I remember back in the 1990s sitting in meetings at Nature’s Way talking about the potential of the functional food and beverage sector, which at that point was in its infancy. Now, well over a decade later, we are in the ramp up to significant expansion of the category with new products entering the market on an almost daily basis. A simple walk down the beverage aisle of Whole Foods provides an excellent example of the proliferation that has occurred.

The sheer volume of functional beverage entries is both staggering and intimidating. Even more sobering, 50% of those brands probably won’t be on the shelf one year from now. The beverage isle is a brutal retail battleground where brands either thrive or die.

Functional food brands have not yet proliferated to the extent that functional beverages have, but based upon a review of marketplace activity and trends many more functional food introductions are on the horizon. And the key driver here is the consumer, believe it or not. In survey after survey, consumers have stated they prefer their health and wellness to result primarily from what they eat and drink, so it is not a huge leap to expect expanded growth for this market in the near future.

What is a Functional Food?

As defined by the Institute of Medicine (IOM), Washington, D.C., functional foods are “those foods that encompass potentially healthful products, including any modified food or ingredient that may provide a health benefit beyond the traditional nutrients it contains.” Functional foods can include cereals, breads, yogurts, snacks and beverages that are fortified with vitamins, herbs or other specialty ingredients. A specialty ingredient may be a naturally nutrient-rich whole food source such as spirulina, garlic, soy or a specific component of a food, such as omega 3 fatty acids from salmon.

Market Dynamics

Functional foods and beverages represent roughly a $40 billion category in the U.S. retail market. Growth between 2009 and 2010 slowed a bit compared to 2008—primarily because of the recession—and saw the discontinuation of many slow moving entries, particularly in the beverage sector. That being said, the functional food category is still outpacing traditional food and beverage sales in the U.S.

Not surprisingly, nearly 90% of functional food sales occur in mass-market channels, including food, drug, mass volume stores (e.g., Wal-Mart/Target) and club stores (e.g., Costco/Sam’s). Large consumer packaged goods (CPG) companies such as General Mills, Kraft, Nestle, Tropicana and Coca Cola have led the charge in this sector during the past several years, and they continue to own the category in the minds of consumers looking for added functionality.

It is also interesting to note that almost 60% of functional product sales occur in the beverage sector, which has taken the lead in both product development and consumer education.

Unfortunately, roughly 80% of new functional products fail in the marketplace. This is largely due to inadequate promotion, inadequate consumer and trade education (i.e., just because it is a food, don’t assume that consumers will readily see the added value or be willing to pay more for it), and the fatal flaw of introducing what is basically an undifferentiated “me-too” product (i.e., how many energy drinks can the market support?). Despite increased creativity and innovation in the functional products sector, don’t expect this failure rate to improve anytime soon.

Food-Supplement Convergence

One trend in product development and consumer demand that is hard to ignore is the merging of foods and dietary supplements. It’s no secret that consumers would prefer to get their nutrients primarily through the foods and beverages they consume, rather than taking additional supplements to fill in the gaps.

Consequently, manufacturers on both sides of the equation are working to find ways to deliver efficacious doses of nutrients that meet taste and performance expectations when formulated into a food or beverage product.

Several factors are driving this convergence, including:

• A depressed economy
• 2-for-1 mentality
• Pill fatigue among older Baby Boomers
• Rise in overall health awareness among Americans
• Convenience
• Trend toward simplifying life and nutritional intake

Another clear factor in the convergence of foods and supplements is the emergence of “gateway nutrients.” Consumers are becoming increasingly aware of and perceive certain nutrients as having added value. As their perception of added value increases, they become more willing to pay a higher price for foods that include these nutrients. Examples of gateway nutrients include probiotics, omega 3s, antioxidants, soy and green tea.

At a basic level, there are two primary types of functional food/beverage products:

“Better for you”: foods that contain less or none of certain ingredients perceived by consumers to be less desirable.

Examples include:

• Low sodium soups
• Reduced-fat mayonnaise; cholesterol-free baked goods
• No sugar added desserts

While these products may not be “truly functional,” they do offer consumers a way to manage their nutrient intake and improve their health.

“Added functionality”: foods that offer nutrients in efficacious doses added to food products for improved consumer health and wellness. These types of products fit the classic profile of a functional food.

Examples include:

• High fiber products
• Soy products
• Juices with added calcium or vitamins
• Fortified waters
• Naturally antioxidant-rich juices

Doctor, Doctor

Whether you are talking foods, beverages or supplements, the product development and marketing focus has turned to condition-specific applications.

Increasingly, consumers are shopping to meet their specific health needs and they expect more targeted health solutions.

Some of this targeted shopping behavior is recession-driven, and it helps that retailers are increasingly merchandising products by health needs. But beyond that, consumers are looking for a more focused approach to wellness that allows them to assess the results of taking a product. As such, they will look for specific health improvements, or lack thereof, and modify their shopping accordingly.

Some of the more dominant health conditions include energy/performance, healthy aging, immunity, digestion, cardiovascular health, joint support, weight loss and diabetes.

