Functional foods are growing with even more big corporate commitment than before, while supplements slow in growth. Yet key developments in supplements keep the category interesting and suggest a future sales increase as major players enter the supplement business. Every major food corporation from Nestl to Kraft is involved in nutraceuticals. And powerhouse Johnson & Johnson forges ahead with a new supplement brand. Meanwhile, smaller supplement makers continue to shoot themselves in the foot with poor quality, according to laboratory tests.
How do the big companies establish big brands in the nutraceuticals arena? The first answer is to acquire them. Kraft recently completed the acquisition of approximately $140 million of annual sales volume by buying Balance Bar and Boca Burger. The Boca Foods business yields over $40 million annually while Balance Bar had yearly sales of $100 million. Nestl bought the competing PowerBar, which has annual sales of $130 million, making it the leading nutritional bar in the U.S. As the world's largest food company, Nestl intends to expand this brand globally. An acquisition strategy makes sense for many of the large firms. Those world players would rather invest in an already growing brand than try to grow one from scratch. Most of these brands that become acquisition candidates have taken years to grow.
Other firms are entering the market through joint ventures. Quaker has teamed with Novartis to form Altus Food Company. This is a true intersection of food and drug in a functional food creation. This is a 50/50 investment and profit sharing venture relying primarily on the development capabilities of Novartis and the flavor technology and marketing muscle of Quaker. The stated focus is on women, children, athletes and maturing adults. The company's strategy consists of three key ingredients: scientifically proven health benefits, great taste and convenience. They seem to have a good understanding of the market drivers and some important segments to target. Time will tell if they can bring proprietary products to market (for more information on Altus, see this issue's Industry Innovators article, beginning on page 30).
To blur the distinction between supplements and foods, large food companies have entered the U.S. market with probiotics. Nestl has now begun marketing its "LC1" supplement, which provides Lactobacillus johnsonii, a probiotic, in the U.S. through drugstore.com and GNC. LC1 is already marketed in Europe. ConAgra formed ConAgra Functional Foods, part of ConAgra Nutrition Company, and introduced a new dietary supplement named "Culturelle." The company claims it is "the first to introduce Lactobacillus GG in supplement form in the U.S. and the only company that has the rights to sell it in North America. Culturelle is available in capsule form at select drug stores and grocery stores." This clearly shows that the probiotic and prebiotic business is likely to extend from Europe into the U.S. The big difference is the delivery form, which in Europe is in dairy products and in the U.S. has started primarily in the supplement category. There are exceptions, of course; Danone (Dannon) is selling its "Actimel" product in the U.S. in test market.
These products will help retailers redefine supplements and the makers of supplements. Firms such as Danone and Nestl would certainly not be the first companies named when profiling the U.S. dietary supplement business. Yet with Danone leading the world in bottled water and yogurt and positioning itself as a company of healthy brands-Danone/Dannon, Evian, Volvic- it has the knowledge and muscle to help retailers.
In the supplement business, add McNeil Consumer Healthcare, marketing "Aflexa" brand glucosamine in test market. And where else would you test market a glucosamine from a tested major company than Florida, the U.S. headquarters of retirees and seniors? Just to be certain they get the connection, McNeil touts, "from the makers of Tylenol" very clearly on the label.
Why would this Johnson & Johnson subsidiary test a glucosamine product when there are many already on the market today? The smaller dietary supplement makers continue to shoot themselves in the foot with poor quality! Consumerlab.com has now done several major surveys of supplement products and continues to find supplements lacking labeled ingredients. In its recent analysis of arthritis supplements containing either glucosamine, chondroitin or both, this testing lab found one-third did not contain label ingredients. In fact, half of the combination products contained low levels of chondroitin. It must be noted that all ten of the products claiming only glucosamine on the label did pass the test for ingredient content.
Consumerlab.com had previously tested products labeled to contain saw palmetto, known for prostate health, and ginkgo biloba, known for assistance with mental acuity primarily among the elderly who've shown signs of dementia. In each case, a number of brands fall short on label claimed ingredients. This suggests the continuing product quality problem in the supplement industry that makes that category vulnerable. Yet, despite these industry-created problems, consumers clearly look to supplements as a major part of their self care.
More Americans use supplements and use a wider range. A recent Prevention magazine survey shows an estimated 158 million in the U.S. use $8.5 billion in supplements. This number appears just a little low to us from our work with the Council of Responsible Nutrition industry group last year. I'd suggest the low estimate is from asking consumers what they use, as consumers can easily under-report. Directionally the survey shows some important opportunities and issues. Prevention says less than half (41%) of consumers think vitamin/mineral supplements are very safe. Only 24% think herbals are very safe. Yet, 22.8 million consumers say they use herbals remedies instead of a prescription product and 30 million say they use herbals instead of an over-the-counter drug. Over 19 million say they use prescriptions and herbals together while the same number, 19 million, use OTC's and herbals together. This suggests potential interaction problems since supplements do not need to label drug interactions. In fact, the survey reports that nearly 12 million users have reported an adverse reaction from using herbal supplements. Of course, we know from labeling concerns that it is possible the reaction was from another ingredient than the herbal they thought they were buying. There is clearly room for the supplement industry to provide more information and mandate quality standards. There is also a reason to believe there will be more government intervention. This creates a perfect environment for major firms like Danone, Nestl and McNeil to move forward in the supplement field.
We shall likely see more acquisitions and perhaps another joint venture. As I write this it is hard to predict what will come of a joint venture between Monsanto (the self declared life-sciences giant) and Pharmacia-Upjohn. Strategically we can predict that the big will get bigger. We can also predict there will be many changes in the nutraceutical and functional foods market place in the year ahead.
NW