2007 Nutrition Industry Overview

Supplement Sales Channel
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Annual check-ups usually breed a sense of anxiety in a patient, and while the nutrition industry has some concerns, overall there is little to consider life-threatening in 2007. Recent traumas concerning product quality, safety and country-of-origin and the chronic symptom of discredits from the medical and pharmaceutical establishment have afflicted the patient, but vital signs from calendar year 2006 are improved. The U.S. nutrition industry grew 10% in 2006 to consumer sales of $85 billion, its highest growth since 1998. The more mature supplement segment topped $22.4 billion and 5% growth, and the other three major categories were in double digits. Functional foods posted $31.4 billion in sales and its highest growth since 2002 on a strong performance in beverages and niche categories. Natural & organic foods continued a consistent progression into the mainstream food market with 14% growth and moving from 2% of total food sales in 1997 to 4.7% a decade later. Natural & organic personal care and household goods posted a second consecutive year of record growth in 2006.

Supplements Up 5%
At 5.4%, dietary supplement growth in 2006 was almost the highest it’s been in the last several years, the only exception being 2003, which was marginally higher and uniquely benefited from JAMA’s high profile publication of a positive multivitamin study—“the single and perhaps only influential positive media event of the decade,” as one executive dryly observed. Placing 2003’s performance in even higher relief was the ephedra ban in 2004, which drained the remaining but still-substantial ephedra supplement sales from company ledgers, contributing to the supplement industry’s nadir of only 2.4% growth that year.

By contrast, 2006 suffered no dramatic regulatory interventions, fad diets or media ambushes—and even benefited from good news here and there. This included accumulating positive science, notably for fish oil and vitamin D, and the long-awaited final good manufacturing practice (GMP) rules, which the industry hopes will help correct the misconception that supplements are unregulated and build consumer confidence by giving FDA the power to weed out non-compliant manufacturers. Perhaps 2006 therefore should be viewed as a truer snapshot of the underlying health of the supplement industry than we’ve had for some time. Granted, chronic problems rumbled in the background—including an unfriendly media and medical establishment skepticism—but consumers’ pursuit of healthier lifestyles, healthier aging and disease prevention remained compensating macro-influences. Also favoring our industry’s emphasis on wellness was consumers’ growing mistrust of prescription drugs and the awareness that America’s current healthcare system is simply unsustainable in its current form.

Of the six dietary supplement categories tracked by NBJ, Specialty Supplements once again turned in the best growth in 2006, up 11%, followed by Sports Nutrition Supplements (8%), Vitamins (5%) and Herbs (4%). Meal Replacements and Minerals brought up the rear, although the modest 2.7% gain for liquid meal replacements actually represented a turnaround for this $2.4-billion category, which floundered in negative territory for three years following the low-carb diet craze. Also resuming modest growth were nutrition bars, a $2.4-billion subcategory counted by NBJ in the $31.4-billion functional food market.

2006 Nutrition Industry Revenues
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The performance of supplements in the natural & specialty retail channel specifically was heartening, growing to $8.3 billion or 37% of U.S. supplement sales. Revenge is a dish best served cold—preferably over several years. After the mass market embraced the supplement business throughout the mid- to late-90s—characterized by NBJ as the ‘distribution-push’ era—many it saw it as the death knell for independent health food stores. However, natural retail outgrew the mass market each year from 2003-2006. Natural retail succeeded in widening the gap with the mass market, generating 7% growth in supplements (up from 4% in ’04 and 6% in ’05), compared to 2% and a total of $6.2 billion in 2006 for food, drug, mass, club and convenience (FDMCC). However, 2006 was also the mass market’s best year in a while—in fact the first year in positive territory after three years of annual declines of 1-3%, thanks partly to the improvement in liquid nutritionals (Slimfast, Ensure, Boost, etc.). NBJ believes, however, the mass market is winning too few new customers, and, long term, sales are unlikely to improve substantially unless doctor recommendations or reimbursement create a leap forward.

Where natural retail is concerned, are the brands driving the channel, or is the channel driving the brands? Supplements’ natural retail growth appears to hinge on robust performance by several of the larger, independent manufacturers dedicated to the channel. Brands that thrived in 2006 with growth rates in the 30%-60% range included Nordic Naturals, Renew Life, Carlson and New Chapter, according to SPINS data. In the healthy 10-16% range were Jarrow Formulas, Nature’s Way, Gaia Herbs, Bach, Bluebonnet, Rainbow Light, Flora, Natural Factors and natural channel private label. Companies dedicated to natural retail reason that theirs is a long-term strategic choice—one which is paying off as their dedicated consumers grow increasingly interested in managing their own health. Equally, the channel’s performance may also imply that the industry is still highly dependent on the still small ‘enlightened minority’ of core shoppers that populate it.

Only the $1.7-billion practitioner channel, which represented a growing but still just 8% of the U.S. supplement market in 2006, in addition to the still relatively new Internet channel now up to $600 million, grew faster than natural & specialty retail. Practitioner supplement leaders enjoyed robust performances, with Metagenics at nearly 20% organic growth in 2006, Standard Process 20%, and Douglas Labs (part of Atrium) reporting its strongest year in the last decade. U.S.-based network marketers account for $4.4 billion in U.S. supplement sales or 19% of the market, but their domestic growth was a more modest 4% in 2006 after 6% in 2004 and 8% in 2005. (See NBJ’s April 2007 issue on direct channels.)

