Functional foods kicked off in Japan, and the US has been quicker to catch up than Europe. While each market has its individual characteristics and difficulties, many of the lessons learned in Japan and the US can be implemented in Europe, argues Kirill Devrenski of PROMAR International.
Contemporary fascination with functional foods is easy enough to explain. As some industries are plagued with product commoditisation (as is the case with the European food industry), and traditional revenue sources dry up (pharmaceuticals), any new extension capable of generating extra value is welcome. Yet the very concept of functional foods is not fundamentally new. After all, our cats and dogs have been able to take advantage of specially formulated and enhanced foods for a few decades now, with the result being longer life-spans, shinier coats and stronger bones.
In 2000, an average Japanese spent close to US$200, an American US$130, while an average European spent less than US$80
Today we want more from our lives. A phrase from a recent James Bond movie – “There is no point in living if you can’t feel alive” – rings true with many individuals. Everywhere in the developed world, people want to actually live longer, as opposed to taking longer to die. Whilst overall longevity of life has been increasing, quality of life in these extra years has not followed suit. We all know and pity elderly people suffering either from brittle bones, hip fractures, or indeed a host of other age-related conditions. And, whilst we all rely on medical advances, they often come too late for many. By their definition, medications are designed to fix/alleviate a condition, not to prevent it. Coupled with the fact, that national healthcare services across Europe are becoming more of an emergency service, more people are becoming self-reliant in terms of escaping some preventable medical conditions. With greater awareness of the link between diet and health many people turn to foods for health maintenance.
Europe has been slower than Japan and the US in embracing functional foods. In 2000, for example, an average Japanese spent close to US$200 on functional products, an American US$130, while an average European spent less than US$80. Normally, being a latecomer has some tactical advantages. For example, new technology can be tested elsewhere and only working solutions transplanted. Similarly, experience is cheaper to buy than to develop internally.
This is not necessarily the case with functional foods. For these to take off, several conditions must be met, not one of which has anything to do with food functionalisation per se. Rather, the legislation must be favourable, consumers welcoming and companies credible and knowledgeable. As a result, the functional food sector blossoms where these conditions exist (Japan), develops gradually where they are being met (US), whilst confusion prevails in Europe.
Functional food markets make-up in Japan and the US
Population: 126 million
Population: 270 million
FF market: US$11.9 billion*
FF market: US$18.2 billion**
* Breakdown by Function
** Breakdown by product category
In today’s highly regulated markets, legislative attitude to health claims acts as a primary indicator of the functional sector’s viability. Legislation-wise, Japan is the most developed country, while Europe is lagging behind considerably, with the US somewhere between the two. It must be noted here that, whilst both in the US and Europe legislators have been slow to react, the US market is relatively more advanced in terms of functional food penetration vis-à-vis the European one. This is because the key difference between the two legislatures lies in the very way they operate. In the US, everything which is not explicitly prohibited is permitted, whereas in Europe the opposite is true. Consequently, whilst in the US companies can take a pro-active approach, European manufacturers have to wait for the go-ahead from regulators, which greatly inhibits innovation and product introduction.
Japan is the only country so far where functional foods have official definition and status. The concept was formalised in 1984, with the current category of Food for Specified Health Use (FOSHU) – tokuho – set up in 1991. FOSHU are defined as “foods with a physiological function in addition to normal nutritional or sensory properties,” and are subdivided into a dozen plus categories by function. These categories include intestinal regulation, skin care, bone structure, cardiovascular and immune system regulation among others. In order to qualify for the FOSHU logo, the product must meet a number of requirements, viz.:
- It must aid in health preservation
- It must have health benefits based on medical or nutritional claims
- The food or its components must be safe
- The food must be consumed as a normal part of the daily diet, and
- The product cannot be in tablet or capsule form.
It must be noted that the FOSHU system, while government-regulated, actually operates under a voluntary agreement. Since the programme’s inception in 1991, around 300 functional products have been proposed for approval, of which under 200 have actually obtained it. Many companies market products that are functional in nature but do not have FOSHU approval. In fact, the ratio of FOSHU approved versus non-approved products on the market is around 1 to 9, i.e. for every FOSHU product there are 9 free-riders. The Japanese government allows these sales as long as businesses do not make explicit health claims.
The ratio of FOSHU approved versus non-approved products on the market is around 1 to 9
By comparison, the US legislation is less clear-cut. Whilst the government is yet to come up with its categorisation of functional foods, the agencies charged with regulating their manufacture and marketing, including the Food and Drug Administration (FDA) and the US Department of Agriculture (USDA), have established some rules for companies to follow. These include regulations on pre-marketing approval, labelling and advertising, as well as manufacturing processes and procedures. Importantly, the FDA has also introduced a dozen or so ‘associative’ generic claims (for example, link between sodium and hypertension, calcium and osteoporosis) which can be used in order to promote products containing these components.
