Do Case Study Silk Soy Milk

Food, health, functional foods and Australia’s rural industries

A report prepared for the Rural Industries Research and Development Corporation

by Dr Michael Heasman

January 2004

ISBN 0 642 58706 X ISSN 1440-6845

“Food, Health, Functional Foods and Australia’s Rural Industries”

Publication No. 03/140 Project No. MKH-1A

The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report.

This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Communications Manager on phone 02 6272 3186.

Researcher Contact Details

Dr. Michael Heaseman MKH Research Pengerkatu 25B 37 HELSINKI, FINLAND 0050 Phone: +358 9 825 2184 Email: [email protected]

In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form.

RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604

Phone: 02 6272 4819 Fax: 02 6272 5877 Email: [email protected] Website: http://www.rirdc.gov.au

Printed in January 2004 by Union Offset Printing Pty Ltd, Canberra

ii Foreword

Consumer interest in food, diet, and health continues to fuel food and drink industry strategies based around nutrition. In particular the past dozen years or so have seen the world’s processed foods industry embrace a nutrition concept known as ‘functional foods and nutraceuticals’.

The simple idea behind the functional foods concept is that foods and beverages can be developed with health-enhancing food ingredients and/or properties that go beyond basic nutrition and deliver a scientifically supported health benefit, usually in relation to a specific disease condition such as heart health.

This position paper argues that Australia’s rural industries can play a more proactive and innovative role in delivering ‘health’ benefits, including added value produce. This would not be confined to the narrow field of functional foods alone, but would involve adapting and applying the lessons of functional foods for rural industries looking to develop health opportunities and to further business development.

The premise of the functional foods/nutrition science revolution that started in the 1990s is based on observations of the health benefits of consuming more fruit, vegetables and ‘whole’ foods. Fresh produce and products based on them, often miss out on this newly created, nutrition science based, food supply opportunity. In other words there are strong trends for rural industries to tap into and to innovate and compete more effectively in the market for ‘health enhancing’ foods through developing their own differentiated market niches.

In the context of broader market dynamics of global food supply, it is argued that an ecologically integrated approach to food and health, embracing both environmental and human health considerations, is an underexploited route for developing innovative businesses and marketing practices related to rural industries. This is in contrast to the more ‘medicalised’ or ‘technical fix’ approach that often characterizes much of functional food/nutraceutical business thinking.

The report recommends that Australia’s rural industries develop a food and health industry ‘vision’ and from this develop a nutrition strategy framework to facilitate business development that combines environmental and health goals with consumer-led products, marketing, and innovation.

This project was funded from RIRDC Core Funds, which are provided by the Federal Government.

This report is an addition to RIRDC’s diverse range of over 1000 research publications and forms part of our Resilient Agricultural Systems R&D program, which aims to enable agricultural production systems that have sufficient diversity, flexibility and robustness to be resilient and respond to challenges and opportunities.

Most of our publications are available for viewing, downloading or purchasing online through our website:

• downloads at www.rirdc.gov.au/fullreports/Index.htm • purchases at www.rirdc.gov.au/eshop

Simon Hearn Managing Director Rural Industries Research and Development Corporation

iii About the author

Michael Heasman PhD

Michael Heasman has more than 15 years experience of working at the cutting edge of the social science of food, including being an early pioneer in researching the impact of nutrition policy on food and beverage manufacturers. He obtained his Ph.D. in the Food Policy Research Unit, School of Biomedical Sciences, University of Bradford, UK, in 1988. He is a Visiting Research Fellow at the Department of Health Management and Food Policy at City University, London and Affiliate Faculty member of the Functional Foods for Health Program at the University of Illinois.

Michael is currently working as an independent writer, researcher and opinion leader on the global food industry. As an international expert on food, nutrition and health - from business strategy to nutrition policy - he has a track record as a globally focused, interdisciplinary, thinker beyond the ‘box’. He is working on a portfolio of projects including food policy, food innovation, functional foods, health and wellness, and food ethics and corporate responsibility. An UK national, he is now based just outside Helsinki, Finland.

He is co-author of two recent books: Food Wars: the Global Battle for Minds, Mouths and Markets (in press) and The Functional Foods Revolution: Healthy People, Healthy Profits? (2001), as well as Consumption in the Age of Affluence: the World of Food (1996). He is currently working on a new book on the nutrition industries.

Michael is Editorial Director of Innova, a new publication launched January 2003 from CNS Media in the Netherlands, reporting on global new product development and food innovation trends. He is also the publisher and editor of FoodforGood.com, the only publication devoted exclusively to providing news, business analysis, ‘thought-leadership’, and case studies about, and for, the growing number of food and beverage companies around the world being run on ethical and socially responsible principles.

Michael has held a number of academic research posts in the UK, most recently at the Centre for Food Policy, London (1995-1999), but also at the Universities of Reading, London, and Bradford. He has worked on a wide range of projects including investigating the costs and benefits of compliance with food regulation, the competitiveness and business development of small and medium-sized food companies, restructuring of the global food economy, the impact of nutrition policy on food and drink manufacturers, in addition to the global market for functional foods/nutraceuticals.

He was joint editor of the international newsletters New Nutrition Business (1995 to July 2003) and Financial Times Food Business (1999-2001, published by FT Business Ltd). He was co-founder of New Nutrition Business, the leading international newsletter reporting on functional foods, nutraceuticals, and healthy eating business trends published by the Centre for Food & Health Studies Ltd a London- based ‘think tank’ specializing in functional foods, where he was Director of Studies (1998-2002).

Contact details: [email protected]

iv Contents

Foreword ...... iii About the author...... iv Executive Summary...... vi 1. Introduction: Towards a nutrition strategy for Australia’s rural industries...... 1 2. The Scope of the Project and Consultation Sponsored by RIRDC...... 4 3. The Australian market for functional foods and nutraceuticals...... 6 The global and Australian context...... 6 4. A framework to understand food and health choices in the 21st century...... 8 Introducing Three Paradigms for Food and Health...... 8 5. Global business developments in functional foods - why the Functional Foods Counter-Revolution is now dominant...... 19 6. A nutrition and health strategy for RIRDC ...... 27 Key insights from the consultation...... 27 7. A strategic framework for RIRDC...... 32 Understanding the new competitive landscape for rural industries in relations to health and nutrition...... 32 8. Case studies ...... 36 Case study 1: Bioriginal Food & Science Corp...... 36 Case study 2: MotherHemp Ltd...... 37 Case study 3: Arbor International...... 37 Case study 4: BioForce AG ...... 38 Case study 5: Burnbrae Farms ...... 39 Case study 6: Zespri...... 39 Case study 7: The global market for organics set for double digit growth...... 40 9. Appendices ...... 41 Appendix 1...... 41 List of people who agreed to be interviewed as part of the consultation process:...... 41

Table of Figures All figures copyright Lang and Heasman 2003

Figure 1: The Era of Food Wars...... 11 Figure 2: Productionist Paradigm Approach to Health (1950s ff, with Health Education bolted on post 1970s)...... 14 Figure 3: Life Sciences Integrated Paradigm Approach to Health ...... 15 Figure 4: Ecologically Integrated Paradigm Approach to Health ...... 16

v Executive Summary

RIRDC should be cautious about investing heavily in R&D in functional foods/nutraceuticals as usually defined. Despite the caution for functional foods/nutraceuticals it is concluded that 'health' - both human and environmental - is and will be of growing importance in food supply, particularly for the long-term. Rural industries can play a more proactive and innovative role in delivering these 'health' benefits, including added value produce, than they do at present. The premise of the functional foods/nutrition science revolution of the 1990s is based on observations of the health benefits of consuming more fruit, vegetables and 'whole' foods. Fresh produce and products based on them are missing out on this newly created, nutrition science based, food supply opportunity. In other words they are failing to compete. It is therefore recommended that Australia’s rural industries should develop a ‘vision’ and a nutrition strategy framework and facilitate business development from within this framework that combines environmental and health goals with consumer-led products, marketing, and innovation.

To explain how these recommendations were derived the report sets out a detailed overview of the role of health and nutrition in general food supply, introducing the concept of the Three Paradigm Model developed by Lang and Heasman1, and a strategic commentary on the current global market for functional foods and nutraceuticals arguing that a Functional Foods Counter-Revolution is leading to a period of industry maturation characterized more by the status quo, than a nutrition revolution.

Future scenarios for food and health

It is suggested the world of food is on the cusp of a far-reaching transition resulting in a major restructuring of global food supply based around what is argued are three competing scenarii or three paradigms for food and health – the Three Paradigm Model. In short-hand these are - 'business as usual' (what is termed The Productionist Paradigm), and two newer emerging frameworks: 'mix and match' (The Life Sciences Integrated Paradigm) and 'fully engaged' (The Ecologically Integrated Paradigm). Each paradigm addresses different approaches to food and health, how to produce food in the future, how food supply should be regulated, local or global production. The three paradigm model is set out to capture that there are now distinct choices being made in food policy and food supply strategy with long-term implications not being fully debated. The purpose of setting out the Three Paradigm model is to provide a tool for analyzing food and health options integrating the core drivers of: health, business, environmental impact, consumer experience and policy management.

The state of the international market for functional foods

It is argued that functional foods and nutraceuticals markets are entering a prolonged period of consolidation as part of a Functional Foods Counter-Revolution. With all sorts of foods and beverages becoming 'functional' through adding ‘health enhancing’ ingredients the whole concept is in danger of becoming viewed as a “commoditized” market. The result is that for many companies new product development means relying on looking backwards to ‘case studies’, often originating in the mid-1990s, to enter food and health markets with “me-too” type products. The innovation and strategic challenge is now twofold, not to look back, but to look ahead to what is genuinely new, either to win at the consolidation game – stage a successful Counter-Revolution - or to be the pioneers and work on the next big idea to leapfrog into the future. The lessons from the international market for functional foods are set out and the implications of the Functional Foods Counter Revolution.

