Functional Foods Stand Poised For Further Growth

FFN presents its first international overview of the functional foods and nutraceuticals market. Shane Starling looks at how the industry measured up in 2001 and assesses future strategies for success.

It is testimony to the good health of the global functional foods and nutraceuticals industry in the past year that it has been able to weather the kinds of storms that would bring many an industry to its knees. High-profile brand collapses, regulatory crack-downs, supplements and food ingredients scares—not to mention ongoing scepticism from sections of the public and the consumer press—have all failed to dull an industry that continues to grow at a buoyant rate.

San Diego-based Nutrition Business Journal valued the worldwide nutrition market at $156 billion in 2001, based on four broad categories: dietary supplements, natural/organic foods, natural personal care (cosmeceuticals), and functional foods and beverages, representing nine per cent growth for the year, compared with eight per cent in 2000.

If only functional foods ($62 billion) and supplements ($50 billion) are considered, the market stood at about $112 billion in 2001, with the US registering the highest sales ($36 billion, of which $18.5 billion were for functional foods), followed by Western Europe ($32 billion—(FF)$18 billion) and Japan ($27 billion—(FF)$19.5 billion). .These three markets accounted for 85 per cent of global sales, according to NBJ. Growth rates may be higher in developing regions such as Latin America, Asia and Eastern Europe, but the markets there are in their infancy and hence remain marginal in worldwide revenue terms.

In contrast, UK-based Leatherhead Food International (LFI) estimates the world functional foods market at a mere $10 billion for 2000-2001 in its report, "Key Players in the Global Functional Foods Industry ­ 2nd edition." Admittedly, it uses strict criteria, considering only foods with health claims. LFI acknowledges the actual market could be "double this" if one includes other foods widely considered to be functional, such as performance drinks.

Maturing Markets
Individual national nutrition markets have reached various stages of maturity and cater to divergent consumer tastes and education levels, yet many countries share common drivers. In the largest markets of the US, Western Europe and Japan, notes NBJ, sales are underpinned by an aging populace, rising health care costs, and concern for food safety and environmental impacts. In Latin America and Asia (excluding Japan), economic growth, increasing disposable incomes and an expanding middle class provide the macroeconomic context for rising nutrition sales and robust growth rates in the medium-to long-term.

Japan, generally regarded as the birthplace of functional foods, is the only country to regulate health claims via independent legislation. Called Foods for Specified Health Use (FOSHU), regulations were introduced in 1991, and they permit the use of health claims—but not medical claims—in the promotion of approved products. While some FOSHU products have been commercially successful, the sales of others have not lived up to expectations. However, enhanced foods that have not sought approval, and therefore make less specific health claims than allowed under FOSHU, have been quite successful.

Due to the head start of the Japanese functional foods market, it is different in character from those in Europe and the US. Being well established, functional foods are present in most sectors of the overall food and beverage market, and more innovative ingredients are already in use, such as non-nutritive antioxidant polyphenols. Product formulations are also more complex—for example, probiotic products often include a range of other functional ingredients such as vitamins, minerals and herbal extracts. Only now are these kinds of products starting to grab the attention of food formulators outside Japan.

FOSHU products have shown continual market growth and have an estimated market size of approximately $2.29 billion, according to Mintel. If non-FOSHU-enhanced foods are included in the assessment, Mintel ups its market assessment to $15.3 billion (as opposed to NBJ's $19.5 billion).

Liberal Regulations In US
In the US, rules allowing the use of disease-specific claims were issued in 1994 under the Dietary Supplements Health and Education Act (DSHEA). This established a regulatory mechanism for prevention-of-disease claims to be made on food labels. Food and Drug Administration (FDA)-permitted health claims refer to any statement "that expressly or by implication characterises the relationship of any substance to a disease or health-related condition," which would be classified as a medical claim in most European jurisdictions (currently illegal).

