise is generally present in mid-level and senior management

throughout the supply chain. However, there is currently little food safety expertise
present on most food company boards, as most corporate boards currently maintain
oversight through risk and audit committees. We note that companies can engage
external advisors and consultants as an alternative to board level expertise. The
presence or absence of specific expertise on the board is less important than whether
the company can articulate a compelling narrative about how the board manages
food safety issues.
Executive compensation is rarely linked to food safety goals, although companies
indicated that the impact of food recalls on stock price and earnings were significant
incentives for management.
Market concentration in both food suppliers and “demanders” (i.e. commercial
customers) results in the most comprehensive standards. The comprehensive
voluntary standards between major poultry producers (suppliers) and major grocery
stores and restaurants (demanders) support this assertion. On the other hand,
fragmented value chains at both the supply and demand ends are likely to engender
more limited safety standards. We observe that supply and demand for certain
5
products from smaller restaurant chains are fragmented (or less concentrated),
potentially explaining why standards are less comprehensive.
Restaurant companies have the lowest average disclosure rate on internal food
safety systems and the use of external monitors of food safety. We note this low
disclosure rate in the context of the higher impact of food safety incidents on
restaurant companies identified in financial impact analysis.
There are significant differences in disclosure amongst transportation and logistics
companies. High-disclosure companies detailed safety systems, food recall protocols,
supplier audits, and food safety Key Performance Indicators (KPIs). Low-disclosure
companies provided little or no information relating to food safety.
How Can Investors Gain Exposure to Companies with Food Safety Revenues?
Given the trends discussed in this report, we identify three areas of food safety
innovation that offer growth opportunities for investors:
Food testing and analysis

Supply chain technology
Automation and robotics
We present a list of 30+ companies that offer food safety solutions and rate their level of
exposure.
Shareholder Engagement - What Questions Should Be Asked?

Our research raises questions for further exploration as behavioral and demographic,
regulatory, and technological factors impact food safety. Below are several pertinent
questions that investors could ask their portfolio companies to gain better insight into
food safety management.
What internal systems are in place to support food safety objectives? Is third party
certification required for these systems?
What systems and certifications are required from suppliers?
What formal food safety staff training is required? How has this training evolved over
time?
Which technologies are being used to facilitate traceability throughout the supply
chain?
Who is the lead food safety person at the company and to whom do they report? Is
there a food safety committee within the firm?
How does the board oversee food safety? Which Key Performance Indicators are
reported, and how often are they provided?
6
Food Safety: Setting the Stage
What Is Food Safety?

Food safety encompasses the practices and conditions promoted across a food supply
chain with the intention of ensuring food quality and preventing contamination and
foodborne illness. Foodborne illness is caused by pathogens — including viruses,
bacteria, and other microorganisms — and by toxic chemicals or other harmful
substances.
Separately, food quality refers to the particular attributes of a food product — such as
origin, color, texture, flavor, and nutrition — that influence the value of that product to
the consumer. Food safety also differs from food security in that the latter includes issues
of food safety but maintains a broader focus overall. Food security refers to a
population’s physical, social, and economic access to sufficient, safe, and nutritious food
in the pursuit of an active and healthy life.
Ultimately, food safety is a necessary but not sufficient condition for assuring both food
security and food quality.
Using History as a Guide

Ensuring a high level of food safety has long been a priority for companies and regulators.
Some critics cite the rising number of recalls as an indicator of deteriorating food safety.
Our research, however, indicates that more stringent inspections and regulatory
standards and improved technology are identifying food safety threats that would have
otherwise gone unchecked. These developments are also providing data for informed
policy decisions to minimize foodborne disease. The decline in food-related outbreaks
and illnesses is a testament to these advances (Figures 1 & 2). Despite these
improvements, food safety-related recalls represent a continued risk, and companies
must continue to evolve to meet the demands required of new markets and increasingly
complex supply chains.
Figure 1: US food safety related outbreaks and illnesses Figure 2: US food safety related recalls
1,500 30,000
Outbreaks
Illnesses
1,000 20,000
500 10,000
0 0
1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Centers for Disease Control and Prevention, Cornerstone Capital Source: Swiss Re, FDA, USDA, Cornerstone Capital Group
Group
7
Food Safety’s Financial Impact
In 2011, the Grocery Manufacturers Association (GMA) in the US surveyed 36 major
international companies in the food sector. Product disposal and business interruption
were cited as the largest recall costs, and estimates of recall costs varied widely, with
some exceeding as much as $100 million (Figure 3). While difficult to quantify, the survey
also revealed that a top concern following a food safety event is damage to the brand.
Figure 3: Financial impact (sales losses, direct recall costs, etc.) of recalls on US companies
Source: Capturing Recall Costs by Grocery Manufacturers Association 2011, Cornerstone Capital Group
Additionally, we examined 10 major food safety events that affected publicly traded US
companies over the last 25 years (Figure 4). While each food safety event is unique (and
sales can be impacted by multiple factors), there are some interesting takeaways from
this analysis.
Figure 4: Food safety events

Jack in the Box Jan. 13, 1993 - 732 people infected with E. coli originating from beef
patties in hamburgers
ConAgra Foods Jul. 19, 2002 - Recalled 19M pounds of beef trim and fresh and frozen
ground beef products that may have been contaminated with E. coli
Pilgrim's Pride Oct. 12 2002 - Recalled 27.4M pounds of fresh and frozen turkey and
chicken products that may have been contaminated with Listeria
Yum! Brands Dec. 6, 2006 -71 persons infected with E. coli originating from shredded
lettuce at Taco Bell
ConAgra Foods Oct. 11, 2007 - 83.9M pounds of frozen pot pie products recalled due to
outbreak of salmonellosis
Kroger Jun. 30, 2008 - Multistate outbreak of E. coli linked to ground beef
Campbell Soup Jun. 17, 2010 - Recalled 15M pounds of "SpaghettiOs with Meatballs"
canned products due to possible under-processing
Tyson Foods Jan. 10, 2014 - Recalled 33,840 pounds of chicken products due to threat
of Salmonella contamination
Kraft Heinz Aug. 25, 2015 – Recalled 2.1M pounds of turkey bacon products that
may have spoiled before the “Best When Used By” date
Chipotle Oct. 31, 2015 - Closed 43 stores in Washington and Oregon after E. Coli
outbreak was linked to its stores
Source: Cornerstone Capital Group
8
Key observations from our analysis include:
Restaurant share prices experience the most negative and sustained impact from
food safety events. In the three events we examined, same store sales (SSS), an
important driver of share price, declined in the quarter in which the food safety
event occurred and remained depressed for several quarters thereafter.
While Pilgrim’s Pride and Tyson both recalled poultry products, Pilgrim’s Pride share
price experienced a dramatic, albeit temporary, decline. Tyson’s share price, on the
other hand, was largely unaffected. The primary differentiating factor appears to be
the size of Pilgrim’s Pride’s recall, seeing as it was the largest meat recall in US
history at the time.
In the remaining cases, the food safety events had little to no observable impact on
shareholder return.
Restaurants
Restaurant companies experienced the most sustained impact on shareholder return.
A potential factor is that restaurants are downstream and more directly exposed to
negative consumer perception. Unlike other downstream companies such as grocery
stores, restaurants face little time between product purchase and consumption.
Therefore, adulterated food may be more likely to impact human health.
We provide accounts of three major food safety events in the restaurant industry.
Jack in the Box (JACK)
Figure 5: 1993 Jack in the Box E. coli outbreak

