By Bob Jones, Scientia Advisors, BJones@scientiaadv.com

Foods fortified with nutritional ingredients that target specific health conditions are invigorating the U.S. food industry

Functional foods are a growing segment within the foods and beverages industry, and many wonder, “Is this just a fad, or is it a sustainable business?”  This is definitely not a fad; it is the early stage of a movement that is here to stay.   That is not surprising, given the aging population, the increasing number of people who are overweight or obese, and the increase in incidence of chronic disorders.  Health and wellness is on the consumer's mind, and more and more believe that there is a connection between diet and health.

Functional foods are defined as “foods that provide a health benefit beyond basic nutrition.”  An analysis indicates that the total global market will grow at a compound annual growth rate of 7%/year through at least 2012.  Considering only the basic categories of foods, beverages and “lesser-evil” foods, the global market for these finished goods will be almost $200 billion in 2012.  Including sports nutrition, herbs and botanicals, and meal replacements will bring the total to $270 billion in global sales for 2012.

Four factors are driving this sustained growth:
· The need is increasing.  As the population ages, the number of people with chronic disorders (such as diabetes, cardiovascular disease and GI diseases) is increasing, and chronic disorders should be managed every day, which means that these patients require more treatments than people with an acute condition (such as a broken leg).
· The cost of healthcare is reaching unsustainable levels.  In 2006, global healthcare spending was $5 trillion.  The U.S. was responsible for 38% of that amount, a staggering 16% of the country's gross domestic product.  Chronic medical conditions are typically treated with drugs and devices, and these are expensive.  Functional foods can help manage these chronic conditions less expensively, which reduces the burden of health care costs.
· The media is reporting the advances in nutrition science.  Consider the number of scientific and newswire articles about omega-3s published each year.  Both numbers are increasing.  Interestingly, the number of mainstream articles has exceeded the number of scientific articles in recent years.  The combination of continually increasing scientific support and continually increasing media publicity is fueling consumer adoption.
· Foods that deliver medical benefits can command higher prices.  Obviously, pricing is a part of strategy, so not everyone chooses to charge more.  However, many finished goods providers are very comfortable charging a premium of 30% or more for a traditional product (such as yogurt) that has been fortified with a functional ingredient (such as probiotics).  The simple notion is “charge more for foods that do more.”

Which Segments Will Grow the Fastest?
The two fastest-growing segments will be probiotics and bioactive lipids (omega-3s and phytosterols).  Both of these will grow faster than 15%/year for the next few years.  Closely behind that will be some (but not all) segments of the fiber market.  There are clear health benefits associated with each of these categories, and many consumers are already educated about the connection between the health benefits and the ingredients.

How’s the Science?
There is a substantial body of elegant and compelling clinical evidence supporting the health benefits of omega-3s.  In fact, one prestigious group of scientists recently declared that omega-3 fatty acids are “essential for life,” which is a powerful statement. Some of the other categories offer science that is promising but not yet sufficiently advanced to be persuasive, and some are simply ridiculous.  However, there are certainly functional ingredients that can be incorporated into a finished good with complete confidence.

Is There Anything to Look out for?
Definitely.  A number of well-regarded companies have met with failure in their initial forays into the field of health and wellness.  Success requires addressing and coordinating 8-10 critical factors, including picking the right delivery vehicle, making sure you understand the regulatory requirements, and confirming that you have picked the properly motivated prospective customer.   These sound obvious in hindsight, but many companies have excelled at two or three of these, and ignored the remaining five to seven at their own peril.

Market Leaders are Already on This Bus
The movement toward health and wellness via nutrition and functional foods is growing and will be here to stay.  The growth rates are exciting, and the underlying drivers (increasing need, economic pressures, media involvement, and the ability to charge more) will support that growth for years to come.  The science ranges from established to emerging, and like every new business, there are start-up risks.  However, the market leaders have already made decisive commitments to this field.  If not already on the bus, consider getting on board.

Bob Jones, principal, Nutrition and Functional Foods with Scientia Advisors, leads the Nutrition and Functional Foods practice for Scientia Advisors.  He can be reached at bjones@scientiaadv.com and at 617-299-3011.  Scientia Advisors is an international management consulting firm specializing in growth and operational strategies for major and emerging companies in healthcare, life science, nutrition and biotechnology.

Other Web Resources
Fortifying Milk with Iron
Fatty Diet for Focus
Benecol Can Make Health Claim
Exclusive: Survey on Functional Ingredients
Study: No Support for Probiotic Health Claims
Probiotics in Ice Cream
Palm Oil as a Nutraceutical
ADA's Position on Functional Foods

From the March 15, 2010, Prepared Foods E-dition