Functional foods are at a crossroads. The industry has already seen the first generation come and go—brought to market over the past decade where some have thrived, others are chugging along and many others have made speedy and expensive exits. Taking this into consideration, it can now be described with some accuracy the highs and lows of functional food product development and marketing and what currently works and what doesn’t. The new challenge for the industry is creating the business opportunity for the next generation of functional foods. This will require different concepts, technologies, imagination and flair.
The dynamic between the first and second generation of functional foods is at the heart of what can be described as the “functional foods paradox” confronting the industry today. The paradox is how to capitalize on existing markets, consumer awareness, nutrition opportunities—bringing the first generation to continuing maturity—while at the same time preparing for and taking the business and creative risks to bring forward the second generation—a new generation, which may sweep away the first.
In this respect, the concept of functional foods has become something of an industry burden in itself—a holy grail—not least in the notion that this is not turning out to be the next “big” market it was predicted to be, but it still remains just about the only big idea floating around—one with many contradictions and complexities that in turn characterizes the market for products with health benefits however broadly defined.
Definitions also continue to be a problem. Whichever way one chooses to define functional foods/nutraceuticals, one can arrive at bigger or smaller market figures that suit particular needs or interests.
This is compounded by a simplistic logic of equating population disease numbers, such as heart disease cases or rising rates of diabetes, with potential product opportunities assuming a simple linear relationship, as though all people with a medical condition are the same. The current market reality is more stark—1-2% population penetration for a nutraceutical ingredient if lucky.
For much of the food and beverage industry, functional foods are still described as the future of food, and if by this is meant a broader vision of nutrition marketing and consumer “wellness,” then this is a market still in its infancy. In a food industry still characterized by cost cutting, economies of scale, commodity “brands” and products, achieving double-digit growth through nutrition marketing or new functional foods is a major success. But the challenge for processors and ingredient suppliers is that much harder in a market climate where the major supermarkets and food retailers are dictating the pace and scale of the food economy.
Functional Food Successes
The functional food successes are now significant in terms of both particular categories and for some companies. For example, U.S. energy bars, from modest beginnings in the 1980s, have grown into a $1.1 billion segment of the $2.3 billion food bar market. Since 1999 there have been more than 1000 new soy-based product introductions in the U.S., bringing the total number of products available to around 2500.
One of the functional food company winners (among a small elite—for example, Unilever, Vlaardingen, The Netherlands, with its cholesterol-lowering spread and Tropicana, Bradenton, FL, with it orange juice and calcium) is French dairy group Danone, Paris, France, which has turned its probiotic daily dose product Actimel, marketed for the body’s “natural defense,” into a ¤480 million product, accounting for 8% of its dairy sales. The product had been introduced into 15 countries as of May 2003. At this time Danone was also busy strengthening its grip on the probiotic market by taking a 19% stake in Japanese company Yakult, a 40% stake in U.S. dairy Stonyfield Farm, Londonderry, NH, and securing a global licensing deal with Swedish technology company Probi for its patented probiotics.
More generally, the Natural Marketing Institute (NMI), Harleysville, PA, estimates the U.S. health and wellness industry will grow from $59 billion in 2002 to over $85 billion by 2006, with the functional foods sector growing at a double-digit rate from just over $20 billion in 2002 to approximately $33 billion by 2006.
The food industry has also achieved uniquely something usually the preserve of the pharmaceutical industry—it has created its own health “problem,” notably the multi-billion dollar global market for “gut” health based on probiotics. There is not a single government report or set of dietary guidelines published over the past 30 years in the West that singles out the need to consume “friendly bacteria” as a means to long-term health gains, yet probiotics for “gut” health is one of the functional food success stories, particularly in Europe.
The power of nutrition/functional food marketing to turn categories on their head is no better illustrated than in the U.S. market for baby formula. While it has to be cautioned that this is a specialist market, the introduction last year by the market leaders Mead Johnson, Evansville, IN, and Ross Products, Columbus, OH, to create value through functional baby formula containing the essential fatty acids DHA and ARA resulted in one of the fastest growing value-added niches in the U.S. commodity baby formula market.
