Functional foods and beverages are wholly misunderstood. Discussion and debate continue about their classification (what are functional foods and beverages), regulation and realization (how to succeed in the category).

As we debate the merits of these products, we fail to focus on the one key element that matters most. Debate all you will, it all comes down to how consumers perceive a product and whether it fulfills a desired benefit or need. This is where the well-publicized functional food product failures have occurred. And conversely, this is where we have been witnesses to stunning successes.

Defining the Landscape
In order to create some understanding of this unique category we should first define the landscape of functional foods and beverages. The facts speak for themselves. Nutrition Business Journal (NBJ), San Diego, CA, estimates U.S. sales of functional foods exceeded $18.2 billion in 2001, growing at over 8%. Functional foods represent about 3.5% of the total U.S. food market. Front Line Strategic Management predicts sales in excess of $32.7 billion by 2005. And sales of fortified foods and beverages more than tripled between 1997 and 2001. Functional beverages represent another $7 billion and growth rates are upwards of 12%.

The incredible changes that occurred in our post-industrial diet have led to a nutritional crisis in America (and most Western nations). Our pre-industrial diet was calorie rich and nutrient dense, and was exceptionally biodiverse. But in our post-industrial society we have championed the Western diet, which is calorie rich and nutrient poor, and we have effectively removed biodiversity from our diet.

Today, 99% of American children don't get the USDA recommended number of servings from each of the five major food groups every day. (French fries and potato chips account for 25% of childrens' vegetable intake.) And only 25% of boys and 10% of girls consume the recommended daily amount of calcium.

About 90% of the money that Americans now spend on food goes to buy processed food. There are approximately 10,000 new processed-food products introduced every year in the U.S. Not surprisingly, processed foods tend to contain lower levels of antioxidants and other important phytonutrients than fresh fruits and vegetables and whole grain products. Increasingly, studies are demonstrating a relationship between our (Western) diet and the explosion of chronic diseases.

The awareness of these and other related issues have created an unparalleled consumer demand. While dietary supplements began to address these needs- dietary supplements skyrocketed to become a $15 billion business within a few short years-the market for dietary supplements imploded as there have been increasing concerns about drug interactions, ingredient efficacy, product quality, testing standards, and news about fraudulent claims have proliferated the mainstream. These (and other) consumers are still seeking lifestyle antidotes, although they are now seeking them in the form of "functional" foods and beverages.

Functional Foods vs. Dietary Supplements
According to FMI/Prevention data, more shoppers opt to use functional foods and beverages than dietary supplements. In fact, nine out of 10 shoppers prefer naturally nutritious foods to supplements (FMI/Prevention HealthFocus, 1999). Buoyed by positive media coverage (80%), 59% of people claim to be eating up to three foods for their functional benefits, 93% believe certain foods have health benefits that may reduce the risk of disease and 86% are interested in learning more about functional foods (IFIC, 2000). Consumers are incorporating more functional foods in their diet, representing a shift from eliminating the bad (fat, sodium, calories) to adding the good into their food. Seventy-six percent of shoppers reported using functional foods in the last year (NMI, 2000).

Traditionally foods have provided for us either taste/convenience benefits or nutrition/enhancement utility. But functional foods and beverages offer the consumer both and address their increasing concerns about diet by offering the nutritional solutions sought in dietary supplements with the taste and pleasure of "traditional" foods.

Types of Functional Foods
It is apparent that consumers have a need and a desire, which functional foods and beverages can fulfill. Before evaluating successes and failures in the category, defining three types of functional products is essential.

First, there are those products that naturally contain a beneficial bioactive phytonutrient. As modern science has been able to better qualify the bioactivity of our foods, manufacturers have "called-out" those compounds that infer health benefits. This "call-out" marketing currently constitutes the majority of functional products. As an example, Welch's grape juice sales increased 33% in 1997 after published clinical research validated the health benefits of grapes' bioflavonoids. Cheerios sales increased by 11% after General Mills incorporated an approved health claim promoting the virtues of its whole grains.

Secondly, there are those products that incorporate a beneficial bioactive compound into a "fortified" product. This is currently the second largest segment of functional products as illustrated by Tropicana Pure Premium's inclusion of calcium, driving sales up 173% and building a new category segment in the refrigerated juice business.

Finally, there are those products that are engineered for bioactive benefit. This is the most significant emerging segment of functional products. Gatorade and Red Bull are two stellar examples. The former created a $2 billion category and currently holds an 86% share and the latter built a $1 billion business with sales increasing at 118%.

Successes & Failures
Ninety-five percent of consumers believe certain foods have benefits that go beyond basic nutrition and may reduce the risk of certain diseases (IFIC, 2000). One needs only to look at the explosive nutrition bar category to validate the migration and adoption of functional benefits. Between 1995 and 2000 nutrition bar sales have increased nearly 567% (ACNielsen, 2001), and Frost & Sullivan is predicting sustained double-digit growth for the next several years.

Several companies early on recognized the potential of functional products. Yet some of these early adopters were blinded by science, failing to recognize that while consumers are seeking functional nutrition, they perceive food as food, not as medicine. These early failures followed the misguided approach of packaging a scientifically validated (and often complex) therapeutic payload into a food or beverage. Functional foods and beverages should not be positioned as therapeutics since consumers don't want to eat from their medicine cabinets.

Some of the early failures included products such as Benecol and Intelligent Quisine. Both of these functional products failed at understanding the lesson Tropicana Pure Premium with calcium taught us; they are simply food and beverage products that provide a health or wellness advantage over existing food options, nothing more, nothing less. Successful functional food and beverage products all take the approach of delivering to consumers a healthier alternative to the current consumer product offerings.

In analyzing some of the successes in functional foods and beverages, it becomes apparent that the formula is found with products that enhance consumer lifestyles. This is the primary reason that functional foods and beverages are seeing such explosive and sustained success. Consumers are moving away from the "food negative" paradigm (where we were told what not to eat) and are seeking the food positives (added functional enhancement benefit).

For sustained success in the functional food and beverage category, five common denominators prevail. First, they all created new brands rather than leveraging existing ones. Second, they all built new categories or sub-segments in the market. Third, all of them are marketed for their enhancement or wellness benefit, not based upon the science or clinical data. Fourth, they all offer the consumer a portable and convenient alternative. And finally, something many dietary supplements could not offer, they all have an experiential quality whether through taste or physiological effect.

Consumers are no longer seeking products as much as they are experiences. Starbucks offers consumers a complete experience, not just a more expensive cup of coffee. Functional foods will be successful so long as they address wellness needs and do not act as therapeutics.

About the author:
Peter Leighton is vice president, marketing & product development, Natrol, Chatsworth, CA. He is also a founding partner of Copernican Associates, a business consulting practice with clients in pharmaceuticals, packaged goods, nutrition, biotechnology and sustainability market segments. Mr. Leighton can be reached at 925-944-9945, 801-550-6962; E-mail: peter@copernicanassociates.com.