functional foods article

8/3/2019 Functional Foods Article

1/24

Leveraging growth in the emergingunctional oods industry:Trends and market opportunities

Strategy and growth


2/24


3/24

August 2009

Table o contents

The heart o the matter 2

Opportunities in the dynamic, ast-growingunctional oods market

An in-depth discussion 4

Competitive landscape, consumer trends andhealth science advances shaping the market

Beyond nutrition: initiatives in unctional oods 6

Industry dynamics 7

Key categories and emerging products 9

Growth drivers and success actors 10

Healthcare trends and potential impact 11

What this means or your business 12

A successul investment strategy involves lteringreal opportunities rom the furry o trends

Identiying opportunities: market entry strategies 14


4/24

2 Functional Foods

The heart o the matter

Opportunities in thedynamic, ast-growing

unctional oods market


5/24

The heart o the matter 3PricewaterhouseCoopers

Foods ortied with nutritional and disease-preventing qualities are invigorating the US

ood industry. Health-conscious consumers are driving the demand or products that aim topromote better health, increase longevity and prevent the onset o chronic diseases.

Known as unctional oods, these products include essential nutrients that oten go beyondthe initial purpose o ostering normal growth and development. These supplementsoten

called nutraceuticalsare derived rom natural oods and can be added to other oods toimpart specic health benets.

Advances in ood and medical science as well as changing consumer demand and

demographics are ueling growth in this market. Its signicant potential is likely to attracturther investment by ood and ood technology companies. Moreover, the industry is well-positioned to respond to emerging healthcare trends, including personalized medicine and

greater incentives to reduce medical costs.

Careul consideration o the competitive landscape and consumer dynamics will helpprospective investors lter attractive strategic opportunities rom trends that may ultimately

zzle. In this report, we have created an initial guide to the unctional oods arena. We havealso identied potential areas o opportunity and consideration or companies seeking entry.

Any investment has potential challenges and risks. We aim here to help investors understand

the dynamics o this market and, rom that, build a realistic growth and investment strategy orunctional oods.


6/24

4 Functional Foods

An in-depth discussion

The competitive landscape,consumer trends and

health science advancesshaping the market


7/24

An in-depth discussion 5PricewaterhouseCoopers

Food and beverage makers have long ortied their products with vitamins and other nutrients

to enhance their health benets. Advances in nutrition science and ood manuacturing arenow moving the industry rom identiying and correcting nutritional deciencies toward creating

oods that promote optimal health and wellness as well as reduce the risk o chronic disease.

Many large multinationals, oten in collaboration with specialized ingredient makers, are already

established in the market. Yet smaller participants are successully creating and deendingniches in the market. From a sales perspective, sot drinks and dairy products are leading

product categories; while i we look at the market by health benet, energy drinks are the topcategory.

With between $20 billion and $30 billion in sales a year,1 unctional oods comprise about 5percent o the overall US ood market.2 Recent estimates or sector growth range rom 8.5

percent to as much as 20 percent per year,3 ahead o the overall industry, where growth isestimated at 1 percent to 4 percent per year.4

Changing demographics, in particular the aging baby boomer population, are helping to set

the oundation or uture growth. Healthcare trends, including pharmaceutical investment andresearch into diseases and chronic conditions that are rapidly gaining greater signicance, area urther source or potential growth. At the same time, inorganic growth to date has been

largely driven by acquisitions, licensing and partnership agreements.

1 Nutrition Business Journal, Datamonitor, Packaged Facts

2 Nutrition Business Journal, S&P

3 Datamonitor, BusinessWeek

4 Nutrition Business Journal, BusinessWeek


8/24

6 Functional Foods

The rst ortied ood products resulted rompublic health endeavors. Vitamin B-enrichedfour was introduced in the 1940s to combat

pellagra; iodine-ortied salt substantiallydecreased incidences o goiter; and vitamin

D-enriched milk virtually eliminated rickets.

More recent initiatives, however, areemerging wholly rom the private sector.

In a movement that originated in Japanabout 20 years ago, companies are creating

and marketing unctional oods, nutrient-rich products aimed at consumers who

appreciate the role o diet in their health, andseek to prevent the onset o chronic disease

through the adoption o specic behaviors.

Some examples o nutraceuticals inunctional oods include probiotics(microorganisms that provide digestive

benets), omega-3 (sh oil) extracts, andphytonutrients (ound in plants such as soy

beans, blueberries or grapes).