40%
Jack in the Box
S&P 500 Consumer Services Industry Group Index
20%
Total Shareholder Return
0% Q4 lower sales
projection
Outbreak
-20%
-40% Reported Q2
earnings loss
due to the
Jan 22, a 2-year- outbreak
old child died
-60%
Jan 93 Apr 93 Jul 93 Oct 93 Jan 94
Source: Bloomberg, Cornerstone Capital Group
9
In January 1993, 732 people were infected with a strain of E. coli originating from
undercooked beef patties in Jack in the Box (JACK) hamburgers. The majority of victims
were children; four died and 178 other victims suffered long-term health issues. The
company initially refused to publicly accept responsibility, blaming its meat supplier.
However, Washington State court documents revealed that JACK failed to follow state
law, which required the burgers to be cooked to 155 °F (68 °C), the temperature
necessary to completely kill E. coli. 1
For the quarter in which the event occurred and the quarter following it, JACK’s same
store sales (SSS) declined by 22.2% and 9.2%, respectively. JACK continued to register
negative SSS for two more quarters until SSS finally turned positive four quarters after
the incident. For the 12-month period following the incident, JACK’s share price
underperformed its comparable index by 62%. Ultimately, in the 18 months following the
outbreak, the company lost an estimated $160 million due to reduced sales and increased
costs, including voluntary recalls and legal costs.
As a result of this scandal, JACK restructured its corporate operations around food safety
priorities. It hired a food safety consultant who introduced the company to Hazard
Analysis and Critical Control Points (HACCP), a systematic approach to food safety. 2 The
firm implemented frequent microbial testing on random sampling from all beef suppliers,
a checklist for slaughterhouses, and strict temperature guidelines for both transportation
and cooking of beef patties. It also restructured corporate incentives to prioritize food
safety.
Yum Brands (YUM)
Figure 6: 2007 Taco Bell E. coli outbreak

30% Yum Brands
E. Coli outbreak
20% linked to Taco Bell
restaurants by
CDC
Temporary closure
10% of 90 stores
YUM reports 5%
decline in sales at
Taco Bell
0%
Q1 earnings report
-10%
71 people affected
confirmed across
north-eastern US
-20%
Dec 06 Mar 07 Jun 07 Sep 07 Dec 07
1 The USDA/FSIS currently recommends 160°F as the safe internal temperature for ground beef.
2
Hazard analysis and critical control points (HACCP) is a systematic preventative approach to food safety from biological, chemical, and physical hazards in
production processes that can cause the finished product to be unsafe, and designs measurements to reduce these risks to a safe level.
10
On December 6, 2006, the Centers for Disease Control and Prevention (CDC) announced
the link between an outbreak of E. coli and Taco Bell restaurants. The outbreak affected
71 people in the northeastern US and led to the temporary closure of 90 stores. While
testing initially indicated yellow or green onions as the source of the outbreak, it was
later linked to shredded lettuce.
In the quarters of the E. coli event and the one following it, YUM’s same store sales (SSS)
declined by 5.0% and 11%, respectively. SSS then remained negative for two more
quarters, and YUM’s share price underperformed its comparable index for approximately
six months following the incident, until reporting better-than-expected earnings in the
first quarter of 2007. We note the apparent disconnect between negative SSS and the
positive earnings report. The strength was primarily attributable to growth in China,
while US restaurant sales remained weak. It is also important to point out that Taco Bell
is only one of three brands owned by YUM Brands (KFC and Pizza Hut are the other two).
Chipotle (CMG)
Figure 7: 2015 Chipotle E. coli outbreak

20%
Chipotle
Outbreak
0%
CEO Mar 8, closed store in MA

apologized after workers reported sick
on TV on norovirus fears
CDC probed new
-20% Free burritos plan
Reopened 43 outbreak
restaurants
CDC added Feb 8, temporarily
three states closed all stores for
-40% employee meeting
CDC added
another three
states Management
120 students emphasized food
reported ill safety at ICR
-60%
Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16
In the fall of 2015, media outlets began reporting E. coli outbreaks at various locations of
Chipotle Mexican Grill (CMG). By December 21, the CDC and CMG had confirmed 177
cases across 10 states, but noted that it was unable to locate the source of the outbreak.
As the stock price fell by more than 35%, the company implemented a series of measures
to improve safety and regain customers. It altered cooking methods and HR policies,
presented at food safety conferences, shut all stores for a full day of employee
engagement (February 8, 2016), initiated the Chipotle Funding Program to help suppliers
monitor quality, and offered a “free burrito” day to win back customers.
On March 8, 2016, a separate norovirus incident closed another Chipotle location in

Massachusetts, renewing concerns over the company’s food safety and employee
wellbeing practices.
11
In the quarter of the E. coli event, CMG SSS decreased 14.6%. In the following quarter
(first quarter of 2016), SSS decreased 29.7%. As of mid-May 2016, CMG stock has
underperformed the S&P 500 Consumer Services Industry Group Index by approximately
30% cumulatively since the outbreak occurred.
CMG’s situation is being compared to the aforementioned E. coli outbreak at Taco Bell in
2006. While the comparison is relevant, it took CMG longer to identify the source and
contain the situation. CMG’s brand is also associated with “Food with Integrity,” so there
is arguably more reputational risk at stake. Furthermore, social media has evolved
significantly since 2006, and could complicate CMG’s efforts to reassure consumers that
food safety issues have been resolved.
Meat and Produce Companies
Figure 8: 2002 Pilgrim’s Pride Listeria outbreak

100% Pilgrim's Pride
S&P 500 Food Beverage & Tobacco Industry Group
80%
Oct 30, reported 65% decline in

60% FY2002 profit partly because of the

outbreak; however, the company also
40% expected FY2003 to rise 43%
Jun 9, announced
acquisition of chicken
20%
sales by ConAgra for
$590M
0%
-20% Nov 13, reopened

poultry processing plant
Recall
-40%
Oct 02 Jan 03 Apr 03 Jul 03 Oct 03
In October 2002, Pilgrim’s Pride Corporation (PPC) voluntarily recalled 27.4 million
pounds of turkey and chicken products, citing possible Listeria contamination — at the
time, the largest meat recall in US history. In reaction, PPC lost a quarter of its market cap
in a single day. This recall followed a separate avian influenza outbreak which forced the
company to destroy $4.7 million worth of turkeys. During these events, PPC consistently
claimed that it had control over the situation.
Despite the costly recall and public relations hit, the share price started to recover in late
October when the company released an optimistic outlook that included a 43% expected
rise in annual profit in FY2003. Over the next year, PPC stock continued to outperform its
respective Food Beverage and Tobacco Industry Group Index benchmark. One year after
the incident, the stock had outperformed by nearly 100%, in part due to a well-received
acquisition announcement in June 2003.
This event stands in contrast to the smaller recall of 33,000 pounds of chicken products
by Tyson Foods in January 2014 due to Salmonella. The recalled products were produced
in October 2013 for institutional (i.e. prisons) use only and were not for sale through
12
retail stores. Seven people were identified as having been sickened by the products
between November and December 2013.
Figure 9: 2014 Tyson Foods Salmonella outbreak
Tyson Foods
30%
S&P 500 Food Beverage & Tobacco Industry Group
Recall
20%
announced
10%
0%
-10%
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15
Other Events
Our analysis reveals that other food safety events (ConAgra in 2002 and 2007, and
Kroger, Campbell Soup, and Kraft Heinz) did not negatively impact the companies’ share
price. Because these are large companies with diversified product portfolios, the financial
losses associated with the recalls (sales losses, direct costs of recall, etc.) appear to be
minor in scope relative to the overall business.
The absence of an acute share price reaction does not suggest food safety can be
overlooked at these companies. The diversified product portfolio mutes the immediate
impact of an incident, though it may not insulate the company from potentially longer-
term brand damage.
13
Which Factors Are Driving the Food Safety Conversation?
Behavioral and Demographic Shifts

We identify five emerging trends that present opportunities and challenges for food safety.
1. There is a growing preference for organic, antibiotic- and preservative-free,

and locally sourced food in the developed world (Figures 9 and 10). As these
products capture market share, they require the food supply chain to adapt. For
instance, Cargill says that it has been asked by some customers to remove additives
that it puts in processed meat to inhibit Listeria growth. 3
In another example, demand for raw/unpasteurized milk has grown as states have
legalized its sale and distribution. According to the CDC, this trend coincides with an
increasing number of reported raw-dairy-related outbreaks, as raw milk and raw
milk products are 150 times more likely to cause health issues than their pasteurized
counterparts (Figure 11). 4
Figure 9: Consumers prefer food that gives them peace of mind Figure 10: US organic food sales on the rise
I would be more likely to purchase and am willing to pay __
for food or beverage described as ... In billions
Preservative-free 11% 26% 39% 76% $30
Hormone-free 10% 27% 38% 75%

Antibiotic-free 9% 27% 38% 74%
Having no artificial sweeteners 8% 21% 44% 73% $20
GMO-free 10% 24% 36% 70%

Natural 9% 20% 38% 67%
Unprocessed 7% 22% 36% 65% $10
Clean 10% 19% 33% 62%

Real 6% 17% 39% 62%
Organic 10% 21% 28% 59% $-
Significantly more Slightly more No more