1 Lang, T. and Heasman, M. (2004) Food Wars: the Global Battle for Minds, Mouths and Markets, London: Earthscan vi Key insights from the consultation

A total of eight interviews were undertaken with Australian experts with different backgrounds and experience of the food economy and functional foods. The consultation serves as a pilot study and the main objective was to test international developments in the context of Australian activity. The interviews were not aimed to be inclusive of the majority of Australian experts or to cover all professional areas that are relevant to functional foods and nutrition. Information from the interviews was analyzed manually and comments grouped into six main themes which arose from the examination of the interview data, these were: ‘market constraints,’ ‘get close to the market,’ ‘local versus global development’, ‘the image of Australian food,’ ‘total diet approach,’ ‘future challenges.’ Details from the interviews are presented in this section.

Conclusions

Australia’s rural industries should develop a nutrition strategy with the objective of enabling them to compete more effectively in nutrition markets and apply the successful lessons from the marketing of ‘functional foods/nutrition products’ from the processed/packaged foods industry. The strategic goal of rural industries would be to ‘leapfrog’ current market activity with a new consumer-led nutrition vision integrating human and environmental health.

vii 1. Introduction: Towards a nutrition strategy for Australia’s rural industries

The past dozen years has seen the world’s food industry embrace a food and nutrition concept known as ‘functional foods and nutraceuticals’.

The concept originated in Japan in the 1980s driven by that country’s concern about the potential health needs and disease burdens resulting from the demographic shift towards a rapidly aging and older population profile.

After the 1980s when the food industry was under intense negative scrutiny about the amounts of fats and sugars ‘hidden’ in processed foods, the functional foods concept of the 1990s presented a welcome opportunity to develop products for ‘positive’ eating. The functional foods idea – although totally alien to consumers - opened the potential for a raft of new value-added product innovations that threatened to blur the distinctions between food, drug, and dietary supplement.

The pharmaceutical industry was touted by many experts as being the driving force behind the future of such health-promoting foods. From the cusp where food and pharma meet a functional food revolution was to unfold and a multi-million dollar market for new product offerings was predicted for the pharmaceutical industry.

Optimism was further fuelled by consumers telling market researchers they wanted to eat healthily, were concerned about nutrition and health, and looking for products with health benefits.

Then it all got horribly complicated. Consumers choked on paying up to four to five times the price of traditional foodstuffs for what were often poorly understood health benefits. Degrees of difficulty were encountered over safety and toxicology. A regulatory minefield quickly became apparent over what health claims could be made and over product labeling. Developing and understanding the science to evaluate and demonstrate the efficacy of individual functional foods proved highly problematic. And public health and nutrition policy responses to these new developments continue to be mixed and ambiguous

But despite these complications, whole new categories of nutrition-based products have been successfully introduced, and nutrition marketing, with health benefit messages to consumers, – has been used to give new market life (and sales) to many traditional foodstuffs.

New categories developed over the past decade include US$ billion global examples such as the market for ‘energy’ beverages, dairy products targeting ‘gut’ health, soy milk as a ‘healthy’ alternative to diary milk as well as promoting the health benefits of soy, and ‘energy’ and nutrition bars. Among traditional foodstuffs given new market life, prominent has been oats and whole grains in relation to heart health, tomatoes and lycopene for the prevention of certain cancers, and cranberry juice and urinary track infections. And there are many more examples, with lesser sales, perhaps the most notable new category being cholesterol-lowering products based on ingredients derived from plant sterols, such as margarines. The market has been largely driven by ingredients – from less than cutting edge ideas such as calcium fortification to trying to stimulate consumer interest in essential fatty acids, to using unusual botanicals/herbals.

The reality of this market activity is that nutrition in a wider sense than functional foods/nutraceuticals alone has moved centre stage in much food and beverage product development and consumer marketing. To illustrate this point, the Innova new product database was investigated to understand the extent of functional food new product activity2 Over the past 12 months the Innova database recorded more than 20,000 new food and beverage introductions. Of these some 1,100 were described as ‘functional and fortified’, however, this total was just one part of around 8,000 products listed that had some sort of nutritional positioning, such as ‘low and light’ or carried a nutritional benefit message (interestingly more new ‘low and light’ products were introduced globally than ‘functional and fortified’ over the period examined).

The distinction - between what might be termed ‘pure’ functional food/nutraceutical activity and the broader concept of nutrition marketing in relation to food, diet and health - is at the heart of this report.

It will be argued that Australia’s rural industries should look beyond functional foods/nutraceuticals and embrace a broader, even radical, ‘nutrition’ agenda. In doing so rural industries will need to apply the lessons from functional food product development and marketing strategy to produce value- added nutrition-based commercial opportunities in the context of a nutrition strategy for themselves.

The major conclusion of this Position Paper is, therefore, that RIRDC should not consider at this stage research funding for specific nutraceuticals/functional ingredients.

Instead resources should be used to establish a robust competitive defense of the nutritional and health benefits of rural produce. This can be achieved, by first, developing and facilitating ‘buy-in’ for a far-ranging nutrition strategy for the rural industries that integrates human and environmental health objectives, and second, to resource commercialization opportunities for small and medium-sized enterprises to enable innovation and new product development consistent with the broad goals of this nutrition strategy.

RIRDC could commission an analysis of the literature on the health potential of its portfolio of products and rank the significant opportunities. It could then selectively identify areas for further research, but do this cautiously and in partnership with other collaborators.

Any strategy choice involves ‘risk’, and the strategy outlined here should be seen in the context of bigger changes in global food supply which are discussed in Sections 3 and 4.

For example, the broader concepts of nutrition and ‘wellness’ (that is beyond ‘functional foods’ alone) in business and product strategies are today transforming industry cultures of the world’s largest multinational corporations. Nestlé, the world's largest food and beverage company, told investors in May 2003, the development of its nutrition business is a top priority. Nestlé Chief Executive Peter Brabeck was reported as saying that Nestlé’s strong Research-and-Development position and strong global brands, position it to achieve its goal of becoming a: “respected and trustworthy nutrition, health and well-being company.”3

2 For more information see: www.win-food.com. Innova, produced by CNS Media, the Netherlands, tracks new product launches through the world on a continuous basis. 3 Brabeck, P. quoted in: Food Navigator (2003). Nutrition and Health, accessed May 27th http:/www.foodnavigator.com/news/news.asp?id=7700 2 In an interview in February 2002, the Chairman and CEO of Unilever said: “…people want vitality because they are living longer and there will be longer periods of time when they are not working full time. The other thing that will be more important is products that have a physical benefit but also an emotional benefit. Things that make you feel better because you are using them. People are increasingly looking beyond the brand, beyond the company, and we have to do more to ensure that Unilever is known for what it represents”4

Whatever way the market is viewed – from global nutrition needs, public health policy, the burden of diet-related disease, new healthy lifestyle choices being pursed by consumers, to the strategies and business development of global corporations – food and health issues are potentially re-shaping the very nature of food supply.

The question addressed here is how Australia’s rural industry can benefit from this dynamic in the long-term relative to available resources, business development, and commercial opportunities.

4 Interview with Niall FitzGerald, Chairman and CEO Unilever, The Observer: Business, February 24th, 2002, p.14 3 2. The Scope of the Project and Consultation Sponsored by RIRDC

This aim of this Position Paper is to identify current trends towards health and nutrition in food supply and to provide guidance and insightful strategic options for how Australia’s rural industries can respond to these trends, especially to generate long-lasting value to their food chains.

The Paper discusses the broader context of opportunities and activities in foods with health benefits and draws out general implications.

The outcome of the exercise is to shape the RIRDC research funding agenda towards new rural business development in relation to consumer food, health and nutrition trends and concerns.

This final report to the RIRDC aims to capture in a concise and focused way the key issues and opportunities relating to food/beverages with health benefits, illustrating key factors that lead to success or not in developing these products.

Thinking widely about options in food, health and nutrition

The project, in helping RIRDC to develop longer-term strategy, also aims to consider ‘health’ in a broader context that takes into account new technologies and the relationship between environmental and human health – a key concern for agriculture and food production. There are emerging new visions of what is nutrition, and a healthy food supply with competing technologies and policy choices. One such choice, in a polarized form, can be seen in the global conflict between a ‘GM’ future or an ‘organic’ future – with both camps claiming human health and products that will lead to enhanced health benefits as a rationale for their competing ways of producing food. Another is that there is a need for new ‘functional foods’ to go beyond basic nutrition as a way to address ill-health and disease, especially as a solution to the health problems of an aging population in developed world countries and as a way to reduce government health care costs.

Are ‘radical’ options in food and health possible or even feasible?

But there are other ways of looking at food, health and nutrition that offer business opportunities. In the nutrition sciences, for example, a new ‘ecological nutrition’ is being developed, applying evolutionary principles to nutrition. Such thinking has the potential to offer radical new ways to perceive food and health, in particular the way food is produced, that go beyond the narrow ‘technical fix’ concept of functional foods/nutraceuticals often discussed. The word ‘radical’ here is used in the way that world business expert Gary Hamel uses it, that is:

“A radical idea has the power to change customer expectations, to change the basis for competition, and the power to change industry economics…”5

5 Hamel, G. (2002) Innovation Now!, Fast Company, December, pp114-124 4 Developing practical, value-added outcomes

Many of the issues and business models being touted in the area of functional foods can appear remote or abstract - whether they be from the marketing of strange ‘functional foods’ to distant consumers, being flexible to global consumer ‘lifestyle’ trends, or to the possibilities of environmental catastrophes in food production – but they are very real for the future of rural food production. The final goal of this exercise, therefore, was to draw up practical strategic options that aim to secure healthy rural industries able to generate economically viable, value added businesses, in relation to food, nutrition and health.

