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The Great Pet Food Scandal

The Great Pet Food Scandal
How one supplier caused a huge crisis, and why it's just the tip of the iceberg
CHARLIE GILLIS AND ANNE KINGSTON | April 30, 2007 |

Sometime in the next couple of years, when the public gaze has drifted from the tainted pet food epidemic and we've all forgotten what melamine is, a judge in Ohio or California or Ontario will take up the daunting question of what a dog or cat is worth. There was considerable legal debate on this topic even before the current uproar. But if an animal's curative effect on the human heart plays any part in the calculation, the courts might start at a small house in Floral Park, N.Y., where the wounds wrought by the poisoning epidemic will stay raw for a long time to come.
It was here in the Long Island suburbs that Donna Opallo and a couple of relatives brought home Checkers, a chocolate-eyed beagle puppy, three years ago, figuring she might lend solace to Opallo's grief-stricken sister, Debbie DiGregorio. The previous week, DiGregorio's 16-year-old son, Louis, had died suddenly of a brain aneurysm. Frantic for ways to help, the family took a flyer on the dog, and their instincts proved correct. "That dog filled a very big void in her life," says Opallo, 47, who lives with her 45-year-old sister. As the months passed, it became clear that Checkers possessed healing powers no psychiatrist, friend or relative could equal.
Then, in mid-February, the family was thrown back into crisis. Checkers began vomiting incessantly and defecating blood, sending the sisters on a series of futile visits to a local veterinarian. Test after test proved inconclusive, and only after Mississauga, Ont.-based Menu Foods issued its first recall of contaminated food on March 16 did the penny finally drop. Both Checkers and Opallo's own dog, an 11-month-old Bichon-Shih Tzu cross named Taco, had been eating food from foil pouches sold under the Nutro brand name, one of the products on Menu's list. Checkers survived the initial illness, but her gruesome symptoms persisted. Today her vets can't say whether she'll survive. Taco, who hadn't showed any outward signs of trouble, turned out to be in near-total renal failure. He spent more than a week in an animal hospital in nearby Westbury, with an intravenous line attached to his leg and his owner by his side. "Three-quarters of his kidneys are destroyed, and I don't know what his life expectancy will be," says Opallo. "It's like there's a little ticking time bomb inside of him."
The plight of Checkers and Taco is by no means unique: it is believed some 40,000 pets who ate Menu Foods products made with melamine-laced wheat gluten have been sickened in the U.S. and Canada. While mortality estimates vary, a recent survey by the Davis, Calif.-based Veterinary Network estimated the death toll in the U.S. in the thousands. But it does give some sense of the debacle's reach -- as well as its ruinous effect on each family it touched. Quite apart from the collective US$6,200 in vet bills Opallo and DiGregorio have paid out of their line of credit, or the thousands more they're willing to spend, they quake knowing they might lose one or both of their beloved animals. "I don't think I could ever buy another dog," says Opallo. "I'm basically in denial."
The scope of the tragedy -- emotional and financial -- continues to widen. The recall has been expanded four times in the last four weeks, with 889 separate items under 100 different brand names yanked off the market. The company's explanations raise more questions than answers, and there's been predictable talk of reform at the government level. In Canada, talks between pet food makers, vets and a variety of federal agencies have already begun, with a view to imposing rules on an unregulated industry. In the U.S., members of the Senate's agriculture appropriations subcommittee have held hearings into the Food and Drug Administration's handling of the crisis, while the FDA itself continues to investigate the cause of the contamination.
But the economic model that led to the poisoning shows little sign of change. Even in the throes of a PR nightmare, the big grocery chains continue to support Menu, a production behemoth with whom they share a mutual dependency. Loblaw Companies, for one, which sells Menu products under its President's Choice and No Name brands, has no plans to switch suppliers. "They've been a valued partner," says spokeswoman Elizabeth Margles. "We do have confidence about them at this point."

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Loblaw may remain unshaken, but for the average dog or cat owner the entire affair has been a faith-testing experience. Little did pet owners know that, whether they were buying a budget supermarket brand or splurging on top-of-the-line fare at a specialty pet store or from a veterinarian, the food was being produced at the same factory and even shared some of the same ingredients. How could they? Menu Foods' name appeared nowhere on the label. The company existed as an invisible cog in the food chain, churning out most of North America's most popular wet food in cans and foil pouches to its customers' blue-chip specifications -- Science Diet for Colgate Palmolive, Iams for Procter & Gamble, Whiskas for Purina. It also manufactured an estimated 75 per cent of private label brands in Canada, including Wal-Mart's, Sobey's and Pet Valu's. In the United States, where its customers include PetSmart, Safeway and Wal-Mart, Menu supplies between 40 per cent and 50 per cent of wet pet food.
