Sector Insight: Functional foods - Healthy profit increase

THE BACKGROUND

Functional foods and drinks have been around for a while, but specific health benefits are increasingly being seized upon by marketers in response to consumer demand for more accessible products.

Intense media interest in issues such as the obesity crisis is increasing awareness of health issues and consumers are more willing to question what goes into their food and drink. Benecol Yoghurt Drink is currently being backed by a £3m ad campaign, but food manufacturers could soon be hit by a raft of tighter EU regulations.

Growing health concerns over obesity and related illnesses, combined with a belief that individuals must take their health into their own hands, is proving to be good news for the UK's functional foods sector.

Sales of functional foods and drink - defined as those designed to provide a specific benefit beyond their nutritional value with long-term use - hit £835m in 2003, according to Mintel. This represents a six-fold increase since 1998, and Mintel predicts that UK sales could top £1.72bn by 2007.

'The key factor is consumers' growing awareness of what they are putting into their bodies,' says Rob Church, market analyst at Mintel. 'It is, however, still a young market and there is some blurring between product categories, such as the distinction between reduced fat and functional products.'

Further proof of this comes from food industry analyst Leatherhead Food Group, which estimates the value of the sector at anything between £450m and £1.2bn in the UK.

'The strictest definition of functional food is food that makes a health claim,' explains Susie Johnson, business manager, market intelligence at Leatherhead Food International. 'But there are many other food products that, though consumers know they contain an ingredient beneficial to their health, don't use that ingredient as part of a stated health claim. However you define it, the fact remains that an ageing population of British consumers want to feel and act a decade younger. They don't want heart, bone or gut problems, and they are seeing functional foods and drinks as a way of achieving that.' This is borne out by TGI lifestyle surveys which show that consumers are now more health-aware, and that consumers are recognising the need to take more responsibility for their wellbeing.

'With coronary heart disease now Britain's biggest killer, according to the British Heart Foundation, concerns over cholesterol have been a major driver of consumer interest in functional foods,' says a spokeswoman for McNeil Consumer Nutritionals, the company behind Benecol, which claims to lower cholsterol levels.

'The launch of Benecol Yoghurt Drink in early-2004 has contributed to the growth of the yoghurt drink sector by making cholesterol reduction simple and meeting consumer needs for ease, convenience and good taste,' she adds. In the first six months of 2004, McNeil has committed £3m to marketing the product on TV and in the press.

While the British remain Europe's biggest spenders on functional foods and drinks - we each spend on average £110 a year, according to figures published earlier this year by Datamonitor- countries such as Germany contribute a greater number of functional food customers. This adds up to a European market now estimated to be worth £2bn.

Functional products have always existed, but it is only in the past decade or so that companies have used specific health benefits to market certain foods and drinks, says Johnson.

A dizzying array of ingredients go into today's functional foods and drinks. These range from antioxidants - substances that reduce the activity of 'free radicals' that can react with and damage important components in cells - to folic acid, Omega 3 and soya protein.

The benefits of foods including such ingredients are increasingly being promoted via health claims detailed on product labelling in advertising and other promotions. These claims range from the general - suggesting that a functional product is suitable for an active, healthy lifestyle, for example - to the highly specific, such as 'may help lower blood cholesterol'.

Consumer understanding of claims and how functional products should be used, along with faith in the claims made, are essential for the success of any functional food or drink product.

Recently a system for self-regulation of health claims has been established in the UK. However, EU regulation of health claims is expected and proposals have already been discussed - although, as yet, remain unresolved - which would protect consumers from misleading claims and give the functional foods sector more direction and clarity.

'What would most help the industry is more scientific research to ground health claims in incontrovertible scientific proof,' says Mintel's Church.

'But this kind of research takes time - 10, 20, 30 even 40 years if it is ongoing. But in the future, much will depend on being able to substantiate health claims.'

