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Do functional food and beverages represent an opportunity for manufacturers to improve their profit margins, or are the days of functional products already numbered? The new publication on the world market for functional food and beverages by global market analyst Euromonitor provides the answers.

Given tight margins in the broader food industry, many manufacturers are seeking ways to create value. This includes a large number of product types, including convenience foods, organic and better for you foods, as well as functional foods. Leveraging health properties is a clear way to differentiate products and also, in most cases, hike up prices and improve profit levels.

Thus the functional food and beverage market has attracted a large number of standard food and drink companies, the most significant among them PepsiCo, Coca-Cola, Danone, Nestlé, Cadbury Schweppes and Unilever.

The rise of functional food and drinks

The rise of functional foods has occurred at the convergence of several critical factors. These include:

  • Awareness of deterioration in personal health, led by busy lifestyles with poor choices of convenience foods and insufficient exercise
  • Increased incidence of self medication
  • Increased level of information from health authorities and the media on nutrition and the link between diet and health
  • Scientific developments in nutrition research
  • A crowded and competitive food market, characterised by pressurised margins

Euromonitor considers how these factors have created a dynamic functional food and beverage market, offering good prospects for growth for well-positioned food and drink manufacturers. Between 1998 and 2003, global value sales increased by almost 60%, and are set to rise by a further 40% through to 2008.

Key growth areas

Strong growth is occurring in many functional food categories. Some of the more dynamic areas include probiotic yoghurts, plant sterol spreads, energy bars, functional waters and functional juices, although performance varies across national markets.

In terms of therapeutic areas, key growth areas include cholesterol lowering products, gut health and bone health products. Gut health products are particularly important in Japan, but relatively underdeveloped in the US, where fortification with calcium and vitamins, and energy-giving products are more pronounced.

Regional differences

The new report shows how the market for functional foods varies greatly across regions, with Asia/Australasia clearly dominant due to the massive Japanese market, while Eastern Europe and Africa remain very underdeveloped. The level of development is not led by any one factor, but by the combination of several. According to the report key determinants for maturity in functional foods include:

  • Level of government support and compatibility of legislation with market growth
  • Presence of a mature market for processed foods
  • Level of consumer demand for supplementary nutrition
  • Consumer confidence in products
  • Health awareness and threats to functional food

The rise in health awareness which gave birth to functional food has also stimulated interest in other types of food, which to some extent act in competition to functional products, and the report looks at their impact.

Most notable of these is the category of naturally healthy foods, such as wholegrains, oats, soy, cranberries and green teas, among others. These products can also leverage the health benefits of their nutrients as a selling point, and they are therefore positioned very close to functional foods and offer considerable threat.

Functional foodsare also under pressure from “better for you” foods, such as those with reduced fat or sugar content, and from organic foods. Indeed, controversy over the food chain following a number of food scares has catalysed increased demand for “pure” organic foods and could potentially damage sales of functional foods, which in some cases are viewed as “adulterated”. This view is exacerbated by bad publicity regarding GM foods, which are sometimes confused even with the more basic functional foods.

Key success factors

Considering the various alternative trends in the added value food and drinks market, the report stresses the right marketing strategy is even more crucial for manufacturers. For a functional food to be successful, it typically has to adhere to the following positioning:

  • The health benefit has to appeal to a mass market and address general well-being issues
  • The health benefit has to be well communicated, either through understandable health claims, or through using an active ingredient which is readily understood, such as calcium.
  • The product must be competitive on all platforms, and not rely solely on its health benefits. It must also offer taste, convenience and appropriate pricing. Its functionality allows for higher margins, but by itself does not guarantee success.

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