The story of how a tiny, shoestring operation in Toronto's western suburbs came to dominate its industry reflects the seismic shifts in the manufacturing food chain over the past three decades. Increasing power wielded by the margin-obsessed, cutthroat supermarket industry has forced manufacturers to source cheaper ingredients globally. Those forces have favoured faceless giants -- players capable of supplying myriad products demanded by retailers, retooling and remixing recipes as the orders came in. But as the Menu case demonstrates, the system also ensures a continent-wide catastrophe when something goes wrong. Marion Nestle, a professor in the department of nutrition, food studies and public health at New York University, doesn't see the Menu tragedy as an aberration. Rather she calls it "the tip of the iceberg."
Suffice to say, no such spectre troubled Robert Bras, the sharp young supermarket executive who bought into Menu Foods in the late 1970s and turned the plodding company into a trailblazer. At the time, Bras was working for Loblaw Companies, a firm in the midst of its own astounding turnaround from down-at-the-heels grocery chain. Central to its recovery strategy was a private-label program that would rival the big national brands in quality and sales. Without the advertising and distribution costs that inflated the prices of national labels, executives reasoned, a supermarket could sell its own brand -- often made at national brands' factories -- at a lower cost for a higher margin. Pet food was a critical part of the scheme: it is a high-frequency purchase that brings people into the store. Desirable proprietary brands presented a way to cultivate customer loyalty. Sensing untapped opportunity, Bras left Loblaw in 1977 and bought a 50 per cent stake in Menu, a manufacturing generalist that made everything from bargain-basement pet food to bleach.
Bras quickly stripped away extraneous product lines and purchased a factory in New Jersey with an eye to expanding into the U.S. But his big break came in 1979, with a contract to produce Loblaw's "no-name" canned pet food. The first offering, a No Name Luxury meat mix, claimed to match brand leader Dr. Ballard's formula in quality at a lower price. The "luxury" reference was a master stroke: it seduced pet owners into believing they were buying status for the same price as "maintenance" -- an industry term for standard product. Within six months, it was the No.1-selling product at Loblaw's Ontario stores.
Menu's sales grew 25 per cent a year on average during the 1980s, fuelled by the growing number of supermarkets cluing in to the fact they could make margins of 35 to 40 per cent profit on their own premium house-label pet food. Business was buoyed by the fact that pets were increasingly viewed as full-fledged family members -- "furkids" as they came to be called. Nowhere was this more apparent than at the pet bowl. When canned dog food was introduced in 1922 there was no pretense of nutritional benefits; the only benefactors were meat packers who seized on a profitable way of disposing of surplus offal and horse meat. By the 1980s, however, pets' diets were mirroring their owners' own peccadillos, food phobias and culinary dispositions, be they kosher, hypo-allergenic, vegetarian or low-fat.
"We have anthropomorphized our pets," says Kelly Caldwell, editor of Dogs in Canada. "You want to feel you're giving your dog the best possible food. It's a way to show we care, that we're not scrimping, that they're valuable." Caldwell buys only "organic" feed for her purebreds because that's what she eats. "I've bought into the packaging and promises," she says. Nutrition tops the concern of Dogs in Canada readers, she says. Bras understood the business was "counter-economic." Pet food wasn't sold on price alone; if your dog or cat isn't going to eat it, you're not going to buy it. And if people believed they'd improve the health or extend life of their pet, they'd spend more on higher-priced premium labels.
Menu's expansion in the United States was ramped up in the 1990s when Cott Corporation, a Toronto-based manufacturer of private-label soft drinks with grand plans for global domination, bought the remaining 50 per cent stake in the company. Wal-Mart and Safeway were added to Menu's customer roster. The company also benefited from the fact that national brands, under assault from retailer labels, were increasingly outsourcing their manufacturing so they could focus on "managing the brand." It was an ironic twist: managing the brand became synonymous with distancing itself from the grimy business of production.