Consultation with Australian experts

As part of the project a number of Australian experts with different perspectives were interviewed so a range of views on food, health, and functional foods could be incorporated. Eight interviews were undertaken and a list of those taking part is provided, with permission, in Appendix 1. The interview process was not designed or planned to be exhaustive, more of a pilot study to test certain assumptions about the relationship of functional foods to the wider food economy, especially in the Australian context.

There is, in the author’s opinion, an exciting breath and range of thought, from many perspectives, about the food economy, nutrition and health taking place in Australia at present and hopefully this Paper will point towards ways to integrate these perspectives more fully into future considerations about what constitutes a ‘healthy’ food supply.

Towards the end of this paper detailed comments from the interviews are used to illustrate specific issues, and where the interviews generated particular ideas or insights these are acknowledged . However, the author is solely responsible for this final paper, and none of those interviewed has seen or commented on earlier versions, thus any misinterpretations and errors are the author’s responsibility alone.

Despite the different backgrounds and experiences of those interviewed, a form of consensus was reached. Over-simplifying a little, this is:

• RIRDC should stay out of what is termed here as ‘pure’ functional foods/nutraceuticals, • A broader perspective on nutrition and its relationship to the rural industries should be considered instead, • There has yet to be a general move to turn this into marketing and value-added commercial opportunities and concepts for Australia’s rural industries.

5 3. The Australian market for functional foods and nutraceuticals

The global and Australian context

This Position Paper is not a market study. But it is helpful to provide some market data to put the issues discussed here in some sort of market context. It should be noted that all market figures relating to functional foods should be treated with some caution. Different market analyst reports often use a variety of definitions to embrace ‘functional foods markets’ so what gets included or not affects market projections. In addition, there are wide variations between categories, even within very similar products, such as products with ingredients that are grounded in science in relation to their health benefits to those where the science is wanting (although ‘good’ science and ‘bad’ science is not a predictor of market success – many products with the former have performed dismally, many of the latter, have been market ‘stars’).

Other issues muddying market estimates include the nature of market activity. Much marketing activity has been the repositioning of traditional products on the platform of ‘health benefits’. This has taken two forms, either undertaking new marketing activity based on the intrinsic health qualities of a foodstuff – for example nuts, whole grains, oats, tomatoes, orange juice, rye, etc, or adding ingredients to existing product ranges, or through product extensions. This last activity – adding ingredients to existing product ranges - can be very problematic for estimating market activity, since often it involves adding ingredients like vitamins and minerals (the antioxidant vitamins A,C, and E and calcium being good examples) to products already on the market. As a result, almost overnight whole product areas can become ‘functional’. All these developments are important for particular market activities, but perhaps the key areas to look at are what are termed new categories – that is ‘health’ and nutrition- based products that have grown dramatically or are truly new and innovative in particular geographic markets – such as soy milk in the U.S, probiotics (that is, products with ‘gut’ friendly bacteria) in Europe, nutrition bars, ‘energy’ drinks, cholesterol-lowering spreads, etc.

The U.S. based publication Nutrition Business Journal estimate the global nutrition market as being valued at US$150 billion in 2001 (the latest figures publicly available). Of this, by their definitions, functional foods accounts for 37%, vitamins and minerals 14%, herbs and botanicals 13%, sports nutrition 8%, natural and organic foods 20%, and natural personal care 8%. The geographic spread of the $150 billion market is USA 35%, Europe 32%, Japan 18% and the Rest of the World 15%6.

In February 2003 U.S. based Health Strategy Consulting published a comprehensive market report, one of the first of its kind, on the Australian and New Zealand complementary medicine market which also included detailed analysis of dietary supplements and other nutrition markets7. HSC estimate that the New Zealand and Australian nutrition industry represents around 0.8% of the global nutrition market as defined above. They estimate a total nutrition market value for Australia and New Zealand of AUS$2.9 billion, broken down by AUS$1bn functional foods (35.1%), $0.8 organic (27.8%), $0.9 supplements (30%), and $0.2 natural personal care (7.2%). Compared to other developed world markets HSC argue that New Zealand and Australia have much potential for growth based on the fact that per capita expenditure on nutrition products (adjusted for income levels) is considerably lower than that in the U.S., Western Europe, and Japan.

6 NBJ Nutrition Industry Overview (2002), SanDiego, California, www.nutritionbusiness.com 7 More information on the market study, Australia and New Zealand Complementary Medicine Market Overview, can be obtained from Tom Clough, Managing Director, Health Strategy Consulting, LLC, 319 Hope Street, Providence, RI 02906, USA, tel: (401) 270-0760 Ext. 12, Fax: (401) 270-0706, [email protected], www.health-strategy.com

In terms of specific market activity, Goodman Fielder reflects the type of product development over the past 5 to 6 years that characterizes company activity in many countries. For example, the company introduced Logical (in 2000), a cholesterol-lowering margarine containing phytosterol (to compete with Unilever’s Pro-Activ), and other phytosterol containing foods until these were forced to withdraw from the market due to regulatory demands. The company developed a high omega margarine (in 2002), with higher levels of omega-3 fatty acids than any other product on the Australian market, as well as a omega containing bread sold through a retailer house name (own label). In breakfast cereals the company launched the Healthwise brand in 1999, a sub brand of Uncle Toby’s breakfast cereals. Products under the Healthwise brand targeted heart health, bowel health, and women over 40 and their health needs. Importantly the activity of Goodman Fielder reflects different strategic approaches to nutrition marketing; the Healthwise products delivered a “bundle of nutrients” like beta-glucan and isoflavones together, rather than rely on one particular ingredient to deliver the functional benefit.

In other areas of nutrition marketing, but often not regarded as functional foods, the company has introduced products with altered fat levels and types of fat levels, such as high oleic acid, an essential fatty acid associated with cardiovascular health benefits. The company also developed high maize, which is a high amolyose starch (resistant starch). The ingredient is still used in products like bread product Wonder White (although the company no longer has control over this particular ingredient), which is marketed on the basis of its elevated fiber levels.

As Geoffrey Annison, Research and Technology Director at Goodman Fielder said: “Nutrition remains a strong platform for our brands and we have to move with the times and introduce more and more functional products as they become available and the technologies become available”.

In addition, “moving with the times” the dairy industry has been active developing ‘functional foods’ such as a market for probiotic or ‘gut friendly’ products, and numerous companies have been adding vitamins and minerals, fibers and so on to products to develop a nutrition profile for consumer marketing in Australia.

7 4. A framework to understand food and health choices in the 21st century

Introducing Three Paradigms for Food and Health

In the next two sections the global context for food, health and nutrition is considered. The purpose is to set the scene and provide a framework for future debate on strategic options for RIRDC relating to nutrition and business development. In this Section a far-reaching ‘scenario’ for change within food supply centering on health is outlined. The purpose is to capture competing visions for a ‘healthy’ food supply, and to highlight that there are choices to be made – but often involving difficult trade-offs and competing perspectives. In the next Section an overview of strategic directions in functional foods in presented, which in turn are explained in part by the Three Paradigm model presented here.

This Section relies extensively on work recently completed by the author with Professor Tim Lang, Professor of Food Policy at the Department of Health Management and Food Policy at City University, London, and to be published February 2004 as the book Food Wars: The Global Battle for Minds, Mouths and Markets (London: Earthscan).

Lang and Heasman argue that the world of food is on the cusp of a far-reaching transition resulting in a major re-structuring of global food supply based around three competing scenarii or three paradigms, in short hand - 'business as usual' - what we term The Productionist Paradigm, and two newer emerging frameworks: 'mix and match' (we term The Life Sciences Integrated Paradigm) and 'fully engaged' (we term The Ecologically Integrated Paradigm). Each paradigm addresses different approaches to food and health, how to produce food in the future, how food supply should be regulated, and different approaches to production.

The three paradigm model is set out to capture what we regard as distinct choices being made in food policy and food governance with long-term implications for human and environmental health. The purpose of setting out the Three Paradigm model is to provide a policy tool for analyzing food policy integrating the core drivers of: health, business, environmental impact, consumer experience and policy management or governance.

Mapping out ‘frameworks’ for business choices

A key concern is how can we make sense of the complexities of the modern food system to address hard choices? The Three Paradigm conceptual framework is useful to help test and explore such choices. We argue that the current food system that developed rapidly after World War 2 is shaped by a way of thinking that we call the Productionist Paradigm. By ‘paradigm’ we mean an underlying, fundamental set of framing assumptions about what the world consists of or how it is viewed. On its own terms, the Productionist Paradigm has proven highly successful, but the costs of this success, such as environmental degradation, are now part of the contradictions and so-called crises that are starting to undermine the very foundations and future viability of the Productionist Paradigm.

Compounding the unraveling of the Productionist Paradigm are new visions for the future of food that conflict and compete directly with the assumptions upon which the Productionist Paradigm is built. But even these new visions and business ‘models’ about the future of food are often in conflict. We group these competing visions into two emerging ‘frameworks’ that we call the Life Sciences Integrated Paradigm (LSIP) and the Ecologically Integrated Paradigm (EIP). Both are grounded in new understanding in the science of biology, but each interprets biological and societal systems in ways that offers differing choices for our food future: how food is produced, who produces it and how it is

8 sold; questions of social justice, where the food is produced (global versus local sourcing), and the place of food in human health.

But note it would be a mistake to assume that by the LSIP is simply meant GMOs or by the EIP ‘organic’ production alone. While these are important components of each, especially in the current political and policy making arena, our Paradigm model aims to capture a wide range of different thinking about food than these aspects of production alone.

Very powerful forces are lining up behind and shaping these new paradigms for food – but it should also be realized that the existing Productionist Paradigm is still subscribed to and has influence in maintaining the perpetuating ‘business as usual’ or a status quo (as Australia’s food trade negotiators know). As ever, the appeal to continue with existing policies – more of the same, business as usual – is powerful. All three paradigms or frameworks have pros and cons and trade-offs.

