A Strategic Approach to the European Functional Foods Market

A number of U.S.-based companies have come unstuck by assuming entering the European market for functional ingredients and foods would be relatively easy. Many have had less success than they hoped for, and the effort has taken longer and cost more than projected. Why? The European and U.S. markets are quite different in structure, market positioning, consumer and reseller attitudes and expectations, regulations, labeling and claims, value chain, and even product specifications and packaging.

These differences and variations are not immediately apparent to a business visitor touring with his compatriots. In exactly the same way that Europeans often fail in the U.S. market, Americans assume what works with their domestic consumers will work equally well in other countries. They misread the subtle nuance of consumers’ cultural preferences and neglect the differences in market dynamics, regulation, issues with genetic modification (GM), communication styles and business expectations, as well as the unexpected challenges of operating in different time zones.

These differences can lead American companies to make unwise strategic decisions, such as operating from across the Atlantic with no base in Europe, making agreements with distributors that sound enthusiastic but turn out to be less energetic than they are noisy, or making an acquisition only to find that it was a waste of money, time, effort and resources. These factors highlight why these two seemingly similar markets require a very different approach.

And, let’s face it, even the best partner may fail to sell a product with little market potential, or into a marketplace that is too crowded and competitive, or where the barriers to entry are simply too high or, sometimes, too low.

Not doing the basic market research homework can make the strategic effort a waste of time and money. Conversely, gaining a thorough understanding of the European market early in the process can have a great impact on the outcome by helping companies make informed decisions and implement successful business strategies. An investment in informed and objective advice from people and companies familiar with the European market can be returned many-fold.

Clarify the Market Opportunity

Since the definition of “functional foods” varies so much, the apparent market size can also vary over many orders of magnitude. Before going into this sector, companies must determine the real numbers of the target market—not the fantasy numbers touted in so many multi-client studies. While it is certain the market for functional foods will continue to grow, not every product or ingredient will succeed for that reason alone.

After determining the size of the target market, it’s time to profile the demographic. Interestingly, functional foods have had less success in the United States than in Europe. Americans seem to prefer costly dietary supplements to premium-priced, functionally enriched food. Europeans, while still reluctant to pay premiums for functional foods, have historically viewed dietary supplements with some ambivalence. Attitudes also vary within Europe; the United Kingdom and Sweden skew closer to the U.S. trends, while other countries remain more conservative about food. Differences in consumer perception and cultural habits can strongly affect the way a prospective new market player or entrant approaches the European market.

Market Control

In the United States, food and beverage producers wield enormous power over what’s on supermarket shelves, while supermarkets remain fairly passive recipients. In Europe, where supermarkets earn larger margins than in the United States, they tell producers what they’re willing to stock. Broadly, the consumers’ pulse is taken by producers in the United States, but by retailers in Europe. Further, in the United States, cost is the dominant issue for producers; in Europe, consumers will often pay more for a better quality product.

Low costs and low prices are what U.S. food companies and consumers expect and demand; consequently, the ingredients and technology have to be “good enough,” but not expensive. In Europe, especially in countries like Germany, “good enough” is not sufficient, and both companies and consumers demand and are willing to pay for better ingredients and technology. Companies from both sides of the Atlantic find this puzzling, but have to accept it if they want to succeed.

In another example, American companies may underestimate the continued resistance of European consumers to food from GM crops. GM ingredients are not prohibited, but they have to be clearly labeled, and all evidence to date suggests European consumers are unlikely to accept them anytime soon.

An additional consideration in how the market is controlled is the regulatory oversight. There is no GRAS (generally recognized as safe) protocol in Europe, and many functional foods have to obtain “novel foods” approval, a potentially lengthy and expensive process with no guarantee of success. Label health claims can also be a minefield. Being well-informed can help U.S. companies avoid relying on unrealistic expectations of what to expect from European regulators.

There are many challenges for potential new entrants to the European functional food market. Companies wishing to enter the market should to do their homework; research the market sizes, characteristics and dynamics; understand the differences between the European and U.S. markets; know whether there is a real opportunity; and then decide on the best strategic and tactical approach to the market. There is considerable truth in the old saying that “knowledge is power.”

Steve Lisansky, Ph.D., is the chief executive and Esther Hunter, Ph.D., the chief operating officer at CPL Business Consultants, based in Oxford, England. CPL provides consulting on markets, technology and strategies for business development in food ingredients. CPLsis.com, +44-14-918-29346.