Menu, meanwhile, invested heavily in a U.S. infrastructure. A state-of the-art factory was built in Emporia, Kan. In 2001, Menu bought the wet food operations of Doane Pet Care for US$15 million. The following year, the company went public on the Toronto Stock Exchange as an income trust, a structure that avoids most corporate taxation because most of the company's income is paid directly to its unit holders. If there's a discernible turning point in the company's history, however, it is 2002, when Bras died of cancer. He was replaced by Paul Henderson, a former chief operating officer at Cott. In 2003, Menu assumed US$85 million in new debt to purchase a Procter & Gamble plant in North Sioux City, S.D. With that purchase came a five-year supply agreement to be the exclusive supplier of Iams and Eukanuba wet foods, which now account for about 11 per cent of Menu's sales.
But even as Menu's business grew exponentially, its margins were reportedly under constant pressure. It was rumoured within the industry that Wal-Mart and Loblaw, eager to maintain their own margins in a competitive pricing environment, kept a lid on prices that squeezed Menu's profits. Specifically, Menu was expected to deliver expensively made foil packs -- now at the centre of the contamination controversy -- at the same price as cans. "They definitely had to eat margins to a point they weren't making any money selling to Wal-Mart," says an industry insider who explains Menu couldn't afford to lose the contracts because they provided credibility with potential customers. Loblaw says there was no freeze on prices. "We always try to keep prices down but didn't say you couldn't raise prices," Margles says. "We always try to keep costs down for our customers. We have to remain competitive."
At the end of 2005, Menu reported a loss of $54.6 million and suspended payments to its unit holders, blaming the decline in the value of the U.S. dollar. The next year Menu returned to profitability, yet its cash distributions remain suspended. By early 2007, with a revived Canadian dollar and new price increases, prospects appeared on the upswing. Improved cash flow was being used to pay down debt and industry analysts were expecting it to resume distributions to unit holders.

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If the engines of Menu's success were humming again, they cut out abruptly on March 16, 2007. The recall notice the company issued that morning downplayed the implications, describing the removal of 60 million units from the market as "precautionary" and omitting all reference to any potential contaminant. Within days, however, the FDA was asking awkward questions about wheat gluten shipped from China, and pet owners were starting to exchange horror stories on the Internet.
What the company did next will surely go down as a case study in how not to manage a crisis. Far from tackling the matter head-on -- by, say, quickly withdrawing all products made with suspect material -- it left items on the shelves for what by human food-safety standards seemed an eternity. On March 24, eight days after its original notice, Menu expanded its recall to include all varieties of its wet pet food, a rearguard action that encompassed those household names it had so assiduously cultivated, from Iams to Wal-Mart's house brand Ol' Roy. Two more recalls would follow, the first on April 5 for all Menu products made with the suspect wheat gluten, including dry food; the next on April 10, when Menu pulled products made at its plant in Mississauga (previous recalls affected product made at the Kansas plant).
At the centre of all of this was an ingredient few North Americans had heard of before the crisis. Wheat gluten -- essentially, destarched flour dough -- is used in pet food to bind and add texture. Menu had previously been buying it from U.S. sources, but had switched last November to an obscure Chinese manufacturer called XuZhou Anying Biologic Technology Development Co. Menu cited a gluten shortage in North America for the change, but a cynic would point to other potential motivations: in 2006, wheat gluten from China sold for about 20 cents per pound less than that made by U.S. competitors.
Whatever the savings Menu realized, however, could not possibly have been worth what followed. By Feb. 22, according to timelines provided by the company, Menu was receiving warnings from consumers that its food was sickening pets. On Feb. 27, routine taste tests of its own products resulted in the deaths of at least two and, by some accounts, as many as 10 animals. Still, it took Menu until March 8 to notify ChemNutra, the Las Vegas-based distributer of the Chinese product, that it was investigating the possibility the gluten was causing illness. The recall, however, wouldn't come for another eight days.
The contempt implicit in this tardiness infuriates pet owners. Jody Tomlinson of Coquitlam, B.C., lost his job as a warehouse supervisor after spending hours on the phone last winter researching the mysterious kidney ailment that eventually claimed the life of his two-year-old mastiff, Binky. The idea that Menu may have sat on vital information leaves the 38-year-old fuming, and calling for government regulation. "Greed started this," he says, "not common sense." Lance Ganske, a Calgary sheet-metal worker who lost Blackie, one of several pet cats, now distrusts the entire industry. "When I buy something, I don't know whether it's going to be good or not," he says, "and I still have to feed my animals."