The Three Paradigm Model helps to situate business and market developments in functional foods and nutraceuticals and what direction these might be taking for the future. The strategy option set out later suggests there is a business development opportunity for rural industries that has as yet not been fully exploited in the context of what we term the Ecologically Integrated Paradigm. This would represent a ‘radical’ approach as outlined by Hamel, - that is, “the power to change customer expectations, to change the basis for competition, and to change industry economics” - built around integrating a wide ranging health and nutrition strategy for fresh produce businesses.

The future of food, we argue, calls for an ‘authentic health-centered’ food supply. In an authentic health–centered food supply, people will tend to see health, nutrition and the food they eat in the context of their whole diet, including where food comes from, who produced it and how it was grown (this is already happening on a small scale). Policy will promote a holistic approach to food and health, not simply prompting a limited range of healthy ingredients, while ignoring the rest of food production and its role on human and environmental health – issues currently being brought into sharp focus by the obesity epidemic, especially in the United States.

Food ‘health’ has to be defined in a broader sense than it is at present. ‘Health’ includes food safety, diet and human disease, but also optimum nutrition (‘wellness’), through to animal welfare issues, and the health of the environment which has to support food production. An authentic ‘health-centered’ food economy will be the major battleground for the future of food. Already many food manufacturers are responding to new ‘health’ opportunities and creating profitable innovations, new markets, or are involved in initiatives to protect the environment, but others are still deeply embedded in foods and products, such as certain fats, that are seen as having a negative impact on human health.

In one sense the global picture of food and health is potentially bleak, although we believe a realistic one, in which there are more than two billion people in the world who are either under- or over-fed and where tens of millions of people have a daily reality of disease and ill-health in part due to what they eat. At the same time, commentators and researchers have presented a picture which raises mounting concern about the adequacy of the environment needed to produce the world’s food, whether this is the oceans or croplands or rangelands, and in relation to the world’s biodiversity.

We see the world of food policy as formed and fractured by a series of conflicts, which we term Food Wars – these, in the context of the Three Paradigm Model are set out in Figure 1. These are: • Health: by which we mean the relationships between diet, disease, nutrition and public health; • Business: the way food is produced and handled from farm inputs to consumption; • Consumer culture: how, why and where people consume food; • The environment: the use and misuse of land, sea and other natural resources when producing food; and

• Food governance: how the food economy is governed, regulated and food policy choices made and implemented.

We outline current Food Wars as being over the transition from one paradigm designed mostly to increase outputs, to a choice of two others which offer different models of how production and social progress can occur as output is increased. All three paradigms or policy frameworks offer distinct and sometimes competing analyses and choices for public policy.

While it is self-evident that today’s food economy is grounded in a long history of production, experimentation and technological change, the industrial food supply is still relatively young in human history – a little more than 150 years old. Since World War 2 the modern food economy – a framework we capture as the Productionist Paradigm – on its own terms has been spectacularly successful. It has shown remarkable business and technological expansion to provide food for an unprecedented growth in human population, that had doubled in 50 years to more than six billion people in 2003, and has delivered in theory if not political reality, enough food to end hunger. For those with the economic means and access to purchase them the modern food system has produced a choice and array of processed, all-year-round, everyday, convenient foodstuffs never before available.

A food economy such as Australia in historic context is an outstanding example of the success of Productionist Paradigm dynamics and drivers. But the Productionist Paradigm is, if nothing, characterized by contradictions. For example Australia is also a victim of its historical success –

10 Figure 1: The Era of Food Wars

11 an industry structured around highly commoditized production, a domestic food industry dominated by foreign ownership, and a record of value-added processed food innovation that could be improved.

For some commentators and futurists, the ‘health’ of our food supply itself is in immediate danger. To take one prominent example, Lester Brown, president of Earth Policy Institute and founder of the Worldwatch Institute, has spelt out these dangers in his book Eco-Economy, published at the end of 2001.8

He points out there have been some remarkable changes since the 1950s in food supply. Headline figures include the tripling of world grain production; world production of beef and mutton increased from 24 million tons in 1950 to 65 million in 2000; growth in the oceanic fish catch climbed from 19 million tons in 1950 to 86 million tons in 1998. Inputs also grew to match the production of food, for example, world fertilizer use rose from 14 million tons in 1950 to 141 million tons in 2000 (the data is detailed at www.earth-policy.org). This to feed world population that has doubled since the 1950s – the first time a generation in history has witnessed a global population doubling during their lifetime.

Brown argues that such food gains for the future are no longer sustainable if based on past production methods. But food supply problems in the future can only deepen, fuelled by the expectation that the numbers of humans will grow from 6.1 billion in 2000 to 9.3 billion in 2050, to take the United Nations projection of population growth.

In the commercial setting, there is no let up in the tragedy hitting rural and farming communities. While farmers and the land are being squeezed, oligopolies from agribusiness to food processing, retailing and food service, dictate the workings of the food supply chain. We suggest that much food and health policy response to date has been at best reactive rather than proactive as these global processes have unfolded over the half century and more. For example, policy has failed to prevent mass ill-health, yet claims to be prevention-oriented. In many instances, NGOs, business and the scientific community have been both more radical and in tune with wider societal trends about food and health than policy makers and government.

In this respect hard choices loom. How can population health goals be reconciled with the way people want to live their lives? Can consumers realistically continue to expect ever cheaper food? What sort of intensification in production is best for human and environmental health? Can patterns of food trade benefit more people? What are the acceptable limits to the continuing concentration of market share by giant food companies? To what extent should public money support food production? How can we communicate to people about the most appropriate food choices for optimum nutrition and wellness?

Issues for all Three Paradigms include:

• Re-shaping of competition practices and market control • Ensuring quality over quantity • Re-writing the rules for trade and how these are set • Ensuring food safety – human as well as environmental • Setting the regulatory environment • Balancing a sustainable food economy while meeting diverse needs and interests • Redirection of agricultural funds and subsidies (who should benefit, paying for quality not surpluses, setting wider human and environmental health objectives) • How to optimize resource use – land, energy, chemicals, water • Revitalizing and supporting rural economies • Ensuring trust and transparency in the food system

8 Brown, L. (2001) Eco-Economy: Building an Economy for the Earth, New York: Norton & Company 12 • • Making the food economy part of a wider ecological modernization program • Fair prices throughout the food chain and changing pricing mechanisms • Developing and ensuring fair labor practices • Greater emphasis on local production/consumption patterns • Directing food supply towards improving nutrition, health and environment as a priority • Protecting and promoting biodiversity • Working with and through consumers • More inclusive food governance and food democracy

The Productionist, Life Sciences and Ecologically Integrated Paradigms’ approaches to health

A key argument is that while western societies have satisfied the caloric content of the diet – the sheer quantity of food – they have at the same time introduced methods of production, distribution and consumption that threaten the viability and future of the food system that current delivers those calories. In addition, the methods used in producing, processing and delivering the quantity of food, have at the same time contributed to lessening the quality of many foodstuffs, not least their nutritional value such as loss of essential bioactive components like vitamins and minerals.

Our Three Paradigm Model has different implications depending which worldview dominates, in particular each Paradigm has a different way of looking at human and environmental health. These are detailed in Figures 2, 3, and 4.

13 Figure 2: Productionist Paradigm Approach to Health (1950s ff, with Health Education bolted on post 1970s)

14 Figure 3: Life Sciences Integrated Paradigm Approach to Health

15 Figure 4: Ecologically Integrated Paradigm Approach to Health

16 While these Figures appear quite complex, the main implications are quite straightforward. The main ‘health’ component of the Productionist Paradigm has been the assumption that human ‘health’ will follow from sufficiency of supply, which at one level is correct. When from the 1970s onwards, scientists started to suggest certain components of the modern diet may contribute to certain disease (such as too much saturated fat in relation to heart disease) the response in the main was not to alter food supply, but to provide dietary ‘guidelines’, or health promotion and information campaigns, so consumers were informed enough to make choices between about what they ate.

For the Life Sciences Integrated Paradigm the driver behind this is a ‘medicalized’ notion of health – that is, put crudely, disease and illness can be managed through a highly individualized attention to dietary components specified by our genetic make-up. In addition, the health case for increasing output of the food supply is still a critical policy concern, and one espoused in particular by the Life Sciences Integrated Paradigm’s approach to health, or more properly by the biotechnology version of it. A key feature of the LSIP approach (Figure 3) is its focus on individualized health. In some ways, it offers an almost industrial model of health in that it promises the capacity to understand the constituent parts of disease and the human’s capacity to fall prey to particular diseases, and then offers long-term personalized dietary solutions. But this is not a crude industrialization but a highly sophisticated understanding of the minutiae of the biological and genetic ‘cogs’ in the human ‘machine’. The Life Sciences approach disaggregates the complexities of the food-disease-health nexus into discrete parts and offers food or food-derived ingredients as potential aids. Health is delivered by science.

A fundamental difference between the Productionist and Life Sciences Paradigms, on the one hand, and the Ecologically Integrated Paradigm (Figure 4), on the other hand, is that the former conceive of health as an endpoint or outcome of a long process (the food chain or bio-food chain), while the EIP conceives of health as something that is intrinsic to each stage of the growing and distribution process.

The health approach of the Ecologically Integrated Paradigm, as the name implies, is centered on the relatively young science of ecology, that is understanding the working of systems and cycles that are characteristic of biological systems in nature. The emphasis is on process – notably feedback loops, cycles, symbiosis, inter-connections. It proposes that the goal of food policy should be to try to understand these processes and to work with them, rather than to engineer, constrict or fragment them. For example, an ecological approach sees monoculture whether in the field or in diet as anathema, whereas the other two paradigms see monoculture as a matter of business reality and efficiency.