Vitamins: Good ‘D’ay Sunshine; C Prices Swing Upwards
Consumer sales of vitamins grew nearly 5% in 2006, up slightly from 4% growth in 2005. Vitamin E—still suffering the insult of a controversial metastudy published in late 2004 that linked it to higher risk of mortality, and others that reported no benefit—declined 10%. This was better than the -30% of 2005, but still a substantial loss, although supplier Cognis Nutrition & Health believes the category has turned the corner on a global basis, particularly in natural form (see article on p.20).

Multivitamins grew nearly 4% in 2006, on par with 2005, as manufacturers continue to slice and dice the category along lifestyle, age and gender lines. In the summer of 2007, for example, Bayer Consumer Care, introduced One-A-Day Men’s 50+ Advantage and One- A-Day Women’s 50+ Advantage, supporting its marketing launch with findings from The Gender Divide Survey. Earlier it launched the Bayer Nutritional Science brand for heart, mind eye, joint and ‘body and cells’ applications— all sharing a common “vitality” theme, and supported by Bayer’s ‘Vitality Institute’. Wyeth Consumer Health’s Centrum sales grew 4% to $657 million globally in 2006 but SPINS data indicated a 4% decline. In natural retail multivitamin specialist Rainbow Light exceeded 10% growth for 2006, according to SPINS. Overall SPINS showed a 10-point divide between natural and mass in multivitamins with natural up 7% and mainstream down 3%.

Vitamin A and carotenoids grew 22% in consumer sales; vitamin D was up 16%, and B vitamins gained 7%, according to NBJ’s 2006 year-end figures. Apparently medicine is making a paradigm shift in how it views vitamin D, which has benefited from a rapid accumulation of positive science concluding that its effects go far beyond bone health to lowering the risk of multiple sclerosis, cancer, CVD, diabetes and other diseases—truly the sunshine vitamin. In June 2007, a landmark four-year study conducted by Creighton University School of Medicine (Nebraska) and published in the American Journal of Clinical Nutrition found post-menopausal women taking calcium, as well as a quantity of vitamin D3 nearly three times the U.S. government’s Recommended Daily Amount for middle-age adults, showed a dramatic 60% or greater reduction in cancer risk than women who did not get the vitamin—“a drop so large… it almost looks like a typographical error,” commented Dr. Joseph Prendergast of the Endocrine Metabolic Medical Center on his website. “Vitamins have been known to be responsible for a single disease and appropriate supplementation should correct the disease. However, Vitamin D goes to distant tissues and makes multiple metabolic improvements, classifying it more accurately as a hormone.” Vitamin D deficiency is showing up in so many illnesses, until levels are normalized, “We don’t really know what the status of chronic disease is in the North American population,” said professor of medicine Robert Heaney of Creighton University.

The news for vitamin C was not as bright. More than 80% of the world’s vitamin C is from China. In the past several months China appears to have cut production to enforce pollution limits, which pushed up prices by more than 200% to a four-year high, from $3.40 a kilo in January 2007 to a spike in spot prices of $11 a kilo in June 2007, according to figures cited in Christian Science Monitor. The four biggest Chinese vitamin C producers also faced a price-fixing suit in a New York court, which is ironic since fines levied against multinational pharmaceutical companies for the same wrongdoing in 1999 contributed to their exit from the vitamin C business.

Minerals: Food Sources Favored
Minerals eked out 2% growth in 2006, down from 4% in 2005. Only magnesium turned in double-digit growth; all other major mineral categories were flat or in decline, including calcium—the most abundant mineral in the human body and the largest in consumer sales. In a LabelTrends report, The Nielsen Company suggested that consumers are now choosing their calcium sources in foods rather than supplements or other nutritional aids, based on package claims like ‘excellent’ and ‘good’ source of calcium or a comparative calcium claim. EUV (equivalized unit volume) was also up in product categories not typically associated with calcium benefits, observed Nielsen, like canned pineapple, cookies, grape juice and boxed dry spaghetti. Measured in terms of EUV, “complete nutritional products” boasting a calcium claim saw increases for the first time in four years—up 27% after three year declines of over 30% each year, said Nielsen.

Specialty Supplements Shine Bright
Specialty Supplements fared best out of all supplement categories, with sales rising 11% in 2006—albeit a few points lower than the 14.6% growth of 2005. Specialty Supplements (led in dollar volume by glucosamine, homeopathic products, fish oil, CoQ10, probiotics, plant oils and enzymes) has led the six supplement segments in growth every year since 1990 with the exception of 2002 when glucosamine flattened and no other single category took off. In a familiar story, glucosamine/chondroitin, still the largest contributor to the category at $820 million, was flat at 1% in 2006, with a 6-8% price/unit decline indicating still decent growth in volume. Counter to the trend the category showed 5% growth in FDM and a 4% decline in natural, according to SPINS. Led in brands by NBTY’s Osteo-Biflex with a 9% gain in the mass market, Schiff’s Move Free (+8%), Flexamin and Cosamin DS, glucosamine got only a modest lift from the February 2006 GAIT trial, which was lukewarm on the supplement’s joint benefits and generated somewhat contradictory headlines. Glucosamine also faces competition from other joint ingredients like Celadrin, a proprietary anti-inflammatory joint health product that since summer 2006 has been marketed by its developer Imagenetix directly to mass retailers as Inflame Away. For the fiscal year ended March 2007, Imagenetix’ net sales decreased in what the company described as a transitional year during which it began for the first time to sell its own branded products to the mass market. Other innovations include: Schiff’s Move Free Advanced range with hyaluronic acid and bioflavonoids; and making pain relief time claims were Elations, a juice drink originated by P&G, and Nature Made TripleFlex Rapid Relief with glucosamine, MSM and Lubravite (willow bark and ginger root extracts).

