Nutraceuticals are functional foods are
defined as products derived from natural sources, whose consumption is likely to benefit
human health and enhance performance. These foods are in the form of a
supplement/ingredient or as a complete food. Their primary use is to enhance the
performance and state of the human body. Most of the times they are associated with
improving a specific function.

The major applications for nutraceuticals
are as products to nourish human body after physical exertion or as a preventive measure
against ailments.

US Nutraceutical Markets, a Market Engineering report from Frost & Sullivan, has studied
the U.S. markets for nutraceuticals and functional foods. The segments considered were
nutritional supplements, activity based foods, and functional beverages.

Figure 1.1 presents the base year (1998)
revenues and growth rates for market segments covered in this report.

The market size is defined in U.S. dollars.
This definition is followed throughout the report. Since unit shipments or volume depend
on the product type it is difficult to determine the veracity of the data. Hence, figures
for unit shipments are not provided in this report. The forecast period is from 1998
through 2004. The base year is 1998. The compound annual growth rate (CAGR) for revenues
is calculated for the period 1998 through 2004.

Summary of major findings highlighted in the report include:

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By GlobalData

Market growth, opportunities and
total forecast

The total U.S. nutraceuticals and
functional food market was estimated at $4.51 billion in 1998. It is expected to grow at a
CAGR of 14 percent for the period 1998 through 2004, with revenues reaching $9.89 billion
in 2004.

Strategic analysis and forecasts
by major segment

Nutritional supplement market

In 1997, the U.S. nutritional supplement
market was estimated at $ 3.21 billion. The CAGR for the period 1997 through 2004 is
computed to be 15.7 percent.

Market drivers:

  • Increasing nutritional awareness drives
    supplement markets
  • Increasing self reliance in healthcare
    decisions
  • Consumer acceptance of 3 G’s: Garlic,
    Ginseng and Gingko
  • Acceptance in Europe lends credibility to
    supplements in U.S.
  • Standardized extracts allow stricter product
    quality control
  • Private label supplements cater to large
    household needs
  • Health and specialty food stores cater to
    individual buyers
  • Diet influenced diseases remain the leading
    cause of mortality
  • Peer usage helps increase product awareness
  • Growing acceptance of alternate medicine
    remedies

Market restraints:

  • Increasing consumer concerns over legitimacy
  • Supplement abuse can cause nutrient toxicity
  • Consumers are not very brand savvy
  • Increasing industry regulation likely to
    restrict growth
  • Lack of patentable products
  • Nutritional benefits from genetically
    modified foods
  • Lack of consumer education
  • Possible fallout against nutritional
    supplements
  • Inability to meet advertising budgets and
    stocking costs
  • Impediments to product stability

Activity based foods

In 1997, the U.S. nutraceutical and
functional foods market for activity based foods was estimated at $350 million. The CAGR
for the period 1997 through 2004 is computed to be 12.3 percent.

Market drivers:

  • Increasing levels of public health
    consciousness
  • Trends towards consuming “food on the
    go”
  • Increased nutritional awareness
  • Ease of use
  • Role of diet in disease prevention
  • Peer usage
  • Increasing role of self-reliance in
    healthcare decisions
  • Relaxed regulatory environment
  • Symbiotic growth with sports and alternative
    medicine market
  • Increasing interest by larger food companies

Market restraints:

  • Concern over product legitimacy
  • Nutrient Toxicity through Supplement Abuse
  • Consumers are not very Brand Savvy
  • High Price to Performance
  • Changes in Industry Regulation
  • Lack of patentable products
  • Bio-engineered and Regular foods
  • Processing Difficulties limit Organoleptic
    Properties
  • Lack of Consumer Education
  • Possible fallout against Dietary Supplements

Functional beverage markets

In 1998, the U.S. nutraceutical market for
functional beverages was estimated at $ 950 million. The CAGR for the period 1997 through
2004 is computed to be 8 percent.