Both emerging paradigms (LSIP and EIP) offer powerful critiques to the thinking of the Productionist Paradigm, and claim to deliver both environmental and health benefits that are not being adequately delivered by the Productionist Paradigm. These benefits include reduced chemical inputs, foods with better nutrient profiles, and food security. Both assume that the current narrow Productionist approach will not be able to deliver enough food for a burgeoning world population.

Where the paradigms differ, however, is on how to deliver that food increase and the assumed benefits to the general health. They also are rooted in different social groupings within society. The LSIP is largely espoused by and based at the hi-tech agrochemical and pharmaceutical end of the food system. The Ecologically Integrated Paradigm looks to learn from, but modernize, more traditional farming knowledge. Both have concepts of intellectual property, the LSIP through the patenting of genetic materials, the Ecologically Integrated Paradigm by building on and modernizing knowledge built up over many generations. Both emerging paradigms have clear notions of science and technology, but different notions of what these are and are for. Although the LSIP argues that their technologies will deliver human and environmental health, there is no guarantee that they will work in the longer run or in all circumstances. The Life Sciences Integrated Paradigm, like all sciences, are framed by social assumptions and beliefs as is the EIP. To a large extent the health benefits of both the LSIP and EIP have yet to be proven or demonstrated on a large scale over the long-term.

The Three Paradigm model and consumer culture

Crucial to understanding the relationship of human and environmental health to the Three Paradigm Model is the way current food culture is evolving in the context of consumer demand. On the one hand there are celebrity chefs with top rating TV shows, cookery and diet books on the bestseller lists, (just think of the Atkins diet) and popular media concerns about food quality, safety and availability. On the other hand, a crisis of food supply still dominates great tracts of the world. Hunger, under- nutrition and insecurity stalk many lands alongside obesity, and premature death due to mal- consumption and over-consumption – in 2001 the U.S. Surgeon General, for example, attributed 300,000 deaths to obesity in the U.S. alone.

Today’s consumer is vastly different from that served by the framework that shaped the Productionist Paradigm. Even at the basic market-led model, the rich-world consumer is developing a very different conception of food – wanting convenience, snacking, ready meals, an eating-out culture and a food lifestyle that meets time constraints, and one that recognizes the role of women in society is different. The prominence of trends towards health and well-being are also very different today than in the decades after World War 2 when the Productionist Paradigm rightly saw quantity of food as a key requirement. Today, a significant and growing minority of consumers is increasingly questioning where their food comes from, how it is produced, and demanding greater food chain transparency (at the same time it must be remembered another significant minority, to be blunt, couldn’t care a less about such issues). Only by understanding how food culture is shaped can the policy community develop realistic strategies in relation to an integrated food and health policy that embraces both environment and human health and consumer aspirations.

Consumers as Cultural Creatives – the biggest challenge for food supply

An example of this transitional thinking is what American social analysts Paul Ray and Sherry Ruth Anderson argue is a new ‘value society’ emerging driven by what they estimate as 50 million “Cultural Creatives” in America alone9. They also say that research in Europe suggest the same consumer shift here. They identify three ‘value’ paths or movements which they term the Moderns, Traditionalists and the Cultural Creatives. The central path, the moderns, is how today’s society is, based largely on the industrial model and defines how many think today. The Traditionals are a shrinking group, the ‘red neck’ mentality and against all that is ‘modern’. And thirdly, they argue that the Cultural Creatives are growing and becoming more influential in Western society, not least as consumers and in terms of lifestyle values. Ray and Anderson argue the future lies in the activities of the Cultural Creatives. Cultural Creatives, according to this research, are also important consumers of products with health benefits, both human and environment. The emerging new value-based consumer presents yet another challenge for the future of food production. It is among the Cultural Creatives that you will find a lot of the ecological thinking referred to.

9 See Ray, P. and Anderson, SR (2000) The Cultural Creatives: How 50 Million People Are Changing the World, New York: Harmony Books 18 5. Global business developments in functional foods - why the Functional Foods Counter- Revolution is now dominant

This section summarizes international market activity and business strategy in functional foods. The goal is to provide an overview of where the market is today and where it seems to be heading for the future.

The concept of functional foods and nutraceuticals sits very neatly within the framework of the Productionist Paradigm. The solution to human health problems rests with individuals using information about different food components to make so-called informed food choices. Products with enhanced health benefits increase those food choices for health. Functional foods in turn, present a value added market opportunity in food markets where profit margins are slim and continuously under pressure. The thinking forming the Life Sciences Integrated Paradigm promises to take better health through food and beverages a quantum leap further. The Ecologically Integrated Paradigm, to date, has been largely marginal in mainstream functional foods, although the burgeoning natural and organic products market is testimony to its importance in creating new business in largely mature food markets.

But within the context of existing food markets it is important to not lose site of the potential of functional foods/nutraceuticals to transform markets. But even for the biggest players success is not guaranteed . For example a number of high profile product launches have failed to establish markets and consumer acceptance, such as Novartis with its Aviva product range in Europe and Campbell with it Intelligent Quisine (IQ) concept in the United States.

On the other hand the recent (2002) introduction by the U.S. baby formula market leaders Mead Johnson and Ross Products of ‘functional’ baby formula containing the essential fatty acid ingredients DHA and ARA, has become one the fastest growing valued-added niches in the U.S. commodity baby formula market gaining a 15 percent market share 12 months from launch in this $3 billion U.S. market. As important, from a business perspective, DHA/ARA products command retail margins of 9-12 percent, double category averages, and that category price per serving is up 6 percent since the launch of DHA/ARA. The functional ingredients have been developed and supplied by just one company – Martek Biosciences.

The U.S. baby formula market leaders illustrate a key characteristic of the international functional food and beverage market – it is one that is today largely shaped and controlled by the major players in most market categories. In this sense, the global market and business strategy in functional foods and nutraceuticals is entering a prolonged period of strategic consolidation or maturation as part of what can be termed a Functional Foods Counter-Revolution. With more and more foods and beverages becoming ‘functional’ through adding ‘health enhancing’ ingredients the whole concept is in danger of becoming a ‘commoditized’ market. The word ‘commoditized’ in this context is being used to imply that while in the early days of functional foods, products with health benefits were viewed as giving highly differentiated consumer products, when all the market leaders (and other companies) start to offer the same health benefits or functional ingredients, such differentiation becomes difficult to achieve. Further, as more and more ‘health enhancing’ products are introduced across categories, many offering similar health benefits, the health message itself becomes ‘commoditized’ One implication of this is that to succeed, especially as a small player, you have to be very different and innovative.

19 The result is that for many companies new product development in practice has meant relying on looking backwards to ‘case studies’, often originating in the mid-1990s, to enter food and health markets with “me-too” products. The innovation and strategic challenge is now twofold - through either seeking to win at the consolidation game – that is, stage or implement a successful Counter- Revolution strategy - or to be the pioneers and work on the next big idea to leapfrog into the future.

The concept of functional foods/nutraceuticals, in addition to nutrition marketing, has moved a long way beyond its early definitions of the 1990s in the West of adding a ‘healthier’ or ‘health enhancing’ ingredient to an existing food product to take it beyond basic nutrition. Yet adding ‘healthy’ ingredients to an existing product format has become the mainstay of much company functional food activity these days - even while everyone else is doing exactly the same. This nutraceutical treadmill is now turning innovation into a process of seeing just how many ‘healthy’ ingredients you can squeeze into one product. While great for ingredient suppliers or anyone who can come up with an ingredient that is safe, useable and has some health qualities – something that is proving a lot more difficult, costly and less profitable for most than predicted in the mid-1990s - it must be a strategy with diminishing returns in the long run. Just how many 100%’s of recommended daily intakes of particular ingredients can a consumer consume in one day without becoming increasingly nutritionally cynical?

What is the Functional Foods Counter Revolution?

The term Counter-Revolution is being used here in the business sense employed by Richard D’Aveni, professor of strategic management at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire, US10.

D’Aveni uses his counter-revolutionary strategy framework to describe how industry leaders react to new technologies and business models that they fear will render their firm’s competencies and products obsolete. He does not write about ‘functional foods’ so his model is being uniquely applied as a tool for analysis and interpretation in this area. Using D’Aveni’s counter-revolutionary terminology the functional foods concept of the 1990s can be described as a ‘revolutionary’ threat to the giants of the food industry. In particular the market activity of potential new entrants to the food sector or the prospect of innovative functional food and beverage companies and new technologies threatening to undermine industry leaders main product categories or even making them obsolete. Such a threat prompts those companies that are astute enough, to mount Counter-Revolutionary business strategies to contain the potential revolution, according to D’Aveni’s research.

D’Aveni writes that counter revolutionary strategies fall into five components:

• Containment strategies – used when a revolution is spotted early, • Shaping strategies – used when a revolution can no longer be contained, • Absorption strategies – used when a revolution is likely to succeed but can be modified, • Neutralization strategies – used when a revolution has been detected too late, and • Annulment strategies – used to take on a full-blown revolution that can’t be neutralized (this last approach is returned to later)

In his article D’Aveni uses the example of micro-brewing to describe how brewing colossus Anheuser- Busch, makers of Budweiser, Bud Lite, Michelob and Busch, staged several counter-revolutionary strategies to dampen the threat of craft beers made by small pubs and microbreweries in the 1990s and to reinforce its position as the dominant force in the U.S. beer industry. His analysis, in my view, serves as an apt analogy for the threat from the functional foods companies of the 1990s, especially

10 Reference: D’Aveni, R. (2002) The Empire Strikes Back. Counterrevolutionary strategies for industry leaders, Harvard Business Review, November, pp.66-74

20 those that seemed on the cusp of the functional foods revolution to many established dominant mainstream food and beverage corporations.

But first…what was the nature of the revolutionary activity – The Functional Foods Revolution11

In summary there have been two Phases in functional foods –:

• Phase 1: from the early/mid-1990s to 2001 - the Functional Foods Revolution; • Phase 2: from 2002 to date (and perhaps lasting another 3-5 years) the Functional Foods Counter- Revolution.

