Our news section was packed this month with some pretty exciting developments in both the dietary supplement and functional food markets. Here are some of the latest headlines: Americans Scrap Dieting for Healthy Eating, Health & Wellness Sales Top $102 billion, and U.S., China Agree to Research Traditional Chinese Medicine-and that's just the first page. As the economy continues to endure challenging times, consumers are looking for salvation in the form of healthy foods and supplements. So it's no surprise that there is such a high amount of interest and activity in this area. But the news isn't all good.

At the NBJ Summit in July, David Thibodeau of Canaccord Adams, an investment bank focused on the nutrition segment, gave a presentation on the financial health of the industry. He says that while companies are benefiting from major demographic trends such as aging and obesity, the financial picture is turning bleaker for the industry in 2008, as the credit crunch continues to squeeze private equity and fuel prices continue to put pressure on companies struggling to maintain the best price for their products. On the consumer level, he says money is being diverted to energy instead of products. "Over the next 12 months expect to see a lot of volatility in the stock market," he said. "Segments that will likely emerge un­scathed from these tough times include omega 3s, probiotics and organic foods."

But you don't have to take Mr. Thibodeau's word for it. Just look at how Whole Foods is doing. According to a recent New York Times article, the company, once idolized on Wall Street, has seen its stock drop 70% since 2006. As a result, the company is resorting to "budget-focused" store tours in an effort to prove to consumers that it is just as competitive as the more value-oriented mainstream grocery chains.

Despite the sluggish economy, Mr. Thibodeau says there is some M&A activity happening, although deals are not taking place at the pace seen in previous years. In addition, private equity firms continue to compete fiercely for quality companies. Things to bank on for the future, he said, include kids nutrition, probiotics and inner beauty.

A slightly more reassuring piece of information came across my desk in mid-August. It discussed a world in which dietary supplements and functional foods could coexist happily, without one cannibalizing the other. According to Euromonitor International, a global market research firm, functional foods and beverages will continue their impressive growth-34% between now and 2011. Likewise, supplements will also gain significant ground during the next several years, growing a hearty 18%.

One area likely to garner a lot of attention is "beauty from within." Last year alone Euromonitor indicates the beauty-enhancing supplements market rose 17%. While this certainly seems like a promising direction for foods and supplements, it is important to approach consumers with inner beauty concepts very carefully. Some words of caution for those connecting ingestible nutrients with appearance benefits: consumers will be skeptical of formats that run counter to their understanding of oral beauty products. (Remember what happened to Benecol?) In other words, soups that contain collagen-an ingredient that makes more sense in a skin health supplement, not in soup-will probably fail. Soup has never been a logical or lucrative medium for "functional ingredients" beyond simple vitamins and minerals.

On the other hand, using functional beverages as a delivery system for beauty ingredients does make sense. As pointed out by DSM's Caroline Brons in this issue's anti-aging feature (page 60), functional beauty beverages are ideal for a couple reasons: beverages hydrate the skin, while the added nutrients nourish the skin.

So the news isn't all bad and it isn't all good, but that's not really the point. Did you take an opportunity to learn something from it? That's the most important thing.

Rebecca Wright
Editor
rwright@rodpub.com