As the recession took hold in 2008-2010, the retail food and drink industry’s growth trajectory slowed down considerably, with few exceptions. Remarkably, this was true even in sectors that once seemed impenetrable. As a result, industry observers have grown accustomed to viewing graphs with the now-familiar dip in growth rates during this time period. Meanwhile, sales forecasts--in terms of where markets will go in the next five years--are all over the map. Simply put, it is very hard to know how categories will come out of the recession, or if they will ever reach pre-recession benchmarks.
The ultimate cause for this uncertainty centers on overall market factors. Thanks to temporary and longer-term shifts in consumer behavior due to the recession, as well as rising food and fuel costs, an aging population and other factors, markets may perform very differently in the coming years. They may, in fact, be undergoing pivotal changes right now
The broad-reaching and increasingly hard-to-define sector of functional food and beverages has had its share of bumps recently, as well. In fact, in some ways, the bumps are even more pronounced—since some functional products are seen as discretionary by consumers. However, there are bright spots.
Functional Foods and Beverages Overview
For one, the functional food and beverages sector has made gains, in terms of overall usage. Some 56% of adults in a 2010 Mintel custom-conducted survey indicate they have purchased any functional food or beverage in the last three months--up from 48% in May 2008, which represents a substantial increase.
The 2010 survey is insightful, especially considering it was carried out at a time when most Americans were still reeling greatly from the recession’s impact, and consumer confidence was very low. As the recession wanes in 2011-2012, it is likely consumers will certainly gain confidence, and the percentage of functional food and beverage users will rise.
Secondly, since 2004, sales in the overall market are up considerably. According to Mintel estimates, sales of functional food and beverages in food, drug and mass merchandisers (FDMx, excluding Walmart) reached nearly $16 billion in 2010, with solid growth of 36% from 2004-2010. Mintel expects that, by the end of 2011, the market will reach $16.5 billion.
With the above said, there is also some cause for concern. The market is leveling off, particularly with regard to functional beverages. While a general trend in the last few years shows more consumers are using functional food and beverages, sales trends definitely are leaning toward smaller annual growth rates. Mintel expects that, by the end of 2014, sales for functional food and beverages will exceed $18 billion in FDMx alone. However, this represents growth of just 10% during 2011-2014, which is far slower than in preceding years.
Upon closer inspection, functional beverages, rather than functional food, have contributed most to flattening performance. While historically, the functional beverage segment has performed relatively well (growing an impressive 25% during 2004-2008), like many other food and drink segments, functional beverage sales actually declined in 2009 (-2%). By the end of 2011, Mintel estimates this segment will reach $9.3 billion. Indeed, the growth outlook for functional beverages is not very optimistic, as Mintel projects sales to increase a mere 4% during 2011-2014, reaching $9.7 billion in current prices, but reflecting a decline of 2% in inflation-adjusted terms in FDMx.
Notably, by comparison, functional food has enjoyed solid growth performance over the past six years, increasing 55% during 2004-2010 to nearly $6.8 billion at FDMx in 2010. On an inflation-adjusted basis, sales have grown 33% in the same period. With 2011 calendar year sales estimated at $7.2 billion, Mintel expects by 2014, the segment will reach nearly $8.5 billion in current prices, reflecting a 10% increase in inflation-adjusted terms in FDMx.
Functional Market Comes a Long Way
The evolution of the functional food and beverage market in the U.S. follows a trajectory that began decades ago, with the rise in popularity of dietary supplements. These days, the U.S. consumer is well-versed with these products; according to a March 2011 Mintel custom consumer survey, two thirds of adults (66%) say they personally use vitamin/mineral supplements. These consumers likely view dietary supplements, such as “multivitamins,” as good preventative measures, helping with everything from stress to energy depletion to bone and heart health. Some, if not many, consumers use these types of products as something of an “insurance policy,” in order to balance out less-than-stellar eating habits.
It is not a stretch, then, to consider how welcoming functional food and beverages must have been to “supplement-initiated” consumers, when these products originally appeared on the U.S. market. Simply put, consumer belief in the health benefits associated with using dietary supplements made it much easier for food and beverage marketers to capitalize with functional food and beverages. Brands, including the now well-known vitaminwater, have further boosted the functional food and beverages sector by implying their products are nutritionally comparable to dietary supplements. Additionally, lines have blurred further with food forms of dietary supplements--thanks to innovations such as VIACTIV, which successfully markets calcium chews enrobed in chocolate. Of course, other earlier examples exist as well, including chewable vitamin C or children’s multivitamins housed in candy shells. One could even argue that cough drops also fall into this realm.
