In the fast-evolving economies of Latin America, the Asia Pacific and Eastern Europe, functional foods sales jumped 9.6 per cent last year. Christiana Benkouider explores the hottest product categories
Functional foods may be a relatively new addition to grocery shelves in the emerging markets of Latin America, the Asia Pacific and Eastern Europe, but their potential for growth should not be ignored, according to global market analyst Euromonitor International.
The fast-developing economies of Brazil, Mexico, China, South Korea, Hungary, Poland and Russia are changing the lifestyles, demands and incomes of their citizens. Functional foods are well positioned to respond to these changes and deliver positive health benefits to consumers. Indeed, value sales of functional foods alone rose 9.6 per cent in 2004 to top $4 billion in those countries.
Economies drive demand
Long work hours and rising stress levels in developed countries have fuelled demand for functional products that can help alleviate the unwelcome symptoms of everyday life. The same is now true in emerging markets. Countries such as Hungary, Poland and Russia have undergone a period of unparalleled economic growth since 1989 and the impact of this is now being felt by consumers.
Across these emerging markets, consumers are working longer hours; urban populations are rising; more women are entering the workforce; and incomes, for some, are rising. With urban lifestyles in emerging markets increasingly mirroring those in the West, consumers are demanding more from their food. In addition, media exposure to trends in the US has raised awareness of the kind of products available and has driven growth in domestic markets.
Euromonitor International?s latest research predicts that value sales for functional foods will rise by 28 per cent from 2005-2009 in the emerging markets of Hungary, Poland, Russia, Mexico, Brazil, China and South Korea. As Chart 1 shows, slower growth is forecast for Russia, Poland and Hungary, whose total market value is expected to remain relatively small. Brazil, South Korea and China are forecast to attain functional foods value sales of $1.9, $1.7 and $1.3 billion, respectively, by 2009.
South Korea already has a relatively developed market for functional products, perhaps as a result of a traditionally strong work ethic and body culture. South Koreans have long understood the centrality of a good diet to maintaining health and are familiar with the healing and restorative properties of herbal ingredients such as ginseng. Yet, just as the popularity of functional ingredients and products rests on their ability to address and respond to specific problems, it must also be remembered that these markets are as individual as the consumers that compose them.
For example, in 2003, Hungary and Poland had GDPs per capita of $14,900 and $11,000, respectively. By contrast, Russia?s GDP per capita stood at $8,900. Brazil and Mexico reached $8,100 and $9,600, respectively, while China attained $5,600 per capita and South Korea powered ahead with $17,200.
While incomes vary greatly between these countries, it should also be noted that the income gap between rich and poor is often so great as to render functional products unattainable to a significant proportion of the population. Twenty two per cent of Brazilians, for example, live below the poverty line, clearly falling outside the scope of value-added functional ingredients. However, the story is quite different for Brazil?s burgeoning middle and upper classes, whose lifestyles may now be more comparable to those in the US or UK than their own country.
Since China is forecast to be the second-largest functional foods market after South Korea, despite an average GDP per capita that is the lowest of the countries analysed in this article, it is clear that factors other than buying power are likely to dictate demand for functional foods. Indeed, Hungary, with the second highest GDP per capita, is still set to remain the smallest functional foods market between 2004-2009, with value sales of under $50 million in 2004, according to Euromonitor?s latest research.
Rising average incomes for those in professional or managerial positions in emerging economies set the tone for rising demand for functional products. Economic and political liberalisation has meant that previously state-controlled media in countries such as Russia and China have been opened up to advertising from multinationals and domestic manufacturers. Creating demand relies on raising awareness of the potential benefits of functional ingredients and the retail outlets where they can be found.
Economic liberalisation and deregulation also means that supermarkets are now becoming the most common retail channel for health and wellness grocery products. This is especially true of South Korea, Mexico and urban Brazil, but is still in its infancy outside the major Russian cities. Functional foods in South Korea have a particularly well developed retail distribution, with the country?s largest chain of convenience stores ?L25? stocking a wide range of offerings.
Yet the difference between rural and urban life is still marked in emerging markets. While Seoul and Mexico City can match the best of the West for cosmopolitanism and consumption, rural areas are a world apart. For these reasons, the expansion of the functional foods market is truly urban-based and will probably remain this way well into the next decade.