The DHA/ARA products gained a 15% market share 12 months from launch in this $3 billion market. As important, from a business perspective, DHA/ARA products command retail margins of 9-12%, double category averages, and the category price per serving is up 6% since the launch of the DHA/ARA products. What’s more, the functional ingredients have been developed and supplied by just one company—Martek Biosciences, Columbia, MD.
To put functional foods new products into the context of other food industry activity, over a 12-month period in 2002 more than 20,000 new food and beverage products were launched around the world. Of these, over 5% can be categorized as functional and/or fortified (with some variation depending on which datasets are investigated). But take into account nutrition in a wider sense, such as including “low and light” products, and this figure rises considerably. In fact, over this same period there was almost as many “low and light” product launches as functional and fortified.
Creating a Successful Functional Food Product
While there are many lessons to be learned from global activity across all functional foods and beverages, there are a number of key activities and/or processes that characterize the development of processed functional foods. While these carry many caveats, they can be summarized as the following:
• Products need to scientifically support their health benefits and
• Delivering individual nutrients and/or “nutrient bundles” that have proven
• Making interesting, highly differentiated, great tasting, convenient to use,
consumer products, which match targeted lifestyles based on nutrition
• Developing sophisticated consumer communications and marketing
packages built around a combination of food, health and lifestyle “values”;
• Communicating effectively to health professionals and the medical profession;
• Developing constructive and ongoing dialogue with policy-makers and regulators,
(particularly toward developing potential approved health claims or more
effective marketing of health benefits);
• Working through new or unconventional distribution channels to build
new markets (or using existing ones in a creative manner); and
• Creating new categories/brands built around specific health benefits
(i.e.,, gut health, eye health, cholesterol-lowering, etc.).
But this “success” list also raises many of the contradictions and complexities associated with functional foods and nutraceuticals. Exploring “sound” science alone raises two key issues. First, how much science is enough science, one human clinical study or many, and how many? Putting all other issues aside, for marketing purposes, one study with positive results is all that has been needed for many successful functional food marketing campaigns.
The second issue is that for many functional foods, especially beverages, the science can be little more than circumstantial. The marketing reality is that these are “lifestyle” products and it is hard to equate these with long-term population health benefits (nor do these products pretend to do this in most cases). This then leads into another tricky area—should the concept of functional foods be confined to ingredients and products that have proven population health benefits related to a specific disease condition or are they more “lifestyle” products that contribute to an idea and consumer need of optimum health?
Other tricky topics that the market continually fails to find consistent solutions to are dose/efficacy of the product as consumed, the costs equation of new product development (NPD) and pricing of products, addressing consumer understanding/awareness and last but not least, working out the regulatory environment. While regulation is a major issue (and is not covered here), it should be noted that all the success stories of functional foods/nutraceuticals have been achieved within this restrictive regulatory arena. Another issue still unresolved for market development is the question of the use and protection of intellectual property (IP) around technologies and ingredients.
The Strategic Implications of First Generation Consolidation
The early pioneers of successful first generation functional food and nutraceutical innovations had (and continue to display) common characteristics. These include:
• Lifestyle led, rather than promoting a science/disease approach;
• Develop effective consumer communications and marketing education;
• Have simple, focused and positive health messages;
• A long-term commitment to telling a product’s food and health stories;
• Extensive and ongoing product sampling campaigns; and
• Test marketing and refining concepts/products for longer periods than
is common within the food industry.
By the early 1990s, the prospect of these “blue sky” functional foods and nutraceutical companies and products rising to prominence can be characterized as a strategic “threat” to the core market and products of established food companies (especially as it was touted that the major pharmaceutical companies were going to muscle in on these, to them, virgin food markets, needless to say history shows they have failed).
Also, for many larger food companies the novel marketing approaches of functional food pioneers did not sit well with traditional thinking or corporate cultures. So the strategic response by larger corporations over the past decade has been to try and contain the potential threat functional foods posed to their core activities. Today it is industry leaders, rather than radical functional food upstarts, that largely dictate the pace and shape of the market, resulting in the current consolidation period for the global mass market for functional foods.
This period of consolidation is seeing a mass of “me-too” product activity in nutrition markets, which is eroding competitive positioning and shortening product lifecycles. Industry leaders also tend to set the agenda for nutrition science and technology, which meets their corporate needs, both in the laboratory and to the consumer. In this sense, functional foods are being strategically managed within the context of a food supply noted more for its status quo, than revolutionary nutritional change.
