Featuring Walter Rach, Managing Director, Food & Beverage
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Special Series: Part 2 of 3
The past decade has seen an explosion of consumer interest in the category of functional foods. The health enhancing role of foods that provide an additional benefit --- one beyond that of meeting basic nutritional needs --- is a robust and growing market. In 2009, some well-known success stories in the industry are Activia yogurt, Quaker Oats, and Silk Soy milk. According to a recent Pricewaterhouse report, functional foods account for more than $27 billion in sales a year, or about 5 percent of the U.S. food market. Estimates of future growth in the U.S. range from 8.5 to 20 percent per year, far more than the 1 to 4 percent forecast for the food industry as a whole. Globally, numbers for the combined U.S., Western European and Asia-Pacific functional food and drinks market is worth roughly $72 billion.
This buoyant growth is being driven, in part, by aging consumers seeking products that offer a solution to health problems. Because functional foods straddle the line between food and pharmacology, they are attractive to health-conscious consumers. For example, Cheerios made headlines last year by advertising the cholesterol fighting power of their cereal, which was attractive to the baby boomer segment. This move by General Mills cost the company relatively little in research and development, because they chose to highlight an existing product benefit.
Also buying into functional foods is a younger, and highly sought after, set of consumers. They are also devouring functional foods in high numbers with probiotics, energy drinks, and vitamin enhanced beverages topping the list of most popular items. These two segments drive the demand for products that aim to promote better health, increase longevity and prevent the onset of chronic diseases. The bottom line is that functional foods are a significant growth area and executives should watch for increased top line growth in 2010.
Walter Rach, Managing Director of Food and Beverage Search Practice for Cook Associates Inc., had this to say about the emerging segments of functional foods, "Healthier, good-for-you, foods and beverages, as well as more specific functional offerings - like disease prevention - are becoming more and more desirable, especially as the health conscious baby boomer generation ages. This represents a great opportunity for food and beverage manufacturers to create truly unique functional product offerings, which can leverage off strong, established brand names, or to create new and identifiable brands."
The desire to live healthier is a cross-generational aspiration, and the ability to easily ingest a variety of enhanced ingredients in a beverage, snack bar, or other simple food, seems ideal for consumers in a fast-paced and hectic world. Functional foods provide several interesting opportunities. Foremost, is the chance to uncover and meet the needs of a relatively untapped U.S. market. Plus, functional foods also offer an opportunity for established food companies to inexpensively promote existing product benefits through savvy advertising, public relations, and product packaging. Finally, for food companies offering new products, there is a chance to build strong, collaborative relationships with suppliers of unique functional ingredients. There are, however, two major caveats for success in this category: product offerings must be competitively priced and tasty to sell in 2010 and beyond.
FOOD SAFETY AND LEGISLATION
Perhaps the most publicized example of food safety gone awry in 2009, was the peanut fiasco that originated from tainted products produced by a Georgia-based supplier. The subsequent food safety train-wreck that swept across the nation claimed eight lives, and sickened an estimated 19,000 people in 43 states.
Upon closer examination of the Georgia peanut butter plant, a badly frayed food safety net was revealed. As first reported in the New York Times in February 2009, government records show that state and federal inspectors do not require the peanut industry to inform the public - or even the government - of salmonella contamination in plants. Although industry giants use processed peanuts in a variety of products, they traditionally rely on factories to perform safety testing, and disclose issues that arise.
Tomas Maruri, an Operations & Supply Chain Consultant with more than 30 years experience in the Foodservice Bakery Products industry with companies such as Pillsbury, ConAgra, and Dawn Food Products, calculates there will be big changes in the food safety industry, "When it is all said and done, the foodservice industries will undergo another year of sweeping change during 2010."
Maruri points out that the public is more aware and engaged with food safety and cleanliness than at any other time in history, "Due to highly publicized events like the pathogen contaminated peanut incident, and the tainted baby formula of Chinese origin, it would be difficult to find a consumer today who is oblivious to food safety and purity."
Highly publicized food safety cases have catastrophic implications for businesses, and thus key retailers and food service establishments are becoming increasingly insistent on safe food and beverage products. They are requiring their suppliers - the food and beverage processors - to follow, and be able to verify, increasingly strict food safety, sustainability, and traceability requirements.
Likewise, the processors are requiring the same standards from their ingredient suppliers. A real opportunity exists for companies that are strong in food safety to gain a true competitive advantage. Food safety will not be sacrificed by top customers and this will be a trend that will take on even greater importance in the future.
Experts, like Maruri, predict that in 2010, heightened food safety awareness and a growing general interest in nutrition could mean changes in product labeling. It is likely that labeling will become more specified, and that product claims will be reviewed with greater scrutiny. There is also an increased chance that, in response to the misdeeds of 2009, there will be unanticipated legislation.
There are many legal trends that may slow or inhibit general industry growth in 2010. One that has come to the forefront of discussion is pending legislation in New York State. In this instance, the industry widely expects the state of New York will soon pass legislation restricting sodium in consumer products, restaurants, and institutional feeders, such as schools and colleges. This means research and development departments will be diverted from innovation and new product development as they reformulate salt levels in their products. This is an expensive and time-consuming process, which may be a significant barrier to players in that space and region.
A second area of concern, in terms of potential legislation, is the public outcry over obesity. Obesity is now, more than ever, at the forefront of the nation's consciousness. It began when school lunch programs were singled out in popular media as damaging to the health and well-being of children. This fear quickly spread to the quick-service restaurant chains where sliced apples, fruit cups, and raisins were quickly introduced in response to the outcry.
Currently, customers are demanding a steady stream of great-tasting new products, but with restrictions on how many calories, fat, sodium, or non-natural ingredients they contain. This increased awareness of obesity will make the procurement of natural ingredients, low carbohydrate starches, and flavorings more time-consuming and costly. Experts predict shortages of some natural ingredients and rising, demand-induced raw materials costs. Once again, R&D departments will almost certainly be slowed by ingredient restrictions, nutritional testing, and consumer paneling in the flow of new products. However, companies with strong systems in place will be at a competitive advantage vis-à-vis competitors.
PART THREE: GROWTH IN THE NEW YEAR
This three-part series examines opportunities in the Food and Beverage industry in 2010 and 2011. The first installment showcased the private label industry. Part Two of the series has presented noteworthy trends in functional foods and food safety. It has also touched upon some of the legal impediments that may arise in 2010 and beyond. Watch for the final installment of this in-depth foray into the Food and Beverage Industry, which concludes with three opinion leaders' predictions for growth in 2010 & 2011.