Development Opportunities for Functional Foods

July 2003

Development Opportunities for Functional Foods

By Kathie L.WrickContributing Editor

Like the word “nutraceuticals,” “functional foods” is a marketing term whose definitions have ebbed and flowed over the years. The U.S. Institute of Medicine of the National Academy of Sciences has put forward a definition for functional foods that appears to satisfy marketers as well as nutritionists and food scientists. Simply put, functional foods are those in which the concentrations of one or more ingredients have been manipulated or modified to enhance their contribution to a healthful diet (“Functional Foods,” American Dietetic Association, 1999). In practice, functional foods are a small but growing segment of the U.S. retail food industry comprised of foods for health and wellness or improved physical performance.

Growing opportunitiesThe large, mature food industry serves as a backdrop to the comparatively spritely little segment that comprises functional foods. This segment grew slightly in excess of 9% in 2002 to $20.1 billion compared to the $518 billion mainstream food industry’s 3% growth (Nutrition Business Journal, NBJ, 2003). The retail value of organic and natural foods was about $14 billion in 2002, with growth slowing from about 15% in the early 1990s to about 9% today (NBJ 2003, 2002b).

The functional-food concept that began to catch on in the early 1990s ran counter to the trend of reducing less-desirable food components, such as sugar and fat. Conservative approaches to communicating health messages relative to the dietary-supplement and natural/organic segments, and the industry’s history of conflict-avoidance with the FDA has resulted in a slower, more gradual start of the functional-foods category than was achieved with dietary supplements following the passage of the Dietary Supplement Health and Education Act of 1994 (DSHEA). But the cautious cultural environment may be just what is needed to sustain a gradual and prolonged growth curve. Clearly the 7% growth rates for functional foods in 2001 and the 9% rate in 2002 (NBJ 2002b, NBJ 2003) will turn the heads of industry executives toward a serious evaluation of their companies’ opportunities in this market. The growth of the entire U.S. food industry in 2002 was at 3%, and is now estimated at $518 billion (NBJ 2003).

The functional-food industry is poised for growth, but faces technical and regulatory challenges moving forward. The same drivers that helped shape the business environment for nutraceutical products over a decade ago are still in place today. Dietary-ingredient suppliers to dietary-supplement companies are seeking new outlets for their products now that consumer interest in pills and tablets has waned. However, incorporation of new dietary-ingredient technologies into food products faces a unique set of challenges.

Technical challenges to growthNot all products can successfully incorporate added nutrients or phytochemicals. Meat, poultry, fish and eggs can have their composition altered by the animal’s diet, but delivery of truly unique health benefits will probably require genetic engineering, which is not yet accepted by consumers. Should consumer skepticism soften, the future might bring genetic alterations to beef and dairy-cow metabolism to produce increased levels of naturally occurring conjugated linoleic acid (CLA) in meat and milk products. There is strong evidence in animals that increased levels of dietary CLA will help convert fat tissue to muscle; however, this finding awaits substantiation in regard to a role in human weight management.

Should these benefits be confirmed, CLA will likely be sought after for addition to other food products, if it qualifies as GRAS at the levels needed to deliver health benefits.

Some foods, such as milk, chocolate and mayonnaise, have government regulations or standards of identity regarding product composition that make adding novel ingredients difficult. Unless these standards are revised, adding novel ingredients may require renaming these products to something that implies “imitation” to consumers. The compositional standards for foods such as chocolate have strong economic and labeling implications in world trade, so little incentive exists to change them to incorporate ingredients that appeal to a relatively small consumer segment. Other indulgent foods, such as ice cream and sweet baked goods, have historically not been candidates for this kind of fortification, because consumers want to retain their tradition as a dessert or a special treat. This may change as consumer attitudes and ingredient technologies evolve. Nutrition bars in the U.S. market have been the creative exception. They use confectionery or bakery technology but are positioned as healthy, not too sweet, low-fat, or, more recently, “low-carb,” satisfying, and delivering energy and a few added nutrients in a portable, convenient format.

New functional-food ingredients may offer formulation challenges as well. Unlike most dietary supplements, which are pills or tablets, functional foods have the challenge of meeting the taste preferences of target consumer groups. Many functional-food ingredients, such as isolated nutrients, phytochemicals and plant extracts, have inherently unpleasant flavors. When added to foods to meet nutritional requirements, levels of vitamins and some minerals are usually low enough that the palate does not perceive many undesirable flavor notes or chalky textures, or they can be masked with other ingredients. Higher levels can cause flavor problems over the shelf life of some products.

Even if qualifying as GRAS, many herbs, plant extracts or other phytochemicals found to deliver health benefits have strong, unpleasant flavors or textures. At worst, their flavors cannot be masked or hidden, and at best, their use can cause delays in the food-formulation process, or increased ingredient costs to achieve sensory targets. Modifying ingredients comprised of complex molecular blends to address sensory problems without compromising health benefits can be a major research undertaking without a guaranteed positive outcome. Resolution of these issues can add significantly to product development time.Meeting marketing needs Functional foods have different marketing challenges than do dietary supplements. Some successful products in the functional-food category have capitalized on long-known diet-health relationships, such as calcium and strong bones, carbohydrates and physical energy, and caffeine and alertness. Very little “low-hanging fruit” is left for marketers. Ingredients providing health benefits that may have a complicated educational message require much more careful positioning. The experience with plant-sterol- or plant-stanol-enriched margarine-like spreads has reinforced the fact that not all consumers with high cholesterol are interested in managing it through diet. And of those who are, many don’t want to use a higher-priced, though good-tasting spread multiple times a day, even if it makes their cholesterol go down.