Functional oods are used, distributed andregulated dierently rom medical oodsand drugs. The primary distinction is that

unctional oods may be consumed reelyas part o everyday lie. Medical oods

and drugs are used in specic cases totreat or manage a condition under medical

supervision (see table).

Figure 1. Comparing unctional oods with medical oods and drugs

Dierence Functional oods Medical oods Prescription drugs

Uses Energy enhancement;weight management;bolster gut, bone orheart health; diseaserisk reduction; memoryimprovement

Dietary management oa disease or conditionwith distinctive nutritionalrequirements (e.g. dicultyswallowing, loss o appetite,nutrition repletion postsurgery )

Treatment o disease,symptom, or condition

Method o

obtainment

No prescription or

supervision needed;consumer selects

Used with medical supervision Prescribed by health

provider

Distributionchannels

Supermarkets, drugstores,online, major retailers

Hospitals, pharmacies,drugstores, online

Pharmacies, hospitals

Regulatory body No specic body, but isconsidered ood and isthereore subject to FDAregulation

(FDA regulates any specichealth claims that mightbe made)

No additional FDA review/approval needed, but mustabide by regulations concerningoods, e.g., labeling

(FDA regulates any specichealth claims that mightbe made)

FDA approval needed,a multiyear, multistagereview process

Amount consumed As desired As needed As prescribed

Sources: company reports, Nutraceutical World,The New York Times, US Food and Drug Administration, Institute o Food Technologists

Beyond nutrition:initiatives in unctional oods


9/24


The US unctional oods market is estimatedto be the largest in the world, representingbetween 35 and 50 percent o global sales.

Asia-Pacic is the next biggest market.Together, the US and Asia-Pacic are

estimated to account or approximately three-quarters o the current global market or

unctional oods.5

Food and beverage companies are the

primary orce and the market is largelyconsolidated, with US companies playing

a major role. Yet partnerships oten actor

into unctional ood production; companiesenter into these agreements largely to sharedevelopment costs and technical expertise.

Nutraceutical extraction can be relatively

costly; research and development is otensignicant, and there can be specialized

technology needs as well. The groundworkor a product may be conducted in-house, orit may be outsourced to specialized suppliers

dedicated to ood ingredient technologyresearch and product development.

Figure 2. Functional ood supply chain

Agricultural & biotech researchers

Plant yield and hardiness, inputs

e.g., Monsanto, DuPont

Food and beverage companies

R&D; manufacturing and packaging

e.g., Nestl, PepsiCo, Kraft

Ingredient suppliers

Food processing R&D;

synthesis and formulation

e.g., Cargill, ADM, Danisco

RetailersDistribution to consumer

e.g., Walmart, Safeway

End consumers

of functional food

Industry dynamics

5 Scientia Advisors


10/24

8 Functional Foods

Downturn may provide market entryopportunity to retailers

Private-label brands may be poised to gaintraction in the unctional oods market duringthe current recession. These brands tend to

gain unit market share during recessionarytimes because o their appeal to price-

sensitive consumers looking to pay less orcomparable items. From 1990 to 1991, unit

share or these brands increased rom 17.6percent to 20 percent, and rom 2001 to2003, rom 20 percent to 21.8 percent. The

trend appears to be holding in the currentdownturn.6 In 2008, sales o private-label

ood and other consumer products increased

10 percent, compared with 3 percent growthor branded products.7 It is likely the trendcould extend to unctional oods; somemanuacturers, such as FACT Corporation,

already provide unctional oods throughprivate-label retail channels.

Niche players remain active andinnovative

The top 20 unctional ood companies areestimated to account or about 70 percent

o the US market, with a small numbero multinational companies comprisinga signicant share. Smaller players are

nonetheless able to maintain a presence bycreating niche markets; or example, Grupo

Pascual produces milk drinks containingprebiotic ber rom chicory.

Key unctional ood players

Player Key unctional brands

PepsiCo (1) Quaker, GatoradeCoca-Cola (2) Vitamin Water, Odwalla

General Mills (3) Cheerios, Yoplait

Kellogg (4) Special K, Kashi

Krat (8) Capri Sun, Balance Bar

Nestl (9) Nesquik, PowerBar

Danone (11) Activia, Essensis

Unilever (na) Slim-Fast, Blue Band

Yakult Honsha (na) Yakult 400, Jole

Ranking according to US unctional ood sales in 2006. na = notavailable.