Looking for health?
Consumer interest in health and wellness is spurring growth in grocery across the globe. Euromonitor has found that global value sales for functional foods grew by an impressive 35 per cent from 2002-2004 and look set to rise by a further 27 per cent from 2004-2009. Healthy lifestyles are no longer just the preserve of the West, but are increasingly in demand and attainable in emerging economies. Public awareness of heath and wellness has been driven by a number of factors that are particular to these countries and have, to a large extent, dictated the development of their functional foods and beverages markets.
As the economies of China, South Korea, Brazil, Mexico, Hungary, Poland and Russia have expanded, so too have the waistlines of many of their populations. Fast food is an increasingly common choice, meat is replacing vegetables in Chinese and South Korean diets, and sedentary lifestyles are taking their toll. The result is a nutritional transition from traditional diets to more Western food types.
Greater media coverage of the health effects of being overweight and the pervasive cult of body-consciousness in countries such as Brazil, has brought health and wellness from the margins to the mainstay of grocery. The question is what role do functional foods and beverages play within this? Moreover, what factors are driving and constraining current and potential growth?
Functional dairy dominant
Across all the countries analysed by Euromonitor International, the functional dairy category consistently enjoys the highest value sales. Indeed, globally in 2004, dairy products accounted for 56 per cent of functional foods? total $31.1 billion sales. Brazil is a particularly interesting case. At $1.1 billion, functional dairy made up 73 per cent of all functional foods sales in 2004 and 11 per cent of all dairy sales. This is a notable proportion given that functional products such as Nescau (Nestl?) and Toddy (PepsiCo), flavoured powered milk drinks with added vitamins retail at a slightly higher price than standard versions.
Brazil is the third-largest market in the world for probiotic yoghurt drink Yakult (after Japan and South Korea) and an estimated 29 bottles are consumed every second. Yakult was developed in Japan for the domestic market, but as more than seven per cent of Brazilians are of Japanese origin, the country was a logical point of expansion in 1996. Since then, Yakult SA Industria e Comercio has extended its range to ?Yakult 40,? which contains 40 billion lactobacillus casei shirota that aid digestion, nutrient absorption and intestinal function.
This claim has met a particularly receptive audience in Brazil where traditional diets are heavy in meat, cheese and saturated fat. Unlike the US and UK where fermented milk drinks are gaining in popularity through multiple retail channels, 60 per cent of Yakult?s revenue in Brazil comes from door-to-door sales. The same is true of South Korea, where 40 per cent of yoghurt is home delivered and functional dairy products accounted for $1.42 billion in value sales in 2004.
Functional dairy products have been viewed by governments as a relatively easy way to deliver essential vitamins and minerals to consumers whose diets may be lacking in some way. In South Korea for example, Euromonitor found that functional dairy made up 38 per cent of total dairy value sales in 2004 and products were expressly targeted at families, women and children.
Asian diets are traditionally characterised by very low levels of dairy consumption and this had led to fears of inadequate calcium levels among some sections of the population. An ageing population has also brought the health risks of osteoporosis to the fore. As a result, manufacturers — often in collaboration with government advice — have been quick to launch a number of specifically formulated functional milks. Notable is Enfant from Seoul Dairy Corp. Originally launched in 1996, Enfant quickly captured the children?s functional milk market with seven per cent of overall milk sales in 2003. The product contains added magnesium, DHA and vitamins to help the physical and mental development of children.
Euromonitor?s research has found that globally, the confectionery sector accounted for 24 per cent of total functional foods sales in 2004. At $7.4 billion, this is a notable growth sector. Compared to dairy products in which domestic manufacturers have a notable presence, confectionery is dominated by global brands such as Wrigleys.
Across the emerging economies, functional confectionery has shown promising growth. In Hungary, for example, the sector grew by 18 per cent in value terms from 2002-2004, reaching value sales of $21.6 million.
