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    Features

    Key Trends in Functional Foods

    It's not just a credit crunch; it's crunch time for nutrition strategy.

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    Julian Mellentin11.01.08
    While no one knows what's going to happen as a result of the crisis in the international credit markets, it is clear that business and consumer sentiment is turning pessimistic. The European Commission forecasts recession for the U.K., Germany and Spain (and Denmark and Ireland are already in recession). According to the London Financial Times, in Japan, Europe and in the U.S., surveys of manufacturers are bleak with readings suggesting output is falling. The chairman of Morgan Stanley Asia reportedly told delegates at a recent conference in China that the U.S. consumer is "toast, done, finished."

    But an economic decline does not necessarily mean calamity for the nutrition business. Japan's functional food market, for example, was still embryonic in 1990, when the country embarked on its "lost decade"-a financial crisis that led to 10 years of little or no growth, leaving property values at about 40% of their 1990 values and the Nikkei stock index 70% off its 1989 peak.

    Yet for nutrition and health in Japan the 1990s was not a "lost decade." In fact, by 2001 the combined retail value of supplements and functional foods was more than $23 billion. As one senior Japanese industry executive summarized it: "The economy went down and nutrition went up."

    In the west, too, perhaps 20% to 25% of consumers (according to various sources, including Health Focus and retailer Tesco) are strongly motivated by health, and if Japan is any example, even in tough times health-conscious people, whatever their income level, will most likely include one healthy choice in their shopping.

    The key to prospering in the years ahead is to make sure that your product is the healthy choice the consumer makes. That choice will be based, as it is now, on whether-as Swedish brand strategist Peter Wennstrm explains it-the product is in a format that matches the consumer's lifestyle; offers a benefit that they believe is relevant to them; is based on an ingredient that they can accept; and exists under a brand they can trust.

    It is more important than ever for brand owners to focus clearly on these "four factors of success."

    These factors also matter more than ever to ingredient companies. Even upstream suppliers will need, more than ever, to understand the final consumer market and know how to help their customers-the packaged good companies-to reduce their risk of failure by creating product concepts that make sense to the consumer.

    The effect of a slowdown will be to reinforce the core nutrition business trends and sweep away the fads and the peripheral ideas. What brands and ingredients might benefit most? The answer is, as now, the ones that give a benefit that the consumer can quickly see or feel. This means, for now, products for digestive health and energy will remain strong.

    Benefits Consumers Can Feel: Digestive Health & Energy



    One of the biggest advantages a product can have is to deliver a benefit that consumers can quickly feel. Probiotic dairy products for digestive health enable consumers to "feel the benefit" of better digestive health quickly-thus creating a significant competitive advantage. This benefit is a key way of creating brand loyalty.

    Energy drinks deliver a benefit that is immediately effective and detectable. If the twenty-somethings who want to party all night long can feel that energy-boosting benefit then they become-as they pretty much already have-loyal consumers. And it is not only young clubbers who feel the need for a shot of energy. Time and again consumer research fingers "lack of energy" as a key consumer interest-for stressed executives trying to stay on top of their responsibilities, for harassed and time-pressed mothers, for older people who want to stay active and for anyone struggling to get through a sleepy afternoon in the office.

    It's no accident that in the well-developed Japanese market the single-biggest functional brand is an energy drink from Otsuka Pharmaceutical, which has retail sales of more than $450 million. Energy is also a high priority in Europe and the U.S., as evidenced by the success of Red Bull, which has combined retail sales of more than $5 billion.

    Having energy, like good digestive health, is a "wellness" issue, not (like cholesterol-lowering products) a "death and disease" issue.

    In Europe, products for digestive health account for 50% of the functional food and beverage market. In Japan-where the functional food concept was born and where the business is now 20 years old-products for digestive health account for almost 50% of the $3.4 billion FOSHU market (the portion of the functional food market that makes regulator-approved health claims) and 34% of the non-approved functional foods business. Six of the top-10 FOSHU brands in Japan target digestive health.

    New Niches for Probiotics



    Companies worried about how to make money from functional foods at a time when consumer spending is set to become more restrained can take heart from the example of the Dutch market for probiotics.

    The world's 16th largest economy, the Netherlands is also ranked as one of the leading free-market economies in the world. It also has, along with Germany, a well-deserved reputation as one of the most price-competitive markets in Europe. For example, the same brand will retail for around 10% less in the Netherlands than it would in the U.K.