Source: PwC Analysis, Nutrition Business Journal, The Wall StreetJournal,AC Nielsen, Scientia Advisors, Leatherhead Food International

6 PLMA

7 The Wall Street Journal


11/24


Sot drinks and dairy dominate

Functional oods are categorized both

by ood and by health benet. Sot drinksand dairy products constitute 60 percento the market among oods. The sot drinkcategory includes enhanced water, which

has grown in popularity as consumersseek alternatives to carbonated beverages,

perceived by some as high in sugar or articialingredients and thereore less healthy.

Dairy is gaining in popularity, driven in largepart by innovations in yogurts. By now,

enough consumers are likely aware o thehelpul bacteria naturally present in yogurts,

increasing receptiveness to the idea oprobiotic and prebiotic yogurts. Moreover,

consumers do not need to markedly changetheir behavior to reap the benets associatedwith unctional yogurtsa single yogurt

portion may be sucient. In contrast,phytosterol-inused margarines are meant to

be consumed three times a daya behavioralchange that may be undesirable to many

consumers.

Energy is the single largest segmentby health beneft

Foods claiming to boost energy levelsconstitute 29 percent o the marketcategorized by benet. These productstend to have attributes that the consumer

can quickly eel, which has contributedsignicantly to their popularity.

Products in the gut, bone, and heart health

categories comprise a sizable share o themarket and have traditionally been purchasedby older consumers. Other unctional

oods include products with claims to helpmanage weight, sharpen mental aculties,

and improve inant health. These productstend to be sought by younger consumers,

especially those with or expecting children.

Other potential areas o interest

Products or enhanced cognitive health,

such as omega-3 atty acids, are expectedto be a $7 billion market by 2011, according

to Packaged Facts. Other areas to watchare products or weight management, moodenhancement, and those that promote

healthy, beautiul skin.

Figure 3. US unctional ood revenues ($B),

by ood category, 2002-2007

2002 2007CAGR

02-07

Sot drinks $5.4 $9.6 12.3%

Dairy 4.6 6.8 8.1%

Bakery & cereals 3.1 4.6 8.0%

Conectionery 1.7 2.3 6.7%

Savory snacks 0.5 0.5 1.5%

Other 2.8 3.4 3.6%

Total $18.1 $27.2 8.5%

Figure 4. US unctional ood revenues ($B),

by beneft, 2002-2007

2002 2007CAGR

02-07

Energy $5.8 $7.9 6.2%

Heart health 3.6 5.0 6.9%

Bone health 2.8 3.7 5.3%

Gut health 0.4 0.7 15.8%

Other 5.5 9.9 12.5%

Total $18.1 $27.2 8.5%

CAGR=compound annual growth rate

Sources: Nutrition Business Journal, BusinessWeek, Mergent, Euromonitor, Datamonitor, Dairy Council o Caliornia

Key categories and emerging products


12/24

10 Functional Foods

Greater health awareness by consumersand the potential or premium pricing arehelping to uel growth in the unctional oods

market. Sustaining this growth will hingeon manuacturers ability to ocus on ood

qualities, market eectively, and target theappropriate segments, ideally aligning with

the wider public and consumer health andwellness agenda.

Functional oods marketing undamentals

Products with an easy-to-eel eect, suchas an energy boost, are likely to be more

successul (at least in the short term)than a product like omega-3 milk, which

provides an important nutrient but ails togive consumers instant gratication.

Innovative packaging can also dierentiateproducts and enable premium pricing.

Optimel Control, or one, uses daily-dosepackaging, contributing to a signicant

premium over regular products.8

Consumers need to grasp the health

benets associated with a givennutraceutical in order to appreciate

its relevance and premium pricing.

Manuacturers o unctional oods needto consider what actions they can take tobetter educate potential customers andprovide this level o understanding.

Manuacturers must be able to target a

niche, communicating a specic healthbenet linked to a common ailment or

incorporating multiple desirable qualitiesinto a single product. Krat, or example,introduced a shel-stable probiotic nutrition

barthe rst mass-distributed product oits kindin 2008.9 The product appealed

to consumers seeking the benets oprobiotics in a convenient orm (without

the need or rerigeration).

