Nutrition Business Journal, September 1996, V1, N2
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Long live the debate. Since the introduction of the term nutraceutical around 1990, nutrition industry participants-not to mention their customers and regulators-have taken a keen interest in just what nutraceuticals are and what they can do for business. Conceptually, a single-category term is needed to measure the unstoppable trend that is manifesting itself in increased sales of healthy consumables. Dr. Stephen DeFelice, director of Foundation for Innovation In Medicine and widely regarded as the granddaddy of nutraceuticals, defines it thus: “A nutraceutical is a food or part of a food that offers medical and/or health benefits including prevention or treatment of disease.” Products range from isolated nutrients, dietary supplements and diets to genetically engineered designer foods, functional foods, herbal products and processed foods such as cereal, soup and beverages. Functional foods, the most popular term among consumers but far from a product category, are defined by Clare Hasler, Ph.D., of the University of Illinois as foods that include “any modified food or food ingredients that may provide a health benefit beyond the traditional nutrients it contains.”
Using his sweeping definition, DeFelice has estimated the size of the nutraceuticals industry at $250 billion, merely by assuming that half the food consumed by Americans is for reasons related to health. But DeFelice is not in the market research business. Much of his verve is driven by the regulatory system that he perceives provides little encouragement for investment in nutraceutical products, because companies don’t have exclusive rights to the resulting claims. “I am working to convince Congress to pass a law that states if a company does research with a nutraceutical, the company alone will have rights to make a claim…. If passed, it will create a research-intensive nutraceutical industry that will rival the drug industry.”
No doubt, laws and regulations will play a vital role in commercialization of nutraceuticals. The nutrition industry is keeping close tabs on developments at FDA, particularly recent jockeyings over interpreting the definition of a medical food. Building a strong, sustainable market, however, inevitably comes back to one thing: information. And in nutrition, information must be linked back to science. Other experts agree with most of DeFelice’s vision. “Putting science into the product is the key,” said Linda Gilbert of Health Focus Inc. (Des Moines, Iowa.).
Science must be effectively tested, demonstrated and spin-doctored to feed the “circle of information” in the nutrition business. Data flows from food and supplement companies to ingredient suppliers to academic researchers through peer review and journals, eventually being absorbed by the mainstream media. Consumers are depending more heavily on the media for nutrition information than ever, and even deemed it the “most reliable source” in recent surveys. The steamroller of the information age is unlikely to slow down in the 21st century, and the role of information in driving the nutrition industry cannot be overestimated.
The consumer should never be underestimated, emphasized consultants at two recent nutraceutical conferences. With the public hungry for positive information and hard science on the foods they eat, the time is right for functional foods. “The functional food consumer is elite, informed and educated,” said Nancy Childs of St. Joseph’s University (Philadelphia). As a caveat, endless demographic and preference data can point the way, but as one manufacturer said, “all the science in the world can’t cover up bad taste.” The final link in the information loop-and the most important for business-is consumer response, measured first in surveys and focus groups and second in product sales. This in turn feeds back to product companies and the chain reaction to develop new ingredients starts all over again.
The fundamental market drivers for nutraceuticals are well known but are worth repeating. The number one trend in the food industry, according to Food Technology, is “the increasing role of food and food ingredients in self medication and disease prevention.” The baby boom bulge is here, and boomers are seeking antidotes to aging. Antiaging is the new mantra in consumer surveys, and nutraceuticals can provide solutions. Higher health care costs are driving all those that pay to look for alternatives. HMOs in particular continue to seek out and support nutrition and nutraceuticals as a preventative to reduce costs. There is also growing skepticism and mistrust of classical western medical solutions amongst Americans, bolstered recently by the press.
Interaction at the market level, however, is where NBJ has understandably chosen to focus its analysis. Establishing a reliable benchmark for the industry is the first order of business in any detailed research undertaking. And while DeFelice’s $250 billion renders rather insignificant NBJ’s relatively paltry $17-billion nutrition industry defined in our inaugural issue, it is consistent with NBJ’s overall vision. The $17 billion in sales of defined health and nutrition products is only 2% of the $820billion food, restaurant, drug, over-the-counter and personal care sales in the United States in 1995. It is the larger slice of the pie that the nutrition industry seeks to penetrate.