It is suggested here markets are moving from Phase 1 to Phase 2 – from revolution to counter- revolution, the later characterized by a period of food and health marketing consolidation.

Phase 1: early/mid-1990s to 2001 during which:

• The functional foods concept was stimulated by innovations from Japan in the 1980s (Japan is still very important, not least because even today many Western companies have failed to understand how Japanese companies innovate in functional foods or fully understand the original concept of functional foods) • there was much market testing, market failures and some successes, as functional foods were seen as a way to make high margins and new profits. Successes have created significant new business, such as probiotics and cholesterol-lowering spreads in Europe, nutrition bars in US, functional beverages around the globe. But also gave rise to the ‘nutraceutical cowboys’ (especially in the supplements industry), with a lot of misleading health claims and products saying they offered health benefits that could not stand up to close scrutiny (it is interesting to note one of the major problems facing the depressed US dietary supplements industry today is winning back consumer ‘trust’); • it was widely touted that the market will be driven by pharmaceutical companies which saw nutraceuticals as a massive new opportunity. The reality is they largely failed to become any force in functional foods/nutraceuticals. The one exception is McNeil (part of Johnson & Johnson) who despite set-backs from their original plans, have persevered with Benecol cholesterol-lowering spread; • food companies across food categories started to re-position existing products on the back of nutrition science (thus giving the impression of massive market growth when in effect it was simply new marketing for old products), • nutrition marketing became seen as the key to ‘added value’ success (and remains so), • everyone was looking for the next ‘big’ ingredient idea, on the scale of artificial sweeteners from the 1980s, but this has failed to materialize (instead there has be a string of smaller-scale ingredient success such as lutein for eye health).

11 The Functional Foods Revolution is described in exhaustive detail in Heasman, M. and Mellentin, J. (2001) The Functional Foods Revolution: Healthy People, Healthy Profits? London: Earthscan 21 During this period business strategy fell into three main forms12, in summary these are:

1. The functional foods makeover – that is, ‘shoe horning’ ingredients with health benefits into existing food product formats (especially successful here has been added calcium products in the West, but for many companies success has been short-lived or limited); 2. Creating a new category - examples here include taking a idea from one country and introducing them into another, such as little bottle probiotic drinks in Europe pioneered by Japanese company Yakult, but market-led now by France’s Danone, or the creation of new markets such as ‘nutrition’ bars in the US, or energy drinks in Europe and now the U.S. (although even the market leader here Red Bull was an idea taken from Taiwan and then first introduced into Austria); 3. Leveraging hidden nutritional assets – also known as selling the intrinsic health benefits of foods, this strategy is the new marketing of everyday foodstuffs using nutrition science based upon their nutritional properties and/or bioactive components, such as the ‘heart health’ properties of oats and whole grains, the health benefits of lycopene in tomatoes and so on – in most cases no new ingredient is added to the product as such, just ‘new’ nutritional information about its possible role in human health.

This last point – promoting the inherent health benefits of foods using insights from functional food science – is the key characteristic of Phase 1 – it has led to the premise that all foods are functional foods or can be, and has enabled the major food companies to capture the nutrition marketing high ground with little or no actual product innovation.

Phase 1 was also, in part, a food industry response, to the widespread dissemination during the 1980s of expert and policy advice on ‘healthy eating’, often promoted by governments, that said the Western-style diet was bad for our health with too much fat, sugar, salt and not enough complex carbohydrates (we were also advised that we needed to drink alcohol in moderation and take more exercise!). Functional foods, in the West, allowed food companies to turn what they saw as largely criticism and negative attitudes to their many food products implied by ‘healthy eating’ advice, and ‘spin’ a positive nutrition message.

But, in many respects it could be argued there has been limited innovation in terms of new ideas in functional foods. For example, old ideas – such as probiotics, that were so common place in Japan that they were not even included as ‘functional foods’ in market reports on Japan in the early to mid-1990s - are often taken from one region and introduced in another thus making them ‘new’ (there is nothing wrong with this process of course and still much scope here for innovation in particular geographic regions and a route that is surprisingly still overlooked). Another example is a particular or different form of ‘fortification’ – adding more vitamins and minerals (especially calcium, Vitamins A, C and E) to more and more products. Most ‘new’ products are increasingly copy-cat or me-too introductions following this process. It is interesting to note the more recent new product trends of adding more and more ‘health’ ingredients to the same product format, a classic recent example, being Snapple-a- Day drink introduced in 2003 by Cadbury Schweppes in the U.S.- it is sold as a meal replacement with 24 added nutrients, soy protein (you assume for heart health) and fiber – it is hard to tell what the differentiated health message is in products such as these.

Despite some notable successes, new functional foods business is niche in comparison to total food markets unless one accepts a broader definition and concept of nutrition marketing.

In addition it is hard to tell what is a ‘functional food’. Is orange juice with added calcium really a functional food or sophisticated nutrition marketing? In comparison the Japanese product The Calcium, to my mind, is a functional food while orange juice with added calcium is not – but does it matter, both have been highly successful. And of course ‘leveraging hidden nutritional assets’ has allowed many very, very old food products to be re-marketed as nutritional wonder products.

12 Heasman, M. and Mellentin, J. (2002) Strategies in Functional Foods & Beverages, London: New Nutrition Business 22

Added to the above mix, companies have often confused two types of marketing health messages:

1. targeting products for specific disease conditions (key in the West has been heart health, gut health and bone health – although just about every condition has been targeted) and, 2. products, for want of a better phrase, for ‘positive’ or optimum health, that is products for ‘healthy people, keeping healthier for longer, maximizing performance of body and mind.

The marketing and communications messages for each of these approaches need to be different. Products that fall into the ‘positive’ health category have generally been more successful.

In short, there has been a revolution (not an evolution) in food marketing and Phase 1 also saw ‘boom and bust’ markets in dietary supplements and some ‘natural’ product markets.

Phase 2 – 2002 to (I guess) 2006/7 – the Counter-Revolution gets into full operation

In Phase 2 the functional foods Counter Revolution come into play. Phase 2 is not a major break with the past 10 years, it will be related in many respects to Phase 1 with very similar business strategies - so the lessons of Phase 1 should not be forgotten. But what makes Phase 2 different is that it will be characterized as a period of consolidation by major industry leaders who have now just about taken over the functional foods revolution from small and medium-sized companies or negated the threat of new market entrants. Phase 2 will see the industry leaders positioned to dictate the pace and shape of the future market. They will also attempt to set the agenda for science and technology that meets their corporate needs. The strategic ‘threat’, in the way used by D’Aveni, of functional foods is now being managed within the context of a food supply noted more for its status quo, than revolutionary nutritional change.

In functional foods we now see in most cases that the industry leaders take over the functional foods revolution – in other words they have staged a successful counter-revolution. But not all – for example, it could be argued that some of the carbonated beverage companies have been slow to react to some of the revolutionary challenges in beverages, from energy drinks like Red Bull to functional beverages like SoBe.

As a result of take-overs and acquisitions, today it is hard to think of an entirely new stand-alone major branded consumer functional food company to emerge from the past 20 years of functional food activity who are not now part of a dominant market player or were brands developed by already existing industry leaders in their categories or geographical area (exceptions that come to mind are companies like Red Bull – but can this be considered a ‘functional’ food’ in the conventional sense of delivering a long-term health benefit?). Even successful and revolutionary brands like White Wave’s Silk soymilk in the U.S. owes its business success to big dairy cash and is now part of dairy giant Dean Foods.

Classic successful functional food Counter-Revolutionaries would be Unilever in cholesterol-lowering spreads with Pro-Activ or Danone in probiotic little bottles with Actimel (in contrast, Nestlé would be a Counter-Revolutionary that has struggled with probiotic “little bottles”). These two companies, both second to market, are unique in that their counter-revolution strategy involved developing and marketing their own products in response to strategic threats - McNeil/Raisio in the case of spreads and Unilever, Yakult in Europe in the case of Danone and probiotics. Both have now made their products international with launches in 21 countries for Pro-Activ (as of December 2002), and 15 countries for Actimel (as of May 2003). But for many of the leaders in the food industry it has been the old case of just buying up the companies offering the threat (for example, the leading nutrition bars makers in the U.S. have all, but one, been bought by major companies) or ‘absorbing’ the potential threat – that is bringing the ‘revolution’ inside to enhance their existing business. This, in part, is what 23 giants like DuPont and General Mills in the soy and cereals industry respectively have done through marketing the inherent health properties of these traditional foodstuffs.

The Counter Revolution is in force across most nutrition markets. Whether in functional food and beverages, dietary supplements or natural products there are saturated markets dominated by a handful of major industry leaders. For Phase 2 the counter-revolution will be how this consolidation plays out and in which direction these leaders are able or willing to take the market for nutrition, food and health. The question now is: where are the new revolutionary companies, concepts, or technologies to shake up the Counter Revolution and will the counter revolutionaries want to stray too far from their newly found Counter-Revolutionary status quo?

Saturated nutrition markets – too many similar products and companies

Looking at the current position we can see the extent of the challenge in many nutrition market areas. For example, Gruenwald and Herzberg13 in a recent article identify a number of key problems in the over the counter (OTC) dietary supplements market in Europe. First they point out there are just too many products: 33,000 OTC products but only the top 100 products generate 25% of the total sales revenue. Second, there are too many companies – 32,000 manufacturers/distributors competing for market share, yet fewer than 6% of the companies generate 70% of the sales. Third, and surprisingly in what has been a dynamic consumer pull for nutrition and health products, they say there has been too little innovation, since only 10% of European turnover is generated by products introduced in the last 10 years. On average among the top 20 products, there were only 7.5% new market launches since 1992. Finally, they say the market is too local – only 1% of all products were represented in at least three European countries at the same time.