Public and private sector actorsthat support unctional oodsmarket growth

Public sector actors

Label legislation:In 1997, the FDAapproved the rst ood-specic health

claim under 1990s Nutrition Labeling andEducation Act. Subsequent legislation has

simplied the approval process or healthclaims on unctional ood labels.

Disease prevention: The US governmentseorts to reduce healthcare costs by

investing in disease prevention are raising

consumer awareness o the link betweendiet and health. As a result, some consumersare switching to products they perceive tobe healthier or more purposeul. The trend

toward unctional products can be seen inthe carbonated sot drink market: whereas

volume growth in the 1990s approximated3 percent a year,10 volumes in each o the last

three years have declined. In contrast, strongorganic growth and M&A activity is holding in

the energy-enhancing drinks segment.

Private sector actors

Emerging technologies in ood processing

are leading to new methods or stabilizingingredients, optimizing texture, and

improving product taste.

Premium pricing potential is attracting

ood and beverage companies to the market.Conventional oods ace volatile margins as

commodity prices fuctuate and competitionintensies. Margins on unctional oods,

on the other hand, tend to be consistentlyhigher. Although these products typicallyrequire greater initial R&D and ingredient

costs, price premiums may reach 30 percentor higher, depending on the product.11

8 Nutraceuticals World

9 Nutraceuticals World

10 Beverage Digest

11 World Bank

Sources: The New York Times, Euromonitor, The Journal o Agrobiotechnology Management & Economics

Growth drivers and success actors


13/24


The unctional oods industry is well-suited to participate in emerging healthcare trends,including personalized medicine and the inexorable shit o more healthcare costs toconsumers.

Healthcare trend Impact on unctional oods Key issue

Focus increases onpersonalized medicine

Functional oods may be oered inmore specifc variations

The eld o personalized medicine has beengrowing in prominence as scientists uncoverthe dierences in genetic proles and howmedicine can be customized to addresspatients unique medical needs.

People can also undergo tests that will allowthem to better understand their geneticpredisposition to certain diseases.

As people gain greater appreciationo their unique disease risk proles,they may increasingly seek oods thataddress their specic health concerns.

This demand, paired with oodcompanies growing ability to nelysegment products, is likely to lead togreater varieties o unctional oods. Forexample, in recent years, the enhanced

water market has grown aster thanthe overall bottled water market, partlybecause manuacturers have createddozens o varieties, each productoering a specic benet.

To what degree canmarkets continueto ragment beoreniches becometoo small to beattractive?

Health costs are pushing employersto provide wellness incentives and/orshit costs

Greater fnancial incentives toconsume unctional oods arepossible

Some companies provide incentives...Prevention-based healthcare has becomea key initiative or companies seeking toreduce healthcare expenses. For example,about two-thirds o employers now usewellness programs that seek to motivateemployees to engage not only in healthy

behaviors such as exercise and smokingcessation, but also in healthy eating.

and others shit costs to employeesAs health costs rise and the economyweakens, some companies are trimmingbenets in their healthcare plans or shitingcosts to employees in the orm o higherdeductibles or co-pays.

Studies have demonstrated theeectiveness o wellness programs.Financial incentives such as gymdiscounts or reduced insurance co-pays help to motivate employees tomanage their weight. In the uture,companies could invest in nancial

incentives supporting the consumptiono unctional oods as a weight-management tool, which would driveindustry growth.

As the burden o health payments shitsto consumers, they may try to limit theirexposure to co-pays and other costs.Consumption o unctional oods maycome to be seen as an alternative,aordable way or consumers to bettermanage health.

What is the dollarvalue associatedwith preventingdiseases? Willconsumers becomemore attuned to thepotential savings?

Sources: S&P, PwC Health Research Institute, The Wall Street Journal, Watson Wyatt

Healthcare trends and potential impact


14/24

12 Functional Foods

What this means or your business

A successul investmentstrategy involves ltering

real opportunities romthe furry o trends


15/24

What this means or your business 13PricewaterhouseCoopers

The unctional oods sector is expected to continue to attract urther investment and deals;

there is little indication o deceleration in advances in ood science and technology or awaning o the increasing consumer appetite or oods that may bolster natural deenses.

Moreover, the sector remains dynamic and evolving. Demographic changes in advancednations are likely to support new products; pharmaceutical and medical advances are likely tourther seed demand or new, narrowly tailored ood products.

