• by Karlene Lukovitz  @KLmarketdaily, August 22, 2009

Functional foods and beverages continue to flourish, with projections for this sector ranging anywhere from 8.5% to 20% growth per year.

But what makes some functionals more successful than others?

Products with an immediate, obvious effect, like an energy boost, are more successful -- at least in the short term -- than those that may provide real benefits (like omega-3) but no immediate gratification, according to a new PricewaterhouseCoopers report on leveraging growth in the functional foods industry.

Innovative packaging also helps differentiate products and facilitates premium pricing. Example: "daily dose" packaging supports pricing for Optimel Control that is significantly higher than that of similar weight-management products.

Not surprisingly, successful products address and communicate a specific health benefit linked to a common ailment, or offer multiple desirable benefits in a single product. Example: Kraft's introduction last year of LiveActive bars, the first mass-distributed shelf-stable probiotic nutrition bars, which appeal to consumers seeking the benefits of probiotics without the need for refrigeration.

Factors supporting functional foods' overall growth, in addition to consumers' growing concern about disease prevention, include the FDA's simplified approval process for health claims on functional food labels; emerging food processing technologies that are leading to new methods of stabilizing ingredients, optimizing texture and improving taste; and premium pricing potential. (Functional products typically require greater R&D investment and ingredient cost, but pricing premiums can reach 30% or higher.)

Consolidating existing industry study data from various sources, PwC's report shows functional foods' annual sales at between $20 billion and $30 billion, representing approximately 5% of the total U.S. food market.

Soft drinks (including rapidly growing enhanced waters) are the top U.S. functional F&B by food category, with $9.6 billion in '07 sales and compound annual growth of 12.3% between 2002 and 2007.

Dairy (including yogurts) is second ($6.8 billion in '07, 8.1% five-year CAGR), followed by bakery and cereals ($4.6 billion, 8% CAGR); confectionary ($2.3 billion, 6.7% CAGR); savory snacks ($0.5 billion, 1.5% CAGR) and other ($3.4 billion, 3.6% CAGR).

Ranked by product benefit, energy products dominate, with $7.9 billion in sales in '07 and a CAGR of 6.2% over the past five years. They are followed by heart health products ($5 billion, 6.9% CAGR), bone health products ($3.7 billion, 5.3% CAGR), gut health products ($0.7 billion, 15.8% CAGR) and other ($9.9 billion, 12.5% CAGR).

Other up-and-comers: Products that enhance cognitive health, such as omega-3 fatty acids (projected to reach $7 billion in sales by 2011, according to Packaged Facts); as well as weight management, mood enhancement and skin enhancement products.

Niche players remain active in the functional F&B market, but major CPG's dominate. PwC's analysis of various source data puts PepsiCo (Quaker and Gatorade) on top; Coca-Cola (Vitamin Water, Odwalla) second; General Mills (Cheerios, Yoplait) third; Kellogg (Special K, Kashi) fourth; Kraft (Capri Sun, Balance Bar) fifth; Nestlé (Nesquik, PowerBar) ninth; and Danone (Activia, Essensis) eleventh.