Functional food: the saviour of a stagnating food industry or unfounded hype? Dynamic as it is, the sector currently remains a small niche. The potential for growth is huge, and players in the sector are forecasting ambitious profit growth. New research brings you the very latest in analysis of this segment, and this feature offers a snapshot of the report.
Functional food does not describe a distinct food category as used in conventional market analysis, for example, frozen food or bakery items. The term takes in a fast growing range of food industry developments that cut across traditional grocery categories. The original definition of functional foods saw the category as part of the normal diet, recognised as beneficial for well-being and health. Nowadays functional foods can be seen as products with something added or promoted because of their intrinsic health benefits.
The two major factors driving the functional foods sector can be described as firstly, changing consumer attitudes to health and an accompanying shift in attitudes to food and, secondly, a means of achieving valued added growth and profitability in very competitive food markets.
Although functional foods have been proclaimed as the saviour of a stagnating food industry, it must be remembered that when compared to the total food and drinks market, the sector continues to represent a very small niche. Although some observers in the USA believe that functional foods is already accounting for a 5% share of consumer annual expenditure on food and that this proportion will grow by double digit figures in the foreseeable future, just-food.com believes that this is overstated and that the true proportion lies closer to between 1% and 2%.
Still estimating sector size

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“Evaluating market size is complicated by the definitional problem and the nascent nature of the product category. “ |
The range of estimates for the market size of the functional foods sector varies from US$6.6bn (taking in the narrow definition only) in 2000 through to US$34bn if the broader definition is used. In comparison the respective market size figures in 1998 stood at US$5.6bn and US$28bn.
In terms of segmentation of the market by region, Japan (the most sophisticated global market for functional foods) is also the largest market in the world with a 38% share in 2000 (taking the narrow definition of the market) followed by the USA and Europe, each with a 31% share.
Milking the market
“The largest category … is dairy products, principally due to the importance of the sector in Japan and Europe. “ |
Evolving regulatory environment
The regulatory environment for functional foods is extremely complex and constantly evolving. In the absence of a stringent legal and regulatory background, in many markets functional food producers are working within a “grey area” of health claims legislation, where what may be accepted in one country may not be in another. Indeed, there is strong industry support for the view that the lack of a clear regulatory environment relating to health claims on foodstuffs will present an important barrier to the future growth of the global market.
Five marketing strategies
It can be argued that five marketing strategies are currently driving growth in the functional foods sector. Firstly, the least risky route is that of fortifying already existent brands with added vitamins and minerals. Secondly, there are companies entering entirely new markets with new products, which it is hoped consumers will purchase as a replacement for existing brands. Thirdly, there are a very small number of companies creating an entirely new category focused on an innovative functional product line. Fourthly, there are companies finding ways of creating new brands to compete within existing product sectors, resulting in a boost to the overall turnover of the category. Finally are those players using the “health” proposition of a rival product sector and branding accordingly to attract more customers.
Over the past few years there has been a clear market repositioning by food companies, especially ingredient suppliers, in terms of declaring the extent of their commitment to and investment in functional foods. Included in this category are food companies such as Unilever, ConAgra, Nabisco, Quaker, life science companies such as DuPont, Monsanto and Novartis as well as the transnational food ingredients companies. Many have set up functional food or human health divisions to exploit market opportunities.
In the functional foods sector, as in no other, the challenge to find “innovative” ingredients is resulting in a plethora of strategic partnerships between global food and drink companies and technology focused pharmaceutical and healthcare operators.
Both parties bring benefits—the large food giants offer global distribution, marketing and branding skills, whilst the specialist companies offer the ability to innovate. Food companies have to be more “science centric”—i.e. an increased emphasis on safety, efficacy testing as well as learning about new distribution channels, for example, healthcare professionals. On the other side of the equation, pharmaceutical companies need to be more “consumer centric”, i.e. more mass market orientated, shorter development cycles, etc. In this context, strategic partnerships or joint ventures are a critical component of sustainable success in the sector.
Maturing slowly
What is fast becoming apparent is that the functional foods market will take some time to develop to maturity. Whereas originally claims for fast growth were abundant, increasingly industry observers now believe that the market will take between five and ten years or even up to fifteen years to mature.
The development of the functional foods sector has been compared to that of organic foods where over a longer term period what has changed is not so much the product, as the public perception of what the product represents. In this context functional foods will not meet with mainstream success overnight.
However, it is acknowledged that the functional foods sector could be growing at up to 15% annually when most of the food industry is only growing at between 1% and 3%. Estimates of what the global functional foods market could achieve by 2003 vary from US$28bn up to US$51bn.
The factors most likely to impact on the performance of functional foods include product promotion, consumer education, proof of efficacy and endorsement by the medical profession.
One of the key tenets for future product development strategy in the sector will be the increased targeting of functional foods at specific demographic sectors, be it women, children, athletes etc.
Following in Japan’s footsteps
“Japan … will set the tone for further developments in the USA and Europe”
Many industry observers believe that what is happening in Japan in the functional foods arena will set the tone for further developments in the USA and Europe. The Japanese market is unique both in the range and diversity of functional lines on offer as well as in the role that the government plays in promoting functional foods. The country has become internationally known for its system for the regulation of functional food, FOSHU (Foods for Specified Health Uses), with the potential of this system serving as a model in the US and Europe for allowing health claims on individual functional foods.
Enormous opportunities
Indisputably the opportunities in the functional foods sector are enormous. There is substantial scope for further product development and value added growth as well as the potential for further market segmentation and niche marketing. In addition, the functional foods market remains largely underdeveloped outside the three major markets of the States, Europe and Japan.
“Ultimately, those manufacturers who succeed … will be those who take a long term view” |
Ultimately, those manufacturers who succeed in this challenging and complex sector will be those who take a long term view, based on an extensive commitment to consumer education, a credible innovative product proposition reinforced by strong pricing and marketing strategies and probably as part of a strategic partnership involving both a food industry and pharmaceutical industry player.