Food and beverage conglomerates are reshaping to refect these undamental demand

trends. Five years ago, Nestl declared it was moving rom an agriood business to an R&D-driven nutrition, health and wellness company.12 Other top ood and beverage companies

have signaled similar intentions, including Danone, Unilever, General Mills, Kellogg, PepsiCo,Coca-Cola, Yakult, and Krat.

Nonetheless, opportunities appear to exist at various stages o the supply chain, in newsegments and in niches. Determining the right opportunity depends largely on strategic

priorities. A review o recent deal drivers, the astest-growing products and innovation trendscan help businesses identiy the most promising entry points to this market.

12 The Economist


16/24

14 Functional Foods

How are companies growing inorganicallyin the unctional oods market? Frequentapproaches involve acquisitions,

partnerships, or licenses. Major ood andbeverage manuacturers have engaged

in deals that tend to be large, completeacquisitions.

The multinational ood companies, as part otheir health and wellness ambitions, recently

invested in unctional oods, with 17 related

deals13 struck since 2003. The averageunctional ood deal approximated 6.2 timesthe size o the average nonunctional ood

deal during this period, in instances wheredeal size was known.

Most deals (14) consisted o complete

acquisitions, with the remainder consistingo acquisitions o minority stakes. Dealsinvolving unctional beverages were the most

common, ollowed by unctional oods, andnally nutraceutical ingredients.

Figure 5. Three ways o entering or expanding in unctional oods

Players Acquisitions Joint ventures Licenses and partnerships

Involvingingredientsuppliers

Private equity rmGilde acquired DSMBakery Ingredients, anutraceutical supplier

Coca-Cola ormed a jointventure with Nestl tocreate Enviga, a negativecalorie drink (Nestlsupplied the nutraceutical)

Krat Foods has ormed a researchand licensing partnership with MedisynTechnologies to discover eectivebioactive ingredients or use inunctional oods

Involving oodand beveragecompanies

PepsiAmericasbought unctionaldrinks maker ArdeaBeverage

Danone and Yakult setup a joint venture in Indiato enter that countrysprobiotic dairy market

General Mills and Curves partnered tolaunch a ood brand with extra ber orweight management

Other N/A14 Healthcare group NovartisConsumer Health ormeda joint venture with QuakerOats Company to produceunctional oods

Kellogg licensed Marteks DHAomega-3 technology to create LiveBright Brain Health Bars

Sources: Thomson Financial, Jeeries International, Nutraceuticals World, Mergermarket, Dairyreporter.com

13 Does not include joint ventures

14 To date, there has not been signicant evidence o acquisitions involving partiesother than ingredient suppliers and ood and beverage companies.

Identiying opportunities: market entry strategies


17/24


Identiying opportunities inunctional oods

Which products and health benefts areorecast to lead growth rates?

Top productbeverages:Globally,beverages are orecast to be the astest-

growing segment and to assume the largestshare o the market (56 percent in 2013). Two

key drivers are consumer preerence or theconvenience and versatility o beveragesand the relative ease o creating tasty

products and innovative packaging. Bothaspects generally are more dicult in the

case o ood.

2013BeveragesFoods2007

128,000

8.5%annually

78,300

16,800

32,900

Figure 6. Beverages lead global marketfor functional foods, growth by form,2007-2013F ($M)

Sources: Nutraceuticals World, BCC, Datamonitor, Beverages World,New Nutrition Business, The Food Institute Report, Jeeries, Foodnavi-gator-usa.com; Scientia Advisors

Top health beneftenergy: Energydrinks are expected to remain popularbecause consumers can quickly eel

the benet o the product. In particular,certain kinds o energy drinks and isotonics

(beverages that replace lost electrolytesor rehydrate) are cited as growth niches.

2012 36,653

27,231 382834

6.1%annually

1,4672,171

4,568

Figure 7. Energy leads US market forfunctional foods, growth by benefit,2007-2012F ($M)

2007 27,231

2012

Other

Energy

Hearthealth

Bonehealth

Guthealth2007



18/24

16 Functional Foods

Top ood categoriessot drinks anddairy:The sot drink category includessports drinks, enhanced waters, and other

beverages. Functional dairy brands such asDanones are seen to be growing becauseo their emphasis on eel the benet,

convenience, and good taste. Danonesunctional brands are orecast to grow

approximately 5 percent to 15 percentannually over the next our years, outpacing

the companys nonunctional dairy brands.Danones our unctional brands are orecastto constitute 74 percent o the companys

dairy revenues by 2012.