While estimates of the size of the UK functional foods sector vary, there is consensus on the growth areas within it. The biggest sub-category is cereals, which accounted for just over 25% of all UK functional food sales last year; followed by spreads (such as market leader Flora Pro-activ), with 20%; stimulation drinks (such as Red Bull and V), with 18%; and probiotic yoghurt and drinks (such as Yakult and Danone's Actimel), with 17%.

The fastest-growing sectors are soya-based dairy alternative products and probiotic yoghurts and drinks, which are outstripping general growth in the yoghurt and yoghurt drinks market. Growth in functional spreads is also well ahead of total spreads, due to a number of product launches in recent months.

Functional cereals have grown significantly as consumers opt for healthier products. With fortified products containing added vitamins and minerals now commonplace, Kellogg recently launched its first functional cereal for children, Rice Krispies' Muddles, which features a probiotic ingredient to optimise digestive health.

Functional cereal bars, however, have not fared so well. Recent months have seen the withdrawal of a number of products, including Marks & Spencer's range and Benecol bars. Mintel points to the growing preference among consumers for drinks as snacks as one explanation, as health-conscious, time-poor consumers seek quick and easy solutions to their health demands.

FUNCTIONAL FOOD CONSUMERS ACROSS EUROPE (m)

Brand 2007 2002 1997

(est)

1 Germany 7.3 5.4 2.5

2 UK 4.4 3.2 1.4

3 France 3.8 2.7 0.9

4 Italy 2.9 2.1 0.9

5 Spain 2.1 1.5 0.7

6 Netherlands 0.7 0.6 0.3

7 Sweden 0.3 0.2 0.1

8 Other 26.2 19.2 8.5

Source: Datamonitor

GROWTH RATE OF FOOD AND DRINK VS FUNCTIONAL FOODS (% change 2001-2003)

Brand Overall Functional

1 Soya dairy alternatives 46 550

2 Probiotic yoghurts and drinks 22 47

3 Bottled water 46 30

4 Spreads 4 27

5 Breakfast cereals 5 23

6 Stimulation drinks 29 23

7 Eggs 21 17

8 Juice, juice drinks and dilutables 13 13

9 Cereal bars 32 -100

Source: Mintel

TOP CONSUMER HEALTH CONCERNS BY TYPE (%)

2003 1998

1 Heart disease 41 n/a

2 Breast cancer 41 40

3 Lung cancer 36 n/a

4 Other cancer 32 28

5 Prostate cancer 31 18

6 High blood pressure 30 26

7 Arthritis 26 29

8 Colon cancer 26 9

9 Asthma 24 22

10 Diabetes 20 14

11 Obesity 16 11

Source: BMRB (1998 & 2001); NOP (2003)/Mintel

ANALYST COMMENT

Susie Johnson, Business manager, market intelligence, Leatherhead Food International

Functional foods and drinks account for 1% of the UK food market by value and this will double over the next five years. A new trend in dairy products especially, but also increasingly evident across the whole UK functional foods market, is to offer more than one health benefit in a single product, and there have been several dairy products coming on to the market in the past few months, targeting both gut and heart health.

Recent activity in product development has been driven by subtle changes to existing products, such as Hovis Best of Both, which contains less salt and more barley, and the arrival of new ingredients.

Many of these have been developed in overseas markets, notably in Japan.

For example, Nippon Luna recently launched Luna Pro-Biotic Yoghurt, a solid-set probiotic yoghurt with a bifidous culture with aloe vera and acerola.

Another active category is food-based anti-ageing cosmoceutical products, such as a Japanese drink called Yagua Beauty Juicer, which contains collagen and aloe vera.

We are likely to see more of these sort of products becoming available in the UK, but whether British consumers will take to them as readily as others elsewhere remains to be seen. As with the cosmetics industry, where launches and product claims stack up by the week, the danger is that cynicism sets in.

How well the UK functional foods sector capitalises on consumer interest in wellbeing will depend on how well they meet these consumers' needs. They need to develop multi-functional products and communicate a clear message not so much through advertising but through editorial, promotions and even doctors' surgeries.

This article was first published on Marketing