(5% increase or more) (up to a 5% increase)
Fruit and vegetables Dairy
Numbers to the right of each bar represent the percentage of consumers Beverages Packaged/prepared foods
surveyed who said they would be more likely to purchase food or beverages
Breads and grains Snack foods
described by the term on the vertical axis (e.g. preservative-free). The colors of
the bar reflect how much more, if at all, those consumers are willing to pay. Meat, fish, poultry Condiments
Source: Technomic 2014, Cornerstone Capital Group Source: USDA, Economic Research Service using data
from Nutrition Business Journal
3
http://fortune.com/food-contamination/
4 http://wwwnc.cdc.gov/eid/article/18/3/pdfs/11-1370.pdf
14
Figure 11: US documented outbreaks associated with unpasteurized milk, 1998-2014
20
Outbreaks per year
Three-year moving average
Number of Outbreaks
15
10
0
1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Centers for Disease Control and Prevention
Organic, antibiotic- and preservative-free, and locally sourced products do not

inherently entail increased food safety risks. However, companies are adapting to
new and evolving supply chains, and consumers and governments expect
accountability and high standards of food safety throughout the transition.
2. The shift toward two-earner families and busier lifestyles in developed

markets and some developing markets means that fewer meals are being
cooked at home. Spending on pre-packaged and ready-to-eat foodstuffs is notably
increasing. However, this category of food is most affected by recalls (Figures 12 and
13). Ready-to-eat meals require complex production processes with numerous
ingredients from various suppliers coming together on a “just in time” basis. 5
Consumers are also allocating a larger share of their food budget to “eating out”
instead of at home (Figure 14).
Figure 12: Consumer survey: "Why do you purchase ready meals Figure 13: Ready-to-eat meals are most affected by recalls
versus preparing a meal from scratch?" in the US
Source: Euromonitor International 2012, Cornerstone Capital Group Source: Swiss Re 2015, Cornerstone Capital Group
5 http://media.swissre.com/documents/Food_safety_in_a_globalised_world_final.pdf
15
Figure 14: Shares of US consumer spending on food at home Figure 15: US consumer perception on how much food
and on food away from home, 1950-2014 producers take issues into account
Do take into account a great deal
80% Should take into account a great deal
70% Food Safety 20%

74%
Food at home
Affordability 17%
60% 57%
Nutrition 13%
50% 66%
Environmental sustainability 9%
40% 53%
Food away from home
Fighting hunger 9%
30% 45%
Transparency in production 9%
20% 51%
1950 1960 1970 1980 1990 2000 2010
0% 20% 40% 60% 80%
Source: USDA Economic Research Service, Cornerstone Capital Group Source: The Chicago Council on Global Affairs 2015, Cornerstone
Capital Group
In light of these trends, packaged food producers and restaurants are enjoying an
expanding market. But with growth comes risk, and companies that do not
adequately address food safety may exacerbate an existing consumer trust issue.
According to a 2015 Science and Food Survey conducted by the Chicago Council on
Global Affairs, a stark contrast exists between how the public thinks food producers
are performing on food safety, and how they think they should perform (Figure 15).
This “perception gap” exists across numerous issues, but food safety is where the
respondents were most dissatisfied. 6
3. Consumers are becoming increasingly aware of food safety issues, and are
demanding increased transparency from companies. In both developed and
developing markets, a number of high-profile food safety incidents have led to
heightened consumer awareness. The proliferation of mobile devices and social
media is accelerating this trend. Information travels more quickly, thereby
diminishing the ability of companies to control the message that comes out of a food
safety incident.
4. Rising incomes in developing markets will drive growth in demand for animal
protein and dairy (Figure 16). These products are resource-intensive and will put
additional pressure on local supply chains. One implication is that bacteria found in
animals may potentially cause more foodborne illness, especially in countries where
quality control and monitoring programs are scantily developed. Moreover,
increasing global demand for animal protein has led to the rise of certain farming
practices, such as aquaculture in some lesser developed/less-regulated markets,
which may more easily allow the transmission of foodborne parasites. 7
6 Glassman, Marcus (2015). “Hungry for Information: Polling Americans on Their Trust in the Food System.”
7
Broglia A, Kapel C. 2011. “Changing dietary habits in a changing world: emerging drivers for the transmission of foodborne parasitic zoonoses.” Veterinary
Parasitology. 182, 2-13
16
Figure 16: Rising global meat and milk consumption
Meat 250 Milk

100 1964–1966 1964–1966
kg per capita per year
kg per capita per year

1997–1999 200 1997–1999
75 2030E 2030E
150
50
100
25
50
0 0
World Developing Industrialized Transition World Developing Industrialized Transition
countries countries countries countries countries countries
Source: World Health Organization, Food and Agriculture Organization of the United Nations, Cornerstone Capital Group
5. As populations in developed markets continue to age, more people will be at

risk for foodborne diseases. Due to their weaker immune systems, infants and
older adults are particularly vulnerable to illnesses, including those caused by
foodborne pathogens. Examination of CDC FoodNet data shows that for many
pathogens, incident rates and/or the probability of severe outcomes tend to increase
with age (Figures 17 and 18).
Figure 17: Incidence of select infections per 100,000 people by age in the US, 2014
60 Salmonella Listeria
1.0
40 0.8
0.6
20 0.4
0.2
0 0.0
Source: 2014 FoodNet Annual Report by Centers for Disease Control and Prevention, Cornerstone
Capital Group
Figure 18: Shares of people hospitalized for select infections by age in the US, 2012
60% Campylobacter 80% E. coli O157
60%
40%
40%
20%
20%
0% 0%
Source: 2012 FoodNet Annual Report by Centers for Disease Control and Prevention, Cornerstone
Capital Group
17
Regulatory Developments
Regulation is a significant driver of food safety advances, and new food safety regulations
have been implemented in both developed and developing countries. In the US, food
safety regulation began in the early 1900s and grew rapidly in the latter half of the 20th
century with a range of regulations regarding inspections, product composition, and
product safety. The most recent significant regulatory change in the US was the
introduction of the Food Safety Modernization Act (FSMA) in 2011.
Figure 19: US food safety regulatory timeline
Source: Monsanto, Current Trends in Food Safety and Challenges at the Plant Level by David Cole, 2009, Cornerstone Capital Group
Food Safety Modernization Act

FSMA changes how food safety is regulated in US, mandating that food safety systems
actively address risks in the food supply chain rather than rely on production standards
and government monitoring of outbreaks and incidents. The introduction of FSMA in
2011 mandated a change in approach to food safety from the FDA and associated
agencies as well as implementation of new food safety rules for key elements of the food
supply chain.
In addition, there are six new rules enforceable by the US Food and Drug Administration
(FDA) and the US Department of Agriculture (USDA) that relate to food production,
animal feed, produce packaging, food imports, transportation, and food adulteration.
General compliance with these rules is required starting between September 2016 and
October 2017, depending on the rule 8.
8 IFT, 2015, FSMA Rules Timeline, http://www.ift.org/public-policy-and-regulations/policy-developments/fsma/fsma-rules.aspx
18
Figure 20: Summary of FSMA and its impacts
Source: FDA, EC, Cornerstone Capital Group
The majority of FSMA changes and new rules require operational changes by companies,
but we view the FDA’s increased ability to mandate product recalls and suspend
production as a key change. Previously, companies voluntarily recalled products that
were identified as posing risks to human health. The FDA can now force companies to
recall products, potentially changing how companies must react to food safety issues and
altering the reputational risk landscape.
The FDA has also expanded its scope for holding and testing food prior to release to
market. Prior to FSMA, companies maintained food safety systems with the priority of
ensuring “reasonable certainty of no harm” and using ingredients that are “generally
recognized as safe.” The FDA then only held products that presented “credible evidence”
of “threat of serious adverse health consequences or death”. Now, the FDA can hold and
test any foods that it has reason to believe are adulterated or misbranded.
While general compliance with the new rules is proposed to start later this year, the
impact of the new approach of the FDA on food safety mandated by FSMA has coincided
with a significant uptick in recalls. The USDA, responsible for the safety of meat, poultry,
and egg products, works alongside the FDA. Data on USDA recalls is shown in Figure 21.
19
Figure 21: USDA number of recalls by type, 2005-2015
150 Other
Undeclared
Substance
Residue
Misbranding
100
Number of Recalls
Chemical
Contamination
Processing Defect
Extraneous Material
50
Undeclared Allergen
Salmonella
Listeria
monocytogenes
0 STEC*
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: USDA 2016, Cornerstone Capital Group