By contrast, the third largest specialty category, fish oil (homeopathic products are number two), blew away all others with 36% growth, adding up to consumer sales of $490 million in 2006, according to NBJ. Executives attributed this performance to strong science, a better taste profile, a higher-value conditionspecific market, and greater consumer and practitioner awareness. Attention on fish oil grew in part to the profile of Omacor, Reliant Pharmaceutical’s prescription fish oil drug, which is marketed as an adjunct to statin therapy. Direct selling of omega-3s are also speeding growth. Omega-3’s early transition into food appears not to have drained impetus from the supplement side of the business—a dynamic once feared for supplements using calcium as an example but perhaps now proving to have the reverse effect, at least in the early stages for both fish oil and probiotics. Leading oil brands in the natural retail channel are ranked as Nordic Naturals, Barlean's, Spectrum, Carlson and private label; in FDM private label has a 27% share, followed by Nature Made, Nature’s Bounty, Sundown, Spectrum and Natrol, according to SPINS.

Probiotic supplements grew 23% to comprise nearly a $300-million U.S. consumer supplement category. In Europe, probiotic supplements have benefited from the success of food and beverages with added beneficial bacteria. The same boost may finally be happening here, benefiting, said executives, from the launch of probiotic functional foods in the mass market, notably Danone’s Activia in 2006, which was followed to market by Activia Light, DanActive dairy drink and Danimals with Lactobacillus GG.

According to Scott Bush, vice president of the dietary supplements business unit for Danisco’s Cultures Division, the U.S. market for probiotic finished supplements is about $240-300 million; raw material manufacturers represent about a $30 million market. Driving the market are “higher-strength formulations, increased medical community acceptance (driven by increased substantiation of health benefits) and increased consumer acceptance (push from influencers and pull by consumers seeing Dannon advertising),” said Bush.

One wonders whether the U.S. will see multivitamin-plus-probiotic combinations like those in Europe, where Merck’s leading Multibionta brand has line extensions positioned for specific conditions (vaginal health) and occasions (Montezuma’s revenge). In some European countries OTC-registered probiotic formulas compete effectively with other types of OTC antidiarrheals, according to Nina Stimson, executive vice president for Nicholas Hall & Co. (see NBJ’s Global issue, May/June 2007). If probiotics can break out of the ‘digestive’ mold in the U.S. and assert their presence in immunity and other more specific applications, the category has a lot of growth to look forward to—provided it does not allow itself to be ambushed by potency and survivability issues.

Probiotics can be marketed as shelf stable, “but there is neither a definition of what shelf stable means nor a requirement for proof of substantiation of this claim,” according to Bush. “At Danisco we offer strains which are shown to be stable for 24 months at room temperature and thus would certainly qualify as shelf stable. In order to support our customers in delivering on such a claim we provide specific advice regarding formulation, processing, storage and shipping conditions.” However, he noted that refrigeration can help preserve potency by diminishing the opportunity for temperature abuse.

Enzymes grew 9.5% in 2006, but unlike probiotics have yet to break into the mass market or functional foods in a big way and are still primarily associated with digestive relief. Suppliers are hard at work marketing systemic enzymes and other applications. Interestingly, in July 2007 one of North America’s leading practitioner supplement manufacturers, Atrium Innovations Inc., chose to acquire an enzyme company to establish its health and nutrition division in Europe. Germany-based Mucos Emulsions GmbH, whose main brand is Wobenzym systemic enzymes, had 2006 annual revenues of approximately $85 million.

Interestingly, all three of the top-growth specialty supplements—fish oil, probiotics and enzymes—are pushing the boundaries on multiple health applications, although they came to view on the strength one specific health association: heart health for fish oil and digestive relief for enzymes and probiotics.

Nutrition Industry Growth
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Mild Cold Season Hits Homeopathics
Sales of homeopathic medicines, which are not regulated as supplements but under the Food, Drug and Cosmetic Act and FDA regulations, rose a respectable 8.7% in 2006. However, this was down from 16% growth in 2005, attributable in large part to a late, mild cold and flu season. In natural supermarkets in 2006, sales of the dedicated homeopathic brands Boiron, Similasan, Hyland’s and Bach were all up between 10-15%, according to SPINS. One distributor reported 75% growth in its homeopathic category, with notable growth for Bach Flower Essences and even faster growth for Bach Rescue Remedy.

In FDM, Hyland’s and Boiron grew in excess of 20%, according to SPINS, and sales of arnica products were up 30%. Boiron noted in its annual report that its Arnica Montana is now recommended in more than 20 U.S. hospitals, including Columbia University in New York and UCLA and Kaiser Permanente in Los Angeles.

In the mass market, Quigley Corp. referred not only to the mild cold season but also significantly increased competition from the “immune- booster market” to explain declining sales of its homeopathic zinc gluconate glycine tablets; its cold remedy segment declined 15% compared to a 28% gain in 2005. The reference likely has the successful Airborne brand in mind, a company that posted $145 million in wholesale sales in 2006, among other coldfighting supplements.