Similar top heavy concentration in the nutrition industry is painted by research undertaken by San Diego-based Nutrition Business Journal (NBJ) in the US14. The top six supplement companies in the US (Royal Numico, Unilever {Slim Fast}, Wyeth, Leiner, NBTY and Pharmavite) in 2001 had sales of $5 billion representing 58% of the market, while the remaining 900+ companies had combined sales of $3.1 bn. According to NBJ’s definitions, the top five functional food companies in the US (Pepsico, General Mills, Kellogg, Kraft, Coca Cola) had combined functional food sales of $7.73 billion or 45% of the US functional food market – which in turn only represented 3.7% of the total US food market in 2001 (NOTE: NBJ estimate the US organic market will grow in value to more than 4% of the total US food market by 2010 – perhaps even bigger than functional foods?).

In Japan the success of the Counter Revolution can be characterized by the way that the FOSHU system is now dominated by ‘old’ products and dominant companies with products from the Yakult range to Fibe Mini – nothing brand new with these products except a conversion to FOSHU status. The Japan experience is slightly different though, the original revolutionaries are now the successful Counter Revolutionaries.

However, within these markets there is still room for good new ideas. For example, NBJ have produced market data on nutrition bars showing how this market was worth in consumer retail sales $360m in 1996, growing to $1.3billion in 2001 and estimated to reach sales of $2.4bn by 2006. But again this market is now controlled by major industry leaders with a few independents hanging in. The top eight nutrition bar companies controlled 73% of wholesale sales distribution in 2001. Bars illustrate how industry leaders have staged a successful counter-revolution through acquisition in this case, and are now leading this growth industry – they will benefit from the maturing of this category as it adds another $1 billion in sales.

13 Gruenwald, J. and Herzberg, F. (2002) The Global Nutraceuticals Market, Business Briefing: Innovative Food Ingredients, pp28-31 14 NBJ Nutrition Industry Overview (2002), www.nutritionbusiness.com 24

So where are the products/ingredients for the future? For many analysts their consensus (which may not be correct) is that niche is still important, but there are not many niches left, instead a lot of me-too activity – the period of consolidation. But some still argue there is great potential to penetrate mainstream products with functional food ideas. Despite successes, such as nutrition bars, total US functional food market growth is forecast to slow down (‘mature’ in marketing terms) over the next few years and plateau from 2010 as ‘everyone’ gets in on nutrition. Product lifecycles are also shortening according to some experts, with ‘copy cat’ products quickly eroding many new product advantages.

There are some emerging key components to the functional foods Counter-Revolution:

• Consolidation and stronger grip by industry leaders on nutrition markets and marketing; • A desire, if not yet a market reality, to fill every nutritional niche as fast as possible; • Deepening reliance on science having the ‘nutrition and health’ answer through developing new products and ingredients; • The new belief in tailored diets to tackle disease: that is, the application of modern science that will mean doctors will have at their disposal blood tests that will tell people with substantial predictive power how long we will live and from what diseases we are likely to suffer. From this diets for optimum health could be constructed; • Companies saying that their increasing focus on consumer insight will drive scientific discovery • The persistent industry belief that consumer skepticism towards GM foods and ingredients will diminish opening up new markets for GM derived functional foods/nutraceutical products

An interesting part of the Counter-Revolution is the way in which industry leaders (for example Nestlé , Unilever and the world’s largest food ingredients company Danisco) have set up new venture capital funds to invest in innovative science and technology companies that might shape the future of nutrition (although these funds also invest in companies and technologies outside nutrition), they are not going to let any revolutionaries out of the bag in which they now don’t have a financial stake. Another aspect is the growing emphasis on intellectual capital/property to create value, not least through brands, but also the growing number of court cases cropping up over patent infringements for nutraceutical ingredients and processes. The drive to obtain ‘health claim’ regulation is another part of tightening the grip around the Counter-Revolution and industry leader consolidation.

What are the implications of the functional foods Counter Revolution for innovation and nutrition business strategy?

The Counter Revolution presents two major challenges with clear implications for innovation. First, strategy can be geared to aid and assist the major industry leaders as they consolidate their counter- revolutionary activities or companies can understand how to be part of market and category consolidation. It is a big bandwagon and not everyone is on it, so there is still opportunity to jump on.

It is also an opportunity to extend the process of consolidation – so there will be increasing numbers of functional products derivatives, from sugar free “little bottle” probiotics, flavor extensions, concepts into new categories, such as nutrition bars replacing breakfast cereals, and so on. For ingredients companies there is much scope to help processing companies come up with techniques to jump on the bandwagon. But it has to be acknowledged it is a bandwagon and companies are, therefore, not alone. This strategy might also have many limitations, depending on where and which products are involved. The nature of the Counter Revolution is that it induces a sense of the status quo and a chance to minimize ‘risk’, it also fails to respond rapidly to new consumer trends. There is also the law of diminishing returns - for how long will consumers respond positively to a bombardment of nutrition messaging – a factor that has happened many times in nutrition markets over the past 25 years.

But Professor D’Aveni’s research also provides the clue to another approach and the second challenge. One of the counter-revolutionary strategies he describes is something he calls ‘annulment’ – that is making a ‘revolution’ irrelevant. He writes that ‘annulment’ takes two forms – leapfrogging one revolution with another revolution or sidestepping the revolution altogether. But he warns this is a high risk strategy. There are a few interesting rumors and some speculation about possible leapfrogging routes in functional foods, but which major company will have the courage to fully explore these let alone leap – perhaps a failed Counter-Revolutionary? This is the next real challenge for the functional foods Counter-Revolution.

Are food and health markets ready for a truly innovative leapfrog?

26 6. A nutrition and health strategy for RIRDC

Key insights from the consultation

A total of eight interviews were undertaken with Australian experts with different backgrounds and experience of the food economy and functional foods. The consultation serves as a pilot study and the main objective was to test international developments in the context of Australian activity. The interviews were not aimed to be inclusive of the majority of Australian experts or to cover all professional areas that are relevant to functional foods and nutrition – for example, health professionals were not consulted nor were farmers and growers (for the latter group it was decided this would require a separate consultation exercise dependent on whether a more comprehensive nutrition strategy is pursued for the rural industries). The interviews followed a very loose structure and topics covered included:

• How could Australia promote or influence availability of and production of nutritious food? • What obstacles are there to implementation and how might these be overcome? • What roles could stakeholders or the government play • What is happening in Australia • What can Australia produce • Are their examples that Australia could emulate • Should it be local or global production • What does health mean when it comes to food and beverages and rural industries?

Information from the interviews was analyzed manually and comments grouped into six main themes which arose from the examination of the interview data – ‘market constraints’, ‘get close to the market’, ‘local versus global development’, ‘the image of Australian food’, ‘total diet approach’, ‘future challenges’. Details are presented below (for this section quotations cited are identified by an Interviewee number rather than name):

1. Market constraints

The interviewees identified a number of market constraints for the functional foods/nutraceuticals market as currently structured in Australia. The main issues raised being: regulatory constraints, the small market potential for ‘pure’ functional food/nutraceutical products within Australia, and the lack of protection for intellectual property.

Interviewee 2 emphasized the importance of the regulatory regime and the implications for market development: “The regulators are dragging the chain, it is a conservative regime, and an uncertain policy framework…(what is) now putting the brakes on the development of these foods is the regulatory regime”. They also pointed out that it was uncertain what level of substantiation is required to allow particular levels of health claims

This interviewee drew out the market implications of the regulatory ‘brake’: “…so I would be surprised whether another phytosterol ester type technology will be in the offering in the short-term, or medium-term, industry (is now) looking for much more benign technologies, perhaps with benign technologies we could start to get some movement in this area”.

For different reasons, interviewee 7 also saw regulation as a market constraint. They said: “the policy environment is privileging the highly processed products, if functional foods are defined by health claims, these are legitimized by the clinical trials. Rural industries will not have the money like big corporations to fund the science. There is a fundamental dilemma; it privileges the science and

27 research that might not be most useful to the rural industries. (This market is) driven by a couple of companies, the vast majority of the food industry is not going to benefit from this”.

Interviewee 3 highlighted the fact that the market for functional foods is relatively small. They said that it was now possible to really carve up the demographics to look at market opportunities. In addition there is good market information and data available on cholesterol lowering spreads, which can be used to estimate market size, to see how heavy advertising works, and to work out uptake. Interviewee 3 said: “this was done for a whole range of physiological conditions and we couldn’t get to a market size for any of the others where we could afford to spend the bucks for the local market, so we were really forced into a global view, which is really difficult.”

This interviewee also raised the “real big issue of the lack of Intellectual Property (IP) protection. They said: “it is very hard to get IP protection around nutrition, for example in cholesterol lowering plant sterol spreads (there were quickly a range of similar products on the market) – suddenly the margins for 10 years of R&D are gone. It is very hard to carve out a protected market.”

Interviewee 4 also raised another possible market constraint in that the supermarkets are price based competitors whose main interest is to ratchet down prices as much as possible, as they said: “the relationships are not that pretty by and large”. However, Interviewee 3 had a slightly different perspective, they said: “(the supermarkets can have a) big impact and can drive back right to the grower…could work closely to develop fresh vegetable market, definitely further opportunities…”

In short, interviewee 5, neatly summed up the problem: “there are issues around economics, costs and market opportunity”.

2. Get Close to the Market

This was a major concern raised by a number of those interviewed, that is making sure that farmers linked to consumers more closely, implying that some felt there was much more work needed in this area.