Note: “Other" includes producing without inspection, or failure of importers to present products for
import inspection. It is also known as “Failure to Present (FTP)”
*Shiga toxin-producing E. coli
Over the last 10 years, the USDA has increased detention of food it believes to contain
undeclared allergens or for which it found insufficient information to make a reasonable
assessment. The growth in number of USDA recalls could imply a higher number of recall
events from the FDA going forward, presenting greater reputational and operating cost
risks to companies.
Globalization of Food Supply Chain

Global trade volume in food and agricultural products reached close to $1.8 trillion in
2014, making it the third-largest major product category after fuels and chemicals. 9
This trade facilitates the creation of cuisine that has components from around the world.
For example, even a hamburger may have components originating from more than 10
countries (Figures 22 and 23).
9 https://www.wto.org/english/res_e/statis_e/its2015_e/its15_merch_trade_product_e.pdf
20
Figure 22: International food trade Figure 23: Import components of hamburger
Source: Swiss Re Source: Roka Bioscience
US food imports have grown over the last two decades with plant, raw, and processed
food experiencing the highest growth rates (Figures 24 and 25).
As food imports grow, so does the interconnectedness of food safety regulatory systems.
Similar systems enable reduced trade barriers and processing time, while major
differences in systems can slow trade and increase the risk of food safety incidents.
Figure 24: US food import growth, 2000-2014 Figure 25: Value of US agricultural imports, 1990-2015
In billions Total import share In billions
of the value of US
$140 Processed
food consumption 30% $120
Total animal foods imports Semi-processed
$120 Total plant foods imports 25% $100 Raw
$100 Beverages imports Bulk
20% $80
$80
15% $60
$60
10% $40
$40
$20 5% $20
$0 0% $0
2000 2005 2010 2014 1990 1995 2000 2005 2010 2015
Source: USDA, Cornerstone Capital Group Source: USDA Economic Research Service, US Department of
Commerce, US Census Bureau, Cornerstone Capital Group
FSMA aligns the US more broadly with the risk assessment and prevention approach to
food safety taken by the EU. At the same time, China is undertaking significant changes in
its food safety regulation, focusing on problem areas such as baby formula, health foods
and online shopping. The interaction of these regulatory systems is set to increase with
new trade agreements, such as the Transatlantic Trade and Investment Partnership
(TTIP), and with ongoing linkages of global food systems.
An assessment of two countries’ and one region’s food safety systems and new trade
agreements is shown in Appendix 1. The assessment shows that food safety approaches
are converging in the EU and US, with China quickly implementing new processes and
21
regulations to address food safety issues. However, the US has fewer restrictions and
labeling requirements relating to the use of livestock antibiotics, growth hormones,
poultry antimicrobial rinse, and genetically modified foods than the EU, while China is
increasing its scrutiny on these inputs. Multi-party trade agreements aim to increase food
trade, particularly between the US and Europe, but China is not participating in either the
TTIP or the Trans-Pacific Partnership (TPP).
Technological Innovation
Across the supply chain, technological innovations are changing the way business is
conducted. Cheaper, faster, and more efficient computing hardware, improved software
and network connectivity, and advanced sensors are among the technologies that are
yielding new applications in food safety. Technological innovations are also converging to
accelerate the utilization of advanced supply chain technology, automation, and genomic
sequencing. 10
Supply Chain Technology

As the food supply chain becomes increasingly global and regulations require more
detailed monitoring and record-keeping, food companies are leveraging supply-chain
technology powered by the Internet of Things (IoT) to address food safety challenges.
Simply defined, the IoT refers to the network of physical objects embedded with
electronics, software, sensors, and network connectivity that enables these objects to
collect and exchange data. 11 When existing infrastructure is connected, there are
opportunities to integrate the physical world with computer-based systems. As a result,
an IoT-empowered food safety system allows automated data collection and analysis,
continuous monitoring, remote real-time accessibility, and digital record-keeping. 12
Advanced sensors are one of the technologies enabling the IoT in food safety. Sensor
costs are declining as mobile device demand (i.e., smartphones and tablets) drives
production efficiencies and economies of scale. These devices are a prominent source of
big data and are used in data collection, monitoring, decision-making, and optimization.
With regards to food safety, sensors monitor key production conditions such as
temperature, shipping time, and signs of disease in livestock.
Radio frequency identification (RFID) technology also offers promise for food safety.
RFID tags, which typically consist of a microchip attached to an antenna, use radio waves
for identification and tracking purposes. This provides an advantage over barcodes,
which require an unobstructed line-of-sight between the barcode and reader. RFIDs are
still more expensive than barcodes, but decreasing costs, improving performance and
reliability, and increasing standardization are driving RFID usage not only in food safety,
but in supply-chain management broadly as well.
10 Please see Cornerstone Capital Group’s report on “The Economics of Automation: Quick Service Restaurant Industry,” for detailed analysis.
11
https://en.wikipedia.org/wiki/Internet_of_Things
12 Powerhouse Dynamics, “Better & Faster: The Internet of Things Reinvents Food Safety Management for Food Service Operators”
22
When combined with sensors, RFID technology can provide a comprehensive solution for
identifying products, enhancing traceability, and responding to problems in real-time (or
close to real-time).
Figure 26: Price development of RFID tags
Source: State of the art report Options for sustainable food processing by European Parliament 2013
Advanced Robotics
Robots originally emerged downstream in the food production process, where they were
used primarily in palletizing (stacking cases of product) and packaging. Since then,
robotics has penetrated upstream into areas such as production and picking. We believe
this trend is set to accelerate. Companies are addressing rising labor costs, employee
health issues resulting from repetitive motions, and costly food safety and hygiene
compliance. At the same time, robot performance is improving while previously
constraining factors such as cost, weight, and assembly hours are declining.
Figure 27: Tasks for which robots are used in the food and Figure 28: Evolution of robotics
beverage industry
300%
Packaging 12 Production costs
Maintenance
Performance
Repackaging 11
Change since 1980
200%
Palletizing 27
Picking 5
100%
Production 4
0 10 20 30 0%
Number of Companies Indicating Use for Each Task 1980 1990 2000 2010
Source: DGL, Buckenhuskes and Oppenhauser, 2014 Source: KUKA, Cornerstone Capital Group
23
Robots offer several advantages in managing food safety. For example, robots can work
in harsh environments, such as the extremely cold temperatures required for frozen
foodstuffs, without compromising speed or reliability.
Robots also minimize human workers’ contact with food products. This is important
considering infected food workers cause about 70% of norovirus outbreaks, which,
according to the CDC, is the leading cause of disease outbreak from contaminated food.
Finally, robots can offer embedded traceability. Robotic vision systems read barcodes
and store information, and robots can be interfaced to other product ID technologies
such as RFID tags. 13 This functionality also allows robots to be integrated into the IoT,
thereby becoming part of an advanced supply-chain solution.
Along with food safety benefits offered by robots, improvements in product consistency,
worker safety, and productivity are all driving robot order growth in the food and
beverage industry. According to data from the Robotic Industries Association, food and
consumer goods increased its share of North American robot orders from 3% in 2005 to
7% in 2014 (Figure 29). Moreover, the latest generation of robots — small, lightweight,
flexible, and connected robots — offer advantages that make them an interesting option
for tasks that have not previously been automated.
Figure 29: Share of North American robot orders
Source: PWC, Robotic Industries Association, Cornerstone Capital Group
In a recent example of robot deployment, Nestlé announced that it will install a fully
automated storage and material handling system at one of its production sites for baby
and infant food. The installation will include an integrated warehouse shuttle system
with connecting conveyor system technology, as well as several automated guided
13 http://robot.fanucamerica.com/robotics-articles/Robots_Help_Provide_Consumers_with_Safer_Food.aspx
24
vehicles. Nestlé’s decision to launch the project, targeted for January 2017, was based,
among other factors, on the need to comply with sensitive food production guidelines. 14
Genomic Technology
Whole genome sequencing (WGS) has emerged as the most comprehensive method for
analyzing the genome. Although commonly associated with sequencing human genomes,
the scalable and flexible nature of WGS technology makes it equally useful for sequencing
any species, including livestock, plants, and/or disease-related microbes. 15 The cost of
gene sequencing technology has declined precipitously (Figure 30), opening the door to
new applications within food safety. To illustrate the nature of the reductions in DNA
sequencing costs, the graph also shows hypothetical data reflecting Moore's Law, which
describes a long-term trend in the computer hardware industry that involves the
doubling of 'compute power' every two years. Technology improvements that ‘keep up’
with Moore's Law are widely regarded to be doing exceedingly well, making it useful for
comparison.
Figure 30: Cost of sequencing a human-sized genome, 2001-2015
100000000
10000000
Moore's law
In logarithmic Scale
1000000
Cost per
100000 Genome
10000
1000
2001 2005 2010 2015
Source: NHGRI Genome Sequencing Program 2016, Cornerstone Capital Group
The most basic food safety application of genomic sequencing is to identify pathogens
during foodborne illness outbreaks. Pathogens isolated from food or environmental
samples are compared to isolates from sick patients. A match helps define the scope and
origin(s) of the foodborne illness.
A major advantage of WGS over traditional technology — for instance, pulsed-field gel
electrophoresis (PGFE) — is the level of detail and accuracy provided. PGFE cannot
differentiate between certain strains of pathogens nor distinguish between samples
associated with previous outbreaks. WGS technology does not have these limitations,
14
http://www.foodproductiondaily.com/Trends/Automation/Nestle-to-automate-baby-and-infant-food-plant
15 http://www.illumina.com/techniques/sequencing/dna-sequencing/whole-genome-sequencing.html
25
thereby allowing scientists to determine if two people infected with the same strain of
pathogen were affected by the same food source. 16
While WGS is building upon existing methods for pathogen testing, it is also creating a
new market for studying the microbial ecology of foods and their processing
environments throughout the food supply chain. From a regulatory standpoint, the FDA
and other public health agencies can use WGS during routine inspections to monitor
compliance with FSMA. The FDA is also spearheading an international effort to sequence
the genomes of foodborne pathogens and to upload this data, along with the geographic
location from which a given pathogen was gathered, into a public database called
GenomeTrakr (Figure 31).
Figure 31: Total number of sequences in the GenomeTrakr Database, 2013-2016
Source: FDA, Cornerstone Capital Group
Equally important, companies throughout the food supply chain are leveraging next
generation genomic technology to mitigate foodborne illness risk. For instance, the
Consortium for Sequencing the Food Supply Chain, run by IBM Research and Mars, Inc.,
is building infrastructure to collect, aggregate, and analyze pathogen data in order to
deliver insight into microbial management.
Bringing It Together: Food Safety Is in a State of Transformation

