Now 10 years old, it is important to look back on this maturing market to see what lessons can be learned.
By Julian Mellentin Possibly the most telling event of this year—and the least remarked upon—was General Mills (Minneapolis, MN) decision to withdraw its Yoplait cholesterol-lowering yogurt from the U.S. market. The move came as the still-niche U.S. market for products made with cholesterol-lowering sterols stalled—despite the efforts of Yoplait and Coca-Cola (Atlanta, GA)—while simultaneously the European market roared ahead to hit $650 million in retail sales (which is 10 times the size of the U.S. market) and became the largest sterol market in the world. The story behind these events contains in microcosm the forces that are shaping and defining the entire functional ingredient market and clearly illustrates the success factors that will determine the future of every ingredient and every brand.
Editor, New Nutrition Business
The future direction for the functional food and beverage market has become very clear. The defining trends and the success factors are now set in stone both for ingredients and for brands—and it is rapidly becoming clearer which companies, brands, ingredients and strategies are emerging as the winners, and as the losers.
Lutein, lactoferrin, lycopene, beta-glucans, conjugated linoleic acid (CLA), omega 3s, plant sterols—and almost every other health ingredient—have been forecast again and again over the last decade to be on the verge of becoming “hot” hit ingredients. But the reality is much more complex and most of the “next hit ingredient” predictions of the last 10 years can now be seen for what they were—empty hype.
Some ingredients such as marine omega 3 DHA/EPA are still embryonic but are showing fast growth and tremendous potential, driven by savvy marketing by brand owners and major ingredient suppliers like Ocean Nutrition (Dartmouth, Nova Scotia, Canada).
A few like CLA have achieved surprising levels of success while still remaining niche. But many others such as lutein and lactoferrin have seen their progress into foods and beverages grind to a halt, left by the wayside as the functional food juggernaut races ahead, with no prospect of either of them having any impact on the future development of the functional food market.
The Sterols/Stanols SagaThe recent story of plant sterols/ stanols illustrates very clearly the triumphs and tragedies of the functional food business—and the critical lessons for everyone in the industry.
This year played host to the stalling—some might even say the demise—of the U.S. market for cholesterol-lowering plant sterols and stanols. This paralleled the rocketing ahead of the European market to unprecedented levels.
The U.S. market is worth, according to the most generous estimate, around $80 million in retail sales, and the withdrawal by Yoplait of its cholesterol-lowering yogurt is a significant setback to the ambitions of sterol producers.
The other “great hope” of sterol makers was for Coca-Cola’s Minute Maid Heart Wise to become a mass-market success—but three years after launch the brand is apparently still stuck at around $30 million in retail sales, according to IRI supermarket scanning data. That’s roughly what the much-maligned Benecol (Raisio) cholesterol-lowering spread achieved at its peak. Meanwhile sales of Take Control (Unilever) and Benecol spreads are continuing to shrink, falling from over $50 million in retail sales in 2001 to $40 million in 2005—with the decline accelerating.
By contrast, Europe has become the world’s biggest market for sterol-based cholesterol-lowering products, worth perhaps as much as $650 million at retail prices in 2005.
Back in 1999, when the first sterol-based cholesterol-lowering foods were launched in the U.S., management consultants were forecasting that the market was about to explode, basing their predictions on statistics such as the one that 52% of Americans have elevated cholesterol. When Benecol and Unilever’s rival brand Take Control failed to make much headway, the soothsayers blamed it on the high price premium (400% over “regular” products) and the fact that sterols had been launched in table spreads—yellow fats, an image not compatible with the concept of lowering cholesterol.
So why have sterols performed so well in Europe but continued to disappoint in America? And what can we learn from the experience? Here are some of the main reasons:
1. A me-too benefit or a new benefit:“Cholesterol-lowering” is a me-too benefit in America, where supermarkets are full of products carrying FDA-approved claims that they can lower your cholesterol—such as those for whole grains, soy, nuts and oats—and so many products that talk about cholesterol that it’s an everyday selling message. That’s not to not to mention the growing swathe of products like pomegranate juice, for example, that refer to “heart health”—a term better understood by the average person than “cholesterol-lowering.” In Europe there’s no such intense competition. Very few countries have permitted cholesterol-lowering claims for oats or soy, and so as a benefit it still represents a point of difference for products that carry it.
2. A hard-to-accept ingredient:Americans can choose to lower their cholesterol by eating foods they can understand and sound familiar—such as oats, nuts or soy. The term “plant sterols” by contrast sounds scientific and consumer research shows that most Americans still haven’t heard of sterols. People, we have learned over the last 10 years of functional foods, like to get their health benefits from foods they can easily understand and accept. Europeans, too, haven’t heard of sterols. The difference is that they have fewer places to go to get the benefit—and, as we shall see, brand owners have done a better job of making the cholesterol-lowering concept acceptable in many other ways.
