An End User Perspective: The Impact of FSMA on Restaurants

Abstract

On January 4, 2011, President Obama signed into law the Food Safety Modernization Act (FSMA or P.L. 111-353). This act may be the most far-reaching food safety legislation since the Food, Drug and Cosmetics Act (FDCA) of 1938. FSMA aims to ensure that the U.S. food supply is safe by shifting the focus of regulation from contamination response to prevention. This legislation imposes administrative costs on the food supply chain in the United States by requiring additional record keeping and safety procedures. Previous research has shown that the value of food processing, wholesale and grocery firms was reduced by the passage of this legislation. We hypothesize that the negative value effects caused by the legislation may be partially passed on to end users of food products, specifically, restaurants. Consistent with this hypothesis, we find that passage of FSMA reduced the market value of publicly traded restaurants by approximately 5%. This result is roughly one half of the impact borne by other firms in the food supply chain. That is, we find evidence that a portion of the supply chain costs of FSMA are passed on to restaurant firms and possibly other end users such as consumers. We conclude that federal legislation that is not specifically directed at the hospitality industry may still have significant effects for hospitality firms.