I. Scott Bass, Esq.11.01.03
There has been a good deal of provocative press lately proclaiming the end of innovation in the field of functional foods. These reports of the market's death are premature, and, indeed, do not take into account promising new developments that clearly indicate that the functional food market will be a large, successful venture.
Nevertheless, it is accurate to say that the initial rush past the DSHEA starting post came to a crash after only a few years. That said, it is crucial to examine why that was so, as well as discuss the regulatory and market indicators that compel the conclusion that functional foods are a profitable vector pulling many large and mid-sized companies.
While there is of course no single story that could apply to all of the market segments that did not succeed (nor to those, like beverages, which have succeeded), three principal factors seemed to contribute heavily to the negative perceptions:
• FDA's mishandling of the phytosterol health claim process made the market unattractive to responsible companies, which wished to make substantial investments;
• The promise of DSHEA did not pan out, in large part because industry failed to meet a minimum standard of substantiation; and
• Many companies caught in the Internet profit bubble had unrealistic expectations about the short-term sales potential of these products.
One of the first major ingredients researched, tested and marketed by significant food processing and finished product manufacturers was phytosterols. Benecol Margarine from McNeil, Fort Washington, PA, and later Take Control, from Unilever, New York NY, became the first huge mass market foods containing functional ingredients.
FDA published its initial health claims regulation for these products in a very narrow way that essentially provided a de facto monopoly to the first two companies. Other major companies that had compiled significant research or provided variants of the phytosterol and stanol mixtures petitioned FDA to expand the final health claim. At issue was not just FDA sanction; it was the confidence of the industry that the FDA health claims and GRAS (generally recognized as safe) processes could be utilized to separate the responsible players from the fly-by-night entrants. It was anticipated that major customers such as drug and food chains would only want products that bore FDA-approved messages backed by responsible safety data and claims support.
FDA had a statutory deadline to meet in issuing its final health claim regulation for phytosterols. After compelling companies to meet a short deadline for comments, FDA, because of strained resources and other reasons, dropped the ball. It missed its deadline by well over a year. Industry lost confidence in FDA as a market regulator. "Me-too" products proliferated, cheap science and flimsy substantiation prevailed, and many responsible companies saw no purpose in making large investments and waiting to get products on the market when FDA could never guarantee that the wait would keep untenable competitors off the market.
Those who remained in the market thus turned to dietary supplements, aggressive use of structure/function claims on foods and, increasingly, to the beverage sector instead of investing heavily in research on novel ingredients for conventional foods.
Some industry critics characterized DSHEA as a return to the Wild West. Supporters hoped that the food and dietary supplement industries would utilize DSHEA in a self-regulatory manner that maximized substantiation, encouraged testing and increased the use of dietary supplement-related structure/function claims in the conventional food world.
At the outset, FDA and others denied the applicability of DSHEA structure/function claims to conventional foods. Some food companies viewed the law as an anomaly. After a short time, however, functional food companies began aggressive campaigns to utilize ingredients and claims that had previously been the sole province of the dietary supplement industry. Responsible players were actually doing safety testing, obtaining GRAS opinions and preparing strong substantiation files.
By January 2000, FDA conceded that conventional foods should be treated equally in the burgeoning structure/function arena. At the end of the day, however, industry had failed to establish strong enough self-regulatory standards to stem the tide of Internet marketers and others who abused the field. Some companies put sedatives in snack foods or soups; others promised cancer relief from four to five foods or drinks; and still others put in miniscule amounts of functional ingredients and made outrageous claims for those foods. Congressional and FDA sentiment turned against the industry because of easy targets that caused broad strokes to be painted.
In addition, the continued viability of many of these outliers had created disincentives for large or mid-size companies that wished to do innovative functional food work. Given the fact that patent protection was rarely accessible, that FDA had not provided adequate regulatory support to add a marketing advantage and that there was consequently little time to control information in a responsible way after the discovery of a potential functional ingredient, many companies exited the field.
Many larger companies went into the functional ingredient field expecting nine-figure sales results immediately. Promising projects were scuttled after a relatively short period of time because the market potential clearly pointed in a different direction. With a few notable exceptions, most fell far below expectations, which were more appropriate for mainstream foods such as low-fat products or bottled water.