3. Education:A benefit that people don’t see as relevant to their lifestyle or an ingredient that sounds too scientific are both powerful disincentives to purchase. In Europe, Unilever and Benecol, followed quickly by all their competitors, have invested massive sums in consumer education, with free cholesterol-tests—conducted by health professionals in supermarkets, shopping malls, country fairs and community groups—one of the most effective ways of demonstrating to people that they need to be concerned about their cholesterol. There has been no education effort by any U.S. brand owner to compare with the massive scale of investment in Europe.
4. Packaging innovation:Alongside education, packaging is one of the most important success factors. In Europe, the market for “daily dose” probiotic dairy drinks (typically around 100 ml, or 5 fl. oz.) is worth around $3.5 billion annually and still growing rapidly. For Benecol, Unilever, Danone and others it was a no-brainer to use the daily dose dairy drink as the vehicle for kick-starting a market that, like the U.S., was confined to table spreads. This packaging innovation—a convenient daily dose—has wrought a revolution, growing the European market by more than 50% in the space of just two-and-a-half years. These little bottles account for over 30% of the European market.
The daily dose packaging format has transformed the fate of the cholesterol-lowering sector and has become the package format of choice in Europe, as it has in Asia and South America, for products that want to signal health. To take just one example, Unilever has chosen the 100 ml drink format for every single functional food launch in Europe over the past 18 months, including an omega 3 drink, a blood pressure-lowering drink and a drink that delivers two of your “5-a-day” fruits and vegetable intake.
In the U.S. market, by contrast, there has been sparse packaging innovation. Every product launched—Minute Maid HeartWise, Yoplait Healthy Heart—made the mistake of offering no additional convenience benefits and looked no different from any regular product, meaning that “cholesterol-lowering” then became the sole reason-to-purchase that each brand offered.
Healthy Ingredients Can No Longer be THE Sole Point of DifferenceThe divergent fortunes of sterols in Europe and America contain powerful lessons that are particularly relevant for everyone now. Functional food and beverage markets are no longer virgin territory. The market is flooded with ever-more me-too health products and ingredients offering me-too benefits. Lactoferrin, for example, offers the benefit of immunity—the same benefit offered by many probiotics (Danone’s successful Actimel brand, for example, sits on precisely this platform), as well as colostrum, zinc, vitamin C, cranberries, echinacea and many others. And new ingredients claiming some potential immunity benefit emerge all the time—Coenzyme Q10 (CoQ10), goji juice and beta-glucans to name just a few.
In a world over-supplied with health ingredients, your ingredients’ health benefit may no longer by itself be a sufficient point of difference to interest either food formulators or consumers. For food formulators that point of difference has to be created by cost advantages that increase their margins or enable them to be more price-competitive in the market-place—the ease with which your ingredient can be formulated into foods and beverages (without taste problems), processing advantages and so on.
A point of difference can also be created by helping brand owners identify new segments in the market to whom your benefit can be made relevant—when delivered in the right packaging format. It is more necessary than ever for companies—even ones far back in the value chain from the final consumer—to understand consumer motivations and how they can create new segments of the market and new propositions.
Life-Stage MarketingLife-stage marketing targets a benefit and a brand very precisely at a niche associated with a particular stage of life. This strategy is possibly “most developed” in kids nutrition—particularly in the way omega 3s continue to carve out a unique position in the kids market.
Omega 3 DHA (docosahexaenoic acid), derived from fish oil or from algae, has proven benefits for both heart and brain health. But with the heart health market becoming more crowded, brand owners have increasingly turned to the brain health benefit to create a new segment in the market. To take some examples from the past year:
• Mueller Dairy (Germany’s biggest dairy company) has added omega 3 (from Ocean Nutrition) to its probiotic drink Mueller Vitality. The package refers to both heart and brain development benefits, marketing the latter to mothers. Vitality includes a 100 ml daily dose drink in its line-up.
• Nestlé has added omega 3s to its probiotic kids dairy drink (also in a daily dose format)—Munch Bunch Drinky+ is marketed on a brain health platform.
• The U.K.’s Dairy Crest last year launched St. Ivel Advance omega 3 milk, with a platform of improving children’s learning and concentration, using omega 3s from DSM Nutritional Products, Inc. In its first year it achieved sales of $30 million—not a bad start in a country with a population only slightly bigger than California.
• In Canada, Danone launched Danino, which is a kid-specific yogurt that carries the Canadian government’s approved health claim that: “DHA, an omega 3 fatty acid, supports the normal development of the brain, the eyes and the nerves.” Danino, says Danone, has taken a 17% share of the kid-specific dairy market in Canada.
Even in the U.S., when Coca-Cola-owned Odwalla made its debut in the soy milk market earlier this year, it did so with a product containing added DHA (from Martek) and a clear brain health benefit claim, giving the brand a clear point of difference from all other soy milks, which all have cholesterol-lowering or heart health as their standard benefit message.
CLA at first might seem an unlikely candidate to be a functional food winner, but that is what it has turned out to be for Norwegian biotech company Natural ASA and its licensing partner, German ingredient company Cognis, which markets CLA under the Tonalin brand.
