• by Karlene Lukovitz  @KLmarketdaily, February 21, 2007

U.S. sales of functional foods and beverages--those marketed primarily as offering positive health benefits beyond basic nutrition, based on their inclusion of medically beneficial ingredients--reached at least $24.8 billion last year, according to a new report from the Packaged Facts publishing division of MarketResearch.com, with sales projected to leap by 56%, to $38.8 billion, by 2011.

Although current growth is being driven by aging Baby Boomers' strong interest in preventative health measures, marketers will focus increasingly on the largely untapped younger market in the coming years, the analysts note in "Functional, Fortified and Inherently Healthy Foods and Beverages," which is to be released soon.

The sales estimates are based on IRI-tracked supermarket, drugstores and mass merchandisers, extrapolated to reflect all retail outlets through use of data from trade press and other Packaged Foods reports. Functional products here are "inherently healthy" (e.g., oatmeal, whole-grain breads, cranberry juice, nuts), fortified (e.g., orange juice with plant sterols), or "designer" (e.g., soy protein bars, smart spreads), but must be marketed on the basis of medical benefits.

Some highlights:

* Functional foods/beverages offer significant competitive advantages to marketers now faced with the maturing/commoditization of traditional categories such as breakfast cereal and juice. "Medically beneficial formulations can be used to strengthen brand differentiation, expand market share, attract new users and increase consumption among established users."

* Marketers are competing in the functional foods sector in four main ways: Using naturally health-beneficial ingredients (such as oats and other whole grains; strawberries and blueberries, which are high in antioxidant phytochemicals; flax seed, which is high in omega-3 fatty acids); extending existing brands with fortified products (such as yogurts with probiotic/natural dietary fiber cultures); acquiring smaller marketers (Kraft's acquisition of Balance Bar, Kellogg's acquisition of Kashi Co.); and launching new brands (Frito Lay's "Flat Earth" line, containing half a serving of fruits or vegetables per ounce).

* The largest functional food/beverage categories last year were ready-to-eat cereal, accounting for almost one-third ($3.2 billion) of total sales, followed distantly by food bars ($896 million, 8% share of market) and hot cereal/oatmeal and fresh bread (both at about $800 million).

* The top three fastest-growing functional food/beverages categories were refrigerated teas (jumping from 2% to 8.3% of all refrigerated tea sales); ready-to-eat cereal (gaining over three percentage points, to reach nearly 60% of the total RTE cereal market); and food bars (up four percentage points, to a 47.5% share of market).

* U.S. marketers' major-media ad expenditures in 2005 (latest year for which full data are available) totaled $825 million for functional foods and nearly $200 million for functional beverages, based on CNS Media Intelligence/CMR data.

* Kellogg (Kashi, Special K, Smart Start, Frosted Mini Wheats) accounted for over 28% ($235 million) of the functional food ad spend, followed by General Mills (Cheerios and other healthy cereals, Yoplait products), at about $171 million; PepsiCo Quaker Oats at $135 million; and Kraft Foods at $109 million.

* Largest functional beverage ad spenders were PepsiCo (Propel Fitness Water, Tropicana beverages and SoBe energy drinks), at $75 million; Altria Group (Fruit2O, Tazo tea) at $30 million); Ocean Spray at $25 million (over several varieties); and Coca-Cola (Minute Maid) at $19 million.

* Although the FDA's hearing in December on how functional foods should be defined has not yet resulted in regulatory next steps, the FDA's "typical hesitance in granting health claims could indicate that it may very well adopt more restrictive policies," observes Packaged Foods.