    But this has not held back the development of a premium-priced probiotic market. About 15 years ago, the first probiotic brands debuted. By 2007, sales of probiotic dairy drinks were more than 149 million ($200 million), and according to Nielsen data, showing 9% growth in 2008. The brands that dominate the market-Danone Actimel (branded DanActive in the U.S.) and Yakult-sell at very high prices, measured on a price per litre basis.

    The focus on creating value-which Danone has done in Europe even as sales of its traditional low value-added lines slipped in the face of low-price private label competition-is what the company calls "valorizing." Juan Carlos Dalto, Dannon's president and CEO, was quoted last year as saying: "You can do business by commoditizing the category. We don't want to do that. We must immediately bring value to the consumer. If you do that, we believe there are no limits to the category. It's the best answer in times of crisis."

    The window of opportunity for "me-too" digestive health probiotics has closed. In both Europe and Japan the probiotic dairy market has come to be dominated by just a few large players-such as Danone and Yakult-as will also happen in the U.S. Anyone looking at probiotics now has to have a new point of difference that can be achieved by segmenting probiotic benefits according to age, gender, health conditions or product format. Here are three examples:

    Innovation in product format: In America in 2008 Kraft launched the first mass-distributed shelf-stable probiotic nutrition bar. Many companies are trying to deliver cost-effective, and technically effective, delivery mechanisms for probiotics that will allow them to be used in shelf-stable products, but Kraft instead chose a bacteria-L.plantarum 299v, supplied by Probi of Sweden-that needs no encapsulation or protection, and in fact thrives on the open shelf.

    Innovation in benefit and format: In Sweden, Skne Dairy this year launched an extension of its very successful Pro Viva probiotic fruit juice drink-like the Kraft brand, based on L. plantarum 299v-called Pro Viva Female. The line extension is based on clinical evidence that the probiotic can improve iron uptake in women. The product differs little from the parent brand except that it contains a small quantity of iron, but this point of differentiation allows the brand to charge a higher price.

    Innovation in benefit: In Japan Yakult Honsha is finding success with a product that takes the company beyond its traditional probiotics-for-digestive-health focus. In blood pressure lowering it is now the biggest player-possibly in the world. Yakult developed a patented process to produce gamma-aminobutyric acid (GABA), an important neurotransmitter in the central nervous system, which can have an anti-anxiety effect and lower blood pressure. The process is based on fermenting two lactic acid bacteria. Yakult launched its technology in a dairy drink format under the Pretio brand in late 2004. By 2007 sales had hit $53 million and were still growing at more than 15% annually. The brand was both growing the niche and displacing an established peptide-based brand.

    Weighing in on Weight Management



    Today, weight management is where probiotics used to be. Most companies have yet to figure out exactly how to successfully create, price, position and market a weight-management brand. Many of the possible active ingredients in weight management products are expensive-and working out how to use them to make a product that will sell at a price people are willing to pay is not proving easy.

    European dairy companies are ahead in finding a solution. Thanks to a very promising first year's performance by Campina's Optimel Control dairy drink in the Netherlands and Germany, we can clearly see the components of a successful weight management brand:

    A benefit you can feel: The active ingredient in Optimel Control is Fabuless, an emulsion of oat and palm oil from DSM Nutritional Products, which has been clinically proven to cause a feeling of satiety.

    Relevant to the target consumers: Marketed with the simple claim, "Helps you eat less," Optimel Control focuses on a target group of people who are only a couple of kilograms overweight-in other words, healthy people with a small and manageable weight problem. It is these people who will make the best target for weight management products, not the obese, whose problem is a medical one.

    Packaging innovation: One of the key lessons of the last 15 years is that packaging innovation is important in differentiating a brand-as important as the benefit offered and as important as the underlying science, if not more so. Optimel Control comes in a 100 ml "daily dose" package. That's a perfect choice, for a weight management product is a true "individualized nutrition" product, consumed by one person in the family and not for family consumption. Any package that supports that nutritional individualization and makes the product more convenient is a good choice.

    Super-premium pricing: Even more important, using single-serve as the basis for a brand and using packaging innovation intelligently opens the door to achieving-while also concealing-super-premium pricing. Each 4-pack of 100 ml bottles of Optimel Control retails for 2.77 ($4.37), a price equivalent to 6.92 ($10.92) per litre. By comparison, regular branded drinking yogurt retails in a 1-litre carton at 1.24 ($1.96) a litre. In other words, Optimel Control is priced at a 450% premium to regular products.

    This proved to be no barrier to Optimel Control achieving retail sales of 8.8 million ($13.7 million) in the Netherlands, a country of just 17 million people, in 2007, its first year on the market. Pro-rata Optimel's sales figures to a market the size of the U.S. and it would be a $100 million brand. In Germany the brand's sales were three times that.