So how does one measure the burgeoning nutraceutical product categories? This month, NBJ has analyzed the retail food business in order to get a grasp of the popular “functional food” category, a stepping stone to a nutraceutical industry definition. The table above presents the categories and demonstrates the results, but merits explanation. First, although all sales outlets analyzed in our last issue are taken into account, the sales channels are not presented on the chart. The data breaks down the $422 billion of food products sales in the United States in 1995. Category heads may not appeal to all but were deemed necessary to create appropriate distinctions.
Functional foods are essentially those with added ingredients or that are concentrated specifically for health or performance purposes: enriched cereals, breads, sports drinks, teas, vitamin-laced snack foods, baby foods, prepared meals, etc. “Lesser-evil” foods are also altered from their originally manufactured state, but by removing unwanted substances: fat, calories, preservatives, caffeine, alcohol, salt, etc. Unlike functionals, not all lesser-evil foods are counted as nutraceuticals. The venerable DeFelice does characterize the oil-free chips, light non-alcoholic beer and low-tar cigar he attempts to enjoy during the football game as nutraceuticals, although many would disagree, he concedes. The “market standard” category comprises the remainder, and it has adopted former functional and lesser-evil foods like lowfat milk, enriched cereal, iodized salt and others that represent over 50% of category sales. The market standard category contributes 8% of sales to the nutraceuticals category, with products like chicken soup, orange juice, yogurt and others that are frequently consumed for health reasons.
Adding the $8.9 billion in supplement sales to the $71 billion in nutraceutical foods results in an $80billion nutraceuticals industry. Numbers along these lines are close to other estimates. Applied Biometrics (North Palm Beach, Fla.) sizes the nutraceutical market at $77 billion (62% meals/food/meal replacements, 28% beverages, 8% supplements and 1% diet aids). Given the current market, the sizable sales potential and the unyielding trend in consumer behavior, it is surprising that more major corporations have not plunged in, recent news from Campbell’s notwithstanding (see p.17). “Few and perhaps no major food or drug firm is ignoring the nutraceutical and functional foods area,” said consultant Greg Kitzmiller (Bloomington, Ind.). Reasons for hesitation include a culture of risk aversion for large, established companies, regulatory uncertainty and lack of protection for proprietary products.
In nutraceuticals, the caution of the big could yield to the courage of the small. The industry may indeed evolve like the biotech industry, in which small, entrepreneurial companies backed by venture capital invest in front-end science, approach the commercial stage and then sell out to those with distribution channels. Industry comparisons don’t stop there. Those savvy enough to gauge the nutrition industry as a global business expect the largest entrants to be Japanese and European. “It’s like the auto industry,” said DeFelice. “U.S. food and pharmaceutical companies will take a big hit before the end of the 20th century.” Without an established nutraceutical claims structure and its resulting incentive for research, this will become even more apparent, he warns. In Europe and Japan, governments actively promote nutrition, including nutraceuticals, to curb healthcare costs. In all industries, domestic market conditions drive international competitiveness.
The food and drug industries will eventually be lured or dragged into nutraceuticals. The food industry, said Childs, is very good at listening to consumer demands and producing new products efficiently. Food companies are seeking value-added opportunities because margins are tight. It is conceivable that a company with a nutraceutical from a biotech firm or an ingredients company will be able to make a product that can, with the proper science, make a major health claim about heart disease or diabetes and charge a premium. This was tried by Kellogg’s in the late 1980s and ultimately failed. The regulatory landscape is shifting, however, as scientists, the industry and even consumer groups demand that the nutritional needs of Americans be met, preferably with the recognition of nutraceuticals. With $80 billion at stake and another $800 billion on the horizon, it is no small wonder what all the fuss is about.
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Nutrition Business Journal (NBJ) is a monthly executive newsletter focusing exclusively on the nutrition industry. Each issue discusses business activities, market size/growth, trends, and opportunities in the nutrition industry, which NBJ defines as dietary supplements, herbs, natural foods and natural personal care products. NBJ provides:
- Market niche size and analysis
- Case studies in marketing strategy
- Profiles of major companies & new entrants
- Lists and revenues of top companies in key segments
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