These developments occurred in the 1990s at the same time that the Internet market drove executives between companies and forced some to exaggerate profit projections. Functional food development, which is necessarily a longer-term project requiring education of consumers, came under the budget knife.
The experience of the health food industry has been that highly educated consumers are the first wave of purchasers and that mass distribution follows. With the proliferation of health information in all consumer media, it is not difficult to develop such a market with a proper plan. Good examples include the oat campaign by Quaker, the cranberry juice campaign by Ocean Spray, the functional beverage entries by many major players after the success of Fresh Samantha, Odwalla and Arizona iced tea, and some of the energy bars.
The products in the previous paragraph are proliferating. Enhanced bottled water is a hot category, a new generation of energy bars is taking front position and functional beverages are booming.
It is also promising to see that some mid-size and larger companies that had been in the food processing field are now developing fractions that are receiving increasing attention. Many of the developments have not yet been publicized, but both domestically and abroad, the byproducts of standard commodities will be the leading functional ingredients of the near future.
Herbs also continue to grow in importance, particularly as trade with China increases. In both Europe and Asia, herbs compliment many traditional food products and their increasing presence in U.S. functional foods is a harbinger of a second category of entrenched functional foods.
At the same time, the regulatory climate has improved. Both FDA and FTC have increased enforcement against false claims and unsafe products. Although this is not making a major dent on the Internet, it is catching the attention of responsible companies that may feel that the tide has turned. Commissioner McClellan has made this a priority and recent legislation proposed by Senators Orrin Hatch and Tom Harkin (S. 1538) would add millions of dollars in enforcement money for this purpose to FDA. In addition, FDA has begun to embrace an expanded structure/function claims position for conventional foods, and has also been forced to accept qualified health claims because of the Pearson decisions. These developments will create fertile ground for new claims for functional ingredients.NW
About the author: Scott Bass is partner at Sidley, Austin, Brown & Wood, Washington, D.C. He can be reached at sbass@sidley.com.
Nevertheless, it is accurate to say that the initial rush past the DSHEA starting post came to a crash after only a few years. That said, it is crucial to examine why that was so, as well as discuss the regulatory and market indicators that compel the conclusion that functional foods are a profitable vector pulling many large and mid-sized companies.
Why did Functional
Foods Falter?
While there is of course no single story that could apply to all of the market segments that did not succeed (nor to those, like beverages, which have succeeded), three principal factors seemed to contribute heavily to the negative perceptions:
• FDA's mishandling of the phytosterol health claim process made the market unattractive to responsible companies, which wished to make substantial investments;
• The promise of DSHEA did not pan out, in large part because industry failed to meet a minimum standard of substantiation; and
• Many companies caught in the Internet profit bubble had unrealistic expectations about the short-term sales potential of these products.
FDA and the
Phytosterol Rule
One of the first major ingredients researched, tested and marketed by significant food processing and finished product manufacturers was phytosterols. Benecol Margarine from McNeil, Fort Washington, PA, and later Take Control, from Unilever, New York NY, became the first huge mass market foods containing functional ingredients.
FDA published its initial health claims regulation for these products in a very narrow way that essentially provided a de facto monopoly to the first two companies. Other major companies that had compiled significant research or provided variants of the phytosterol and stanol mixtures petitioned FDA to expand the final health claim. At issue was not just FDA sanction; it was the confidence of the industry that the FDA health claims and GRAS (generally recognized as safe) processes could be utilized to separate the responsible players from the fly-by-night entrants. It was anticipated that major customers such as drug and food chains would only want products that bore FDA-approved messages backed by responsible safety data and claims support.
FDA had a statutory deadline to meet in issuing its final health claim regulation for phytosterols. After compelling companies to meet a short deadline for comments, FDA, because of strained resources and other reasons, dropped the ball. It missed its deadline by well over a year. Industry lost confidence in FDA as a market regulator. "Me-too" products proliferated, cheap science and flimsy substantiation prevailed, and many responsible companies saw no purpose in making large investments and waiting to get products on the market when FDA could never guarantee that the wait would keep untenable competitors off the market.
