A WORLD OF OPPORTUNITY

THE U.S. NUTRITION INDUSTRY grew a healthy 9.3% overall in 2005 for total sales of $75.4 billion, up from $69.0 billion in 2004. Growth was led by double-digit increases in natural and organic personal care and household products, up 15% each; and natural and organic food, up 13%. Functional foods grew 9% in 2005 and dietary supplements trailed the pack at 4.5%. With each new generation, Americans

THE U.S. NUTRITION INDUSTRY grew a healthy 9.3% overall in 2005 for total sales of $75.4 billion, up from $69.0 billion in 2004. Growth was led by double-digit increases in natural and organic personal care and household products, up 15% each; and natural and organic food, up 13%. Functional foods grew 9% in 2005 and dietary supplements trailed the pack at 4.5%.

With each new generation, Americans are growing more concerned about health — a concern described in terms of longevity, appearance, energy and holistic well-being. Underpinning this concern are certain demographic realities: The United States is in the midst of a population bubble of Baby Boomers, in addition to having to care for a growing number of geriatrics. These facts coincide with an era of escalating health care expenditures, which further highlight the need to address wellness issues — both as individuals and as a nation. Baby Boomers have also benefited from a period of unprecedented economic growth and enjoy substantial buying power as they grow older. This buying power, coupled with a desire for health and fitness, is creating a huge market and still great potential for what's known as healthful foods.

The U.S. healthful food market in 2005 is quantified as follows:

Catering to the healthful food trend are some of the world's largest corporations, not to mention thousands of smaller businesses and entrepreneurs, which together comprise the $109 billion healthful food market in the United States. Whether the product is derived from natural and organic sources, features ingredients specifically for health or performance purposes, or has negative ingredients removed, each of these food categories has grown significantly faster than the food industry overall for at least the past decade. Collectively the U.S. healthful foods market (comprised of natural and organic foods, functional foods and lesser-evil foods) has grown from $55 billion in 1995 to $109 billion in 2005 — and from 13.3% to 19.8% of the retail food industry in the same period.

2005 U.S. Nutrition Industry Revenue
(IN BILLIONS)
Supplements $21.3
Natural & Organic Foods $20.8
Functional Foods $26.7
Personal Care $6.6
TOTAL $75.4
2005 U.S. Total Retail Food Industry Sales
(IN BILLIONS)
FOOD CATEGORIES 2005 SALES % OF TOTAL GROWTH
Natural & Organic* $22.9 4% 13.5%
Functional* $26.5 5% 9.0%
Lesser Evil* $60.2 11% 3.9%
Market Standard $442.8 80% 0.2%
TOTAL FOOD $552.3 100% 1.5%
Healthy Foods* $109.5 20% 7.0%

LOW-CARB SETS THE STAGE

Over the last two decades, healthful foods have gradually changed the face of the U.S. food industry. However, it was the low-carb fad of 2003-2005 that finally drove home just how much is at stake for food manufacturers: Not only product differentiation and better margins, but winning leadership in healthful foods. Low-carb marked the first time in which they reacted (some say overreacted) to broad consumer movement in record time. Starting in late 2002 and continuing well into 2004, suppliers, brand managers, consultants and formulators raced to capitalize on the low-carb diet trend.

With $2.16 billion in low-carb food sales in 2004 and $1.48 billion in 2005 (not including bars and shakes), it is clear that low-carb did not change the way all Americans eat. However, it surely affected how they shop by raising awareness of carbohydrate content, just as they learned to pay attention to fat and calorie content in the 1980s and 1990s. Consumers are growing more health-conscious, weight-conscious, and energy- and well-being-conscious, even if their waistlines don't show it.

CONSUMER OPTIONS EXIST

Research continues to indicate that more and more consumers are interested in and buying more healthful foods than the market-standard offerings. Multinational food companies have responded primarily in two ways. First, in the lesser-evil category, they have removed unwanted ingredients, including carbohydrates, sugar, salt, trans fat, non-whole grains, or have replaced them with preferable alternatives. Second, in the functional food category, companies have added beneficial ingredients to their food products, including more vitamin premixes, calcium, oat bran, protein and omega-3 oils, among others. To a lesser extent, companies have also entered the natural and organic category, but this has mostly been by acquisition rather than through brand extensions or internal product launches.

Consumers have responded positively to these tactics, pushing U.S. healthful food sales to 20% of the total retail food industry. PepsiCo, Nestlé, Coca-Cola and Kraft are just a few of the conventional food companies that are repositioning some of their brands and business units as healthful products and businesses. Indeed, these and other companies are re-polishing corporate identities and even core mission statements in order not to be left behind by the healthful food movement.

U.S. Healthful Food Sales: 1995 & 2005
(IN BILLIONS)
YEAR SALES % OF TOTAL RETAIL FOOD
1995 $54.6 13.3%
2005 $109.5 19.8%

SUPPLIERS PLAY A MAJOR ROLE

Healthful food is not only a market defined by consumer products but also by the suppliers selling functional ingredients to improve the nutritional value of these products. Many suggest that it will be the raw material suppliers that will contribute the science and validation for health claims for new generations of healthful foods.

Besides these major players, hundreds of others compete in functional ingredients, but the number may shrink in the coming years. GMP standards will quell consumers' safety concerns but could eliminate 15%-25% of the smaller suppliers currently in the nutritional ingredient business. With a shakeout looming, suppliers large and small are keen to participate in healthful foods by forming closer alliances with branded manufacturers.

CONSUMER-MANUFACTURER KEYS

Healthful foods have made it easier for consumers to fulfill their health and wellness needs. In turn, as more healthful food options become available, consumer awareness will grow. In other words, a sort of exponential momentum is building in the healthful foods business. Conventional retailers are part of this movement, as evident from the quick penetration of low-carb food and a growing list of store brands in functional and natural and organic foods.

Converting the evolving “health proposition” of a healthful food product into a “value proposition” in traditional business terms is a complicated matter. Products either seem to be preferable versions of a familiar product (Diet Coke, Tropicana w/Calcium) or category-defining products like Powerbar, Gatorade, Silk or Red Bull — with the latter more likely to support a higher perception of value and hence a higher price premium.

The aging U.S. population sets the stage for growth in healthful foods. Annual growth rates of 6%-8% for the $110 billion healthful foods category in NBJ's conservative forecast are defensible in a five-year horizon. However, many product niches and distribution channels of significant size will show growth in the high teens and twenties.

FOR MORE INFORMATION ON THIS STUDY, “HEALTHY FOOD REPORT 2006,” OR OTHER INFORMATIONAL PRODUCTS, CONTACT NUTRITION BUSINESS JOURNAL AT (619) 295-7685 OR [email protected] [2]. BOTH SN WHOLE HEALTH AND NBJ ARE OWNED BY PENTON MEDIA.

SOURCE FOR ALL: NUTRITION BUSINESS JOURNAL