The healthy option
The global market for functional, fortified and better-for-you foods is growing rapidly as more affluent consumers put health and wellness at the top of their agenda.
The health evolution
If you want a clear indication of the growing importance of health and nutrition, look no further than Nestlé, the world’s largest food and drink company. In June this year, chairman and CEO Peter Brabeck told the company’s investors: “Nestlé is evolving from a respected, trustworthy food company to a respected, trustworthy food, nutrition and health and wellness company. We will concentrate our marketing spend where we have the most evidential nutritional advantages in our products and have been able to
integrate proprietary technology, making those products unique in the marketplace.”
Consumer pressure
The big food producers have been left with little choice. Recent research by Merrill Lynch estimated that $120bn of food retail sales in the US was ‘at risk’ from consumers moving to healthier product lines. Categories ‘at risk’ included potato chips, desserts, colas and fats and oils.
In September 2005, Nestle established a €500m venture capital fund to invest in health and wellness research and start-up companies around the globe. On the other side of the Atlantic, Heinz has been aggressively expanding its investment in product and packaging innovation in the nutritional and organic food segments, where it predicts annual growth rates of 15%-20% in the US and 25% in Western Europe.
Don DArling, Vice President Development, Unilever European Ice Cream Business
Buying a healthy lifestyle
As margins in traditional categories come under pressure, there has been an increase in investment in healthier products. Vandemortele Group, the owner of the Alpro soya brand, plans to invest half of its €90m budget in soya products, which currently account for around 25% of group sales.
Unilever, which counts Wall’s ice cream among its 2,000 ice cream brands, said it would allocate 40% of its €50m annual budget on ice cream R&D to the health and wellness sector. “We are now looking at how we can incorporate ingredients like ‘super fruits’ – which are high in added nutrients such as vitamins, minerals or phytochemicals – into ice cream,” says Don Darling, vice president development at Unilever’s European ice cream business.
A market waiting to happen
Perhaps surprisingly, there has been little M&A activity of any size in the health and wellness space. In September 2005, Swiss healthcare giant Novartis announced it was delaying the sale of its health food and slimming and sports nutrition businesses due to a lack of attractive offers.
The demand for product innovation is creating an opportunity for private equity investors. With access to capital to spend on R&D, private equity can help companies fill this pipeline. As the world’s largest food manufacturers increasingly position themselves as brand managers, they are looking for suppliers to provide some of that innovation. There are clear parallels with the pharmaceuticals market, where an increasing proportion of product development is effectively outsourced.
Consumer and investor interest in the health and wellness category stretches across four sub-sectors: functional enhanced products; better-for-you products; organic foods; and naturally healthy products, according to definitions from Euromonitor International. Much growth has been seen in the category of functional products, where food and drinks are enhanced with beneficial ingredients such as calcium, vitamins and omega 3.
Fit for purpose
“Germany was the first country to have a classifiable functional soft-drinks market,” says Susie Johnson, business unit manager at research group Leatherhead Food International. “In the Spanish market now, there is rapid growth in functional health foods as well as lots of research and development. In Scandinavia and the Benelux countries, there’s a strong awareness of the importance of health issues.”
Johnson cites Finland’s largest dairy company, Valio, which has been a worldleader in the R&D of functional foods, as a prime example. Valio was one of the first companies to develop a probiotic bacterial strain for dairy products, launching its first probiotic juice, Gefilus, in 1997. Gefilus now boasts a 32% market share in Finland’s juice market,
more than twice PepsiCo’s Tropicana. Valio has licensed its probiotic strain to 17 companies worldwide.
In the near-term, fruit and vegetable juices will be packaged to include more functional ingredients. Processing techniques allow for antioxidants and phytochemicals to be
extracted from fruits and vegetables and placed at high concentrations into the juices. Coca-Cola is set to launch a cholesterol-reducing juice with phytosterols in the UK, while US company Bravo! Foods recently launched its vitamin-enhanced milk drink in Europe.
Susie Johnson, Business Unit Manager, Research Groupm Leatherhead Food International
A growth market
Manufacturers are reacting to consumer demands for healthier products. Cereal Partners Worldwide, a joint venture between Nestlé and General Mills of the US, has announced that all ready-to-eat breakfast cereals it sells in the UK will be made with wholegrain in future.
These health-and-wellness orientated consumers tend to be wealthy, sophisticated and upwardly mobile, although, as prices fall, products are moving into the mainstream. According to Euromonitor, global sales of better-for-you packaged foods will reach $104bn in 2005, functional packaged foods sales will reach $33bn and organic packaged foods $16bn – a huge increase on the $79bn, $23bn and $10bn in the same categories in 2002. Ready-meals and processed foods with functional ingredients, labelled as organic or reduced fat and salt, account for a growing proportion of the market.
“Forty years ago, consumers were closer to their food and more in control of what they were eating than they are now,” says Christiana Benkouider, head of health and wellness research at Euromonitor. “There’s an awareness now that we are too distanced from our food and no longer understand what’s in the food that we buy. There’s also an increasingly negative attitude towards preservatives and additives. That has a positive impact on the development of the healthier food market.”
Designated drivers
The drivers of the health and wellness trend vary across Europe. In the UK, concerns over specific health disorders, including heart disease, high blood pressure, diabetes, strokes and obesity, play a key role. By contrast, Germany has a strong tradition of consuming functional foods, with consumers taking a more holistic approach to wellness.
Better-for-you foods are a trend that is set to continue for some time and transform the way food is produced, packaged and sold. For those companies prepared to grasp the innovation mantle, the future looks healthy.