Ensuring a high level of food safety has long been a priority for companies and regulators.
There have been significant developments in food safety as the field has become
considerably more evidence-based, quantitative, and reliant on risk management.
16 http://www.fda.gov/Food/FoodScienceResearch/WholeGenomeSequencingProgramWGS/
26
Much of the progress made in food safety, however, has been crisis-driven and
reactionary in nature — a strategy that may now be outdated.
Figure 32: Converging forces impacting food safety
The regulatory environment is shifting to one focused on prevention, and consumers are
becoming more engaged in the source, production and quality of the food they eat. Rising
protein demand in developing markets is shifting supply-chain risks and making them
more complex, and aging populations present more serious implications for companies
faced with food safety incidents.
Furthermore, the proliferation of internet-connected mobile devices and social media is

accelerating the rate at which information travels. This is leading not only to increased
transparency, but also to a diminished ability of companies to control the message
around a food safety incident.
From a solutions perspective, the food industry can leverage IoT-empowered supply
chain technology, advanced robotics, and next generation genomic sequencing
equipment to enact meaningful and positive change. In addition to addressing food safety
challenges, this dynamic/environment presents clear growth opportunities for
companies that offer solutions within these areas.
Our research indicates that technological, regulatory, and behavioral/demographic

factors will catalyze the food industry’s transition towards increasingly proactive and
innovative food safety strategies.
27
Food Safety Disclosure Assessment
To consider the opportunities and risks associated with a transition in food safety
practices, we assessed the food safety practices of almost 60 of the largest, U.S.-based
companies throughout the food supply chain in the following segments:
Meat and produce

Diversified and snack foods
Transportation and distribution
Grocery stores
Restaurants
Agricultural products
Supplementing information disclosed in company filings (annual report, earnings
transcripts, sustainability report, website, etc.) with interviews with investor relations,
sustainability, and food safety officers, we reviewed each company with respect to the
following food safety elements:
1. Internal food safety system – Public disclosure of a company-wide food safety system
may suggest that the company is confident that it can withstand public scrutiny. It
may also be a source of competitive advantage. Internal safety systems include
Hazard Analysis and Critical Control Points (HACCP) 17 and Good Manufacturing
Practices (GMP) 18, as well as independent systems.
2. Externally certified – Additional, voluntary third-party accreditation, particularly
those recognized by the Global Food Safety Initiative (GFSI), indicates transparency
and willingness to allow external review of a company’s food safety system 19.
3. Supplier management system – A publicly available food safety code of conduct for
suppliers shows a company’s recognition that food safety issues manifest in other
segments of the supply chain and affect the company’s customers.
4. Food safety committee and staff training – Disclosure of company-wide food safety
committee and ongoing staff training indicates a commitment to food safety issues.
5. Published food safety key performance indicators – Reporting of food safety incidents,
recalls and plant/store audits in public filings creates accountability and enables
stakeholders to track progress.
6. Food safety risks in 10-K reports – Explicit acknowledgement of food safety risks in
the 10K indicates food safety issue awareness at the board and executive levels.
17 The Hazard Analysis and Critical Control Points (HACCP) system, which is science-based and systematic, identifies specific hazards and measures for their control
to ensure food safety. HACCP can be applied throughout the food chain from primary production to final consumption and its implementation should be guided
by scientific evidence of risks to human health.
18 A Good Manufacturing Practice (GMP) is a system for ensuring that products are consistently produced and controlled according to quality standards. It is
designed to minimize or eliminate instances of contamination, mix-ups, and errors.

19 The Global Food Safety Initiative (GFSI) is an industry-driven initiative providing thought leadership and guidance on food safety management systems necessary
for safety along the supply chain. Certification to a GFSI recognized scheme is achieved through a successful third party audit against any of the schemes that
have been recognized by the GFSI.
28
7. Product traceability – Discussion of traceability initiatives beyond “one-up, one-
down” (i.e. ability to trace products one step backwards and one step forwards in
supply chain).
8. Executive compensation – Linking executive and board compensation to food safety
metrics provides explicit incentives for addressing food safety at a company’s highest
levels.
9. Lead safety person – The existence of senior, qualified food safety personnel (e.g. a
Chief Food Safety Officer) with a direct link to the executive suite indicates strong
commitment to managing food safety.
10. Food safety expertise on board – Food safety expertise on the corporate board enables
further scrutiny and board input into food safety approach.
11. Sick leave policy – The CDC notes that in a study of workers in 426 restaurants, 12%
had worked when sick with vomiting or diarrhea 20. Comments from workers were
that they would not have worked if they had a sick leave policy. The existence of a
sick leave policy signals that food safety risks are being mitigated at all levels of the
company.
In the following sections, we aggregate data and present key observations at each level of
the supply chain. We note that companies agreed to provide additional information on
the basis that we would not explicitly compare or rank food safety approaches within a
particular segment. Therefore, we do not disclose company-specific information except
where we view it as best practice.
Furthermore, the food supply chain and food safety is global in nature and there are
implications for non-US investors and companies. However, to ensure data comparability
and an assessment scope that enables us to generate actionable insights, we focus on the
US food industry, while including some key non-US companies with major US presence in
the food chain as well.
20 CDC, March 2012, Food Workers Working When They Are Sick, http://www.cdc.gov/nceh/ehs/ehsnet/plain_language/food-workers-working-when-sick.htm
29
Meat and Produce
Figure 33: Results for meat and produce
Source: Company documents and interviews, Cornerstone Capital Group

Sample size: 9 companies
Meat and produce companies show a high degree of disclosure on internal safety systems
(HACCP and GMP) and external certifiers, reflecting ongoing consumer and regulatory
focus on safe meat and produce. Many publish KPIs and note food safety risks in financial
filings.
However, there are fewer disclosures relating to supplier management or executive

compensation. Only two boards that were studied have a member with explicit food
safety expertise, and only one company explicitly links executive compensation to food
safety.
Notable initiatives include:
Hormel Foods and Maple Leaf Farms have implemented pork product traceability
back to the individual hog, while Marine Harvest has developed genotyping tools to
quickly identify sources of Listeria outbreaks.
Dean Foods includes a recall target in the performance pay for the CEO.
Maine Harvest publishes the most food safety related KPIs including food safety
incidents, customer claims, and total recalls.
Hormel Foods and Marine Harvest each have two food safety experts on their board
of directors.
30
Diversified and Snack Foods
Figure 34: Results for diversified and snack foods
Source: Company documents and reports, Cornerstone Capital Group