Publicly traded Matrixx Initiatives Inc. announced sales of $96 million in 2006, a 6% increase over 2005 net sales with strong sales reported for its Zicam Cold Remedy line, which it said continued to outpace the cough and cold category. For the year, retail sales of Zicam products (excluding Wal-Mart) increased approximately 19%, while the total cough/cold category increased approximately 1% compared to the prior year. However, in 2005 the Zicam brand increased approximately 50% compared to a 13% increase for the total cough and cold category, according to the company, which attributed 2006’s lower growth rate principally to the slow start to the cold season. Zicam products claim a 2.7% dollar share of the cough/cold category, in which it competes mainly with OTC remedies.

Herbal Botanical Trends
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Herbs & Botanicals Lifted By Superfruits
Herbs & botanicals sales fared marginally better in 2006 than at any other time since 1999, when the category made its infamous dive from 13% to 3% growth as a result of the first wave of negative media, much of it around St. John’s wort. The herbal category has never recovered from what some view as a ‘sucker punch’, and while 2006 was the best in a few years the category still only grew 4% compared to its heyday of 20% growth in the mid 90s. Most of 2006 growth was in natural retail or direct paced by liquid botanicals, but worthy of note was that mass market singles halted its 5-year decline (see chart).

One of the few bright spots in herb & botanical pills was cranberry supplements, which grew 12% and are being linked to conditions other than UTI health; Pharmavite’s CranAssure is an FDM category leader. But it has been the ‘superfruit’ tonics that has boosted the H&B category in recent years. In 2005 liquid botanicals kept herbal & botanical supplement in positive territory and in 2006 more modest growth added a percentage point to growth in a segment of which it now just represents 10%. Liquid botanicals noni, mangosteen, goji and acai have all done well and noni is now the largest subcategory in the H&B segment with sales of $260 million and mangosteen third with $150 million.

Judging by the comments from executives interviewed in this issue, the category still gets worked over regularly by the media, and the ‘bread and butter’ herbs like Ginkgo biloba, echinacea, saw palmetto and St. John’s wort were all down or flat. Nicholas Hall said garlic sales fell by 9% in FDM, suggesting that it might be suffering competition from new supplements aimed at cholesterol and heart health, with Chattem’s Garlique atop the category with more than double the sales of its nearest rival, Nature Made Garlic. Echinacea declined by 17%, with competition from other natural cold prevention treatments (e.g., Airborne) bearing down on sales. Nature’s Resource echinacea led the mass-market channel in 2006. Menopause botanicals failed to get traction, with black cohosh down 3%, and red clover showing a double-digit decline, according to Nicholas Hall; soy sales declined by 12%. NBJ’s recent global issue also showed regional declines in soy and menopause botanicals.

SNWL Shows Endurance
The remarkable thing about Sports Nutrition supplements is that despite scandals, bans and fads it has managed to sustain fairly steady growth over the years, typically 3-5 points higher than vitamins and herbs. At 8.1% growth in 2006, up from 6.6% in 2005, last year was no exception. This trajectory reflects the continued growth of consumers in the active, healthy lifestyle demographic, who appreciate the importance of nutrition in athletic performance, even if they only work out on weekends.

Another advantage is the segment’s ability to produce new or at least novel-seeming products, not to mention being the stage for the holy grail of weight loss. New companies continue to enter the broader Sports & Weight Loss (SNWL) business, exploiting a somewhat fragmented introduction channel—direct, Internet, gyms, etc.—rather making their entrance through more traditional retail establishments.

According to NBJ, meal replacements recovered to 2.7% growth following the devastating post-Atkins years when the category lost 11% of its value from 2003-2005. For the year ended Aug. 13, 2006 in FDM, the biggest meal replacement brand Ross' Ensure grew 4%, SlimFast 2% and Novartis' Boost 4%. In terms of individual brands, Slimfast Option Weight Control grew 35% (although this was cancelled out by big declines in other Slimfast products). Meal replacement shares in 2007 were Ensure (Ross/Abbott at 30%; SlimFast (Unilever) 24%; Boost 13% (Nestle), according to Nicholas Hall's citation of IRI data.

Weight loss pills declined by -3.5% in 2006—barely an improvement on -4.5% in the prior year. Brands continued to fight for marketshare and juggle with non-ephedra ingredients. FTC has been keeping a close eye on the category, and a handful of OTC diet supplement marketers sustained fines totaling $25 million for deceptive marketing. Notably weight-loss pills have fallen from 18% of NBJ’s $10.5-billion SNWL market in 2001 to 9% of the $18.1-billion SNWL market in 2006, losing $500 million in annual sales in the process. At the same time, sports & energy drinks have shot from 33% to 49% of SNWL sales, not an entirely coincidental trend say observers that believe energy drinks have picked up where ephedra left off.

In pills, MuscleTech (Iovate) kicked the downward trend in spectacular style, with sales up more than 70% in the ‘weight control candy’ category, according to IRI data for the year ended August 13, 2006. This continued in 2007 with Muscletech’s Hydroxycut overtaking TrimSpa as the top ranking weight loss aid, according Nicholas Hall’s July 2007 OTC Update, which said Iovate’s weight loss portfolio increased by nearly 300% in the reporting period. TrimSpa by contrast fell by almost half and was ranked fifth, partly owing to the death of its spokeswoman Anna Nicole Smith in February. Sales of Relacore (Carter Reed/Basic Research), Metabolife (Ideasphere), Xanadrine (Cytodyne) and Zantrex (Basic Research) all fell, although NxCare’s NV Be Desired, with Carmen Electra as spokeswoman, has seen strong growth since its 2006 launch.

