$86 billion in products, 8% growth
Nutrition Business Journal, August 1997, VII, N8
Ask Dr. Stephen DeFelice-who coined the term nutraceutical-what a nutraceutical is, and he’ll tell you it’s a “food or part of a food that provides medical or health benefits, including the prevention and/or treatment of a disease.” Ask a federal regulator, and you’ll be told that the U.S. government does not recognize nutraceuticals as a regulatory category but that laws governing foods, drugs or dietary supplements may apply. Ask a food company if it is considering nutraceuticals, and the answer will probably be yes-especially if you ask its marketing department or advertising agency. But ask the longdistance cyclist selecting an endurance product or a woman juggling a cell phone and a toddler as she studies women’s dietary supplements on the health food store shelf whether they’ve heard of nutraceuticals, and you may well draw a blank.
Ironically, while healthy food is a consumer driven category, nutraceutical is a term most beloved of consultants and marketing pros as a way of capturing the healthy eating trend. Most uses of the word nutraceutical refer in the broadest terms to the vast assortment of foods, ingredients, pills, liquids and powders that people consume to stay healthy or to achieve optimal physical or mental performance. Seen as a marketing category, nutraceuticals are often targeted at niche markets of customers with specific health needs and disease prevention goals. The consumer’s intent in using a product determines which regulatory category the FDA will place it in and what requirements and restrictions apply to the labeling. Inherent in the definition and regulation of this emerging product category are several core paradoxes.
Because nutraceuticals include so many products consumed for so many purposes, they elude ready classification under existing laws that regulate drugs (1938 Food Drug and Cosmetic Act, FDCA), foods (the FDCA and the 1990 Nutrition Labeling and Education Act, NLEA), dietary supplements (1994 Dietary Supplement Health Education Act, DSHEA), and other, more specific, categories such as foods for special dietary uses, medical foods and orphan drugs. This elusiveness creates both opportunity and confusion for companies looking to develop products to take advantage of the nutraceuticals movement. Companies marketing products in this dynamic but still ill-defined category are selling to customers who don’t distinguish “prevention of disease” from “treatment of disease” as sharply as the FDA.
Companies developing nutraceutical products to meet consumer demand must reconcile the consumer’s goals, which are often expressed in terms of preventing, managing or treating disease, with the FDA’s tenet that any product used to diagnose, cure, mitigate, treat or prevent human disease is a drug and should therefore be regulated more restrictively than a food or dietary supplement. Most nutraceuticals are marketed under one of three principal regulatory categories: dietary supplements, foods for special dietary uses, or as medical foods. Placement of a product into any of these categories demands the manufacturer’s compliance with FDA labeling requirements. Overarching the whole discussion related to disease, however, is the fact that many consumers look not just to prevent or cure ailments but to enhance their general well being, energy levels and longevity.
While the term nutraceutical has developed a certain amount of cachet, NBJ has not chosen to rename the $19-billion nutrition industry (supplements, natural foods and personal care products). Nutraceuticals, arguably, better captures the broader product transition in food and pharmaceutical industries to healthier alternative products but is more of a cross-sectoral product category than an industry in and of itself. To simplify current NBJ terminology, we have embraced the term nutraceuticals to account for all consumable food/supplement products that are purchased predominantly-though not always exclusively-for health reasons, including the prevention and cure of disease. This includes all supplements and the food categories analyzed on the table on page 3. This table reprises our analysis from last year in dividing total 1996 U.S. retail food sales of $447 billion (68% of which is from grocery stores) into four categories. Natural/Organic Foods are either certified or broadly recognized, accepted and labeled as such. Functional Foods are products with added ingredients to add or enhance healthy properties. Lesser Euil Foods are those with ingredients or properties removed or minimized, usually fat, calories, caffeine, sugar, sodium or allergenics. Market Standard Foods are self-explanatory but do change along with the times to subsume products such as 2% low-fat milk, enriched bread, iodized salt, vitamin D milk and others from the other three categories. Food sales growth was 3.6% in 1996 with the natural/organic (18%), functional (6%) and lesser evil (5%) categories leading the way. Nutraceuticals include the first two, partial contributions from lesser evil and market standard foods and $9.9 billion in supplement sales to total $86 billion in 1996, with growth of 7.5%. (See next month’s NBJ for a detailed quantification of 1996 nutrition industry sales.)
Mainstream Companies Cautious
Notwithstanding the intense discussion surrounding the definition and regulation of nutraceuticals, relatively few mainstream food and pharmaceutical companies have sent up trial balloons to test consumer spending. In the formal sense of a tightly positioned product like Nabisco’s Knox Division’s Nutra-Joint (a dietary supplement) or Campbell’s Intelligent Quisine (a unique meal program with a unique distribution), nutraceutical product introductions have been relatively few, stated Nancy Childs, professor of food marketing at St. Joseph’s University (Philadelphia).
