Food Firms Eat Up Health Trend

Nestle USA continues the rush by mainstream food companies into the natural and “functional foods” niche today by introducing a dietary supplement that claims to bolster the immune system

The Glendale-based U.S. unit of the Swiss multinational food giant, which also agreed last week to purchase energy bar maker PowerBar Inc. of Berkeley, is moving to offset sluggish sales in its core business by catering to the health and wellness concerns of affluent baby boomers.

That strategy is sweeping the food business. In recent weeks, H.J. Heinz Co. formed an organic and nutritional foods unit to oversee its expansion into healthy ventures, including its recent investment in organic foods mainstay Hain Food Group Inc. And Quaker Oats Co. announced an alliance with drug maker Novartis to sell so-called functional foods, or products designed to provide consumers with specific health benefits beyond basic nutrition.

General Mills Inc., Kraft Foods Inc. and Kellogg Co. had already staked out their territory in the wellness arena, purchasing some of the most recognizable names in health food in recent months.

“Food safety is really beginning to resonate in a big way with consumers as they learn more about pesticides and GMOs [genetically modified organisms],” said Karen Raterman, editorial director of the trade publication Natural Foods Merchandiser. “Obviously, these food companies now think this is a trend worth jumping on.”

Sales within the organic and natural food category have been growing at a 15% to 20% clip during the last five years, surpassing $5 billion last year, while sales of traditional grocery items have inched up 1% to 2%, according to the Grocery Manufacturers of America. And sales of natural foods are accelerating even faster in Europe, where the hue and cry over genetic engineering has taken center stage in the last year.

Indeed, Nestle extracted the acidophilus bacteria, or “good” bacteria, in its LC1 supplement from a yogurt it had been selling in Europe for six years.

Dried to a colorless, tasteless powder and packaged in a 30-day supply, the product--one of Nestle’s most expensive--is selling for $30 at General Nutrition Center stores in the western and southwestern U.S and on Drugstore.com Inc. LC1 also will eventually be mixed into food products sold by Nestle and other food manufacturers.

“Dietary supplements are not only an attractive business from a sales standpoint, but also from a profitability standpoint,” said Amit Desai, marketing manager for Nestle’s nutrition division.

However profitable, natural and functional food products such as these aren’t likely to become a major part of any of these large companies’ core businesses, analysts say. But they could eventually add several hundred million dollars to their revenues in coming years as natural foods begin rolling into more supermarkets.

With retail markups on such niche products almost double that of traditional grocery items, retailers are beginning to make more space for these products on their shelves, adding some of the industry’s hottest items such as organic produce and dairy, nutrition bars, and soy milk. Albertson’s Inc., for instance, now carries about 30 natural food products in its Central and Southern California stores.

Big food companies “are going to help the entire industry by building awareness of the quality of organic products and by converting more acres to organic produce,” said Katherine DiMatteo, executive director of the Organic Trade Assn. “We need to have large corporate brands laying the groundwork for us in mainstream supermarkets.”

That said, DiMatteo and others have some concerns about the effect that competition from big food companies will have on small farmers and independent health food producers. “It becomes a very difficult marketplace when you have someone with that kind of capital and collateral competing with you,” she said.

A decade ago, most large food makers would have scoffed at acquiring organic food brands. Then, the business was a cottage industry composed largely of entrepreneurial Birkenstock-clad individuals who had dabbled in organic farming in their backyards. But as natural food companies grew and gained legitimacy, big food companies, especially cereal companies, began courting them.

Phone calls from big food companies and financial analysts began trickling in to Carpinteria, Calif.-based Balance Bar Co. a couple of years ago, said Chief Financial Officer Thomas Flahie. At the time, they were only asking questions about the company’s marketing efforts and distribution of its energy bars.

But as soon as Balance Bar surpassed $80 million in annual revenue, the acquisition offers started rolling in. And last month, Philip Morris Co.’s Kraft Foods agreed to purchase Balance Bar for $268 million, 37% more than its shares traded for a day earlier. The same week, Kraft struck a deal to buy Boca Burger, a maker of soy-based meat alternatives.

Companies are racing to snap up the few remaining large companies in the natural foods business, focusing on the products with the most mainstream appeal, such as soy products, organic dairy and energy bars.

Cereal maker General Mills was the first player to push into organics, launching a cereal called Sunrise last March. Then in December, the company made an even bigger play, purchasing Small Planet Foods, a $60-million company that sells frozen and canned organic products under the Cascadian Farm and Muir Glen brands.

By virtue of General Mills’ clout with retailers, Cascadian and Muir Glen could triple their distribution in mainstream supermarkets from 5,000 to 15,000 stores in the next year or two, Small Planet Chief Executive Gene Kahn said.

But healthy ventures such as these aren’t a sure thing. Sunrise cereal hasn’t yet become a big seller for General Mills. And there’s a real chance that the involvement of these huge corporations could turn off the loyal but wary group of customers who purchase natural foods.

“The most commonly asked question is whether we are going to lose our commitment to organics now that we’re part of General Mills,” Kahn said. “And I say, why would they want to [tamper with that and] lose the very thing they were paying for?”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Food and Function

Soy, organic foods and “functional foods” are hot sellers, which is drawing interest from many big food companies.

What’s Hot

* Calcium-enriched foods

* “One-skillet” meals

* Sour-flavored foods (sour candy, sweet and sour)

* Soy

* Organic foods

* S’mores

* Chipotle

* Dulce de leche

*

What’s Not

* Low-fat food products

* Foods containing genetically modified organisms (GMOs)

* Foods with no “function”

* Smoothies

* Celebrity foods (except Newman’s Own)

* Microwave popcorn

* Single-serving entrees

* Ice cream in gallons rather than pints “Functional foods”--those that are nutritionally enhanced or go beyond basic nutrition--are gaining popularity. Sales of functional foods increased about 13% from 1998 to 1999 while sales of traditional grocery items inched up only 1% or 2%.

*

Mainstream stores

*--*

% Change Food type Sales* 12/98 to 12/99 Meal replacements $904.1 + 3.7% Energy bars and gels $267.3 + 62.7 Medicinal blend teas 44.9 +23.4 Medicinal single Teas 25.8 +7.5 Functional juices 24.5 +22.5 (refrigerated) Natural diet teas 6.6 -3.8 Functional juices 2.9 +21.8 (Non-refrigerated)

*--*

* In millions *

Health food stores

*--*

% Change Food type Sales* 12/98 to 12/99 Meal replacements $168.4 +14.1% Energy bars and gels 109.1 +13.9 Medicinal blend teas 0.6 -4.6 Medicinal single Teas 1.7 -17.0 Functional juices 0.6 -36.8 (refrigerated) Natural diet teas 0.3 -25.1 Functional juices 2.0 +3.0 (Non-refrigerated) Natural sports drinks 0.8 +20.0 Total 283.5 billion

*--*

Sources: Global New Products, SPINS, ACNielsen, Grocery Manufacturers of America

Researched by NONA YATES/Los Angeles Times