“Food companies need investment to bring skills they don’t have”
Willy Wonka set teams of eager Oompa Loompas to work developing cavity-filling caramels and vitamin chocolate in Charlie And The Chocolate Factory. For the largest global food groups, the goal of offering health benefits with your meal is slightly less eccentric but every bit as enthralling a quest.
Multinationals including Nestlé, PepsiCo and Danone are upstaffing R&D departments, eyeing strategic acquisitions and developing regulatory expertise as they blur the lines between everyday food products, nutrition and pharmaceuticals. At stake is a vast market that shows little sign of slowing its phenomenal growth: the 60% of global healthcare spending analysts Frost & Sullivan say goes towards managing chronic diseases such as diabetes, heart disease and cancer, and the millions of consumers with an interest in preventing such conditions.
The World Economic Forum says costs associated with the five most common chronic diseases will reach US$47 trillion by 2030. For food groups with a ready-made route to consumers, meeting such needs seems attractive – but they risk stepping on the toes of the pharmaceutical industry and entering a regulatory minefield far beyond their current experience.
Food manufacturers have long been interested in nutrition, which has led to fortified breakfast cereals, vitamin-enhanced soft drinks and margarines with cholesterol-reducing properties. But the difference between such ‘functional foods’ and the nutraceuticals market – which focuses on management of specific conditions – is less distinct following a series of acquisitions and product launches from the food sector.
Nutraceuticals have, until now, been the preserve of smaller, regional producers, often spun out of pharma groups or with deep links to the sector. These include Roquette, the name behind cereal bars to help digestion and drinks focused on gastrointestinal health, as well as Abbott Nutrition – a division of Abbott Laboratories – which provides nutritional and therapeutic products for babies and children, bars and drinks to supplement adult health and products to support patients with chronic illnesses. According to BCC research, the nutraceuticals market is currently worth US$151bn but will hit US$205bn by 2016.
“Governments and NGOs will get behind nutraceuticals because they have the potential to curb rising healthcare costs,” says John Morris, a KPMG partner in the UK firm. “But the two industries’ business models are so different. Food companies will have to invest far more than they currently do and bring in skills they don’t currently possess.”
Such realities are reflected in the headline acquisitions and investments being made in the functional foods arena. Danone took a majority stake in Swedish company ProViva – a market leader in health drinks – in 2010 and paid US$62m to acquire Medical Nutrition USA, which makes liquid protein supplements for the elderly. Fruit giant Dole has a sizeable Nutrition Institute in North Carolina.
Others have entered partnerships: Mars is working with Switzerland’s Barry Callebaut to develop chocolate products which harness the circulation-boosting powers of cocoa flavanols. Kraft has an agreement with TyraTech, which is reported to be developing a cheese that kills intestinal parasites.
Nestlé made its own leap into the market in late 2010, promising a US$510m investment over a decade to “pioneer a new industry between food and pharma.” In 2011, it has hit the acquisition trail, tying up four deals including the purchase of US-based diagnostics specialist Prometheus Laboratories and a stake in Vital Foods, which makes drinks to aid gastrointestinal conditions including IBS.
“We believe nutrition is the largest drug in anyone’s repertoire,” says Luis Cantarell, who was named President and CEO of Nestlé Health Science, a newly created division focused on nutraceuticals. “There is an opportunity for a new model that is closer to the pharma model in terms of value chain but has nutrition as a key element.
“Nutrition is one of the most overlooked elements when it comes to medical conditions. At present, you could say health has no economic value – the only value is in sickness. Nobody pays me to be healthy, but everyone is ready to support me if I get ill”. Brain health and fighting cognitive decline, he says, are particularly interesting areas: the company already has a dog food it claims can halt the onset of canine Alzheimer’s. In common with its competitors, however, Nestlé faces numerous hurdles as it explores the market. Most immediately, will consumers trust nutritional solutions from a company frequently associated with snack foods?
Cantarell is bullish: “Nestlé has been in nutrition for many years, and I don’t see any contradiction in providing nutritional foods for people. There are no good or bad foods, just good and bad diets. We firmly believe that and if we didn’t, we wouldn’t be in ice cream or chocolate. Every food has a role to play in diet. It’s a question of balance and understanding.”
But the more health claims food groups make, the more interest regulators take in their products. In the US, the Federal Trade Commission has taken issue with fruit juice makers who offer “heart-improving” drinks. The European Food Safety Authority has forced health claims off probiotic yogurts.
The result means manufacturers need rigorous testing regimes (including human testing) and the ability to engage rule-makers and medical practitioners. “They will have to demonstrate to the market they have the diagnostic capabilities to produce scientific evidence,” says Morris, who believes food makers will “heat up the war for scientific talent” as leading minds are fought over by two industries.
Some have already been burned. The Center for Science in the Public Interest has pursued high-profile cases against fortified foods. Separately, Coca-Cola and Nestlé discontinued Enviga – a green tea that claimed to “burn calories”.
Japan’s Food for Specialized Health Uses (FOSHU) is a government-regulated scheme that offers a clearer route to market, with more than 250 products licensed. Still, the wait for a truly mainstream nutraceutical continues.
Cantarell is confident Nestlé’s operational heft will help it succeed despite the “challenge” of regulation: “We’re not trying to replicate the pharma model. It’s not a race. We’re creating our own solutions.” But as Morris points out: “Food groups with price-to-earnings ratios between eight and 12 cannot afford to miss the margins enjoyed by pharmaceuticals companies.”
The result could be consolidation in both industries – and, just maybe, a chocolate bar that makes the weight drop off.
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John is a Consumer Markets industry partner at KPMG in the UK. He also has more than ten years experience advising clients in the pharmaceutical industry.