Diversified and snack foods are subject to intense consumer and regulatory pressure
which, in part, supports the high disclosure rate on internal safety systems, external
certifiers, and supplier management. Food safety risks are also noted clearly in annual
filings.
Similar to meat and produce companies, there is little disclosure on compensation linked
to food safety goals. There is no disclosed food safety expertise on the boards of the
assessed companies.
BRF S.A., ConAgra, and Kellogg Co. disclose food safety KPIs which include supplier
products under third-party certification, product recalls, and food safety audits.
Traceability beyond regulatory requirements generally focuses on sustainability
assurance for palm oil. We view this as an environmental disclosure rather than a
food safety issue.
Kellogg’s uses performance-based cash bonuses to promote achieving business goals
that explicitly include food safety.
31
Transportation and Distribution
Figure 35: Results for transportation and distribution

Note: One company recently conducted an initial public offering (IPO) and food safety risks were
mentioned as a risk in the IPO filings.
We observe a high degree of variation in food safety disclosure among transportation and
distribution companies examined. All of the companies note food safety as a risk in
financial filings.
However, only three of the five provide information on internal safety systems, supplier
management systems, and traceability programs. None of the companies disclose food
safety KPIs or compensation aligned with food safety goals.
Sysco has implemented an audit system for its ready-to-eat produce customers, and
audits Sysco brand products annually. In addition, Sysco has a dedicated approval
system for ground beef, veal, and specialty meats. The company has a GS1 Standards
Initiative that enables the tracing back to all raw materials. GS1 is an international
not-for-profit organization that develops and maintains standards for supply and
demand chains across multiple sectors. GS1 standards provide a common foundation
for companies to identify, capture, and share supply chain data. Bar codes and RFID
technology are key in capturing data in this process.
Performance Food Group designates “recall leaders” at each location to ensure recall
effectiveness. It also has a trace back system for all of its Braveheart branded beef
products.
32
Grocery Stores
Figure 36: Results for grocery stores

Sample Size: 8 companies
Grocery stores disclose information about their supplier management systems at a rate
equal to other parts of the value chain, and food safety is commonly reported as a risk to
investors in 10-K reports.
However, only half of those studied disclose information on internal safety systems and
external certifiers. Food safety KPIs and traceability are also discussed infrequently.
None of the firms disclose any link of executive compensation to food safety or any food
safety expertise on the boards.
Wal-Mart has mandated GFSI and Safe Quality Food (SQF) for all suppliers and uses
meat traceability systems.
Costco manages suppliers and factory audits through its Traqtion system. Through
its membership database, Costco can contact every customer who has purchased a
recalled product.
Delhaize Group reports progress against 2020 targets on supplier food safety
compliance, factory audits, and product recalls.
33
Restaurants
Figure 37: Results for restaurants

A majority of restaurants in our sample provide detail on supplier management systems

and note food safety as a risk in 10-Ks. However, restaurants rarely disclose information
regarding internal safety systems and external certifiers. KPIs are also published
infrequently. Only one restaurant links executive compensation to food safety or has a
board member with disclosed food safety expertise.
Starbucks has implemented a product traceability program that enables the company
to trace 100% of the raw materials in a particular product within four hours.
Similarly, Darden Restaurants has implemented full product traceability for shelf life
management and food safety crisis management with leading supply chain standards
organization, GS1.
Panera, Texas Roadhouse, Cheesecake Factory, and Jack in the Box have
implemented HACCP and GMP plans for food preparation.
Chipotle, McDonald’s, and Cheesecake Factory disclose the presence of a sick leave
policy, though the level of detail varies.
34
Agricultural Products
Agricultural product companies operate upstream, supplying products and services to
food producers. The category encompasses a diverse group of companies that operate in
markets such as:
Fertilizers
Seeds, herbicides, and other agricultural chemicals
Animal feed and feed products
Agricultural commodity processing (i.e. vegetable oil, flour, grains)
Due to the segment’s diverse mix of companies and unique set of issues, many of the food
safety elements we use to consider other parts of the supply chain are not applicable.
Furthermore, the impact of these products on the safety of the end product is diffuse. The
goal of product safety and quality is primarily focused on supporting the food safety
processes of their customers.
For example, antibiotic use in livestock and poultry production is a commonly cited food
safety issue. The proliferation of antibiotic resistance is primarily attributed to the
misuse and overuse of the drugs in animal agriculture and human medicine. Animal
health companies that manufacture products such as anti-infectives, medicated feed
additives, and vaccines are addressing regulations and consumer scrutiny that may curb
antibiotic usage in livestock and poultry production. 21
Other food safety trends impact agricultural product companies to a lesser extent.
Companies that produce fertilizers such as potash, nitrogen, and phosphate must ensure
product quality and proper labeling, but the risks around foodborne illness originating
from their products is minimal. Using sewage sludge as fertilizer on food crops is a
separate food safety issue and is not part of the product portfolio for large, publicly
traded fertilizer companies such as Agrium and PotashCorp.
Considering the diverse mix of companies, distinct sets of issues, and diffuse impact on
the end products, we did not apply our assessment framework to agricultural products.
21 Please see Cornerstone Capital Group’s report on “Antibiotics and Animal Health: Value-Chain Implications in the US,” for detailed analysis.
35
Observations for the Food Supply Chain
Restaurants
Restaurants have the lowest average disclosure rate for internal food safety systems and
external certification. Comments from interviewee companies pointed to the absence of
an industry-wide standard and the fragmented county and city health inspector system
as contributing factors.
The lack of disclosed safety systems contrasts with the outsized contribution of
restaurants (full service and quick service) to food safety outbreaks. Figures 38 and 39
show that the 20% of calories consumed in restaurants and fast food outlets account for
40% of food safety outbreaks. Given the increasing tendency for Americans to eat out
rather than prepare their meals at home (Figure 14), it is unlikely this trend will change
any time soon.
Figure 38: Calories consumed by place Figure 39: US food contamination outbreak by place 2010
Adults age 20 and older Children age 2-9 Caterer Prison, jail
2% 2%
Other away
from home Other away School House of worship
Other
from home 7% 11%
9% 3%
7%
Fast School
food Fast 3% Restaurant or deli
13% food 44%
Banquet facility
Restaurant Home 14% 7%
10% 68% Private
Restaurant Home Workplace, home
5% 67% office, not 20%
cafeteria
8%
Source: USDA Economic Research Service analysis of 2005-2008 Source: Efficient Consumer Response 2013, Centers for Disease
National Health Examination Survey data, Cornerstone Capital Group Control and Prevention, Cornerstone Capital Group
Considering this relationship, it is possible that additional regulation may emerge to

standardize food safety in restaurants. Furthermore, investors can use safety system
disclosure and food safety KPI reporting by fast food companies as a proxy for managing
food safety risk.
Transportation Divergence
The limited sample of publicly traded transportation and logistics companies reveals
significant differences in disclosure. High-disclosure companies detailed safety systems,
food recall protocols, supplier audits, and food safety KPIs. Low-disclosure companies
provided little or no information relating to food safety.
FSMA includes new rules for the food transportation and distribution system,
particularly the refrigerated food chain. With growing regulatory scrutiny, investors
could consider disclosures as a proxy for the management of food safety issues.
36
Upstream vs. Downstream
Our food safety assessment shows lower levels of disclosure moving from upstream to
downstream. To this end, a Duke University report titled “A Global Value Chain Approach
to Food Safety and Quality Standards” provides an analytical framework for considering
differences in standards and, by association, disclosure 22.
The analytical framework, shown in Figure 40, suggests that there is a relationship
between the relative concentrations of food suppliers and “demanders” (i.e., commercial
customers), and the prevalence of standards. Market concentration in both food
suppliers and “demanders” (bilateral oligopolies) results in the most comprehensive
standards. The comprehensive voluntary standards between major poultry producers
and major grocery stores, including the development of the GFSI, supports this idea.
On the other hand, fragmented value chains at both the supply and demand ends are
likely to encounter more limited public standards. We observe that supply and demand
for certain products in the restaurant industry are fragmented (or less concentrated),
potentially explaining why private standards are less comprehensive than in some areas
of the supply chain.
Figure 40: Value chain governance and food standards