    What makes the achievement all the more remarkable is that it has been achieved in two of Europe's most price-sensitive grocery markets.

    In the U.S., the recent GRAS (Generally Recognized as Safe) approval of Tonalin conjugated linoleic acid (CLA), from Cognis Nutrition & Health, opens the door to the creation of new brands. An example of how it has been used successfully comes from the dairy industry in Spain, where the Naturlinea brand, which uses Tonalin CLA, has grown to become a 50 million ($70 million) brand since 2004.

    The brand communicates that CLA is a natural ingredient, derived from safflower, and the health claim used on the package says: "Helps to reduce body fat." The label also carries the Tonalin brand ingredient symbol with the words: "Contains Tonalin, clinically tested."

    Stress-Testing Beauty & Anti-Aging



    In last year's functional food update, I wrote that in Europe 2007 was the year when "beauty food" debuted and 2008 would be the year that would test whether the concept could succeed. What 2008 has taught us is that beauty and anti-aging may be settling down as an ultra-niche.

    The launch of Danone's Essensis yogurt brand in 2007 was a bold move. Packaged in an eye-catching shade of rose, Essensis is a yogurt that carries a claim that it will "Nourish your skin from the inside," with the benefit delivered by the ingredient complex "ProNutris"-vitamin E, green tea, probiotics and borage oil.

    Beginning in France and Spain, Essensis got a warm reception from consumers and the launch plan was accelerated. By late 2007, however, it had stalled. Danone does not disclose sales, but industry sources estimate that the brand peaked at no more than 50 million ($70 million) in retail sales, Europe-wide. If true, that's well short of the 100 million ($144 million) target Danone said it was aiming for. Industry executives say that in France the brand's sales fell in early 2008, prompting a re-launch.

    Among the reasons may be that it is merchandised in the supermarket-alongside the regular yogurt. That's not a place where a brand can acquire any cachet or mystique. Moreover, it's easy for consumers to see that the brand is priced at a high premium compared to regular yogurts. French consumers have been tightening their belts in 2007 and 2008-and Essensis just isn't differentiated enough to justify a price premium. Its only point of difference from other yogurts is the beauty benefit.

    By comparison, Nestl's current launch in the U.S. of its Glowelle beauty beverage looks much better aligned to the market. Glowelle is a rare example of a new launch that innovates from every angle. It even acknowledges the reality that functional foods are a high-value, low-volume niche. If it doesn't work, the reason will most likely be that women are not yet ready for beauty drinks. Glowelle's points of difference include:

    1. Innovation in ingredients: Although it's a product that represents the excellence of food technology skills, Glowelle in fact conveys a strong message about the "naturalness" of its ingredients. The ingredient list features cocoa extract, apple extract, pomegranate extract, green tea extract and others, while the flavors of the products are derived from fashionable fruit, such as pomegranate, raspberry and lychee. The types of ingredients used figure in the strategies of an increasing number of ingredient companies, such as Cognis and DSM, which have formulated vitamins, antioxidants, carotenoids and polyphenols for use in beauty beverages. The success or failure of Glowelle will impact their destinies.

    2. Innovation in packaging: Retailed in a 260 ml bottle, as well as stick packet powder form for adding to other drinks, Glowelle recognizes the reality that most foods and beverages for health are for individual consumption-not family consumption.The package design itself also looks right for a product that is in essence a cosmetic, with a slightly clinical look.

    3. Innovation in distribution: Supermarkets are often the worst place to sell a product. Your package can all too easily become invisible among the thousands of other products cluttering the shelves-and finding the right aisle to put your product can be a nightmare. Where better to sell your beauty product than in the beauty and cosmetics section of a very upscale department store such as Neiman Marcus-a place where women go with beauty on their mind and where they are used to taking the time to browse and sample. Functional brands feature a high amount of information-there's a lot to explain about what they are and how they work. This is precisely why Glowelle is being heavily sampled in the beauty area, where there will be knowledgeable staff on hand to explain the product-which is what consumers expect beauty brands to do.

    4. Super-premium pricing: The Glowelle strategy recognizes from the outset that "beauty" is a niche-perhaps an ultra-niche-opportunity and is priced accordingly. Priced at $7 (4.90) for each 260 ml bottle, that's equivalent to an impressive $27 (18) per litre. Put another way, on a price per litre basis Glowelle retails at:
    A 270% premium to a premium brand such as POM Wonderful pomegranate juice.
    A 1045% premium to a mass-market superfruit brand such as Minute Maid's Pomegranate-Blueberry juice.