Those who remained in the market thus turned to dietary supplements, aggressive use of structure/function claims on foods and, increasingly, to the beverage sector instead of investing heavily in research on novel ingredients for conventional foods.
The Failed Promise of DSHEA
Some industry critics characterized DSHEA as a return to the Wild West. Supporters hoped that the food and dietary supplement industries would utilize DSHEA in a self-regulatory manner that maximized substantiation, encouraged testing and increased the use of dietary supplement-related structure/function claims in the conventional food world.
At the outset, FDA and others denied the applicability of DSHEA structure/function claims to conventional foods. Some food companies viewed the law as an anomaly. After a short time, however, functional food companies began aggressive campaigns to utilize ingredients and claims that had previously been the sole province of the dietary supplement industry. Responsible players were actually doing safety testing, obtaining GRAS opinions and preparing strong substantiation files.
By January 2000, FDA conceded that conventional foods should be treated equally in the burgeoning structure/function arena. At the end of the day, however, industry had failed to establish strong enough self-regulatory standards to stem the tide of Internet marketers and others who abused the field. Some companies put sedatives in snack foods or soups; others promised cancer relief from four to five foods or drinks; and still others put in miniscule amounts of functional ingredients and made outrageous claims for those foods. Congressional and FDA sentiment turned against the industry because of easy targets that caused broad strokes to be painted.
In addition, the continued viability of many of these outliers had created disincentives for large or mid-size companies that wished to do innovative functional food work. Given the fact that patent protection was rarely accessible, that FDA had not provided adequate regulatory support to add a marketing advantage and that there was consequently little time to control information in a responsible way after the discovery of a potential functional ingredient, many companies exited the field.
Excessive Sales Expectations
Many larger companies went into the functional ingredient field expecting nine-figure sales results immediately. Promising projects were scuttled after a relatively short period of time because the market potential clearly pointed in a different direction. With a few notable exceptions, most fell far below expectations, which were more appropriate for mainstream foods such as low-fat products or bottled water.
These developments occurred in the 1990s at the same time that the Internet market drove executives between companies and forced some to exaggerate profit projections. Functional food development, which is necessarily a longer-term project requiring education of consumers, came under the budget knife.
The experience of the health food industry has been that highly educated consumers are the first wave of purchasers and that mass distribution follows. With the proliferation of health information in all consumer media, it is not difficult to develop such a market with a proper plan. Good examples include the oat campaign by Quaker, the cranberry juice campaign by Ocean Spray, the functional beverage entries by many major players after the success of Fresh Samantha, Odwalla and Arizona iced tea, and some of the energy bars.
An Inevitable Market
The products in the previous paragraph are proliferating. Enhanced bottled water is a hot category, a new generation of energy bars is taking front position and functional beverages are booming.
It is also promising to see that some mid-size and larger companies that had been in the food processing field are now developing fractions that are receiving increasing attention. Many of the developments have not yet been publicized, but both domestically and abroad, the byproducts of standard commodities will be the leading functional ingredients of the near future.
Herbs also continue to grow in importance, particularly as trade with China increases. In both Europe and Asia, herbs compliment many traditional food products and their increasing presence in U.S. functional foods is a harbinger of a second category of entrenched functional foods.
At the same time, the regulatory climate has improved. Both FDA and FTC have increased enforcement against false claims and unsafe products. Although this is not making a major dent on the Internet, it is catching the attention of responsible companies that may feel that the tide has turned. Commissioner McClellan has made this a priority and recent legislation proposed by Senators Orrin Hatch and Tom Harkin (S. 1538) would add millions of dollars in enforcement money for this purpose to FDA. In addition, FDA has begun to embrace an expanded structure/function claims position for conventional foods, and has also been forced to accept qualified health claims because of the Pearson decisions. These developments will create fertile ground for new claims for functional ingredients.NW
About the author: Scott Bass is partner at Sidley, Austin, Brown & Wood, Washington, D.C. He can be reached at sbass@sidley.com.