Menu officials haven't helped matters, allowing their phones to ring unanswered for hours at a time, according to angry consumers, and providing confusing explanations for what went wrong. (In one interview, vice-president Randall Copeland blamed part of the contamination on a "clerical error" that saw the wheat gluten bags receive false U.S. labelling; photos supplied by the product's U.S. distributor clearly show the words "Made in China" printed directly on the bags.) In an email to Maclean's last week, Menu CEO Paul Henderson disputed suggestions that the company dragged its feet. While Menu did receive reports of cat illnesses on Feb. 22 and 28, he said, "the vets who attended these cats informed Menu that they each had access to various contaminants and could have gotten into something they should not have, such as antifreeze." A third call reporting a cat death came in on March 5, Henderson said, and while Menu did not receive veterinary information about the third case, the consumer did send in the unused food. "We tested the food, but the testing did not reveal anything wrong with it," he wrote.
The irony in all of this is that Menu was blindsided as well -- the company just can't seem to communicate it. In the end, lab tests performed in late March on the Chinese gluten identified the likely cause of the poisoning as melamine, a plastic by-product that is entirely foreign to the production of wheat gluten -- or, for that matter, pet food. "It's unheard of," says Steve Pickman, a vice-president at Atchison, Kan.-based MPG Ingredients Inc., which makes wheat gluten for human and pet consumption. "You'd never think to test for it."
Indeed, reports out of Washington last week said the FDA was investigating the possibility that workers at the XuZhou Anying factory tainted their product deliberately -- that they were using the substance to amp up the apparent nutrient value of their product. Melamine, it turns out, mimics protein when mixed into wheat gluten, creating the illusion that the substance is packed with value. Whether the supposed saboteurs knew it was fatal to animals is one question. How you guard against miscreants half a world away is quite another.

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Despite what seems to be an unsurmountable crisis, analysts remain optimistic about Menu's future. Aleem Israel, an analyst at Cormack Securities in Toronto, currently rates Menu Foods Income Fund a "buy," noting that its status as the primary supplier of wet pet food, as well as the only source of foil pack pet food, ensures its survival. And while most of its customers aren't locked into long-term supply contracts, no other manufacturer has the economies of scale that can provide the same profits.
That retailers have an economic stake in maintaining the status quo also works to Menu's advantage. No grocery giant is standing by the company more staunchly than the one that helped create it. "To say [the contamination] is extremely unfortunate is an understatement," says Margles, the Loblaw Companies' spokeswoman. "People feel very strongly about their pets and we feel very strongly about product integrity. Still, they've been a valued partner and we have a very detailed recall process here and we are keeping on top of it, as we're sure they are with any products they're manufacturing."
Margles, like others, blames the tainted raw material, not the manufacturer, for the catastrophe. "It does seem to be linked to the wheat gluten in China," she says. Such a rationale doesn't reassure nutritionist Marion Nestle, who compares the Menu case to last summer's E. coli outbreak in the continental spinach supply. "What this has exposed about globalization issues is just breathtaking," she says. "No one knew this kind of thing. People knew that spinach was centralized because of what happened over the summer. But the idea that one ingredient from China could go into 100 brands of pet food is something no one had any idea about."
Nestle, currently writing a book about pet food, believes the recall should make customers question the price differentials in the pet food market. "The disclosure is particularly striking for people who were paying a lot of money for Iams or one of those expensive brands," she says. "The idea that the same ingredients are going into cheap brands as expensive brands disturbs pet owners to no end. It's not that the formulas are the same but that they're using the same ingredients."
It certainly upsets Benjamin DeLong, 33, and his wife Jennifer, 32, a Wadsworth, Ill., couple who believed they were doing their cats Freddie and Rita a favour when they upgraded from no-name brands to Iams' "Tuna and Sauce" and "Salmon and Sauce" in foil packs. They now blame the products for Freddie's death and Rita's illness, and have joined a class-action lawsuit launched in Chicago. "We thought, let's spend a little more on our pets, get them a little better food and maybe they'll last a little longer," Benjamin DeLong says ruefully.