It’s too soon to tell whether diet pill Alli (GSK), the OTC version of Roche’s Xenical (orlistat) that became available in the U.S. in June 2007, will change the complexion of the weight loss category. The OTC product is intended for very overweight people. A 60-capsule kit costs $50, and a 90-capsule kit around $60. Alli starter kits include capsules, a carrying case, and interestingly a compartment for multivitamins. The Alli website reported in August 2007 that “sales are flying high,” but “we are also receiving the initial feedback from what can be very embarrassing and uncomfortable side effects to Alli.” Interestingly, because of Alli’s effect of restricting enzyme production, some fatty-based vitamins may not be absorbed, and the site recommends a daily intake of vitamins. The starter kit comes with a compartment for multivitamins. Also anticipated to have an impact on the U.S. weight loss market was the prescription diet drug rimonabant. However, in June 2007 FDA’s Endocrine and Metabolic Drugs Advisory Committee concluded that the French manufacturer Sanofi-Aventis failed to demonstrate the safety of rimonabant (Acomplia) and voted against recommending the anti-obesity treatment for approval.

The best performing weight-loss segment— but not one that NBJ includes in its segment definition—is diet food home delivery, which grew into an $800-million market fueled by NutriSystem, Jenny Direct, Medifast and a few dozen others, according to Marketdata Enterprises’ 9th edition of “The U.S. Weight Loss & Diet Control Market” released in April 2007, which analyzes 10 segments of the U.S. diet industry. The average monthly cost of home delivery for consumers is pegged at $725. According to Bestdietforme.com’s analysis of first quarter 2007 data, when it comes to food plans, 59% of dieters prefer to use supermarket food, 11.4% want pre-packaged or diet company food, 4% want meal replacements (shakes, nutrition bars), and 23% have no preference. According to Marketdata, the U.S. weight loss and diet market, including products, centers, member programs and counseling, is led by Weight Watchers ($1.2 billion), NutriSystem ($568 million), LA Weight Loss ($500 million), Jenny Craig ($462 million), Slim-Fast ($310 million) and Herbalife ($271 million—U.S. diet product sales).

Supplement Companies
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The irrepressible Sports & Energy Drinks categories racked up 24% growth combined, with sports drinks at 11% and energy drinks at 48%. This was down only slightly from 27% in the year prior after a steady upward curve since 1998. The declining popularity of carbonated soft drinks continues to provide a positive context for both.

According to Beverage Digest, sports drinks rose 13% in volume in 2006, but in the first quarter 2007 they dropped to 3.2% growth compared to 18% for the prior year’s quarter, with Gatorade flat. In its most recent quarter, PepsiCo reported non-carbonated beverage growth was offset by poorer sales of Tropicana juice and Gatorade. Analysts have been watching the sports drink goliath for signs of a return to higher growth after supply chain difficulties in preceding quarters and an unfavorable comparison with strong growth since 2005.

Energy drinks maintained strong growth in 2006, albeit slower than in 2005. Beverage Digest estimated that energy drinks grew 56% on an all-channel basis in 2006 in volume compared to nearly 80% in 2005, although it should be borne in mind that the category is now very large. Dollars were up by about 45% due to growth of larger packages (lower pricing) for a category worth about $4.9 billion, according to BD (and higher than NBJ's estimates), up from $3.4 billion in 2005. Red Bull still leads with just less than one third of the U.S. market, although its share is being eroded, and Hansen remained at number two with Monster, and a 5-point share gain. Energy drinks are now the second biggest category in C stores in dollar terms, behind sodas, BD reported.

Healthy Food Passes 20% of Total
NBJ’s umbrella definition of Healthy Foods includes functional, natural & organic, and lesser-evil foods. Together they totaled $120 billion out of $566 billion in 2006 food sales or 21.2% of the total. Healthy foods have grown at 7-9% growth rates from 2002-005 compared to only 1-2% for foods overall, although there was a slight pick-up in the latter in 2006 to 2.4%. Lesser-evil foods represent those products with something undesirable taken out, i.e., fewer calories, carbs, fat, sugar, etc., and is the largest piece of the healthy food retail pie with $62 billion in sales. Functional foods contributed $31.4 billion and natural & organic $26.5 billion.

Whatever the source, the fundamentals of consumer demand for healthier foods appear to be strengthening: According to the International Food Information Council’s “Food & Health Survey: Consumer Attitudes toward Food, Nutrition & Health,” conducted in February/March 2007, in the past six months 66% of respondents said they made changes in an effort to improve the healthfulness of their diet, up from 57% in 2006. Asked about the impact of convenience, healthfulness, price and taste on their decision to buy food, taste remained stable and highest at 88% in 2007. The remaining variables all increased in importance with healthfulness at 65% versus 58%, price at 72% versus 63%, and convenience at 55% versus 49%.