Approved claims are based on a high standard of scientific evidence and can be used on any product that meets the appropriate conditions pertaining to the claim. Model claims are set out, for example: "Regular exercise and a healthy diet with enough calcium helps teen and young adult white and Asian women maintain good bone health and may reduce their high risk of osteoporosis later in life." There are currently 14 approved health claims. In addition, companies can make structure/function claims—describing the effect a supplement may have on the structure or function of the body—without FDA approval. An example is, "Calcium builds strong bones."

Despite the perception of the US being one of the world's most liberal markets when it comes to dosages and labelling, the FDA this year issued warnings to three food and beverage companies for the use and labelling of herbal additives in beverages marketed to young people. According to Mintel, this new stance is just one indication that manufacturers may have to tighten up their advertising and packaging claims in the US if they are to avoid the wrath of the regulators.

Uncertaintly In Europe
In Europe, regulations vary between countries and are often highly conservative or vague, a situation that continues to negatively affect the market and to create business uncertainty. Although the European Commission has launched a new food safety programme that includes directives on fortified foods, nutraceuticals, herbals and botanical products, as well as proposed health claims legislation that will cover all these categories across the European Union, it is an initiative motivated by a desire to restore consumer confidence in the wake of a series of food scares.

For countries with liberal functional foods and nutraceuticals rules, like the UK and The Netherlands, the proposed legislation represents a potential loss of market freedom. Conversely, suppliers and retailers in more restrictive markets such as Germany, France, Spain and Italy may find the directives provide a more conducive environment in which to conduct business.

Solgar Vitamins Holland Technical Director Pim Dekker says the recently ratified Directive on Food Supplements is a potential disaster area for his company. "We will lose 200 of our products if the legislation is adopted as it currently stands," he says, adding that the company is engaged in ongoing lobbying efforts to reduce the number of vitamins and minerals that may be banned by the Supplements Directive.

He sees the legislation as reflective of wider European controls. "In a lot of European countries, there is hardly any market because of legislation," he says. "It is true that America is always one or two years ahead of Europe. Our awareness is generally less than in the US. We are trying to change this, of course, and the gap is growing smaller."

"It is strange, because hair shampoos and other cosmetic products have a positive image since they contain vitamins, yet if you try to get people to take a supplement, they will say, 'No, no, you only need to eat well,' and they think if you take too many vitamins it will harm you. It's a strange paradox," says Dekker. "The general feeling about supplements remains negative, even in The Netherlands, which is one of the more liberal environments in this area in Europe. Slowly, however, it is changing. Slowly."

Consumer Consciousness
There has tended to be a mistaken assumption that consumers' rising health awareness or nutritional consciousness equates to nutraceuticals awareness. In one poll by the American Dietetic Association, 90 per cent of respondents said nutrition was important to their health, yet the same survey found that 79 per cent of consumers had never heard of nutraceuticals or functional foods or that the terms had little meaning for them.

Attempts to jump on the functional bandwagon have further compounded this lack of consumer understanding by commoditising some ingredients and fuelling consumer cynicism about key ingredients such as fibre. Two issues are of particular importance in this context:

  • Unfocused fortification of a wide range of products with the latest ingredient fashion, without giving adequate consideration to the fit between the underlying product and its health benefit, target consumer lifestyle and perceptions.

  • Over-ambitious claims for products containing levels of functional ingredients far below effective levels and using high levels of other ingredients, such as fat, sugar and sodium, that are often considered non-beneficial to health.

The breakfast cereal market illustrates this problem, especially in the US and the UK, which share common scenarios. In a market where nearly all products are fortified with a one-size-fits-all cocktail of 'essential' vitamins and minerals, the issue of fortification has been reduced to a generic, non-differentiating characteristic of the products.

In line with developments in dietary supplements, attempts are being made to focus on specific combinations of vitamins and minerals according to the core audience of the breakfast cereal product (for example, extra calcium in products aimed at women, iron in products aimed at children). In contrast to developments in other market sectors, where activity is focused on new-product innovation, the increase in value in functional breakfast cereals is due to repositioning well-established and familiar products as functional foods.

