Nutraceuticals Business...As Usual

An overview of recent developments.

By Greg Kitzmiller

Okay, maybe I’ve become a bit of a nutraceuticals geek with some of the statistics I dig up. Like the number of times the words “functional foods” or “nutraceuticals” have appeared in one of the top 50 U.S. newspapers or in a press release from September 11 to November 1. By my count, “functional foods” appeared 24 times and “nutraceuticals” appeared 63 times. Does it matter? Probably not. But in the age when we suddenly are reading about terrorism, anthrax, Cipro to counteract anthrax and war in Afghanistan, there have also been nearly 90 uses of these terms related to our industry in newspapers and press releases. To me, this suggests that nutra­ceuticals is a key term in business today. It suggests that in the grand scheme of carrying on business there is a great deal of activity in nutraceuticals.

In a further review of the year there are a number of areas on which to focus. We could look at the growth of soy products or the continued strong growth of bars and beverages—all predicted by those of us who watch the market. We could focus on the tough times for many supplement firms and for some of the ingredient companies. We could focus on the fact that no single new nutraceutical brand has yet catapulted to the success of Procter and Gamble’s Swiffer or Febreez in home care. Yet it seems that perhaps the best focus is on recent developments in leading firms.

Looking back over the past few years we can clearly see that the trend in the food industry has been toward mergers, acquisitions and strategic alliances. In fact, the supplement industry is not far behind since Numico made its major U.S. purchases and a number of nutra­ceutical firms have acquired other companies or brands. It is perhaps not surprising that the firm to make the greatest gains with natural yogurt, Stonyfield Farm, has entered into a partnership with Danone, a leader in pro- and prebiotics worldwide. We all wait to see how 8th Continent, the General Mills-DuPont PTI alliance, will do with soy products. And now we are anxious to see the rollout of the range of products from Altus, the Novartis and Quaker (now PepsiCo) joint venture. Things have certainly changed since Altus was formed, as now not only is Quaker part of PepsiCo, but Novartis has pulled its European functional foods brand and Novartis executives continue to talk of how nutrition is distant from its core competencies. Yet for all of these changes we see clear examples of how nutraceuticals are a big part of the strategies of major firms.

Let’s look at two firms as examples. Does Coca-Cola finally understand that it may be behind in functional beverages? Certainly the firm seems to have been making up for lost time this year. The stock market did not respond well when rival PepsiCo snapped up Gatorade, nor did it seem to react favorably when Coca-Cola announced it would enter a strategic alliance in the foods business with P&G. Since then Coke has reneged on its deal with P&G and has relaunched PowerAde both in the U.S. and Europe. In addition, last month Coke announced its acquisition of Odwalla, primarily a juice company focused on natural products (for more on the Coke/Odwalla deal, see this issue’s Word from Wall Street, p. 28).

In August Coke kicked off its PowerAde reformulation with an athletic exhibition in the streets of New York, featuring jocks from traditional sports like basketball as well as action or extreme sports such as BMX and skateboarding. PowerAde’s formula change includes B vitamins for energy,a “Light” extension with fewer calories and an announcement that PowerAde is reformulated for today since nothing has changed in the sports drink category for 30 years, while exercise and lifestyle have clearly changed. As Coke rolled out the new beverage in Europe in October it reaffirmed that it is the leading provider of sports drinks outside the U.S., something that PepsiCo will surely try to change. Coke’s press release noted that the European sports drinks market is about 20% of that of the U.S. in volume. Coke attacked both markets this fall and seems to be making a real effort to gain foothold in the global market before PepsiCo pushes Gatorade across the waters.

Now with the purchase of Odwalla, Coke is starting to try to reclaim its spot in innovation. Coke also had sat and watched as PepsiCo bought SoBe, a mostly hype new-age beverage containing herbals. The word ‘innovation’ appeared prominently in Coke’s press releases about Odwalla with an emphasis on Coke’s Minute Maid division using Odwalla as a source of future product development.

Coke has also purchased Planet Java and its coffee drinks and Mad River Traders, Inc., purveyor of teas and other drink products, while Pepsi distributes cold Starbucks brand products. Thus, it appears Coca-Cola is pressing forward with both a nutraceutical approach to PowerAde and entries in other beverage markets that at least border functional foods. This is a good example of the nutraceutical trend influencing the strategy of one of the world’s largest beverage firms.

Regarding the other example, consistently in the headlines over the past year has been ADM. At the company’s annual meeting of shareholders November 1, Chairman G. Allen Andreas stated, “A rapidly growing interest in health and nutrition continues to drive the development of the next generation of functional foods” (ADM press release, 11/1/01). The firm has chosen to brand a host of ingredients with the “Intel inside” approach to food and supplement ingredient using nutraceuticals. As a leader in soy processing, the firm markets the ingredient Novasoy as a branded soy dietary supplement ingredients and Nutrisoy as a food and beverage ingredient. In addition, it launched a new cold-water dispersible form of d-alpha tocopherol as a source of vitamin E in Europe and the U.S. Its d-alpha vitamin E is a branded ingredient that is carried on several brands of supplements.

According to The Tan Sheet (5/14/01), ADM received GRAS status in May from FDA for its Cardio-Aid brand of cholesterol lowering plant sterols. Cardio-Aid is a combination of soy, phyto­sterols and lecithin, according to the firm. It sees the ingredient being incorporated into beverages, yogurts and bars, among other foods. In addition, ADM had launched Soy7, a blend of natural soy protein, which is included in Martha Gooch pasta. It even picked up an exclusive license for flax lignan technology with Flax Consortium of Canada. Thus, ADM now has a large array of branded nutraceutical ingredients.

ADM reorganized in September by creating a Food and Bio-Products Division, of which Health and Nutrition or value-added products as ADM calls their nutraceuticals, is one of the three legs, along with food and feed. Thus, ADM sees nutraceuticals as a way to have competitive advantage versus other food grain suppliers and processors. It has moved from being a firm competing in a commodity market to a strong attempt to set itself apart by participating in nutraceuticals. It is also unique in its direct-to-consumer approach with advertising that actually mentions the word “nutraceuticals.”

Thus, while many big firms have become involved in nutraceuticals through mergers and acquisitions or alliances, we also see product development as a primary strategy of both Coke and ADM. We expect more firms in foods and supplements to be gobbled up or to become part of an alliance. Yet we won’t be surprised to see nutraceuticals affecting strategy in product development for the future.NW