These products developed a small, but very loyal consumer following; however, mainstream U.S. consumers who might be at risk for heart disease were not necessarily responsive to a product positioning that reminds them of it. Chronic diseases such as hypertension, diabetes and cardiovascular disease have no demographic boundaries.

Identifying the target consumers within a group of people who suffer from a particular disorder usually requires psychographic segmentation and knowledge of consumer purchasing patterns in order to estimate potential market size. Market research tools do exist, although this research is expensive.

Marketing a functional food to address a specific medical condition has not proved successful in the eyes of the mainstream food industry, as this strategy appeals to a relatively small consumer segment and will not generate the revenue needed to satisfy shareholder expectations. Large food companies are generally not interested in products with a market potential less than several hundred million dollars. Industry is now betting that consumers seek positive nutrition in general for overall health and wellness, outside of the context of preventing specific diseases.

The health benefits of a high protein intake for weight loss as part of a low-carbohydrate diet, calcium for strong bones, and dietary fiber and probiotic bacteria for gastrointestinal health are now promoted in a wide variety of functional-food categories that are growing at attractive rates. Collectively, these health and wellness products are now about as popular as vitamin-fortified products, with a 49% and 46% share of 2002 functional food sales, respectively (NBJ, 2003). These are the ingredients around which marketers have tried to craft a health message that appeals to consumers and stays within the limits of FDA labeling regulations and FTC rules on consumer-product advertising.

The concept of functional foods with key ingredients responsible for a particular health benefit may shift as marketers change their focus from foods for disease management and prevention to a broader message about health and wellness. Ingredients associated with good health, but without a link to disease, could be used in products marketed to a larger audience. The soy market gives a clue to this trend: That soy is a healthy alternative to meat and dairy protein may be the only message needed for consumers to feel positive and for marketers to avoid regulations that can be cumbersome.

Driving developmentSome industry drivers that favor gradual, long-term growth of functional foods should provide encouragement to consumer-product companies frustrated with the long product-development process required by some functional foods.

For one thing, baby boomers now comprise about 27% of the U.S. population, and are generally interested in good health (Healthy People 2000 Final Review, National Center for Health Statistics, 2001). For this demographic, the food-health connection is already made, although some subsegments may need more convincing about the link between foods and disease prevention to change buying behavior.

Second, Americans of any age will always eat food for energy and basic nutritional needs. But many people view dietary supplements beyond a multivitamin-mineral preparation as expendable. This means there will likely be a place for food products as a source of new health benefits. The pressures of our 21st century lifestyles have led us to become a nation of grazers, who eat when we can, whether walking to work, riding a bus, changing planes at an airport or driving a car. Nonetheless, while the supplement industry addresses the challenge of winning over new consumers, most Americans don’t take supplements regularly, but they all eat food every day.

Third, although some dietary supplements may claim to suppress appetite, supplements in general will never satisfy hunger when someone has gone for extensive periods without eating. Only food can do that.

Functional foods have the potential to be a major growth driver for the food industry; however, the right mix of market research, marketing, science, branding, distribution, pricing, taste and convenience has been elusive. The pioneers in functional foods, including Kellogg (Ensemble), Novartis (Aviva line) and McNeil (Benecol), all had mainstream ambitions for a business that appeared stuck in a niche. Nonetheless, functional foods have the potential to be premium brands, even within product segments that either are at or approaching commodity status.

Ocean Spray and especially Tropicana brands are preeminent examples. Ocean Spray cranberry beverages saw significant incremental sales after promotions explaining the science supporting cranberries’ role in preventing and managing urinary-tract infections. NBJ (2002b) reports that Tropicana’s venture into functional foods has built its citrus beverages to a $1.4 billion brand. If Soyatech Inc.’s forecasts are correct (“Soy foods: The U.S. Market 2002”, 2002), soy-food sales will approach this figure by 2005. A health and wellness marketing trend for mainstream foods currently underway positions products with health benefits as being “good-for-you” or “better-for-you,” rather than designing them to prevent specific diseases. If successful, this trend will help functional foods remain one of the larger growth segments in the mainstream food industry.

Kathie L. Wrick, Ph.D., R.D., principal of Food, Health and Nutrition, TIAX LLC, Cambridge, MA, can be contacted at [email protected]. TIAX LLC, Arthur D. Little’s former technology and innovation business, creates business opportunities and growth through the power of science, technology and innovation. This article is excerpted from the forthcoming book “Regulation of Functional Foods and Nutraceuticals: A Global Perspective,” edited by Clare M. Hasler, Ph.D., M.B.A., and published by Iowa State Press, Ames, IA ( www.iowastatepress.com). Copyright 2003 Iowa State Press.

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