In addition, major industries have “absorbed” the potential threat of functional foods—that is bringing the “revolution” inside to enhance their existing business—through what companies like DuPont in soy and General Mills in cereals have done through using functional food science to reposition products and ingredients on the basis of their inherent health properties.
If all this activity is added together with the takeovers and acquisitions by major players, today it is hard to think of an entirely independent, standalone major branded consumer functional food company to emerge from the past 10 years of functional food activity, who are not now part of a dominant market player or were brands developed by already existing industry leaders in their categories or geographical area (an exception that comes to mind is a company like Red Bull, but is this really a “functional food?”). Even successful and revolutionary brands like White Wave’s Silk soymilk owes its success to big dairy cash and is now part of dairy giant Dean Foods.
The implications of this market “consolidation” are two-fold. On one level there is the tedious task of identifying all the remaining nutritional niches in different segments to discover if the market leaders are present or doing a good job. Then if you are an ingredients company it is either approaching the leader and suggesting to them how they can consolidate the niche, or find an aggressive competitor or innovator who will take the segment on and try to claim ownership. For smaller players it is a question of innovate like mad or lose out.
The second option is to move onto the next generation and pioneer the future.
Where will the Next Generation Emerge?
So what of the future? It is possible to paint many different scenarios and spot emerging opportunities. The trick is translating these to commercially viable consumer solutions. It is here where the functional food paradox takes shape. It is easy to continue along the “me-too” route, however, harder to set the trends. What’s more, recent developments in population health and nutrition trends threaten to bypass functional foods and nutraceuticals unless the industry is alert.
The Innovation Challenge: Within the “me-too” product mentality, as the first generation of functional foods reaches maturity, is the innovation challenge of providing a real competitive point-of-difference. From this perspective, it is important to consider what it is about the nutrition message that consumers perceive as truly meaningful from the numerous choices that are already currently available. Allied to this concern, research by Group EFO, Weston, CT, suggests that one of the top three factors in new product failure results from a lack of clear focus, in particular the fact that much NPD is forged to combat a competitive entry rather than upgrading or offering anything new for the consumer. Another major new product challenge the group identifies is one of positioning, with product benefits not being easily recognized by consumers on the shelf or “ownable” by consumers. Addressing these issues will be the core challenge for second generation innovation but also its rationale to differentiate itself from the first generation.
Ingredient Lessons: A common question is, “What is the next ‘hot’ ingredient?” The answer to this is simple—all ingredients can be hot, but it all depends on who is heating them up. For example, who would have thought in the early 1990s that lowly calcium would be such a hot “new” nutraceutical ingredient or that caffeine would be reinvigorated as an ingredient through the “energy drink.”
Increasingly it is becoming the responsibility of ingredient companies to drive functional foods and nutraceuticals, from dreaming up the product and marketing concepts to doing the consumer research to convince manufacturers of the consumer need—in other words, to “heat” up their ingredients. Kemin with its branded form of lutein has become the current “hot” model for ingredient companies. However, keep in mind that it took dietary supplement market leader Centrum® to have the insight to promote lutein and eye health as part of its multivitamin product, coupled with Roche technology, which enabled the company’s lutein to get into the product. The lesson: It is difficult to go it alone in this market. As lutein now crosses over from dietary supplements to food, another ingredient “heating up” and poised to make the same transition is conjugated linoleic acid (CLA), especially in the sports nutrition segment. Sales of CLA have risen from almost $35 million in 2000 to $65 million in 2001 to $125 million in 2002. One of the first companies to introduce CLA into food markets was Cytodyne Technologies, Hicksville, NY, through the launch of its Xenadrine bars in September last year.
Lutein and CLA are both examples of how unusual ingredients (to the consumer) can build markets over time on the back of functional food and nutraceutical trends to make ingredients “hot.”