    Given the very expensive array of ingredients and the marketing costs involved, Glowelle'spremium price is necessary.

    While wobbles in America's financial world and the mortgage woes of ordinary people might bite into the sales of mass-market products, in a country such as America there's still a large niche of people whose wealth is at a level far, far removed from ordinary mortals. And these wealthier people shop at Neiman Marcus.

    The worst thing a company could do now is aim a product like this toward the average person. Better by far to build up an elite following and leave moving into the mass market to some future date when conditions allow it.

    If Glowelle succeeds as a super-premium, ultra-niche product, then the beauty foods market will be confirmed as a profitable niche opportunity for brands that are willing to innovate and obey the marketing rules of the cosmetics market.

    If Glowelle fails, despite its innovative approach, then it will present the question of whether beauty foods really have any future at all.

    Beverages & All-Natural: The Future of Functional Foods



    It's no accident that most of the brands mentioned in this article are beverages. In the nutrition business it is in beverages that most success stories are found. Beverages also represent the category's future. In Japan, for example, 12 of the top 20 functional brands are beverages. The reasons for their dominance include:

    superior convenience
    more room for packaging innovation, which is vital in capturing consumers' attention on crowded supermarket shelves
    beverage formulators are particularly skilled at making most things taste good
    consumers are more willing to experiment with beverages
    it's easier for consumers to accept them as a snack (no change needed to their eating habits).

    It's for reasons such as these-and savvy marketing-that brands such as California-based Function Drinks have been able to make rapid headway. As a result, Function Drinks' sales jumped to more than $30 million in the space of three years.

    There's a big group of consumers for whom the message that a food is naturally healthy is one of the most persuasive in food marketing today. It's for this simple reason that juices based on cholesterol-lowering plant sterols have bombed in the European and U.S. markets, while pomegranate juice, marketed for its natural heart-healthfulness, has massively outsold such products (by a factor of at least five to one). Fortunately the consumer groups who look for "naturally healthy" products are the same ones willing to pay much higher prices than has traditionally been the case.

    One of the biggest beneficiaries of consumers' desire for "natural foods" have been fruit drinks. Makers of juices and smoothies have been particularly successful in combining convenience, health, taste and "naturally healthy" in consumers' minds. And there's no sign of this trend slowing down.

    However, it isn't enough to simply add a health ingredient to a fruit drink and hope for the best. Tropicana's Healthy Heart omega 3 fortified juice, for example, has achieved around $25 million in sales, according to IRI data. Unlike many of the examples discussed throughout this article, no attempt was made to differentiate the product along any parameter other than the ingredient and its benefits-and the challenge for omega 3s is that the benefits in terms of heart health don't offer a big enough point of difference in a supermarket that's crowded with products making heart health claims.

    The skilful use in marketing of the connection between a high level of antioxidants in a juice and heart health benefits has completely redefined strategy for anyone looking to market a heart-healthy product, and while pomegranate and high antioxidant juices can make a "naturally healthy" connection to heart health, omega 3 fortified products look "less natural" by comparison and therefore less interesting to the consumer.


    Mood Food: We Were Too Early



    Last year we identified mood food as a trend. But re-evaluating one year later we have to admit that it's looking more like a micro-trend. While this is an important benefit area with a wealth of ingredient possibilities, companies have yet to find their feet-and the "how to succeed" part is still being worked out.

    Summary



    There's a big difference between a trend and a fad. Many of the forecasts made for functional foods and beverages in recent years have proven to be wrong-such as the booming market for cholesterol lowering that we were promised or the claims that eye health would be big in beverages. What has emerged are some consistent, long-term trends, each of which presents a brief window of opportunity for companies to carve out a place before the market gets established.

    What has also become clear from the last 15 years of functional foods is that, whatever market you are aiming for, your strategy must incorporate as many as possible of the following elements: focus on being an expert brand-one simple benefit; focus on a benefit the consumer can quickly feel (or teach them how to feel it); support the brand with good marketing and consumer education; focus on appealing to the niche of most health-conscious consumers; and focus on premium pricing and sales targets based on value, not volume.

    About the author: Julian Mellentin is an expert on the business of functional foods and has been involved in this area for 15 years. Mr. Mellentin is the editor of New Nutrition Business, a long-established international journal on the global nutrition business. He can be reached at 44-20-7533-6595; E-mail: julian.mellentin@new-nutrition.com; Website: www.new-nutrition.com.
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