Market drivers:

  • Increasing Health Consciousness
  • Interest in thirst quenching nutritious
    beverages
  • Link of natural ingredients to good health
  • Peer Usage
  • Associative growth with increase in Sports
    and Physical activities
  • New Product Development by large beverage
    companies
  • Relaxed Regulatory environment
  • Self Reliance in healthcare decisions
  • Increasing Customer Confidence in Natural
    Beverages
  • Media Coverage of Nutraceutical and
    Functional Beverages

Market restraints:

  • Product Proliferation
  • Lack of customer loyalty
  • Product Legitimacy
  • Price to performance
  • Industry Regulation
  • Bio engineered foods
  • Product processing and Stability
  • Consumer Education
  • Possible Fallout against natural foods and
    beverages
  • High Advertising budgets and Stocking costs

Competitor analysis

The individual market segments vary in the
type and number of players that sell their products. The nutritional supplement industry
is dominated by larger companies that are either chemical or herbal supplement
manufacturers. Activity based foods are dominated by smaller sized companies with revenues
of about $ 20 to 30 million a year. The functional beverage market has both large beverage
companies as well as smaller sized herbal beverage manufacturers.

Major market challenges

  • Slower growth in traditional food industry
    increase category interest
  • Cost of regulatory compliance expected to
    minimize smaller market players
  • Fragmented nature of the market leads to a
    lack of strategic focus
  • Need for market players to associate with a
    growing concern on personal fitness
  • Increasing incidence of diet related disease
    enhances need for innovative nutraceuticals
  • Distribution strategies likely to determine
    true market winners
  • Internet is likely to play an important role
    in category success
  • Concerns over product legitimacy likely to
    hinder category growth
  • Lack of patents makes product management
    extremely critical
  • Capital limitations require creation of
    strategic alliances

Conclusions

The key strategies for success in the U.S.
nutraceutical and functional food markets, as identified in the report are:

  • High level of product and technical
    innovation and technical service
  • Development of intellectual capital to
    suitably address the needs of a diverse end-user segments
  • Large and cost efficient scale of
    manufacture
  • Collaborations with large end users, and
    small technology firms to maintain market share through customer satisfaction and
    innovation
  • Keen understanding of international
    substrates and processes to address customers shifting manufacturing sites
  • Development of efficient global distribution
    systems

Fig 1.1

Total Nutraceuticals and Functional Foods
Market: Evenue Forecasts (U.S.), 1994-2004

Year Supplements
($ Million)
Foods
($ Million)
Beverages
($ Million)
Revenues
($ Million)
1994 1,790.30 203.60 691.90 2,685.80
1995 2,058.90 232.10 747.20 3,038.20
1996 2,429.50 264.70 814.50 3,508.70
1997 2,793.90 304.30 879.60 3,977.80
1998 3,213.00 350.00 950.00 4,513.00
1999 3,791.30 399.00 1,035.50 5,225.80
2000 4,473.80 454.90 1,128.70 6,057.40
2001 5,144.80 509.40 1,219.00 6,873.20
2002 5,865.10 570.60 1,304.30 7,740.00
2003 6,744.90 633.30 1,395.60 8,773.80
2004 7,689.20 703.00 1,507.30 9,899.50
CAGR (1997-2004): 15.7% 12.3% 8.0% 14.0%
Key: CAGR = Compound Annual
Growth Rate

Note: All figures are rounded.
Source: Frost & Sullivan

Total Nutraceuticals and Functional Foods
Market: Market Engineering Measurements (U.S.), 1998

Measurement Value Trend
Market Age Market Development
Total market size $4,513 Million
Potential market revenues by year 2004 $9,899 Million
Historical growth rate (1994-1997) 15 percent
Projected growth rate (1997-2004) 14 percent
Market saturation (current/potential
users)
35 percent Increasing
Replacement Rate High Increasing
Price Sensitivity High Decreasing
Consumer Units Low Increasing
Number of products High Stable
Competitors (active market competitors for
total market in 1998)
> 100 Decreasing
Degree of competition High Increasing
Degree of technical change High Increasing
Customer Satisfaction Low Increasing
Customer Loyalty Low Increasing
Market concentration (% market share of
top two competitors)
<30 percent Stable
Price to performance High Decreasing
Product development time 6 to 12 months Decreasing
Time to market 12 to 18 months Decreasing
Major current distribution channel
(direct/indirect)
Indirect
Food Processing Company Presence Marginal Increasing
Pharmaceutical Company Presence Low Up
Independent product development companies Low Increasing