The term nutraceuticals was coined in the 1980s to describe food products that have a medicinal benefit, and the sector has exploded in recent years to include functional foods such as vitamin-enriched products, nutritional supplements, sports drinks and medically formulated foods. It is estimated that the demand for ‘intelligent’ food that promises to deliver health benefits beyond the traditional nutrients could create a sector worth US$250bn globally by 2018.
With life-style related illness having potential to cost the NHS over £10bn annually in the UK, the incentive for governments to focus on preventative care and for consumers to become more health-conscious is immense, and food and pharmaceutical companies are perfectly placed to capitalise.
Chris Stirling, KPMG Global Head of Life Sciences comments: “Nutraceuticals look like the ideal investment opportunity. This convergence of medicine, food and technology is likely to create a battleground in which food and pharmaceutical companies compete against each other for dominance of the sector. Both industries will need to learn new skills in order to crack the nutraceuticals market and the winners will have to excel in six key areas: technology, product strategy, compliance, marketing, supply chain management and corporate deal making.”
Nutraceuticals represent an opportunity for food and pharmaceutical companies to diversify
In the race for the nutraceutical market to date, food companies have taken the lead thanks to a greater understanding of nutrition and food formulation, plus decades of consumer research and relationships with mass-market distributors. However, they lack some of the in-depth scientific resources needed to create major breakthroughs, with innovation tending to involve modest improvements, such as reducing sugar content. Therefore food manufacturers may struggle to achieve the kind of game-changing breakthroughs necessary to open up new nutraceuticals markets.
Pharmaceuticals companies face a different set of challenges. They have strong research departments, stakeholder relationships and regulatory structures that enable them to generate new compounds. Yet their organizational culture and long research cycles may struggle to adapt to the faster pace of the nutraceuticals market.
Willy Kruh, KPMG Global Head of Consumer Markets comments: “Technology is going to play a critical role in success. We are in an age of information savvy, health-obsessed consumers and there is an increasing cultural focus on health and wellness. Those brands that are tapping into these trends will see growth and be the real winners.”
A major hurdle in creating a global nutraceuticals brand, is the inconsistency of regulation. In the EU, products that claim to be a nutraceutical have to be certified by the European Food Standards Authority, and a similar system operates in Canada. However, this contrasts with the US and Japan, two markets that currently account for over half the world’s demand for nutraceuticals, where products do not have to pass stringent government tests as long as they do not claim to treat or prevent a specific diseases.
Success will depend on the ability to take a long view while seizing short-term opportunities
The nutraceuticals market is likely to benefit from the trend of personalized medicine, and developing technology which aids this movement is key, including taking advantage of the huge amount of data created by an increasingly connected healthcare system. Consumer companies have the intelligence available to personalize dietary advice, andwith prudent partnerships, pharmaceutical companies may be able to personalize over-the-counter nutraceuticals products to supplement consumer lifestyles.
Catering to such specific tastes with specific ingredients means having a secure and transparent supply chain. As the industry expands, the major players will have to ensure a steady supply of ingredients such as plant extracts, dairy products, whey proteins and omega-3 fish oils. This is reflected in a number of acquisitions which have been aimed at securing stable, high quality supplies of raw materials.
While many of these recent corporate transactions around nutraceuticals have involved relatively small acquisitions and sell-offs, these manoeuvres are preliminary skirmishes; and the emergence of a nutraceuticals powerhouse is a long way off. However it will only take one sizable acquisition to change the dynamics of the industry, and then other big companies in the field will be forced to respond. There will be many mergers, and divestments and a lot of incubation of future winners.
Looking ahead, Stirling concludes: “The nutraceutical winners will have to do a number of things that go against their corporate cultures: be bold, supple and patient, all at the same time. As neither pharmaceuticals nor food companies currently have all the ingredients needed to corner the nutraceuticals market, the field is wide open, so expect governments and healthcare industries watch with close interest as this battle goes into round two.”
To download the full report, please visit: www.kpmg.com/uk/nutraceuticals