Price Premiums
The costs of entry to the market and pricing are key issues for all players. The high costs of entering via the novel ingredient route are likely to encourage companies, both large and small, to follow the less innovative route and promote the intrinsic properties of foodstuffs. In a recent report on the UK market, Mintel noted Nestlé's re-positioning of Shredded Wheat and Cheerios (owned by General Mills in the US but a joint venture with Nestlé in the UK) on the strength of the beneficial properties of whole grains.

The extent to which consumers are willing to pay price premiums for the promise of health benefits has proven to be another major factor in product success. Excessive price premiums can act as a barrier to trial and repeat purchase. The introduction of Flora pro.activ at $2.98 per 250g in the UK, compared to Benecol, at $3.80 per 250g, suggests that price has been a contributory factor to Flora pro.activ's current market leadership, notes Mintel.

Despite these examples, Nestlé Chief Executive Peter Brabeck-Letmathe echoed the position of many multinational food and drink corporations when he said, "Our nutritional division is a major, major growth driver for the future. It transforms commodities vulnerable to private-label competition into high-price-premium products."

Foods Trump Supplements
In the US, NBJ highlights the strong growth in functional foods combined with flattening sales in the supplements category—two related phenomena.

According to Ian Newton, director of US business development and regulatory affairs at Roche Vitamins Human Nutrition Group, functional foods are now biting into the supplements market. Transfer from supplements to foods is being encouraged by recent government concern about excessive fortification now that so many foods have added nutrients, he says. "Even if only five per cent of the health-oriented population taking six to eight capsules a day decide to substitute fortified or inherently beneficial food products for some of their nutrients, it will impact the market," Newton says.

According to Newton, the positive aura surrounding dietary supplements is fading for several reasons. In addition to a dearth of new blockbuster products and science findings—heaped on top of the negative media and quality concerns plaguing supplements—the tougher economy is putting pressure on fence sitters for whom supplements are a discretionary purchase. "Fence sitters are what's driving this market," says Newton, who estimates that around 25 to 30 per cent of the population fall into this category while 45 per cent are 'committed' users and 25 to 30 per cent don't believe they need supplements.

This drop in demand is affecting raw materials providers. For example, cheap raw materials from China, consolidation and legal sanctions in the wake of a vitamin price-fixing scandal continue to exert price pressure on vitamin suppliers, causing flat revenues and reduced profits. "It would be impossible for the major players to take costs any lower," Newton states.

The Swiss pharmaceutical giant Roche and New Jersey-based BASF control almost 70 per cent of the world vitamin raw materials market, but Chinese suppliers are now the third-leading producers of vitamin raw materials and remain a wild card in global markets. After a difficult year in 2001, Roche in September 2002 announced that its vitamins and fine chemicals division will be acquired by Holland-based DSM.

Supplements Slowdown
Europe has also seen its supplements business slow down as traditional distribution channels have reached a demand plateau. Supplements sales in Germany, still concentrated in pharmacies, have been slow for more than three years now. France has fared little better. And most of the rest of Europe failed to achieve late-1990s growth rates in the past two years.

Europe's downturn in growth, however, reflects a drop in value due to lower pricing rather than a decline in per capita usage, according to Mike Hudson, an executive with, a UK-based consultancy. "Across the main markets of Europe in 2000, there was about a five to six per cent increase in volume but a two to four per cent decline in value," he says.

A shift in distribution to large grocery retailers, particularly in northern Europe, is largely responsible for the value decline. This is because supplements that have become relatively well understood by consumers, such as fish oils, evening primrose oil and antioxidants, have become increasingly available in the form of branded and own-label store products.