Leading Spanish dairy group CAPSA (Corporación Alimentaria Peñasanta) was the first company in the western world to launch products with added CLA. The Spanish are the most health-active consumers in Europe—according to consumer research company Health Focus International—an observation that’s born out by the success of omega 3 milk (one brand alone has over $130 million in sales) and the country’s high consumption of sterol-based cholesterol-lowering daily dose drinks.
CAPSA’s NaturLinea brand of yogurt, milk, juice and (of course) a 100 ml daily-dose dairy drink, marketed with a weight loss message, has grown steadily to over $60 million in retail sales in the two years since launch—an impressive achievement in a country with a population of 40 million. To put this success in context, if a U.S. brand achieved the same penetration it would have over $400 million in retail sales.
The success of NaturLinea underscores the value in identifying a benefit that is absolutely compelling to the target market—Spanish women care about weight and their figures to an extent probably only matched by French and Japanese women. The benefit is delivered in a credible and convenient format under a trusted brand and it actually works. Taken together these factors make it easier for consumers to overlook the fact that they’ve never heard of the ingredient.
Looking at lutein by contrast, although the companies behind it, such as Kemin Foods, did a great job of explaining the naturalness of the ingredient—which can be found abundantly in spinach—they were never able to overcome the problem that, as Kemin itself admitted, improved eye health and combating age-related macular degeneration (AMD) is not seen as relevant by the majority of consumers, leaving only an ultra-niche of older consumers interested, and these people were best reached through supplements, not food.
Market DominationIt’s a basic rule of business strategy that in most markets there’s generally only room for two leading players—and sometimes a third player, who between them will dominate a category, controlling 80% of the market and leaving the others to fight over the remaining 20% as niche players.
It also tends to be the companies who are first to market who dominate. In Europe’s market for plant sterols/ stanols, for example, which is variously estimated at between $150 million and $180 million, the three companies who were first to market—Raisio Benecol, Cognis and ADM—hold an 80% share between them. That leaves the other 20 suppliers fighting over what’s left and each new entrant—the latest of whom is Procter & Gamble with its Nutraphyl brand of sterols—left wondering how it can differentiate itself and build business.
It’s a similar story for omega 3s, where there are at least 17 suppliers and more entering all the time. Leaders like Ocean Nutrition (which has a more than 40% share of supply into food and beverage) firmly established that new entrants would need exceptional technology, exceptionally aggressive pricing and exceptionally active marketing efforts to have any hope of surviving in this category.
Anyone entering today’s crowded market with a new ingredient needs to have some extraordinary point of difference in terms of benefits or technical performance—but that is something very, very rarely achieved. In practice, the only tool the me-too suppliers have to compete with is lower price, hence driving the commoditization process as they fight for the crumbs.
One tactic that is being followed, and which we’ll see happening more, is that being followed by Canada’s Forbes Medi-Tech, a me-too sterol player, which has yet, its accounts show, to hit profitability. In partnership with a dairy company, it is positioning itself as the supplier to supermarkets, offering them the opportunity to sell private label versions of the branded functional products. It’s a strategy that is off to a good start, with the U.K.’s Tesco (Europe’s biggest supermarket chain), Albert Heijn (the Netherlands biggest grocer) and Finland’s Keskko, all offering a full range of cholesterol-lowering products 30%-40% below the branded offerings from Benecol and Unilever.
There is an argument that space for new players will be created as more food types are able to be fortified with sterols. The reality is that the same false hope was held out for probiotics—but in Europe, Asia and South America dairy applications dominate the consumer product market. Consumers think dairy when they think probiotics and no other probiotic consumer products (bread, cereals, sausages, cookies) have been able to change that.
Similarly, dairy is taking control of the cholesterol-lowering market in Europe, and given the muscle that Benecol, Danone and Unilever are putting into their dairy offerings, dairy will also become synonymous with cholesterol-lowering, as it has with probiotics, and no other food category will be able to come anywhere close to challenging that leadership.
For every ingredient, the likelihood is that one consumer product type will be the dominant format, with only a few ingredient suppliers enjoying real success. You therefore need to be early to market and focused on supporting the formats that fly.
Once again, it’s Europe’s dairy industry that is cornering this new functional food market, innovating with new products, new packaging and now with omega 3, a new ingredient—as it already has with probiotics and plant sterols. No other food or beverage category has played as strong a role in driving the functional food revolution in Europe. So strongly has dairy now captured the platform of added health benefits, it’s questionable whether any other category can catch up. It might just be too late for functional bread or juice.
Dairy’s track record sets it apart: to take an example from the U.K. market—sales of probiotic daily dose drinks exceed $450 million; cholesterol-lowering daily-dose drinks bring in $100 million and omega 3 milk brings over $100 million.
It’s no exaggeration to say that in terms of future developments in functional foods, what happened in the dairy sector—be it in Europe or America—may matter more than any other category.