More evident are food companies pursuing new or extended markets with familiar products by repositioning, marketing and supporting research. One example is Tropicana’s premium line of antioxidant-fortified and calciumenriched juice. Tropicana’s success was preceded by Proctor & Gamble’s less successful Citrus Hill (which proved to be ahead of the market) and was followed by calcium-enriched Minute Maid (a Coca Cola line).
According to Childs, food manufacturers are less interested in developing unique or new products than in providing consumers with better reasons to buy the foods that they are already comfortable purchasing. Quaker Oats is an example of a company that has supported a number of well designed, peer-reviewed studies that helped to grow the oatmeal category and its own marketshare into the bargain. Similarly, Ocean Spray succeeded in spanning the nutraceutical continuum, from prevention to remedial, by supporting clinical studies on the efficacy of cranberry juice in preventing and easing urinary tract infections. Such claims were stuck in the realm of folk medicine until Ocean Spray’s PR program highlighted new science, raised awareness of cranberry juice and expanded both the market and the company’s marketshare.
However, clinical studies may not even be necessary to reposition a product as a nutraceutical, as certain commodity products are proving. The “milk mustache” campaign took a commodity product that had been getting bad press and losing its market and started repositioning it, emphasizing different values to different customers. The campaign is creating a new image based on milk as a nutritional vehicle and segmenting the market for milk by age, athletic activity and ethnicity.
“This, in effect, is preparing the public for the launch of the next generation of special milk products with nutritional enhancements or nutraceutical benefit claims,” said Childs. The same type of push is also being seen among orange juice manufacturers, which are collectively promoting its cancer preventing effects. “This is all occurring because of marketing… It proves the power of marketing in realigning the market,” said Childs. Little surprise that nutraceutical is a term best beloved by consultants and marketing pros.
Dr. Stephen DeFelice of the Foundation for Innovation in Medicine (Cranford, NJ.), believes strongly that the media is the only legitimate educational/marketing tool for successfully marketing nutraceutical products. Clinical studies, followed by peer review, a creative marketing event and ensuing media coverage is preferable to the old advertising driven model, believes DeFelice. “The media is effective because not only can it get good products out there, it can also control bad products being sold to the consumer. Federal regulations can only go so far, but the media can be the gatekeeper for nutraceutical products, promoting the good versus keeping the bad out.” However, companies are slow to adopt this approach. “There isn’t a single nutra-ceutical company that has demonstrated its ability to effectively market/educate a product using the mass media…. Those companies that will be successful in this effort will be those that learn to use mass media, which I believe is the proven and legitimate educator of both physicians and consumers.”
Movers in the ranks of food manufacturers include Nabisco (Snack Wells), Hershey’s (Sweet Escapes), Campbell’s (Intelligent Quisine), Nestle, Kellogg and Kraft (see p.4). One of the boldest moves was made by Campbell’s, whose launching of Intelligent Quisine (see p.l0) into test markets in Ohio was an eyeopener from a company with such a strong mass market heritage.
“It was a wake-up call to many companies,” said Robert Oros, president of Business Development Resources Inc. (Stamford, Conn.), a marketing consulting company specializing in new product development. “Nutraceuticals are a ’90s issue, and companies are becoming more aware of the opportunities in that arena through base line positioning, line extensions and new product introductions,” said Oros, whose company assisted Campbell’s in validating its concept for Intelligent Quisine.
Both Oros and John Cassens, a consultant who heads up Cassens Consulting (Norwood, NJ.), agree that all of the big food corporations are looking hard at the nutraceutical class of foods. The United States is very much a sea of segmentation, catering to myriad tastes and preferences, said Oros. “Mass” market has turned into a “class” market, with nutraceuticals as one of those classes, he noted.
Cassens believes that more large food companies will start conducting clinical studies in the pharmaceutical mold. “Kelloggs, Campbells, M&M, Nestle and Kraft all have large nutrition departments capable of developing functional foods and dietary supplements…. They’re honing in on the medical foods and dietary supplement arena,” said Cassens. “The dial is going to start moving towards a more scientific basis for the industry, which will be great for consumers, big companies and those in the analytical and clinical fields,” he said. Oros concurred: “We’re going to see more food companies undertake clinical studies upon which to stake claims… it’s all bubbling under the surface right now.”
Pharmaceutical Companies Respond
In the pharmaceutical industry, Child’s expects to see much more interest in OTC products and dietary supplements, such as the activity surrounding zinc as a way to combat cold symptoms. This was a classic DSHEA product that didn’t need hard, documented research noted Childs. However, “the big players would like to bring more integrity into the arena and to give supplements and herbals the same integrity of research and manufacturing as their other products,” she added. Witness Johnson & Johnson’s arrangement with Raisio to market stanol ester, the cholesterol lowering ingredient in Benecol margarine.
Among the early movers of nutraceutical products in the pharmaceutical industry are Germarr multinational Boehringer Ingelheim through its U.S. subsidiary Pharmaton, McNeil Consumer Products subsidiary of Johnson & Johnson, Otsuka, a Japanese company that purchased Pharmavite, and Chattem Pharmaceutical, which recently acquired Sunsource.