In making dietary changes, Americans say they agree that certain foods and beverages can improve “heart health” (80%), maintain overall health and wellness (76%), improve physical energy or stamina (76%), and improve digestive health (75%). However, only 42% currently consume food to improve heart health, followed by 34% who eat for physical energy/stamina, 34% for digestive health and 30% to reduce the risk of getting specific diseases. In the group that doesn’t currently consume but are interested, the largest percentage at 64% was interested in improving mental performance.

Obesity a Powerful Driver
On the vendor side, multinational food companies are still eager to respond to government concern over public health, not to mention market opportunity. In the latest iteration of obesity statistics, researchers at the Johns Hopkins Bloomberg School of Public Health Center for Human Nutrition reported in July 2007 that at current rates, by 2015 75% of adults will be overweight, 41% obese. Some minority and low socioeconomic status groups are disproportionately affected. “Obesity is likely to continue to increase, and if nothing is done it will soon become the leading preventable cause of death in the United States,” said one of the study’s co-authors. In a related study it was found people purchase foods based on their income level and perception of a food’s health benefit and cost. Another study found food choices are greatly influenced by social circles.

In a recent effort to preempt government intervention, 11 companies spearheaded by Kellogg agreed to limit U.S. advertising aimed at children under 12. The announcement was made just prior to Federal Trade Commission hearings into whether the growing child obesity problem could be curtailed by more responsible marketing practices. Kellogg will use its Global Nutrient Criteria to determine which products will be marketed to children. A third of the cereals that Kellogg marketed at that time to children in the U.S. fell outside those standards. The initiative impressed even the watchdog group Center for Science in the Public Interest, whose executive director Michael F. Jacobson said, “Kellogg has vaulted over the rest of the food industry.”

Also prominent in 2006-7 and predicted to become a major issue in 2008 were food safety scares, most involving fresh produce. According to FoodProcessing.com’s sixth annual Manufacturing Trends Survey, 47% of respondents named food safety their top concern, up from an historic low of 30% the year prior. Historically, food scares like Mad Cow, alar and the recent China melamine scandal have tended to benefit safer options, notably organic alternatives. Incidences like the multi-state outbreak of E.coli-infected spinach at the end of 2006 can decimate a category (losses as high as $200 million were estimated). While organic food is often the beneficiary of food scares, should such an incident ever be associated with organic produce one imagines it could blight the entire category.

Fresh food also remains a strong trend. The Food Marketing Institute’s study, “The Food Retailing Industry Speaks 2007,” reported that nearly every responding retailer identified “fresh” as by far their most successful strategy. However, FMI’s study of shopper trends also found a 16% drop in food safety confidence and vastly heightened concern about produce in 2007.

Interest in healthier foods certainly appears to be backed up by new product statistics: According to The Nielsen Company, there were more than 49,000 UPC barcodes in the 52 weeks ended March 2007 in the food and beverage category including, in the health and wellness arena, more than 4,200 natural products, 2,400 organic and more than 1,000 items each in categories that include absence of a specific fat, make a vitamin/mineral claim, are preservative free, or are whole grain, low fat, low sodium, fat free and cholesterol free.

Top Supplement Companies 2006

Functional Food Sales Up 10%
Functional food (including NBJ’s broad definition of inherently functional, substantially fortified and performance functional) represented 37% of the $85-billion U.S. nutrition industry in 2007 (or 5.3% of the $590- billion food industry), up 10% in 2006 for a market worth $31.4 billion, according to NBJ research compiled on more than 400 brands and published in NBJ's Healthy Foods Report 2007. Beverages continued to be the pace setters and were 56% of functional food sales on 15% growth. Energy drinks rose 48% to $3.7 billion with an outside chance at catching sports drinks ($5.1 billion and growth of 11% in 2006) if trends continue, although both subcategories are benefitting from the fall of carbonated soft drinks. Functional water & soda was up 35% to pass $1 billion, led by Propel, Veryfine, Glaceau and Aquafina on growth and brand extensions, and leading CSD brands tested the waters with some functional sodas. Soymilk and other dairy alternatives tallied $1.4 billion and growth picked up to 5% in 2006 from 2% the previous year.

Natural foods distributors are seeing explosive growth in functional foods with cranberry and pomegranate topping juice growth, and omega-3 eggs, kombucha-based drinks (see p.23), enhanced cereal and dark chocolate all having breakthrough years in 2006. Cereals trail only beverages in terms of sales in functional foods and recent developments include the addition of more than the commodity nutrients that have been the staple of substantially enriched cereals. A $2-billion market since 2003, nutrition bars turned around modest declines to register 4.2% growth in 2006. After losing sales for two years in a row this was a relief, but few forget the days of 20-30% growth before the market got knocked off balance by low-carb mania.

Dairy products also contribute significantly to functional foods. Yogurt and kefir was the fastest-growing refrigerated category in both natural supermarkets and conventional outlets. SPINS data showed FDM sales increased by 40% and natural supermarkets by 17% and a leading distributor reported yogurt was its top category in overall sales dollar growth in 2006.

PepsiCo remains the U.S. functional food leader, but globally Nestlé and Danone lead the market. While Pepsi and Coca-Cola have made headlines for small, healthy beverage acquisitions in the last year, Nestlé is making a significant research investment to transition from a conventional food company into a health, nutrition and wellness company. Nestlé’s Research Center in Lausanne, Switzerland has collaborations with around 140 universities, research institutes and medical centers worldwide, with healthy aging as one of its focuses. Nestlé also has a program called Popularly Positioned Products, to provide cheap but nutritious products.

