Investing in functional foods

Viewpoints Strategy and growth

Image: Investing in functional foodsIn an environment where consumers are becoming more health conscious and baby boomers are battling the aging process, functional foods—foods that are fortified with nutritional or disease-preventing supplements—are invigorating the food industry.1 With estimated yearly sales of $20 billion to $30 billion and projected annual growth rates of up to 20 percent, the fortified foods market could offer investors potentially high returns.

Fortified foods were initially introduced in the 1940s by public health officials to tackle mass health concerns. However, as preventative healthcare became more mainstream, control of the fortified food industry moved to the private sector. Cholesterol-lowering margarine, probiotic yogurts, and energy-boosting beverages are all examples of functional foods currently on grocery store shelves. Soft drinks and dairy products dominate the market, accounting for 60 percent of functional foods.

Image: spoon Consumers are increasingly savvy about the link between food and good health, a change that the food market is trying to capitalize on. In fact, functional food market participants have been drawn to the industry by the potential to charge premium prices to consumers. However, manufacturers have had to be mindful of the higher research and development investment, the ingredient costs, and the specialized technology associated with the fortifying of foods. Those manufacturers are also being careful to select food-function combinations that would be relatively intuitive to the consumer—such as the popularity of functional yogurt, a food that has long been known to have healthy properties.

The functional foods supply chain
Chart: Supply chain disruptions can affect profitability

Source: PwC, Leveraging growth in the emerging functional foods industry: Trends and market opportunities, 2009.

With such high demand and high returns, investors are looking at opportunities—for example, new segments and new niches— throughout the functional food supply chain, but investors in the functional foods market should be aware of potential risks. Barriers to the market include consumer skepticism and large multinational food manufacturers that can often control significant portions of the market.

Image: issue12-supplementDespite those barriers—as well as concerns that the sector is merely a fad—the market continues to grow rapidly. Interested investors could consider acquisitions, joint ventures, or partnerships that focus on the development of technologies to advance food-function combinations or that grow new or underpenetrated health or food categories.

1  PwC, Leveraging growth in the emerging functional foods industry: Trends and market opportunities, August 2009.