Cassens recommends that pharmaceutical companies outsource the development of nutraceutical products, because the process of bringing nutraceuticals to market is not expected to follow the familiar pharmaceutical model. Outsourcing clinical work is already a clear trend. Cassens also advocates launching into nutraceuticals under a separate subsidiary or brand name as the most comfortable mode of entry for large corporations. Bigger companies are inevitably concerned about associating their names with cutting edge nutritional products that could, if they failed to satisfy customers, reflect badly on their core OTC product. “They don’t want repercussions felt in their own bailiwicks,” Cassens said.
One of the biggest considerations for food and pharmaceuticals manufacturers alike is lack of patent protection for nutraceutical products. As a result, both food and pharmaceuticals companies are seeking alternative product protections such as new delivery systems, patented manufacturing processes or innovative packaging to create a proprietary position. Another alternative is to target products at specific disease states where the research is cutting edge, enabling companies to make claims for their own brands. In some cases, such as Knox for gelatin or Ocean Spray for cranberry juice, a manufacturer may already have such a monopoly on a particular product that nutraceutical spinoffs are sheltered from competition by marketshare dominance in the core product.
Exclusivity through proprietary health claims appears to be a preferred incentive to conduct research to back up nutraceutical claims, according to a recent survey of food, supplement and pharmaceutical companies (see p.5). However, the high cost of clinical research is not the only reason for holding back from developing nutraceuticals products. Cassens sees large companies holding back because of lack of product knowledge and lack of knowledge, comfort and confidence with DSHEA. Also, new product development is time and effort intensive.
“We’re going to see a continued evolution, not a revolution in nutraceuticals,” Oros believes. “Companies are reluctant to be pioneers and to take the risk or make the necessary investment. It’s easier to follow than to lead…. Entrepreneurial companies will be the change agents.” Oros asserts that products developed by herbal, homeopathic and other types of nutrition companies will be expanded into the supermarket class of trade either through product mimicry by current companies with the market access or by acquisition. “Large companies are masters of buying and building rather than purveyors of radical new business opportunities.” Indeed, this model has already been played out by Heinz, which acquired natural baby food company Earth’s Best. Another example is M&M Mars which gradually entered the sports bar market after entrepreneurial company Powerbar defined the category and others paved the way towards mass market acceptance. Just as the stagnant beer business was perked up by microbreweries, Oros suggests that mainstream companies will engage in nutra-ceuticals through acquisition and internal development.
What the Future Holds
Cassens believes customized nutraceuticals lie in the not-too-distant future. “I see lots of research being put into that.” At least two multi-level marketing companies are offering nutritional analysis, said Cassens, blending customized supplements for consumers. The cost of doing tests accurately is still prohibitively expensive, said Cassens, but as the costs of tests come down, he anticipates more activity in customized supplementation based on special needs. Ayurvedic medicine and products have long adhered to matching supplementation to a few basic body and metabolic types. Cassens also anticipates more clinical trials on healthy rather than sick people to study the science of optimum health. “We will see pharmaceutical companies place more emphasis on wellness” rather than sickness.
Cassens believes that enzymes represent another exciting frontier in nutraceuticals. “Enzymes have been underemployed… they’re going to be a hot area in the future.” Fermentation technology using microhes to create new food products also represents potential. “There’s lots of good fermentation technology around, and more and more it’s going to be applied to nutraceuticals.” Transgenics is a third technology that will produce nutraceutical spinoffs, he predicts.
Cassens also predicts that large Japanese or other Asian companies will enter the U.S. market with functional foods and dietary supplements or by partnering with U.S. firms. Childs believes we are starting to see the Japanese influence starting to take hold with the appearance of fructo oligosaccharides-widely used in Japan in drinks, sachets and yogurts-to function as a prebiotic to help feed friendly bacteria in the gut (as opposed to probiotics, which introduce the active culture). In the US, it’s more commonly referred to as FOS and is mostly being used as a sweetener, so we don’t make the immediate connection back to the Japanese product, noted Childs.
The Japanese habit of enriching foods with calcium-from the creamy filling in sandwich cookies to the breading on chicken nuggets- may be delivery vehicles that will catch on in the United States eventually. “What’s intriguing about the Japanese market is that so many ingredients are being put into snack and impulse products-which could have potential here,” said Childs. Blueberries (which have the same active ingredient as cranberries) are also getting a lot of mileage in Japan. Whether the blueberry trade will develop that creative edge in the United States remains to be seen, however. One disadvantage is that it has no clear market leader, like Ocean Spray for cranberries, to spearhead such an effort, she said.
Examples abound of new product initiatives and opportunities waiting to happen in nutraceuticals. Global trends to healthy products cannot be reversed. Companies taking the lead by investing strategically in science, product development, marketing and consumer education will not go unrewarded.
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:
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