Food demand (retail/buyer)
Concentrated Fragmented
Bilateral oligopolies Producer-driven chains
Private Public + private
Concentrated
Most comprehensive standards Safety- & quality-focused process
Food supply standards
(processor/
supplier) Buyer-driven chains Traditional Markets
Public + private Limited public standards
Fragmented
Safety & quality-focused product Least comprehensive standards
standards
Source: Gereffi and Lee (2009), Cornerstone Capital Group
While the concentration of buyers and sellers is not the sole explanatory variable for the
differences in standards, investors can use relative concentration to determine the likely
implementation of food safety standards in different segments of the food value chain.
Board Expertise
A 2013 survey of risks in the Food Processing and Distribution industry found that,
within food processing and distribution, damage to reputation/brand and product recall
ranked second and third, respectively, behind only commodity prices 23. 74% of
companies reported a formal review of readiness for managing product recall risks.
We examined whether a company had explicit food safety expertise, defined by having
food safety education or previous experience in food safety/quality roles on the Board of
22 Gereffi, Lee, 2009, a global value chain approach to food safety and quality standards, Global Health Diplomacy for Chronic Disease Prevention Working Paper
Series
23 AON, 2014, 2014 US Industry Report: Food System, Agribusiness & Beverage, http://www.aon.com/attachments/FAB-Industry-Report-March-2014.pdf
37
Directors. This criterion was narrow as we aimed to assess how board-level governance
related to the industry’s view that food safety issues are a top priority.
Our assessment revealed that food safety expertise is generally present in mid-level and
senior management throughout the supply chain. However, most corporate boards
currently maintain oversight through risk and audit committees; there is little food safety
expertise present on most food company boards.
We note that, as an alternative to board level expertise, companies can engage external
advisors and consultants. The presence or absence of specific expertise on the board is
less important than whether the company can articulate a compelling narrative about
how the board manages food safety issues.
Executive Compensation
Executive compensation is rarely linked to food safety goals, although companies
indicated that the impact of food recalls on stock price and earnings were significant
incentives for management.
38
Potential Growth Opportunities
Given the trends discussed in this report, we identify three areas of food safety
innovation that offer growth opportunities for investors:
Food testing and analysis
Supply chain technology
Automation and robotics
Food Testing and Analysis

The food testing market — estimated to be a $2 billion global market — is expanding due
to the enactment of government regulations such as FSMA, quality improvement
initiatives by food processors, and consumer demand for safer food.
The market is divided into three segments including testing for pathogens, indicator
organisms, and chemical contaminants. Pathogen testing accounts for the greatest share
of the food safety market, and three organisms — Salmonella, Listeria, and E. coli O157 —
account for 98% of volumes. Approximately two-thirds of pathogen testing volume
occurs at food processing companies and one-third at third-party contract testing labs.
There are three pathogen testing methods commonly used: culture, immunochemical,
and molecular. Tradeoffs exist between accuracy, time to results, and complexity/labor
intensity of pathogen testing workflows. Currently, culture and immunochemical
represent about 61% of testing volume in North America, but molecular is poised to grow
due to better accuracy and faster time to results.
Figure 41: Global food safety testing market Figure 42: Overview of pathogen testing methods
Methods and
Time to
volume share in Characteristics Limitations
results
North America
Culture Generally accurate

Labor intensive 3-5 days
23% Inexpensive test kits
Labor intensive
Immunochemical Typically faster than
Increased false positive 2-3 days
38% culture methods
and negative results
Labor intensive with
Typically faster than
Molecular complex workflow
immunochemical 1-2 days
39% Impacted by inhibitors
methods
and cross reactors
Source: Roka Bioscience 2015, Cornerstone Capital Group Source: Roka Bioscience 2015, Cornerstone Capital Group
Key companies operating in the molecular space include DuPont, Bio-Rad, and Roka
Bioscience. Neogen and bioMerieux have competitive offerings in immunochemical and
culture testing. Neogen also has a partnership with Illumina, the market leader in genetic
sequencing machines, where Neogen’s custom SNP content (genomic data) is built on
39
Illumina’s technology and sold to agrigenomics customers 24. Testing, inspecting, and
certification (TIC) companies are also benefiting from the trends in food safety through
their global network of food testing labs. These labs establish the safety, composition,
authenticity, origin, traceability, and purity of food. Eurofins Scientific has the strongest
focus on food testing of the major TIC companies.
Supply Chain Technology

As the food supply chain becomes increasingly global and regulations require more
detailed monitoring and record-keeping, food companies are leveraging supply-chain
technology powered by the Internet of Things (IoT) to address food safety challenges.
PAR Technology’s SureCheck software is an HACCP solution that replaces manual paper-
based methods with an IoT, cloud-enabled system. The platform helps food service
companies automate the monitoring of quality risk factors and lowers the potential for
human error. Elsewhere in the software space, Trimble acquired the assets of
HarvestMark, a provider of food traceability and quality inspections solutions, in April
2015.
With consumers demanding fresher food with fewer additives and preservatives,
companies are using packaging technology to keep food fresh. Modified atmosphere
packaging (MAP) extends the shelf life of fresh food products by substituting the
atmospheric air inside a package with a mixture of natural gases in carefully controlled
proportions. The type and proportion of gas used is primarily dictated by the type of food
in the package. This protective gas mix slows down the process of decay and inhibits the
growth of microbes. MOCON’s technology analyzes and monitors the amount and type of
gas present in packages. Other MOCON products detect leaks and measure the rate at
which gases and vapors transmit through packaging material.
Automation and Robotics

