BASEL, Switzerland—Pharmaceutical giant Novartis' decision to put its functional foods division up for sale may lead to further corporate rationalisations in the sector, according to a prominent industry insider.
Peter Wennström, the chief consultant at Swedish-based Wennström Integrated, which specialises in branding advice, said other major players are likely to reassess their operations in the wake of the sale, which pundits estimate could raise $1.25 billion for the Swiss corporation.
He suggested the move reflected a common misconception in the functional foods industry that high-tech brands such as those in the Novartis stable could gain mainstream acceptance.
"Take Aviva for example," Wennström said. "Technically it was a very interesting concept, but it had a lack of brand trust—trust in a brand is very important." Aviva was the ground-breaking line of nine products that Novartis launched into the European market in 1999 and then pulled from store shelves within two years because of disappointing sales.
Wennström said, in the short history of functional foods, it has been the low-tech brands and those attached to well-established brands that have proven most successful. "It is a very clear signal about the nature of functional foods. I have observed similar patterns when a high-tech company enters a consumer-driven market and realises after awhile that it is unable to gain value because it can't leverage its corporate strength, which is high technology. The companies that have been successful are good at branding." Low-tech food companies, such as Danone and Nestlé, were more likely to succeed, he said, because they had established brands in traditional foods from which they could develop functionality. They were also experienced in consumer markets. Perhaps recognising this fact, Novartis entered into a joint venture with the popular US company Quaker, but this has been terminated also.
"Novartis has a lot of good brands there for someone who is focused in the healthy foods/nutraceuticals area, someone with a genuine understanding of branding. I'm sure many of its products will succeed, eventually, but maybe in the hands of smaller, more flexible companies," Wennström said.
Of the impending sale, Daniel Vasella, Novartis chairman and CEO, said, "... we believe [these brands'] growth can be accelerated in companies where there is a good strategic fit."
David Beadle, of London's UBS Warburg investment firm, said Novartis might get between 1.5 and three times sales for the business, which has potential operating margins of 15 per cent.
Novartis' Health and Functional Food division is responsible for products such as Ovaltine, Caotina, Céréal, Isostar, Powerplay, Dietisa and Pesoforma. The company's 2001 sales were about $527 million and it employs 2,400 people worldwide. The sale is expected to take up to 12 months to be finalised.