27,231

36,653

35 427863

6.1%annually

1,651

3,219

3,228

Figure 8. Soft drinks and dairy lead US

market for functional foods, growth bycategory, 2007-2012F ($M)

2012

Softdrinks

Dairy

Bakery&

cerea

ls

Confectione

ry

Othe

rs

Savorysnacks2007



19/24


What alternative opportunities can be penetrated or created?

Good areas to explore are those that advance unctional ood technologies or successully

deend specic health or ood categories.

Potentialopportunity

Advanced technology New or underpenetratedhealth category

New or underpenetratedood category

Identiyingkey targets

Which companies are creatingtechnologies to advanceunctional ood possibilities?

Emerging technologies maymake unctional oods moreeective or deliver moretimelybenefts.

Which companies areproviding products withhealth benets not yetadequately met by currentunctional oods?

Companies are researchingproducts that will expandan existing health beneftcategory or bring a newbeneft to the market.

Which companies are seekingto extend applications oknown nutraceuticals to newood subcategories?

Are there companies that aretrying to add nutraceuticalsto oods consumers eatregularly?

Researchareas Some companies are currentlyresearching:

Technologies that enablethe creation o more stableunctional ood ormulations.

Technologies that improvetaste/smell.

Technologies that removegrainy textures o bersadded to beverages.

Some companies arecurrently researching theimmune system benetcategory. The Food InstituteReport suggests researchershave been experimentingwith adding probiotics,prebiotics and synbioticsto not only yogurt and dairybeverages, but also to juices,baked goods, soups andcoee to improve the bodysdeenses against diseaseand inection.

Companies are currentlyresearching the inclusion o:

Probiotics in beverages andbaked goods.

Fibers in beverages and dairyproducts.

Healthy oils in dairy products.

Sources: New Nutrition Business, The Food Institute Report, Scientia Advisors


20/24

18 Functional Foods

Strategic approaches that refectdemographic, health dynamics

Looking beyond individual opportunities toconsider broader growth trends

Potential segmentation approach: age

Aging baby boomers to infuence demand

Dierent age groups have dierent unctionalood preerences and needs. As such, a

close look at the age distribution o theUS population can suggest which types o

unctional oods may become more popular.

For example, it may be relevant to considerthat the 65 and over category is expectedto grow the astest in the coming years,replacing the 5- to 14-year-old segment to

become the largest category o consumers.

Potential segmentation approach:disease

Which diseases are likely to attract

pharmaceutical investment?

One common way to segment the unctionaloods market is by benet. However, demand

or particular benets may grow in line withcertain disease trends. Thereore, consideringthose diseases that are anticipated to

increase in terms o prevalence, diagnosis,or treatment may provide insight into new

unctional ood opportunities.

One proxy or disease growth categoriesis ound in the pharmaceutical therapyareas expected to expand the most.

Pharmaceutical companies tend to invest indiseases or a number o reasons, includingestimates o the size o the potential patient

population.

Considering the leading pharmaceuticaltherapy areas, thereore, may provide insight

into which patient populations are expectedto grow and which benets (existing or new)could become more popular.

These areas include: oncology, anti-

rheumatics, anti-diabetics, anti-hypertensives, and anti-virals. Populations

seeking these sorts o pharmaceuticaltherapies are not likely to look to unctional

oods as a substitute or the drugs theyreceive; rather, they may seek complementsto their prescribed course o treatment.

For example, patients being treated withchemotherapy may become anemic, and

could thereore seek iron-ortied oods.

Figure 9. Share o US population, by age,2009F2030F

Age(Years) 2009 2015 2030

Delta(2030 v. 2009)

Under 5 6.9% 6.9% 6.7% -0.2%

5 to 14 13.1% 13.2% 13.2% 0.1%15 to 19 7.1% 6.3% 6.4% -0.7%

20 to 24 7.0% 6.8% 6.3% -0.7%

25 to 29 7.0% 6.9% 6.1% -0.9%

30 to 34 6.5% 6.8% 6.6% 0.1%

35 to 39 6.7% 6.4% 6.6% -0.1%

40 to 44 6.9% 6.3% 6.4% -0.5%

45 to 49 7.5% 6.5% 5.9% -1.6%

50 to 54 7.1% 6.9% 5.7% -1.4%

55 to 64 11.4% 12.5% 11.9% 0.5%

65 & over 12.9% 14.5% 18.2% 5.3%

Sources: AstraZeneca, S&P, PwC analysis, University o Pennsylvania


21/24


What other actors might driveopportunities in the unctional oodsmarket?

