Unilever buys Bestfoods in the U.S., which jumps them up to rival Nestlé as the world's largest food company. Durk Jager, CEO of Procter and Gamble, resigns with poor financial results. For the world's senior food executives the game is about profitability and buoying stock prices. And that is the exact same recipe that is fueling the investigation and involvement by major food companies into nutraceuticals and functional foods. Let's look at why companies cannot afford to overlook this trend.

Business is tough and turnover in the top spots seems to reduce the tenure of CEO's to shorter and shorter terms. This is particularly true in the U.S. food business where such firms as Campbell and Kellogg have had changes based on company performance and those management changes impacted those firm's projects. Add Procter and Gamble to the list. After only 18 months Mr. Jager resigned. He had been decisive, tough and had made sweeping changes. What drove the man to resign? Slow growth and poor financial performance. In his own words, "I am proud of the vision we set out to achieve with Organization 2005 and we've made important progress. It's unfortunate our progress in stepping up topline sales growth resulted in earnings disappointments" (P&G press release, June 8, 2000). Many P&G brands reportedly lagged behind other companies' performance and stock prices for P&G have dropped precipitously since the first of this year.

These are exactly the factors driving the food industry. They center around branding, competitiveness and resulting stock performance. Food companies, many with disappointing financial results, are looking to their future. And some are acquisition targets, while others will likely seek merger possibilities.

The food business has suffered from slower growth than other industries. It is that slow growth that is transforming firms who are looking for items that will propel their business along. Many firms have sought new products. However, you cannot neglect current brands and efforts to make those current brands grow. The greatest successes in functional foods thus far have been the acceleration of brand growth through health or structure function claims. Tropicana is the prime example of a brand that has become the star of Pepsico, growing the category, increasing share and strengthening an already strong brand. Quaker Oats has grown an old brand into a first-class functional food with a health claim. Ocean Spray has combined good marketing practices of packaging, distribution increases and item proliferation with a strong underpinning using public information about the benefits of cranberry juice and urinary tract health to build their business. Thus, touting the functionality of products for health benefits is giving certain brands new life.

The other major result in a food industry driven by profits and stock prices is consolidation. Unilever bought BestFoods to increase its stake in the U.S., gain another profitable unit and become an even more important global player. Nabisco will likely be part of another firm by the time the ink is dry on this column. At a recent conference in Italy it was concluded that if you don't have one of the top three positions in an in­dustry you are not likely to have major impact. Unilever wants to assure its spot, either as number one or two. Kraft is now threatened as it falls to number three. Kraft is also the only one of the three firms that has bought two brands in the healthy food/nutraceutical arena but has not yet directly developed new products in food-based nutraceuticals.

What do nutraceuticals have to do with all of this? Nutraceuticals represent a potential for growth in the food industry. In addition to the examples of food brands that have been strengthened by functionality claims, we can clearly look at the growth in the natural products industry, which has been in the double digits consistently for nearly a decade with increases above 20% for a number of those years. As traditional products from the natural products industry have migrated to mass retailers in both the grocery and drug trades, traditional food manufacturers have been spurred to grab a part of this growth. Those retailers have added products to their assortment that were traditionally sold only in natural products retailers. Why should traditional food manufacturers be missing out?

In addition to pure product volume in­creases, most natural products and nu­traceuticals provide a real value-added to the consumer, which means they command higher prices and higher margins. Those margins can assist the profitability of traditional food manufacturers.

Thus, it makes sense for food manufacturers to be entering either nu­tra­ceuticals or natural products in some way. The difference between them may be in the degree of long-term potential. Making an orange juice that tastes good and adds to bone health may lead to greater overall market potential than jumping into vegetarian products. Participation in nu­traceuticals is less about jumping into a new market and more about increasing sales, share and profitability that will lead to increased stock prices.

What do we expect? I rarely go out on a limb with predictions as my crystal ball is no better than yours, but we do expect more consolidation in the industry. The top two firms in the global food industry are now European firms. Will number five Danone try to improve their ranking? Or will two of the American giants merge to move further up the ladder? I predict both. Which ends up as number four is not predictable but let's watch for a major U.S. merger while Danone will likely look for some global acquisition target. Danone may be more likely to buy brands than to buy a firm. Each of the major firms will continue to be very active in functional foods and nutraceuticals. Suppliers and packaging firms will play an in­creased role in helping food firms find a sustainable advantage. Look at the role P&G played in providing the unique calcium found in Tropicana orange juice.

If we think the food industry has been exciting in the past year, as the song goes, "You ain't seen nothin' yet!" Just keep in mind it's all about getting the growth, the share and a healthy stock price!

NW

Greg Kitzmiller is a marketing faculty member at Indiana University's Kelley School of Business, Bloomington, IN. He is also on the Board of Advisors and is part of the faculty for the Johnson Center for Entrepreneurship at Indiana University 's Kelley School of Business. He combines international and domestic strategic and marketing management experience with university teaching, professional speaking, executive education and consulting. Mr. Kitzmiller can be reached at 1309 East Tenth St., Bloomington, IN 46405-1701; 812-855-1004; Fax: 812-855-6440; E-mail: gkitzmil@indiana.edu.