DeLong was particularly incensed by a full-page newspaper ad taken out shortly after the first recall announcement by Iams-Eukenuba, asking pet owners to keep buying product that was made in its "own" factories in the U.S., and not by Menu Foods. "Hey, you know what, I thought I was buying Iams," he says. "Obviously there was not enough oversight and management responsibility for somebody over at Menu Foods to stop this from happening. So not only do I hold Menu Foods responsible, but Iams as well."
The tragedy has also laid bare the lack of pet food regulation in Canada. The U.S., United Kingdom and European Union all have government agencies that monitor pet food for safety. Though the Department of Consumer and Corporate affairs oversees labelling claims, the Canadian industry is left to police itself. The Pet Food Association of Canada, comprised of manufacturers, has imposed a voluntary nutritional assurance program, while the Canadian Veterinary Medical Association runs a voluntary standards program that certifies only about two per cent of Canadian-produced pet food. Without systematic oversight, however, it's impossible to know whether the tainted pet food still sits on store shelves in Canada. Last week, the Food and Drug Administration said a random check of 400 retail outlets across the U.S. found some still stocking previously recalled dog and cat food; consumers north of the border have access to no such information.

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How, then, to respond? Who is to blame when poison makes it into an ingredient made by a foreign supplier for a U.S. distributor, who in turn sells to a Canadian processor who supplies retail outlets for pets across North America? How do you stop it from happening again?
At least part of the fallout will take the form of legal retribution. Within days of the first recall, class-action lawyers assumed their customary circling pattern, in some cases posting sign-up sheets on their firm websites for potential clients. Frank Jablonski, an attorney from Madison, Wis., says he's received 3,000 inquiries, nearly half from people whose pets have died. "The stories are devastating," he says. "You end up spending a lot of time on each one of them because essentially you're consoling the person." Jay Strosberg, a class-action lawyer based in Windsor, Ont., who has filed suit against Menu, says he's received more than 100 calls from people whose pets were sick or had died. The company says it faces more than 50 suits in the U.S.
These actions are primarily aimed at recouping vet bills. But it's a measure of how widely the case has resonated that some owners hope to break new legal ground by winning awards for emotional distress. "There's no way you can tell me that emotion doesn't factor into this," says DeLong from Illinois. While courts on both sides of the border have resisted such findings, preferring to treat pets as property rather than family, both Illinois and Tennessee have legislation allowing damages for emotional loss. And in a precedent-setting decision last year, a Superior Court judge in Ontario awarded $1,417.12 to an owner whose dog was let out of a boarding facility and died. The ruling was significant because the judge specifically stated that pets should not be considered "owner's chattel so as to preclude damages for pain and suffering."
The Canadian government, meanwhile, is reconsidering its hands-off approach to pet food safety. Bill Hewett, the executive director of policy and planning for the Canadian Food Inspection Agency, says the Menu case highlights the importance of pets in modern households, and has prompted his branch to reassess its options, including all-out regulation of the industry. The review comes after meetings with the Canadian Veterinary Medical Association, which warned that the absence of rules and standards could expose humans to risk, as well as pets. "What if this had been something other than melamine, like a virus?" asks Dr. Paul Boutet, the association's president. "Government needs to know these things, because a lot of things that affect pets affect people as well. Look how close these pets are to us now. They're sleeping in our beds. You could probably find [homes] where pets are eating at the table."
Still, neither Boutet nor Hewett foresees a new era of risk-free pet food. The vastness and complexity of the industry, they acknowledge, make it difficult to police effectively. "We have everything from large, internationally competitive manufacturers to mom-and-pop, niche-type producers," says Hewett. The Menu contamination, he adds pointedly, occurred despite FDA rules requiring pet food makers to ensure the safety of their products, demonstrating the "opportunity for failure" even in the context of government regulation.
Under the circumstances, pet owners -- even those who escaped this particular crisis -- have little reason to feel confident. Barring a complete restructuring of the economics of food manufacturing -- or a regulatory regime that would see Canadian inspectors combing through factories in China -- the question is not how this contamination happened, or how it might have been handled better, but when the next crisis will strike. Henderson, Menu's CEO, reassures customers that melamine testing will become standard operating procedure for his beleaguered firm. But the broader sentiment in the industry is best summed up in his prediction of Menu's immediate future: "It will be a return to business as usual."

With Nicholas Köhler, Nancy Macdonald and Barbara Righton