Companies that can Shape the Next Generation of Functional Foods
When looking at companies and functional foods it is sometimes hard to see which ones will truly break through their traditional corporate cultures and pioneer the next generation functional foods. But there are some that look very exciting and one such example is Abbott Laboratories, Columbus, OH, which has the potential to become one of the more important large global functional food and nutritional companies. The company is already a global, broad-based healthcare company employing approximately 70,000 people, and it currently markets its products in more than 130 countries. In 2002, the company’s sales surpassed $17 billion.
Abbott has been active in a couple of areas this year to strengthen its nutritional positioning. Perhaps the most significant development is its agreement in July to acquire the ZonePerfect Nutrition Company, Beverly, MA. The acquisition was described by the company as an opportunity to expand its leading position in the medical nutritional category into the healthy living segment. More specifically, this acquisition will expand Abbott’s Ross Products Division into the weight control category.
In addition, the company is tuned into mass market consumer food trends, being a functional food pioneer with its Ensure® brand. Abbott is in the process of re-launching the entire Ensure nutritionals range in re-closable plastic bottles, a first in the adult nutritional category. The Ensure product line—Ensure Plus, Ensure High Protein, Ensure High Calcium and Ensure Fiber With FOS—is expected to be available in the re-closable bottle over the next 18 months. In addition to Ensure, Abbott also markets Glucerna, a nutritional product line for people with diabetes, as well as ProSure, a specialized nutritional product for people with cancer.
Other companies appearing as possible pioneers of the next generation are the newly forming companies that can be seen around the world that focus on one particular health or wellness area, but combine a spectrum of product solutions, often from medicine to dietary supplements to ingredients or nutritional interventions, including foods and beverages.
Nutritional Business Landscape is being Redefined
With all of these trends it is important to recognize that nutrition marketing is bigger than functional foods and nutraceuticals alone. In this respect, the nutrition landscape is being radically redefined by the out of control public health issue of obesity. The latest U.S. government research is predicting that 40% of the U.S. population will be obese by 2010, with severe obesity—usually characterized by people more than 100 pounds overweight—already affecting one in 50 people.
One result of obesity will be the need to reposition functional foods and nutraceuticals within this changed nutrition environment, as it can be predicted the focus will fall on the collision of two “megatrends”—the “good foods/nutrients” trend (where functional foods/nutraceuticals clearly sits) versus “bad foods/nutrients” (where concerns about obesity sit). It is not clear what the fallout of this collision will be, when it will happen or what the opportunities will be. It will not be enough to offer “technical fix” solutions. But it will happen and bring change, not least with respect to the major area of public health concern, and the industry weak spot, which is the marketing and advertising of foods and beverages to children.
The “healthy foods” market will become more confusing and uncertain for the immediate future. These colliding health trends are now threatening to shake up—more than ever—existing food markets. The “megatrends” collision—functional foods/nutraceuticals on the one hand and the rise in obesity on the other—will prove a nutritional challenge that will require many companies thinking in ways that are very different from how they have in the past. There is no quick fix—although the market will see many products that imply just that—but more of a cultural change, in corporations and in consumption behaviors, all of which will take years to play out rather than be reflected in the quarterly results beloved of financial analysts. It is here that the functional foods paradox comes into its own with the opportunity for the take-off of second generation functional foods. The food industry and wider society is crying out for solutions.
For example, one of the most high profile industry responses to the obesity crisis to date has been from Kraft Foods, which announced in late August that it would initiate a new series of steps to further strengthen the alignment of its products and marketing practices with societal needs. The commitments Kraft is making, which are global in scope and supplement a variety of actions the company is already taking, will set the company apart if implemented. The Kraft strategy will focus on four key areas, including product nutrition, marketing practices, consumer information and public advocacy and dialogue.
The current nutrition crisis, which Kraft rightly identifies as global in scope, requires new and creative thinking at the very heart of food industry strategy. Key areas for the food industry and functional foods will be health solutions that are innovative and consumer-focused. For functional foods and nutraceuticals the next generation is just starting—the next 10 years should herald an unprecedented change in food supply based around nutrition and human health, but there will be fierce battles over how to deliver such a healthful food supply. NW
About the author:
Michael Heasman is an independent researcher and writer on food and health. He is also co-author of Food Wars: The Global Battle for Minds, Mouths and Markets due out in February 2004, and The Functional Foods Revolution: Healthy People, Healthy Profits? (2001). He can be reached at [email protected].