Collectively, there is no doubt all of these products have affected consumer attitudes, specifically in terms of how people accept and understand the concept of functional food and beverages. That is not to say consumers are buying these items; but, at least they “get” them--a key point that signifies just how far the market has come.
Since the beginning of 2006, more than 5,000 functional food and beverages have been launched, as monitored by Mintel’s Global New Products Database (GNPD). Considering the sheer number of functional beverages once dwarfed functional food, it is noteworthy that new launches of functional food have far surpassed beverages in recent years. Food comprised 62% of all new functional innovations from 2006-2011. Leading the way, snacks and dairy products combined to account for nearly 25% of functional food launches. (See chart “New Functional Food and Beverage Launches.”)
It is telling that functional food products now dominate as they do, showing how the overall sector is maturing. Whereas “functional” used to predominantly refer to a specially fortified beverage that may have even imparted an unpleasant “vitamin-like” aftertaste, many of today’s functional products are foods that have evolved paradoxically in the opposite direction. Rather than adding specific functional ingredients with supporting claims, many of manufacturers’ latest offerings are just like everyday products in a given category, with one notable exception: they have prominently marketed health claims.
Just two examples are RyKrisp Seasoned Crackers, which feature front-of-package (FOP) claims for 12g of whole grains and an American Heart Association logo, claim and website address. And, secondly, Bouncing Berry Farms Cranberry and Apple Fruit Delight fruit compote markets the claim “The Everyday Antioxidant Superstar!” on the FOP, thanks simply to the presence of cranberries.
In both cases, consumers are prompted by claims to associate a health benefit with consumption--the primary selling point of functional food and beverages--and yet, in terms of taste and texture, for example, the products are not all that different from others with which they compete. The claims are what make them stand out and ultimately drive their sales.
Overall, antioxidant claims top all other functional claims, across all functional food and beverages in Mintel’s GNPD. Fully 45% of all functional products launched since 2006 make this claim. Like the examples above, many of these products with the antioxidant claim are food or beverages that consumers may not have traditionally thought of as functional, because they have been using them for years. This, however, is likely changing.
Two products have taken this tactic, including Bromley Products Green Tea, which features claims on the side panel of the box touting green tea’s ability to potentially protect against heart disease, cancer and Alzheimer’s disease—while also boosting immunity and mental acuity, plus lowering stress. Also noteworthy is V8 Original Vegetable Juice, which features side panel claims, such as “heart healthy,” and a color-coded breakdown, by vegetable juice groups (red, orange, green), and the corresponding presence of active ingredients (e.g., lycopene) and their functional benefits (such as cell protection).
It is this trend away from creating “Frankenfoods” and toward marketing everyday products with any and all permissible health claims that will have the most lasting effect on the functional food and beverage sector. Furthermore, this shift has resulted in a nearly complete change in the way companies create functional products. No longer hampered by the costly and time-consuming task of seeking out the next hot ingredient to patent exclusively or license, they are free to formulate with whole grains; antioxidant-rich fruits and vegetables; dark chocolate; soy; or red wine extract (hopefully, not all in one product).
One primary factor may contribute most to the future success or failure of the functional market: Companies and consumers are not on the same page, with regard to government regulations and functional food and beverages. Companies may frown, when it comes to adhering to regulatory guidelines or to running the risk of unapproved health claims and resulting warnings from the FDA. In contrast, Mintel’s survey data show the majority of consumers (68%) agree that functional beverages, for example, should be tested by the FDA or other government agencies for efficacy. This same audience is more likely to trust a functional beverage that follows FDA guidelines or carries an FDA seal of approval. Consumer distrust of overzealous claims likely has led many to feel this way. Unless companies get serious, their target audiences may finally just tune out. pf
Defining Functional Products for Sales Data
* Functional foods: Products cross many categories, including dairy and margarine, cereal, bars and snacks (sweet and savory), and bakery. Similar to functional beverages, these products are formulated to go beyond basic nutrition and provide specific health/disease benefits--while often having an associated FDA-approved claim (e.g., “immune supportive”).