Hudson projects that, as a result of the impending changes in the European regulatory environment, a two-tier market for supplements will emerge over the next four to five years. One tier will be comprised of a limited number of food supplements for long-term health maintenance sold through mass market channels, at lower prices, where consumer expectations will be modest. The second tier will consist of customised supplements sold for therapeutic use, primarily available in more education-oriented pharmacy and health store outlets.

Claims Help Brands
In the worldwide functional foods sector, the trend for established brands being re-positioned as functional foods with health claims gathers strength. Products that offer additional health benefits and replace existing products in consumers' diets are more likely to be successful than products that require a behavioural change. The big companies that possess strong scientific backing and solid research behind their new and re-positioned products have been particularly keen to support their brands. Getting consumers to try functional foods products is important for success, and below-the-line support and manufacturer-led promotions are therefore prominent.

A wide range of public relations activities is another essential area of support for functional foods products. Web sites and consumer information lines are useful for launches and product-support initiatives. Ensuring that health professionals and the media are informed about the role of products and the scientific support behind them is a key area of promotional activity.

Comparing 1999 and 2001 data, the overall level of concern for health is increasing, although from a low base—Mintel data shows only 19 per cent of people followed recommendations for healthy eating in the UK in 2001. But the data also suggests that a more aware public should be more receptive to health education.

Worldwide research has demonstrated that consumers' key health concerns are cancer, high blood pressure, asthma and arthritis. However, despite increasing obesity rates (excluding Japan), this remains one of the lowest consumer health concerns. Breast cancer is the leading health concern among women. The second-highest concern for women is 'other forms of cancer,' cited by 31 per cent of women. For men, different types of cancer are their top three health concerns, followed by high blood pressure, asthma and arthritis.

Considering the relatively small size of the functional foods market, a penetration of 40 per cent of consumers having bought at least one such product reflects a reasonably positive response. Mintel's analysis of gender differences in purchasing, again in the UK, suggests that women are a potentially more receptive market to functional food and drink products than men.

Distribution And Marketing
Distribution channels for functional foods and nutraceuticals vary greatly. According to Packaged Facts, the most popular retail outlets in the US are supermarkets (defined as grocery stores with at least $2 million in annual sales), chain drugstores and discount stores. Some smaller and less-monitored channels include smaller grocery outlets, natural food stores, independent pharmacies, convenience stores, gourmet shops, fruit stands, specialty shops, vending machines, fitness stores and centres, and even sporting events and doctors' offices.

Nutraceutical products tend to be scattered throughout a store and placed with their non-nutraceutical counterparts, a shelving policy that does little to establish nutraceuticals as a delineated market. However, this is changing. Some outlets have established health food sections, where retailers can stock nutraceutical products, and, as the self-doctoring trend grows and consumers begin to more actively seek out nutraceutical products, nutraceuticals and functional foods sections seem likely to appear, Packaged Facts projects.

According to Competitive Media Reporting (CMR) data, in 2001, major nutraceutical foods marketers spent approximately $484.7 million in measured consumer media buys in the US, down 5.9 per cent from the $514.9 million spent in 2000. This may be due to the general economic downturn since the end of 2000. The fact that many marketers have been spending more on research and other types of developments may also have had some effect on advertising expenditures. In many food categories, it is not unusual for consumer advertising expenditures to fluctuate wildly from year to year, as certain major marketers apply or shift media dollars.

Food Teaches Pharma
Packaged Facts notes that the pharmaceutical industry has much to gain from the consumer trend-spotting and retail marketing expertise that the food industry has to offer. The former has traditionally focused on producing products for well-defined medical conditions, such as high cholesterol, diabetes and cancer, aimed at a captive audience of health care professionals and their patients. This fact puts these companies in a strong position for developing medically functional products. However, the long-term research-and-development-based approach may promote lowest common denominator products being developed while more fashion-driven lifestyle opportunities are ignored.

