Functional food markets – a recipe for success

Did you know that Finland is the leader in functional food innovations? It seems as though the Finns turn their weaknesses into strengths; they may not be very talkative, but they are leading producers of mobile phones, and they may not have a very rich food tradition, but they are at the cutting edge in functional foods.

The Finns developed many functional foods that became international pioneers (see e.g. Markula. 2001). A significant number of different functional food products have since been developed and commercialised by small and large Finnish companies (see e.g. Dunn. 2005).

What is the recipe for this success? For one thing, Finnish food companies tend to have a philosophy in which science-based innovation plays a very central role. And they have also become adept at managing both the costs and the risks of innovation.

Another characteristic of Finland and Finnish companies is the close partnership between companies, universities, research centres and government agencies – in other words, there is an established national cluster for, and a public interest in, food and health (Food and …. 2006).

Fast growing market

Advances in science and nutrition shape our understanding of the way in which our diet affects our health. Research has linked the modern diet with chronic diseases such as heart disease, stroke, cancer, and diabetes. Keeping that in mind, it is no wonder that the functional food market has experienced remarkable growth in the last five years; it has certainly been one of the most dynamic sectors in the food industry in terms of product development and international expansion.

Today the functional foods product area, though maturing and consolidating, is one of the fastest growing food business markets with an almost 8 per cent annual growth rate (The International …. 2006).

Estimates about the value of the markets differ based on the scope of products considered functional. Leatherhead estimates the value of more broadly defined functional foods at $36.3bn in the main markets during 2005 (The International…. 2006), whereas Just-Food estimates the global market to be $73.5bn in 2005 (Global market…. 2006).

The significance of the functional foods area is bigger than might be expected because it influences developments in all food sectors. Any growth-oriented food company must take a genuine interest in it. However, as many failures have shown, it is not an easy area to penetrate.

So what must a company entering the functional foods market take into consideration? There are the basic business aspects such as customers, competition, market size etc, all of which are vital and need to be in order. But there are also issues that are more difficult to take into consideration without prior knowledge of the area.

A common focus in the functional foods topic is on issues like health claims and labels. While inarguably important, they shadow the key challenge that emerges when a traditional food company enters the market.

From a company’s point of view, the challenge can be better illustrated by considering functional foods as knowledge-intensive product. Sensory qualities like taste are important – just as they are in all foods, but what really separates functional foods from traditional foods is the quality and amount of new health-related information.

Traditional food companies have not had to consider such information; they are usually passive when it comes to health issues, simply following given rules, such as including nutritional information on labels. To be successful on the functional foods market, a company must actively manage the relevant information and knowledge flows.

From the company’s point of view, this means that it either has to develop its own capabilities within the area or it has to work more closely with firms providing knowledge-intensive business services for the market (The knowledge-intensive…. 2005).

Focus from science to marketing

The pioneers came first. As the markets were emerging, companies with a long-term research and development orientation played a critical role. In the Finnish context, there were companies like Valio, with its long tradition in innovative research, and Raisio Group, with visionary directors able to anticipate the emergence of new markets and pave the way for Benecol products.

Today it is not always necessary for a company to invest heavily in R&D in order to enter the market successfully. With a lot of research continuously underway and technologies evolving, solutions and knowledge can be acquired from outside sources. Market and marketing competencies have become a priority.

Credibility is extremely important to these markets, as a result, companies must be willing to invest in building long-term relationships with key people and institutions that, from a market point of view, are influential. These key persons include healthcare professionals and decision makers in the area who rely on credible information to support their decisions. Communicating with these kinds of target groups is quite new for food industry companies and requires capabilities in relationship marketing (Relationship Marketing…. 2007), which is a relatively new form of marketing, especially in the functional foods context. At its best, relationship marketing is a question of deep collaboration in which mutual information sharing can result in new and healthier alternatives for customers.

Deeper roots, more specialisation

There is no single answer to the question of how deeply a food firm can root itself in the functional foods market, measured for example by the percentage of functional products it has. It is dependent on the overall strategy of the firm and the market situation.

The deeper the company delves into the market, the more specialised it becomes – not along the dimensions typical in the food industry, but by positioning itself somewhere between the food and health industries.

To illustrate one of the consequences of the change within a company, the role of the nutritionist can be used. In a traditional food firm, the nutritionist mainly gives general nutritional advice and provides the text for the labels. In a functional food firm, the nutritionist plays a more strategic role by assisting the navigation of the business. It’s a role that can be compared with the role of a technology expert in a technology company.

Political environment matters

From the company’s point of view, it is not only the traditional market risks that matter. The political environment must also be taken into consideration. In Europe the general attitude towards new foods has been very cautious. As a result, the market entry barriers are relatively high.

The ingredients and technological solutions in a new food context that already have authoritative approval and market acceptance have a significant competitive advantage because competitors need a lot of time and resources to enter the market.

Consequently, companies entering the functional foods markets can gain a competitive edge by using a recipe consisting of the ingredients and technological solutions that have already established their position on the markets.

Sources

Dunn, J. 2005. Functional in Finland. Food Manufacture. (available at: www.foodmanufacture.co.uk/news/ fullstory.php/aid/1237/Functional_in_ Finland.html)

Food and nutrition sector strategy report: Finland – a competitive forerunner in healthy nutrition. 2006. Sitra. 33 p. (available at www.sitra.fi/Ohjelmat/era/ julkaisut/julkaisut.htm

Global Market Review of Functional Foods – forecasts to 2012. 2006. Just-Food.

The International Market for Functional Foods – Moving into Mainstream. 2006. Market Report.

Leatherhead Food International. The knowledge-intensive business services sector. 2005. European Monitoring Centre on Change. (available at: www.eurofound.europa.eu/emcc/publications/2005/ef0559en.pdf

Markula, J. 2001. Health-Functional Foods in Foodwebs – Developing Products in Food Specific Networks

(Lic.Sc Thesis, available at: http://ethesis.helsinki.fi/julkaisut/ maa /talou/lt/markula/healthfu.pdf)

Relationship Marketing. 2007. (available at: http://en.wikipedia.org/wiki/Relationship _marketing)