As discussed in the “Advanced Robotics” section of this report on page 23, food and
beverage companies are addressing rising labor costs, employee health issues resulting
from repetitive motions, and costly food safety and hygiene compliance. In addition,
emerging market consumers are demanding more processed and packaged foods, which
is leading to accelerated investment in process automation.
Given this backdrop, robot manufacturers such as Kuka and Fanuc appear well
positioned for growth. Food processing equipment companies such as Middleby are also
introducing new products that address food quality and consistency concerns. Machine
vision is playing a role in product quality, safety, and package integrity as well. Cognex
Vision and ID products help food processors with tasks such as bottle inspection and
label placement. This helps food companies manage allergens by confirming
package/product match as well as traceability.
24 Agrigenomics is the application of genomics in agriculture to improve the productivity and sustainability in crop and livestock production.
40
Figure 43: Company exposure to food safety theme
Food safety
Company Ticker GICS Industry Description of relevant business
Exposure
Ecolab ECL Chemicals Food & beverage cleaning, sanitation and plant hygiene solutions High
including customized on-site evaluations, training, and quality
assurance services to foodservice operations
Sealed Air SEE Containers & Packaging Packaging and hygiene solutions High
MOCON MOCO Electrical Equipment, Instruments Instruments that detect, measure, and monitor gases and other High
& Components chemical compounds
Roka ROKA Healthcare Equipment & Supplies Molecular assays and instrument systems High
Bioscience
Neogen NEOG Healthcare Equipment & Supplies Diagnostic tests for food and feed producers and processors High
Where Food WFCF Internet Software & Services Third party verification and traceability of food production practices High
Comes From
Eurofins ERF.FP Life Science Tools & Services Testing, inspection, and certification services for food safety High
Manitowoc MFS Machinery Commercial foodservice equipment Medium/High
Foodservice
Middleby MIDD Machinery Commercial foodservice and industrial processing equipment Medium/High
John Bean JBT Machinery Food equipment & service Medium/High
Technologies
bioMerieux BIM.FP Healthcare Equipment & Supplies Microbiology, immunoassays, and molecular tests Medium
IDEXX IDXX Healthcare Equipment & Supplies Diagnostic, health-monitoring, and food safety testing products for Medium
livestock, poultry, and dairy; Testing and detection solutions of
various microbiological parameters in water
Thermo TMO Life Science Tools & Services Diverse portfolio of food safety testing solutions Medium
Fisher
Perkin Elmer PKI Life Science Tools & Services Variety of solutions that confirm food quality and identify the origin Medium
of food products
Agilent A Life Science Tools & Services Products address food safety and food authenticity Medium
Mettler- MTD Life Science Tools & Services Provides end-of-line inspection systems used in production and Medium
Toledo packaging for food
Bruker BRKR Life Science Tools & Services Nuclear magnetic resonance, mass spectrometry, and Medium
Infrared/Near Infrared instruments for food safety
Rational RAA.GR Machinery Thermal food preparation Medium
PAR PAR Electrical Equipment, Instruments Software-as-a-service solution for storing, analyzing, and reporting Medium/Low
Technology & Components data for HACCP compliance purposes
Waters WAT Life Science Tools & Services High and ultra-performance liquid chromatography and mass spec Medium/Low
systems for food safety labs
SGS SGSN.VX Professional Services Agriculture, Food, and Life business lines offers testing, Medium/Low
inspection, and certification services
DuPont DD Chemicals Qualicon business operates in the pathogen testing market Low
Trimble TRMB Electrical Equipment, Instruments HarvestMark provides food traceability and quality control Low
& Components solutions
Cognex CGNX Electrical Equipment, Instruments Machine vision Low
& Components
3M MMM Industrial Conglomerates Products make it faster and easier for food processors to test the Low
microbiological quality of food
Bio-Rad BIO Life Science Tools & Services Chromogenic and molecular tests for food pathogens, food quality Low
Qiagen GEN Life Science Tools & Services Molecular testing solutions Low
Illumina ILMN Life Science Tools & Services Sequence and array-based technology platform Low
Kuka KU2.GR Machinery Industrial robots Low
Fanuc 6954.JP Machinery Industrial robots Low
Intertek ITRK.LN Professional Services Food & Agriculture business offers testing, inspection, and Low
certification services
Bureau BVI.FP Professional Services Testing, inspection, and certification services for food safety Low
Veritas
Source: Company reports, Cornerstone Capital Group. *Company exposure is based on Cornerstone estimates of current sales derived from
products and services relating to food safety
41
Appendix I – Regulatory Assessment
US China European Union
Overall approach Formerly based on 'reasonable certainty of no Recent changes focus on supervision/control of Based on 'precautionary principle', with
harm' but FSMA introduced risk based, HACCP food chain, enforcement, focus on problem areas evaluation undertaken by organized government
approach and use of auditors (e.g. infant formula, health food, online shopping) bodies
Regulatory agencies Food and Drug Administration (FDA) and US China Food and Drug Administration (CFDA) European Food Safety Authority; national
Department of Agriculture (meat and poultry) regulators (e.g. French Agency for Food,
Environmental and Occupational Health &
Safety)
Food standards US focus is on adulteration and misbranding in New standards for food manufacturing and No harmonization of food composition standards
line with existing food composition standards distribution but no food composition standards across countries
Growth hormones Growth hormones approved for beef cattle with No regulation concerning use of growth No substances that have hormonal action may be
no presence to be detected at time of slaughter hormones but ban on the presence of hormonal given to farm animals
growth promoters in imported animals
Livestock antibiotics FDA regulations tightened to reduce use of No regulation on use of antibiotics in livestock Antibiotics use for growth promotion prohibited
medically important antibiotics for growth presently but inclusion of antibiotic use on labels but allowed for disease prevention
promotion but antibiotics allowed for disease included in new food safety law (2015)
treatment and prevention
Novel foods Producers of new foods have responsibility to Producers of new foods must submit relevant Pre-market approval is required prior to novel
ensure foods are safe and in compliance with information to National Health and Family food being provided in market
applicable legal requirements Planning Commission for review, public
comment, evaluation and approval
Genetically modified foods GMOs are permitted in all foods and labeling is There are no national laws regulating use of Pre-approval required for all GMO foods; must
voluntary GMOs but labeling of GMOs in food is mandatory not pose harm humans, animals or environment,
must not mislead consumers. Labeling also
mandatory
Cloned animal No regulation but voluntary moratorium on cloned No regulation and cloned animal production is Pre-market approval including safety risk
meat is in place being developed assessment required for all cloned animal meat
and approved meat must have clear labeling
Nanomaterials No specific regulation in place No specific regulation in place Labeling requirements
Food labeling: Allergens 8 major food allergens must be included on label 8 major food allergens must be included on label 14 allergens must be included on label
Protected destinations of origin No program in place No program in place Program in place
TPP and/or TIPP Party to both TPP and TIPP; major food safety Not included in either trade agreements Party to TIPP with food safety focus on reducing
element is improved linkages for food import/ regulatory burden for EU foods exported into US
export on basis of 'equivalent' safety regime
Source: US Food and Drug Administration, European Food Safety Authority, China Food and Drug Administration
42
Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to
joining the firm, Michael was a Research Analyst on the Global Growth and Thematic
team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a
CFA Charterholder.
[email protected]
Sebastian Vanderzeil is a research analyst with Cornerstone Capital Group. He holds an

MBA from New York University’s Stern School of Business. Previously, Sebastian was an
economic consultant with global technical services group AECOM, where he advised on
the development and finance of major infrastructure across Asia and Australia. Sebastian
also worked with the Queensland State Government on water and climate issues prior to
establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
[email protected]
Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from
Bowdoin College with an interdisciplinary major in Mathematics and Economics and a
minor in Visual Arts. He spent his junior year studying abroad at the University of Oxford
and the summer prior to that at the Sorbonne in Paris. Andy passed Level I of the CFA
Program in January 2014.
[email protected]
Thanks to Cornerstone Capital Group Research Intern Caleb Ballou for his contributions to
this report.
43
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Food Safety: in A State of Transformation: Global Thematic Research

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Global Thematic Research July 2016

Prepared by Cornerstone Capital Group for the

From a behavioral/demographic perspective, companies are reassessing strategies to

Globally, internet-enabled consumers are becoming increasingly aware of food safety

What Can We Observe from Companies’ Disclosures?

Food safety expertise is generally present in mid-level and senior management

Food testing and analysis

Shareholder Engagement - What Questions Should Be Asked?

What Is Food Safety?

Using History as a Guide

Figure 4: Food safety events

Jack in the Box (JACK)

Figure 5: 1993 Jack in the Box E. coli outbreak

Source: Bloomberg, Cornerstone Capital Group

Yum Brands (YUM)

Figure 6: 2007 Taco Bell E. coli outbreak

Figure 7: 2015 Chipotle E. coli outbreak

CEO Mar 8, closed store in MA

Source: Bloomberg, Cornerstone Capital Group

On March 8, 2016, a separate norovirus incident closed another Chipotle location in

Meat and Produce Companies

Figure 8: 2002 Pilgrim’s Pride Listeria outbreak

Oct 30, reported 65% decline in

60% FY2002 profit partly because of the

-20% Nov 13, reopened

Source: Bloomberg, Cornerstone Capital Group

Figure 9: 2014 Tyson Foods Salmonella outbreak

Behavioral and Demographic Shifts

1. There is a growing preference for organic, antibiotic- and preservative-free,

Preservative-free 11% 26% 39% 76% $30

Hormone-free 10% 27% 38% 75%

GMO-free 10% 24% 36% 70%

Clean 10% 19% 33% 62%

Significantly more Slightly more No more

Source: Centers for Disease Control and Prevention

Organic, antibiotic- and preservative-free, and locally sourced products do not

2. The shift toward two-earner families and busier lifestyles in developed

70% Food Safety 20%

Meat 250 Milk

kg per capita per year

5. As populations in developed markets continue to age, more people will be at

Figure 19: US food safety regulatory timeline

Food Safety Modernization Act

8 IFT, 2015, FSMA Rules Timeline, http://www.ift.org/public-policy-and-regulations/policy-developments/fsma/fsma-rules.aspx

Source: FDA, EC, Cornerstone Capital Group

Source: USDA 2016, Cornerstone Capital Group

Globalization of Food Supply Chain

Source: Swiss Re Source: Roka Bioscience

Supply Chain Technology

Figure 26: Price development of RFID tags

Figure 29: Share of North American robot orders

Source: PWC, Robotic Industries Association, Cornerstone Capital Group

Figure 30: Cost of sequencing a human-sized genome, 2001-2015

Source: NHGRI Genome Sequencing Program 2016, Cornerstone Capital Group

Figure 31: Total number of sequences in the GenomeTrakr Database, 2013-2016

Source: FDA, Cornerstone Capital Group

Bringing It Together: Food Safety Is in a State of Transformation

Figure 32: Converging forces impacting food safety

Source: Cornerstone Capital Group