Natural Keeping Pace; Organic Means Many Things
Natural & organic foods totaled $26.4 billion in U.S. sales in 2006 (or $23.6 billion excluding soymilk and nutrition bars as depicted in nutrition industry totals), with growth of 15%. The strength of organic remains fairly consistent and up 17% to $16.1 billion in 2006, but just natural foods grew 13% in 2006 at double digit rates for the last three years after a spell in low single digits while organic attracted product development and a number of products converted to organic. Over 4 million acres of farmland were dedicated to organic production systems in the U.S. in 2005, up from 914,000 total certified organic acreage in 1995, according to the U.S. Department of Agriculture (USDA). However, the U.S. is a consumer more than a supplier country, and a growing proportion of organic supply comes from overseas.

According to The Hartman Group report, “Organic 2006: consumer attitudes & behavior five years later & into the future,” 73% of Americans use organics at least occasionally, up from 55% in 2000. Driving this increase is the percentage of consumers using organics regularly (at least weekly), which has increased from 17% in 2000 to 23% in 2006. An additional increase has occurred among occasional (less than monthly) users, from 34% to 44%. Of the U.S. consumers who use organics, the majority (66%) is made up of ‘Mid Level’ organic consumers, with smaller segments at the two extremes: 21% Core consumers and 13% Periphery consumers.

While the term organic has a legal definition, Hartman found that as consumer involvement with organics has grown, there is an expanding roster of beliefs around organic, including “better tasting,” “healthier,” “more real,” “less processed,” “fresh,” or “local.” Others rely on organic products as a means of addressing a multitude of food allergies and fears. Still others equate organic with notions such as “sustainable.” And somewhere in the mix lies a small body of consumers who happen to share the traditional industry perspective. Even the legal definition of organic is a moving target. In June 2007, the USDA gave interim approval to a proposal to allow 38 non-organic ingredients to be used in foods carrying the USDA Organic seal when those products are not available commercially in organic form. The interim final rule has a 60-day public comment period. Five items are currently are on the National List. Of the 38 ingredients covered by the interim final rule for inclusion, casings for sausages, hops and fish oil appear to be among the most controversial additions. Opponents believe the additions dilute organic standards, and unless this kind of controversy dies down, organic food could leave more headroom for products making other types of claims—or claims in addition to organic.

In 2006-7, competing or add-on labels like “food miles,” “locally grown” and “Fair Trade” gained currency with consumers, essentially moving towards a tiered market within natural and organic, NBJ believes. Core consumers may perceive that these added values ally their purchases more closely to the true goals of organic agriculture than those products solely with the USDA organic imprimatur. (Interestingly, 43% of survey respondents had no idea what the USDA Organic Seal indicates, according to Hartman.) Environmental footprint and social responsibility are both becoming mainstream features in food marketing. Cause-related marketing plays a key role for many top-selling cereals and chocolates inthe natural channel; environmentally friendly cleaners are posting higher growth than the overall business; and Fair Trade brands are fast-growing within the coffee category.

Watched with interest is Wal-Mart’s involvement with organic. A number of organic farmers across the country were reported as saying that Wal-Mart had backed off of aggressive plans to offer more organic foods after announcing a strong commitment to organic the year before. Wal-Mart refuted this.

According to The Nielsen Co. figures that appeared in FMI’s Facts, Figures & the Future, departments showing continued strong growth within the organic segment include dry grocery, up 32% in dollar sales last year (cereal 42%, soup 33%, and snacks 32% growth); fresh produce, up 39%; dairy, +up 18% (milk 15%, yogurt 18%, eggs 27%, and cheese 48% growth); and packaged meat, up a beefy 50%. Although mainstream retailers are getting more deeply involved in organic, compared to five years ago, consumers are much more likely to use natural food stores to purchase organic foods and beverages, Hartman found (with 29% doing so in 2000, compared to nearly half today). Using grocery stores for organic purchases has fallen somewhat (from 63% of consumers in 2000 to 58% in 2005). But using supercenter/discount stores for organics has increased from 9% to 15%.

As organic private label gains ground in categories like milk, soymilk, carrots, pasta, eggs and canned tomatoes, it’s not surprising to learn that the majority of consumers are unaware of most organic brands—and that many assumed a few natural brands were organic. Only about 4 in 10 consumers have heard of the top five organic brands, Hartman found. Silk heads the list with the highest consumer awareness at 43%, followed closely by Ben & Jerry’s Organic (41%), and Celestial Seasonings, Kashi and Kettle Chips (each with 40%). The seven organic brands purchased regularly (adoption) by at least 11% of all consumers are (in order): Celestial Seasonings (highest at 16%), Kashi, Trader Joe’s Organics, Silk, Kettle Chips, Morningstar Farms and Boca Foods.

Because We’re Worth It: Rationalizing the Organic Premium.
For years now, market researchers have identified price as the leading barrier to purchase of organic products. Hartman found that while organics are still regarded as generally more expensive, consumers are increasingly driven by a belief that at least some organic products are worth the premium. In particular, some organic products are now deemed to be of such higher value that they are often considered important, even essential, to buy in organic form.

