Source: LOHAS Weekly Newsletter
Published: Tuesday, December 01, 1998

NEW YORK—Armed with what they hope is law on their side and banking on strong U.S. consumer acceptance, conventional foods and OTC drug makers have within the past 60 days announced that they will launch products that fall under the increasingly nebulous term “functional foods.”

If successful, the entry into this category by major mass-market foods and drug companies could create a global marketplace estimated at between $25 billion and $200 billion, according to some observers.

The New York-based research firm Datamonitor estimates the U.S. market for functional foods was about $8.9 billion in 1996, the latest figures available, and has grown at a 12.9% compound annual rate for the last five years. If dietary supplements sales are included in the sales figures, the 1996 figure rises to $16.8 billion, but the compound annual growth rate slows to 10.9%. In either case, Datamonitor’s numbers show the U.S. market as the largest and fastest growing in the world.

For years functional food-style products, sometimes called nutraceuticals, have existed in natural foods channels, mostly in beverage or energy-bar form. Power Bar, one of the first energy bars on the market, has been joined by Clif Bar, Balance Bar (BBAR), and beverage maker Odwalla’s (ODWA) Odwalla Bar, and others. Gatorade—arguably the first mass-marketed functional beverage—has been joined by myriad other electrolyte-replenishing drinks. Natural juice makers increasingly embrace the category with vitamin C and botanicals-infused beverages.

Hain Food Group (HAIN) also has joined the group with its new herbal Kitchen Prescription soup line.

But now companies with major mass-market clout such as Kellogg (K), Unilever (UN) and Johnson & Johnson (JNJ) not only are testing markets for these products but also are betting on them to reenergize corporate bottom lines.

Kellogg is a particular case in point. The cereal company in November unveiled its Ensemble line, the functional ingredients of which are psyllium husk and whole oats. The line currently consists of cereal, frozen entrees, bread, pasta and snacks. It will be launched in IL, IN, OH, MI and KY in March 1999, and Kellogg plans ultimately to take it global.

At Ensemble’s launch, Kellogg Chairman and CEO Arnold Langbo went so far as to say that Kellogg needed even more functional foods to turn around its lagging quarterly earnings, which declined 32% in 3Q98.

Kellogg spokesperson Anthony Hebron says Kellogg isn’t disclosing how much revenue it expects to generate with the new line but will say products will be competitively priced with other products in their respective categories. Ensemble’s bread, for example, will carry a suggested price of $1.99 a loaf.

Hebron won’t comment specifically on the lines’ anticipated margins other than to say that he expects Ensemble cereals to generate similar margins to Kellogg-brand cereals. Margins on cereals are generally assumed to be between 60% and 65%.

Lipton, a division of Unilever, in 1Q99 will launch its Take Control line, the functional ingredient of which is plant stanol from soybean extract. Currently, the line contains two margarine-style products.

Lipton spokesperson John Gould says the company hasn’t priced the Take Control line yet.

Johnson & Johnson’s (JNJ) McNeil Consumer Healthcare division has been planning for months to test-market its new Benecol line, the functional ingredient of which is stanol ester, made from plant stanols derived from wood pulp and developed by the Finnish company Raisio. The line currently includes what McNeil Director of Communications Amy Weiseman calls a “diet spread” and several salad dressings. Benecol’s spread will be available in individual packets packaged together to constitute a recommended week’s supply. The package will cost between $4 and $6.

All three companies say their new entries promote heart health by lowering cholesterol levels. Indeed, heart-health claims have been authorized by FDA for soy, whole oats and psyllium as food additives.

Perhaps taking a lesson from Campbell Soup Co.’s (CPB) failed Intelligent Cuisine line—a functional foods line that was distributed through doctors’ offices and to consumers’ homes via United Parcel Service—Benecol, Take Control and Ensemble will be sold in regular grocery-store channels.

But not all will be marketed as food, a circumstance that has created a regulatory hurdle for at least one product; whereas Kellogg says Ensemble will be marketed as food, McNeil is marketing Benecol as a dietary supplement, and Lipton also is considering marketing Take Control as such.

That decision puts Benecol and perhaps Take Control under the purview of the supplements industry’s hallmark Dietary Supplement Health and Education Act (DSHEA), instead of FDA food law. DSHEA allows dietary supplements to come to market almost immediately. Products marketed as food with additives must have FDA approval, which can take months or more.

But, in Benecol’s case, FDA says the product doesn’t currently conform to DSHEA standards, not because of the ingredients it contains or its food-style delivery system, but because of the way it portrays Benecol on product labels.

Shortly before Benecol was scheduled to be test-marketed in Portland, OR, McNeil President Brian Perkins received a letter from FDA stating it had reviewed the prototype label for Benecol spread and determined it portrayed the product as a food, not a dietary supplement.

“…Statements that the product replaces butter or margarine, vignettes picturing the product in common butter or margarine uses, statements promoting the flavor and texture of the products and statements such as ‘help(s) you manage your cholesterol naturally through the foods you eat,’ represents this product for use as a conventional food…not a dietary supplement,” the FDA letter asserts.

After some deliberation, McNeil decided to voluntarily halt the Portland rollout and currently is in talks with FDA to remedy the labeling situation.

“I can’t give you the full details, but we’ve made changes in the wording and the pictures,” Weiseman says. “We feel very strongly about bringing [Benecol] to market as a supplement in food form. We believe we’re a public showcase for DSHEA.”

Anthony Young, an attorney at Washington, DC-based Piper & Marbury, believes FDA’s letter essentially presents an invitation to McNeil to fix Benecol’s labeling. More generally, however, he says the letter should serve as a reminder to natural products companies in the functional foods business to stick close to the letter of DSHEA with respect not only to label wording but to the way a food-style dietary supplement is visually portrayed.

Simply put, “You cannot promote dietary supplements in conventional food terms,” Young says.

As regulatory hurdles are cleared, however, it still remains to be seen whether consumer acceptance in the U.S. will help build the huge markets some predict for functional foods.