Spicing Up Formulations

One of the newest (and oldest) players in the functional ingredient space are spices and seasonings, which have long provided flavor to food but are now being positioned as providing health benefits in the proper dosage. Examples of this trend include rosemary, red peppers, oregano, turmeric (curry), cinnamon and ginger.

Spices support numerous conditions according to scientific literature. Turmeric is widely recognized as an anti-inflammatory agent, making it a top choice for joint health formulations. Red peppers (i.e., capsaicin) jumpstart metabolic activity and aid in weight loss. Ginger has a calming effect on the stomach and is a favorite in digestive health products. Cinnamon helps manage blood sugar and rosemary boosts liver function. In short, spices make a valuable addition in nearly every condition-specific category.

Superfruits Still Strong, But Not For Long...

Increasingly, consumers are looking for foods and ingredients that are “naturally functional,” such as blueberries, pomegranates, whole grains, protein, fiber and soy. These types of ingredients have formed the basis of the functional food offerings in the marketplace to date, as they already have some consumer awareness and acceptance. Finally, these ingredients have ODI (old dietary ingredient) status, and are also GRAS for food and beverage formulations. This means manufacturers can make nutritive value-based health claims that are less likely to be challenged by regulators.

As for superfruits specifically, don’t expect this trend to disappear anytime soon. Americans are enamored with these healthy superfoods, at least for now. But the category is showing some signs of fatigue, particularly as mainstream fruits such as blueberries, grapes, cranberries and pomegranates spend heavily to secure their rightful piece of the superfruit market pie. Meanwhile, keep your eyes peeled for ingredients like sea buckthorn berries (for beauty), yacon (for diabetes) and camu camu (for immunity).

Communicating the Value of These Products is Key

The majority of new product failures have to do with what companies didn’t do enough of, specifically promotion, education and market differentiation. As a result, the brand failed to make a connection with the consumer and sales fell short of projections.

Other issues have emerged that have more to do with product development than with marketing. One concern is the lack of efficacious doses offered in functional food and beverage products. If the products lack enough of the active ingredient to provide results for the consumer, the repeat purchase and word-of-mouth referrals will not happen. The consumer is trying to justify the added cost of a value-added product and they are definitely taking delivery of promised health benefits into consideration as they assess whether the benefits delivered are worth the price paid.

Another critical issue is the lack of legitimate consumer research on both the ingredients added to the products as well as the composite functional product itself. More often than not, consumers are doing their homework to see if the added ingredients are clinically proven to be effective.

Finally, the consumer is open to information but needs to be educated about new ingredients with which he or she is not familiar. Ingredients such as fiber, protein and calcium bring with them a cachet of awareness and other attributes, while other ingredients such as antioxidants, probiotics and omega 3s generally require a more thorough job of education and promotion. Product education takes time and money, something most companies underestimate when planning a product launch.

Moms are totally overwhelmed with food choices, which adds pressure when making the right decisions for themselves and their families. Generally, the fewer ingredients on the nutrition facts panel the better. Keeping it simple is their new mantra.

In particular, moms are keeping an eye out for overly processed food products and trying to avoid them whenever possible. Trans fats, high fructose corn syrup, preservatives and artificial flavors and colors are securely on the radar of things to watch out for. Particularly when it comes to staples for the household, such as milk, bread and eggs, they are attempting to change entrenched habits and begin buying whole grains and organic alternatives.

In addition, mothers are increasingly concerned about incorporating more fresh items in the meals they serve. There is tremendous opportunity for functional food and beverage products to take advantage of this desire for foods that provide a dose of medicine. Research shows that the healthier a product is perceived to be, the less processed it is also perceived to be.

Regulatory Roadblocks

One emerging problem within the category, which definitely impacts the consumer, is the increased use of exaggerated or inaccurate health claims. Not only does this represent a significant area of risk for manufacturers with regulatory agencies, but it also erodes trust and credibility for all products at the consumer level.

This type of offense occurs across the board, but is particularly rampant in the immunity, heart, cognitive and weight loss categories. Both FTC and FDA have stepped up their policing of these types of violations. Indeed, recent FTC legal actions against Coca Cola (for Vitaminwater), Kellogg’s (for Rice Crispies and Frosted Mini-Wheats), and most recently POM Wonderful demonstrate the agencies’ desire to clearly define and separate conventional foods and beverages from dietary supplements.

Still, the marketplace battle is far from over, and as consumer demand and education increase, the temptation for companies to make aggressive health claims for their functional offerings will only grow stronger. Meanwhile, both sides show no signs of slowing in both the race to meet consumer needs and to protect the consumer from misleading or exaggerated claims.

Closing the Gap

It’s important to remember that product education in this category is in its infancy. Consumers may talk about eating healthy and making better food choices, but that doesn’t always translate into purchase behavior. The more your customers know about your products’ health benefits and clinical support, the more likely they are to embrace your brand and act on their convictions.

The functional food and beverage category is definitely worth watching over the coming years. Consumers are clamoring for new products that offer enhanced nutrition and functionality. Eventually demand will exceed supply, so let’s get busy!              

About the author: Jeff Hilton is co-founder and partner of Integrated Marketing Group, Salt Lake City, UT. He can be reached at jeffh@imgbranding.com; Website: www.imgbranding.com.