In the fickle consumer marketplace of the 21st century, it is the more customised lifestyle products that are likely to demand the highest premium. Truly successful products manage to combine a number of these features into one attractive package that fits a wide variety of well-defined and targeted lifestyles. This implies the need for an in-depth understanding of consumers' needs beyond health. It also implies the need for greater consideration of consumption patterns over time.

Marketers are even attempting to position items not traditionally considered to have functional potential, such as alcoholic beverages, eggs, meats and cheese. And there is still plenty of room for growth in strong functional sectors—cereals, for example, and other dairy products—that already include some nutraceuticals.

In many cases, it is not about manufacturing a product that will be able to compete with like products but rather about creating an innovative new product that will be noticed by potential consumers. The marketer of such a product may enjoy the luxury of using advertising to simply educate consumers, rather than to steal them away from marketers of rival products. As noted above, however, larger marketers may shy away from such an educational tactic, especially when there are notable competitors in a given category or niche. In general, the smaller the marketer, the more readily it will embrace the idea of carefully explaining a product's health benefits to consumers.

The 2001 Functional Foods Market

Supplements $M

Functional Foods $M




Latin America






Europe (sum)









Rest of Asia






Mid East






Global (sum)



Source: Nutrition Business Journal

The Fall And Rise Of Functional Foods

Why do some products and product ranges fail outright? High-profile brands such as Novartis' Aviva range in the UK (introduced in the US under the Altus joint venture with Quaker), the Nestlé LC1 range (in the UK) and US brands Ensemble and Intelligent Quisine (IQ) have all been withdrawn. Launches by other big companies such as Kellogg and Campbell also have bombed.

According to Nigel Duffin, technical director for the UK division of soymilk manufacturer So Good International, Novartis flopped because it was marketed as a pharmaceutical food. "I think they forgot people don't want to be on a dietary regimen," he suggests. "People want products that taste great and can be used instead of normal foods, but Novartis products weren't like that. They might have had great bioactive delivery systems, but no one is going to build those into normal meal occasions where they might, if it functions in the same way as an already widely accepted and used product—namely, milk."

Paul Coussement, chief executive officer of Belgian-based ingredients supplier and marketer Orafti Group, agrees. "Success is about developing products that people enjoy and which can be easily incorporated into a healthy, daily diet," he says. "The products must taste good and should remain in the domain of food, not medicine. Developing foods which are suitable for all the family is another important factor. Finding a way of talking about the benefits of the products in a way which is relevant to consumers is also very important," he says.

Finnish company Raisio's Benecol range is so far uniquely successful on an international scale (via licensing in some markets). Consumers do not appear ready to buy into prescriptive ranges, and it would seem that initially focusing on a single product (as Raisio did) that can be extended in the future is a better approach than starting off with a comprehensive range, according to market research cosultancy Mintel. Hence, although the dramatic growth in value of the sector looks good on the surface, the clear signal is that the market needs approaching with much care.

Competitor Dynamics

  • The US shows the greatest number of standard-plus launches (17.5%) followed by Germany at 8.1%. "Standard-plus" are foods and drinks fortified with vitamins and minerals but have no specific function

  • Evidence from Japan may indicate a return to less-specific products as consumer education reaches very high levels

  • Soft drinks and bakery and cereals markets are the most common delivery vehicles for standard-plus nutraceuticals. In the case of many categories, some level of fortification has now become the norm

  • Over a quarter of all standard-plus launches are targeted to children, as parents use these products to ensure sufficient vitamin intake whilst allowing children to consume the types of products they like

  • 23.4% of launches were also positioned as low and light. "Super healthy" positioning has been a successful strategy for many

On the World Wide Web

Nutrition Business Journal:

Leatherhead Food International:


Solgar Vitamins:


General Mills:

Flora pro.activ:




So Good Int'l:



Roche Vitamins:


Packaged Facts:

Competitive Media Reporting:

This report has been compiled using research from Nutrition Business Journal, Leatherhead Food International, Mintel and Datamonitor.

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