However, these moves are still seen as insufficient by both regulators and businesses alike, and the need to take them further is acknowledged by all parties. In particular, consumer advocates urge the introduction of a detailed regulatory system while the industry is against strict guidelines.
By contrast, the EU legislation is most stringent as far as functional foods are concerned. In fact, health claims of any kind are explicitly prohibited by the EU’s Food Labelling Directive, leaving companies no room for manoeuvre. This makes European functional food market ill-defined and very uncertain for businesses. The situation is further compounded by the Novel Food Directive, stipulating that every new (not only functional) ingredient not currently approved for use in the EU, must be taken through an approval process. As a result, the European legislation is dubbed as ‘a potentially deadly factor’ for functional foods to the extent that ‘food innovation may now be impossible in Europe’.
There is, however, some hope that the issue will be addressed in the nearest future. In particular, the European Food Standards Agency (to be launched in 2002) is expected to streamline current, and introduce new, regulations concerning functional food production and marketing.
There is a number of consumer characteristics which are seemingly shared across Japan, the US and Europe and which, at least in theory, should have contributed to a wide across-the-board uptake of functional foods. These characteristics include, but are not limited to, the following:
- Demographic make-up of national population is heavily influenced by OAPs and retiring baby boomers
- Soaring costs of healthcare provision resulting in reduced access to some forms of treatment, particularly in Europe
- Nascent consumer drive to health and wellness maintenance in disease prevention
- Greater awareness between the links between the individual’s diet and state of health.
However, the simple presence of the above factors is hardly sufficient. An important determinant for functional food success lies in consumer willingness to use them. While in Japan extraordinary popularity of technology drives ‘functionalisation’ of foods and consumer confidence is high, the Americans are broadly supportive of the concept. By contrast, European consumers are very negative towards the idea of the idea of ‘tampering’ with food, and see comparatively more personal benefit in organics.
In order to be successful, a company needs to be credible in the eyes of the consumer
Looking at the recent functional food launches (and failures), one key observation is apparent: in order to be successful, a company needs to be credible in the eyes of the consumer. In the food industry, both Campbell Soup and Kellogg have tried to launch ranges of functional foods (Intelligent Quisine, and Ensemble, respectively), and failed after a year or so on the market. Amongst the reasons cited for these demises, were lack of promotional effort and ‘slow consumer uptake’. While the former maybe true, the latter is certainly so. A US survey showed, that, when questioned on functional products by food or pharmaceutical companies, most consumers indicated that a product manufactured by a pharmaceutical company would be more credible. The trouble was, very few respondents could actually name a pharmaceutical company, a considerable marketing disadvantage which Novartis has discovered to its disappointment after the unsuccessful launch of its Aviva Foods in the UK.
By contrast, in Japan, pharmaceutical companies are firmly in the lead as far as functional foods are concerned. Companies such as Otsuka Pharmaceuticals, while supplying medicinal preparations, also have a long established consumer franchise through their food and drinks arms. They are thus able to build both on their health maintenance credibility, and consumer exposure, to generate, as is the case of Otsuka, some US$600m in sales of functional products.
The functional food market is unique insofar as it is not something easily comparable across countries and continents. Because consumer attitudes to, and perceptions of, their foods differ greatly around the globe, every market will develop its own functional foods sector, driven by local issues and/or concerns. That said, there are a few conclusions that can be drawn from the Japanese and US experience, which must be noted for developing a successful functional food business in Europe:
- Legislation… Legislation must encompass functional foods, and it must be clear. In Europe, some national governments have stepped in to fill the void through local codes – UK, Sweden), however, it is not nearly enough for developing a coherent European policy. Additionally, rules of IP protection for functional foods need to be established for pharmaceutical companies to become fully involved in the sector.
- Company credibility… As experience shows, lack of credibility (be it as a pharmaceutical or food manufacturer) leads to costly exits and disillusion with the sector potential. Joint ventures, similar to Altus between Quaker Oats and Novartis in the US, is a possible way forward to build this credibility.
- Consumer education… Consumer education is the key to successful product uptake. The European consumer is potentially ready to embrace new foods and food formats, however, more educational effort is required if the current functional niche is to become profitable in the mainstream.
- Marketing routes… Finally, companies need to be clear as to what they are actually selling. Much confusion is currently fuelled by the disorienting messages received by consumers. ‘Is it food, or is it medicine?’ they ask. Failure to answer clearly will be detrimental to the sector’s development.
By Kirill Devrenski, senior consultant, PROMAR International