REGULATIONS SHADOW BRIGHT FUNCTIONAL FOODS FUTURE

SARAH MULHOLLAND

FOSTER CITY, Calif. -- Functional foods are witnessing impressive growth as consumers increasingly view food with an eye toward proactive health, of particular relevance in the ready-to-drink beverage category.

According to a study by Front Line Strategic Management Consulting, a market and strategy consultancy here, functional foods -- an $18.5 billion category in the year 2000 -- will continue to grow at double-digit rates, attaining $32.7 billion in sales by 2005. However, regulatory factors could play a pivotal role in the competitive dynamic of this burgeoning market.

Second only to ready-to-eat cereal, functional RTD beverages are expected to experience an increase in sales of close to 14% in 2001, said Derrelle Janey, managing director at the consultancy. The study indicates that if current trends continue, RTD beverages will surpass RTE cereals in sales by 2005, accounting for $5.7 billion of the total functional category.

According to Janey, the beverage category is currently the most dynamic segment within the functional foods arena, and this is where the real marketing opportunities lie. Fruit juices and beverage flavors work well to cover the taste of added ingredients, and the beverage category in general is in a strong position for expansion.

"The cereal category has been fairly flat, with just over 1% growth last year," said Janey. "Functional RTD beverages are getting more attention because the growth factor has been there for quite some time."

As more people look to food and drink for supplemental medicinal purposes, heightened regulatory concerns are at the forefront for manufacturers, evident in a spate of warning letters issued by the Food and Drug Administration last month (SN, June 18). The letters, sent to several food and beverage companies, took issue with certain novel botanical ingredients purported to provide various health benefits to the consumer. In addition to expressing concern over the safety of these ingredients, the FDA questioned the validity of health claims made on the product labels. The agency did not pursue further legal action at that time.

For the purposes of the Front Line study, the consultancy did not include products that do not meet the criteria for an FDA-authorized health claim. This excludes many of the more popular beverage offerings making use of common herbal additives such as ginseng and gingko biloba. According to Janey, manufacturers would be wise to take note of the regulatory momentum.

"The regulatory environment plays a key role," he said. "It is a key hurdle to jump over and has a strong and direct implication on how one thinks about marketing tactics in this space."

The Nutraceutical Research and Education Act -- which debuted in Congress in 2000 and is scheduled to be reintroduced later this year -- may be taken as a fair predictor of regulatory intentions. If passed, the NREA would create an exclusive category within functional foods in which companies could use clinical research to claim direct health benefits for marketed food products. In addition, the company would be granted 10 years of exclusive marketing rights.

"There is a drive for a deeper scientific basis for these health claims, pushing the FDA to make sure consumers are not being misled about potential health benefits," said Janey. "The NREA is pointing toward clinical trials to demonstrate the functionality of the product."

Manufacturers must be able to demonstrate a high degree of competency when leading clinical research projects in order to maintain a strong position in the functional foods market, he said. Some larger manufactures may already exhibit a proven proficiency in the realm of clinical research, yet many beverage companies do not. Janey expects this to feed the acquisitive trend, in addition to forging partnerships between pharmaceutical companies and food and beverage manufacturers in an effort to remain competitive.

As large national beverage manufacturers and homegrown insurgents contend with the regulatory din, the ingredient pool appears bottomless, striving for legitimacy in the lucrative beverage marketplace.

Dry Creek Nutrition, Modesto, Calif., recently announced the imminent introduction of ActiVin into the food supply, the company's proprietary grape seed extract. Touted as a potent antioxidant more powerful than vitamins C, E or beta-carotene, ActiVin recently earned GRAS (generally recognized as safe) status from the Flavor and Extract Manufacturers Association. The FDA has granted FEMA this authority, although ActiVin still awaits final approval from the agency.

According to Christine DeMont, director of marketing and sales for Dry Creek Nutrition, the company plans to aggressively pursue placement in the beverage market, banking on convenient trial opportunities and the younger demographic's demand for unique and exciting beverages.

"The younger generation wants something new and different," she said. "They are living life to the extreme. Everything is supercharged and this is a supercharged antioxidant."