The growth of functional confectionery was even more marked in China where it rose 48 per cent over the same time period, reaching sales of $33.7 million in 2004. By contrast, in South Korea, where the market is more developed and demand is consequently growing at a slower rate, value sales were negatively affected by the maturity of xylitol-based functional gums, resulting in overall value decline of four per cent for functional confectionery over the 2002-2004 period. Both China and South Korea are worth looking at in some depth.
The SARS effect in China
The huge growth in functional confectionery enjoyed in China from 2002-2004 was inextricably linked to the 2003 SARS outbreak. Universal awareness of the condition among consumers combined with government advice, led to a vitamin craze as the Chinese sought to boost their immunity to avoid contracting the deadly virus.
Products such as V9 from Fujian Yake Food Co with its nine essential vitamins delivered through two servings a day combined with a $12 million advertising budget, single-handedly propelled the functional confectionery category?s growth. The threat of SARS may have diminished, but luckily for manufacturers the awareness of the positive health benefits of vitamins and minerals has remained at the heart of public consciousness and the potential for future growth looks impressive, with Euromonitor International forecasting 130 per cent value sales growth for functional confectionery to 2009.
New settings in South Korea
The South Korean market for functional confectionery was worth $270 million in 2004 and is consequently far more developed than in China. As a result, the South Koreans are embracing a wider range of functional ingredients as they become more aware of the health benefits they can deliver. Functional confectionery made up 16 per cent of total functional food sales in 2004 and future growth is dependent on keeping demand high through frequent brand and flavour extensions.
With exotic offerings such as ginseng-steamed red candy and aloe green tea candy already available, South Koreans are aware of the properties offered by ingredients that have, in reality, long been a central part of traditional diet and medicines. Translating traditional knowledge of, for example, the restorative properties of ginseng or the cleansing nature of aloe vera, to a modern processed food context has relied heavily on highlighting the convenient format offered by confectionery. Functional gum such as gum containing xylitol (to prevent tooth decay) is also well developed in South Korea, accounting for 74 per cent of total gum sales in 2004.
Xylitol and whitening varieties such as Orbit are also driving sector growth in Brazil, Hungary and Poland where consumers are seeking multifunctional products. Expanding from this, manufacturers are developing more adventurous functional products to respond to specific health demands. Zero Tress gum from Haitai Confectionary Co contains SCP-20, which has long been valued for its anti-stress properties.
Keep the local in mind
Euromonitor International?s research has revealed that functional foods are a growing part of the health and wellness industries in emerging markets. However, manufacturers and retailers would be well advised to avoid the pitfalls of generalisation. As Chart 2, above, shows, China and Mexico are expected to see growth in functional foods spending per capita from 2004-2009 in the order of 146 per cent and 121 per cent respectively. By contrast, Brazil?s per capita spending on functional foods is only expected to climb by 26 per cent, while South Korea is forecast to increase spending by only 2.2 per cent to 2009.
Indeed, while all of these countries have witnessed changing economies, class structures, rising affluence among urban dwellers, and expanding media and retailing, they have retained their distinctive cultural traits. Responding to consumer needs is at the root of developing the functional foods market and attention to local context is well advised.
Legislation is a definitive constraint on the ability of manufacturers to advertise functional foods and beverages on the basis of health claims or the health effects of specific ingredients. Brazil, for example, prohibits the labelling of any functional food with a statement that it can prevent or cure disease, only that it can reduce the risks of such conditions and improve general health.
Similarly stringent controls on the use of medical or health claims on labels are applicable across most other countries. This means that manufacturers may have to find innovative routes to raise consumer awareness of the health benefits of their products.
Functional foods look set to be a dominant force within the nascent health and wellness industry in emerging economies. Their growth will be heavily contingent on responding to local beliefs and working with traditional diets. Future growth will perhaps be limited in countries where incomes are polarised and functional products are beyond the reach of the poorest. Growth will be urban-led and part of a wider, holistic approach to health and lifestyle that has already come to dominate food sales in countries like the US.
The strategic adaptation of the most contextually relevant and culturally agreeable functional ingredients, combined with advertising that addresses the needs of populations in flux, hold the key to spurring future growth.
Christiana Benkouider is head of health and wellness research at Euromonitor International, a leading provider of global consumer market intelligence with offices in London, Chicago, Singapore and Shanghai. www.euromonitor.com
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