New possibilities may arise as scientic and

other improvements address the ollowingquestions:

What i scientists bred genetically modiedoods with unctional properties? Pigs that

produce omega-3 atty acids have alreadybeen cloned (and have been the subject o

some controversy).

What i medical practice requires the

consumption o unctional oods as a

prerequisite or treatment o a certainmedical condition?

What i unctional oods become morepotent? What i it becomes possible orood companies to begin to incorporate

o-patent, over-the-counter drugs intounctional oods?

Filtering the promising rom themore challenging

In a eld dominated by multinationals, as wellas increasingly choosy consumers and likelyincreasing price sensitivity, potential investors

will need to weigh certain questions andactors careully.

Large incumbents

A number o large multinational unctional

ood providers may create barriers to entry.These companies may possess desirable

distribution channels, premium clientlists, and brands that own specic oodcategories or health claim markets. Their

scale may aord them an advantage incoping with the higher cost o researching,

developing, and sourcing unctional oods.

But opportunities appear to exist at variousstages o the supply chain, in new segmentsand in niches. Determining the right

opportunity depends largely on strategic

priorities. Investors will need to askthemselves the ollowing questions:

What is the investors strategic objectiveto add products, geographies, distributioncapabilities, or demographic groups?

What is the investment horizon?

What is the amount to invest? Would

developing new skills or potentially costlytechnologies be necessary to compete inthe chosen segment?

What are the core competencies o

the investor?

These questions are not intended to refect actual trends in the marketplace, but rather to stimulate discussion o opportunities.


22/24

20 Functional Foods

Consumer skepticism

Consumers may already understand the

concept o a unctional yogurt and the roleo helpul bacteria that traditional yogurtsalready contain. However, other unctional

products may be less intuitive to consumers,who may question their purpose.

I the objective is to create a new unctional

product, is it likely to work better than currentalternatives? Will the investor be able tosource natural products and incorporate them

into unctional oerings? Does the companyhave the ability to alter the ingredient makeup

o typically unhealthy products?

Does the investor have the capacity toeducate consumers about the benets o theunctional oods it or the target creates and/

or why they are better than the competition?

Price sensitivity

In the near term, as disposable incomesall, consumers may be more sensitive to

the higher prices at which unctional oodsare typically sold. Investors should askthemselves:

New innovative products can be a way to

spark enthusiasm in a ood categorywhatproducts can be developed and marketed

without costly trials to prove health claims?

Private label goods tend to be oeredat lower priceshow attractive is theprivate label opportunity, strategically and

operationally?

An acquisition might lead to synergiesand cost savings which could enable a

manuacturer to lower prices without hurtingprots. Which targets would maximize costsavings?

What is the capacity to educate consumers

about the value o consuming a particularunctional ood as a way to promote health?

Industry experts suggest that unctionaloods may appeal to consumers seeking to

avoid unnecessary spending on healthcare,making communication o potential healthbenets critical.

Functional oods: possibilitiesand challenges

In conclusion, the unctional oods marketholds numerous possibilities, but also anumber o challenges. In this document, we

have provided a brie overview o some othe key characteristics o the market, but

additional questions will almost certainly ariseas investors look more deeply into this space.


23/24



24/24

30% total recycled ber

This publication is printed on Finch Premium Blend Recycled.It is a Sustainable Forestry Initiative (SFI) certied stock using30% post-consumer waste (PCW) ber and manuacturedin a way that supports the long-term health and sustainabilityo our orests.

www.pwc.com

To have a deeper conversationabout how this subject may aectyour business, please contact:

Mick TuohyStrategy Practice [email protected]

Glenn PappalardoStrategy Retail & Consumer Team [email protected]

Richard ManningStrategy Pharma Team [email protected]

Lisa Feigen DugalAdvisory Retail & Consumer [email protected]

David LevyGlobal Healthcare [email protected]

functional foods article

Documents