“Our study noted such examples as fresh produce, meat/poultry, baby food and milk. Many also break down produce further, alleging that some fruits and vegetables (primarily those with thinner, less pesticide-resistant, skins such as apples) are more valuable in organic form than others (e.g., those with thicker skins, such as bananas),” said Blaine Becker, director of marketing & communications for Hartman. In addition to identifying such “added value” organic products, many organic buyers are also adopting strategies to maximize their money’s purchasing power (e.g., only purchasing organic produce that is in-season and scouting for bargains at farmer’s markets or roadside stands), noted Becker. “All of these methods, especially the distinguishing of product types, are ways in which today’s consumers are stretching their food dollar to allow an increasing amount of organics purchases.”

Nutrition Industry Future: Growth, Food Safety and Country of Origin
What does the future hold for the U.S. Nutrition Industry? Where supplements are concerned, executives appear moderately confident about their near-term prospects. Asked to anticipate the growth of U.S. consumer sales of supplements in 2007-08, most (60%) of executives who attended the annual NBJ Summit in July 2007 forecast a 5-10% increase; 22% forecast a flat market; and fully 13% predicted 10%+ growth. NBJ’s conservative forecast anticipates supplement growth at 5-6% in 2007 and 2008, and 4-5% in 2009 and 2010.

One issue that looks set to get into higher gear—and may even become an election issue—is country-of-origin labeling, which dovetails with food safety concerns. Just as in the past we have seen defections to organic as a result of hormones in milk and Mad Cow disease, so this year contaminated spinach and melamine-tainted petfood caused consumers to abandon conventional categories and seek healthier, more trust-worthy or ethical alternatives.

Laws were enacted by Congress in 2002 to require country-of-origin labeling on food, but lobbying groups pushed back implementation of those laws for most products until 2008. Recent polls, including one by Consumer Reports in July 2007, found U.S. consumers overwhelmingly support stricter food labeling laws, with 92% of Americans wanting to know which country produced the food they are buying. In June 2007, USDA said it would reopen public comment to its country-of-origin labeling measure until August 20.

Although supplements aren’t included in country-of-origin labeling laws, with 80-85% of U.S. vitamins now supplied from China, could country-of-origin concerns impact the supplement market? Sixty percent of food and supplement executives at the NBJ Summit said they viewed the quality crisis regarding food ingredients sourced from China as a ‘call to action’ and 30% were of the opinion that we’ve only seen the ‘tip of the iceberg’. Interestingly while this 90% combined characterized quality of China imports as a major issue, 36% indicated they haven’t changed their buying practices or behavior.

One opinion is that country of origin and food contamination together will be the major issue in 2007-8. “‘Not produced in China’ will sell more product,” said Tom Aarts, principal of Nutrition Advisors LLC, co-founder of NBJ and co-chair the NBJ Summit—whether that’s a food item or a supplement. The other scenario is that initial knee-jerk reactions against supplements produced in China will quickly fade. “Most supplement manufacturers who buy from China say they are pretty confident in who they’re dealing with,” said Summit Co-Chair and NBJ Editor Grant Ferrier, who believes that the majority of vitamin ingredient suppliers addressed much of their Q/C issues in the 2000-2003 timeframe. However, issues beyond product quality, like environmental, labor and business/ownership issues are still unresolved in many cases.

Lines Blur Between Supplement, OTC and Prescription Products
Only one significant cost savings study came to attention in 2006. Commissioned by the Dietary Supplement Education Alliance (DSEA), it updated research conducted by The Lewin Group in 2004 and 2005 and showed that over the next five years, appropriate use of select dietary supplements would improve the health of key populations and save the nation more than $24 billion in healthcare costs. Key findings were announced for calcium with D, folic acid, omega-3 fatty acids, and lutein with zeaxanthin.

Aarts predicted that as supplements knock on the door of mainstream medicine and explore the best route to acceptance, the boundaries between drug, OTC and supplement products will blur. “There’s a lot more research being done on products that have drug-like efficacy,” he said. “Supplement companies are going to figure out how to market with OTC monographs.”

The pharmaceutical industry is nervous about products that have 70-75% of the efficacy of prescription products—saw palmetto versus drugs like Avodart or Flomax, for example, noted Aarts. “One day someone is going to do a clinical proving drug-like efficacy—without the side effects or the high costs,” he predicted. Of course, such a strategy could have an obvious backlash if supplements are perceived as trespassing on pharma turf. Such trespass could lead either to competition (if it’s so good, let’s make a pharmaceutical drug version and claim it’s superior), or an effort to undermine the product, which many believe is what happened with St. John’s wort in 2001.

Whether it benefits supplement or pharmaceutical companies, turning supplements into drugs, or proving they have drug-like efficacy, could be a pathway into the healthcare system. One supplement that has crossed over is prescription Omacor, a concentrated fish oil for heart attack patients. But what savings would it afford the country if we end up paying drug prices for supplements? Individuals might benefit from a co-pay of $15 rather than buying a bottle of high concentration supplements at their health food store. But in the long run the public picks up the tab through higher insurance premiums.

The tie to healthcare is not out of place, however, say most nutrition industry advocates. A two-pronged approach of products styled on the consumer-product food model (essentially the healthy foods market) and on the condition-specific, scientific, pharma model (the supplement market) seems the logical gravitation point for the nutrition industry. But linking each product-type branch to healthcare costs, and not just lifestyle issues, will be crucial to sustain growth well ahead of the growth in consumer products—and perhaps even in the range of the growth of healthcare costs. Now that would really be a surprise as a prognosis for our patient that is the nutrition industry at its annual check-up.