In particular Interviewee 1 felt there was a real need to create ‘spaces’ for dialogue over food and health issues, and suggested that certification schemes as used in organic production could serve as a model in this respect: “what they do (certification schemes) is create a space where producers, traders and retailers, NGOs can come together and network and really build those bridges…the Certification process gets people in the supply chain to start thinking about certain principles of transparency, communication and information flow in the supply chain. Can be a platform in which different actors, be it major supermarkets, major processors, can actually work,

The interviewee gave the example of organic beef in Queensland and the Northern Territory to illustrate that through supply chain co-ordination it is possible get the economic scales they need for a viable market. The interviewee suggested there was a research need to develop case studies where scaling up had been successful (in this case in organic production) and these positive cases examined and lessons transferred to other people, so there was a need for formal vehicles for exchanging these lessons.

Interviewee 2 was concerned there was a real danger of too much “technological push” in functional foods/nutraceuticals and that: “rural industries need to make sure they are very close to the market and getting advice from the retail end of the market”.

They also cautioned: “what is poorly understood at the moment is whether food built on a health platform generally can command a premium compared to other foods, if so how much, our experience is it is really quite difficult to extract a premium on the health platform, people begin to expect it…(it is

28 a ) condition of entry into a market, rather than a point of difference. Depending exactly on the food it will be harder or more difficult to get the premium compared with others”.

Interviewee 4 summed up the problem simply as there being a: “Gulf between farmers and consumers”. They saw this arising from the historical development of the Australian food economy which was set up to feed colonial markets. Even though this perception has been changed by the success of the wine industry, Interviewee 4 made the pertinent point that: “even today you can go to a restaurant in a wine region and the regional wines are not even on the menu”.

3. Local versus Global Development

There was general agreement to develop further regional and local expertise, specialties and identities for rural based businesses.

Interviewee 1 said: “you can’t develop production just on export-driven development…need initiatives that bridge both producers and consumers locally. Case studies in this respect need to be explored and built upon. Need to develop regional and local food identity – help with tourism industry as well…likely to remember products when turn up in supermarkets”.

Interviewee 4 highlighted the development of Australia’s relatively new olive oil industry, being built up by local companies, and one with Spanish investment, and particularly how the products were being marketed in terms of healthy eating. They said: “it has taken less than a decade for the industry to take off, with a lot of plantations developed in recent years. This industry is using the wine industry as a model.”

More generally, this interviewee believed in the long-term Australian trade interests are with East Asia, “this is the way the industry will go”.

4. The Image of Australian food

An important topic raised was the need for the rural industries to understand brand value marketing and to build these ‘values’ as part of their business.

Interviewee 8 suggested there was a possible contradiction in developing functional foods/nutraceuticals for the rural industries, they said: “We want to exploit this ‘clean/green’ foods image, or build on the success of wine industry, with its quality, clean, indulgence food, but on the other hand everyone wants to develop a functional food.”

They went on to say: “Australia has some real strengths it could build on, like its international reputation on wine, also in the area of seafood, and some prepared meals. The country has a reputation for luxury products, that are ‘clean and green’, and ‘fusion cuisine’. The only way a small country like Australia can become more innovative is to invest like hell in a few niches.”

The ‘clean/green’ image was also highlighted by interviewee 6: “I think the Australian food industry could establish an identity that would make it a significant player on the world market, but needs to come together for that, we’ve already seen a little bit of that with the notion of the ‘clean and green’ image. The Australian food industry could also be seen as being responsible, as being consumer friendly, and sensitive to what people are saying in relation to food.”

Words from the interviews that summed up Australia’s food image were: ‘indulgence’, ‘luxury’, ‘good life’, ‘clean’, ‘not over cooked’, ‘natural’, ‘fresh’. Any nutrition or food and health strategy RIRDC embarks on has to stay true to, reflect, and be based on a set of core ‘values’.

5. Total diet approach

One unexpected theme to emerge was the way a number of those interviewed were in effect looking beyond functional foods/nutraceuticals towards what might be termed a ‘total diet’ approach to nutrition and health.

As interviewee 2 said: “Consumers are sophisticated enough to understand there is a total diet approach which is one of the key platforms in a lifestyle approach to health management. On top of that they also recognize those diets can be refined with foods with particular formulations and particular benefits which assist them, particularly in different stages of life or on gender specific things.”

Importantly, this interviewee made the comment: “while being aware not all consumers have the same needs, the trick is to be able to finesse that properly with a product and in a way that is efficient and effective and can be marketed to the consumer. I don’t think any company yet has really sorted that out completely.”

Interviewee 3 echoed these thoughts, they said: “I was never a strong proponent of functional foods, they are a very mechanistic approach to health which doesn’t make sense if you take a holistic approach, a more holistic approach to health is clearly the way to go. The difficulty then is finding the marketing niche, that is the real trick.”

Interviewee 6 took this approach to the national picture: “…we have a commitment to the health of the nation, we want to target the food industry across the nutritional plane and work with all food categories”.

6. Future Challenges

Functional foods/nutraceuticals is clearly a complex topic with many challenges - a number of comments and ideas to meet future challenges are presented below.

“(certification systems could serve as ‘models’ to link farmers with consumers)…they are vehicles to provide information that is not usually available in the market…could learn from the organic movement and how they regulate themselves , setting standards and looking at how they formalize ‘values’”

“need to make connections, to network together”

“Need more work in Australia on the environmental, economic, and social impact of different types of agricultural systems then fuel informed public debate”

“needs to be the space and discussions. For example, overlapping the conventional, gourmet and organic food markets”

“I don’t see a future for functional foods, for example, that is based on taking bioactives out of herbs, or herbal extracts and boosting their levels and whacking them into foods. Come up against novel food standards, which is also a very open process so that is telegraphing commercial intent to the market.”

“If it is thought the extraction process itself is hi-tech – a lot of men standing around in white coats – less acceptable, all depends on the marketing spin that can be put on it. But also depends on how consumer activists respond as well.”

“Some consumers are (looking for life-stage) products and the trick is to tap into those who are and prompt the ones that are not that they ought to be, particularly if they are buying for others such as mums buying for children…(there is) no one formulae, no different from any other marketing challenge. But there is a sophistication of message that needs to be developed.”

“Asian vegetables have a lot of legs, whole fresh vegetable thing has got a lot of legs, a number of smaller companies in Australia playing here, some have bought in technology help, for example, packaging technology, to help with shelf life.”

“Industry has not got together to look at these issues as an industry”

“Huge market for Asian produce, but not sure of export potential, in terms of vegetable niche products, not much export going on.”

“The functional food issue is important, but changes in demand are critical. Australia has not traditionally had a strong horticultural base – could be developed in future”.

“This is one of the things we have been trying to address, see how we can get some market pull, some strategy around innovation, and some ideas how to manage competition.”

“We need an education program – an awful lot of work to be done, work to date been focused on increasing the quantity and productivity of commodities, where we should now look at quality…the literature that is coming out of the U.S. is starting to become alarmist in places, the food industry is being painted as a baddie, there are dichotomies forming, and as the data on obesity comes out the food industry is being seen as a culprit, I really do think we need to watch that one, it is unhealthy for everybody.”

“Comes down to the fact we need to think big in terms of food economics and overall strategy of the food industry…the push to quantity has had its day in the sense that its very success could kill off its own market if not careful.”

31 7. A strategic framework for RIRDC

Understanding the new competitive landscape for rural industries in relations to health and nutrition

In April 2003 the World Health Organization published its expert report Diet, Nutrition and the Prevention of Chronic Diseases, the result of a two-year-long Joint FAO/WHO Expert Consultation. The Expert Report, which contains the best currently available scientific evidence on the relationship of diet, nutrition and physical activity to chronic diseases, concludes that a diet low in saturated fats, sugars and salt, and high in vegetables and fruits, together with regular physical activity, will have a major impact on combating the high toll of diet-related death and disease.

Widespread interest in functional foods and nutraceuticals has been in part stimulated by the growing body of science that shows that increasing fruit and vegetable consumption is accompanied by a decrease in risk of certain diseases and illness, such as cancer and cardiovascular disease. But scientists in trying to understand the bioactive components of foods that impart health benefits continue to examine a whole range of foods – not just fruit and vegetables - that are relevant to developing new business opportunities for rural industries. Prominent among other crops and animal sources studied for their health benefits are grains and cereals, dairy products, meat and fish. The insights from such on-going research are being applied in developing new ingredients and processed products with enhanced health benefits. Nutrition, functional foods, and nutraceuticals are destined to remain key activities in foods and beverage marketing for the foreseeable future.

But the application of these scientific findings, in the main, has been used to drive market growth in processed or packaged foodstuffs. The traditional logic in functional foods is that rural industries serve as a resource base from which to ‘mine’ bioactives/nutraceuticals as ingredients to be applied in a wide range of processed foods. In other words, rural industries are at the bottom of the functional foods value chain – although this still might be a more profitable value chain than producing conventional crops (but there is some evidence from other countries that even in this respect, many farmers still receive little of the ‘added value’ from this activity – Case Study 1 on Canadian company Bioriginal Food Science illustrates a positive example of how rural industries can benefit from being part of an innovative functional foods ingredient value chain).

But what if this logic could be turned on its head? What if a new ‘functional food’ value chain started and remained close to the rural industries. If rural industries learnt, with respect to nutrition and health, to get closer to the consumer and to link more with consumer trends and markets?

From this perspective, rural industries, especially fruit and vegetable growers, should not see current market developments in functional foods and nutraceuticals as simply a supply opportunity based on developing crops as a raw material for bioactive ingredients – although this is a valid business development model in the right circumstances - but instead consumer concerns and interest in food, diet and health as a major competitive opportunity to their core products.

It is a competitive opportunity to which rural industries in some repsects have as yet failed to respond. In this sense, fresh produce, natural produce, minimally processed foods, fruit and vegetables are in themselves core ‘functional foods’. In effect rural producers are being out-competed on their health benefits by other sections of the food industry. The strategy outlined here proposes that rural industries could benefit from the functional foods and nutraceuticals lessons of the processed foods sectors and apply them in a more systematic manner to develop new business opportunities, open up niche markets and to re-focus marketing activities. Global developments around nutrition and health present a new opportunity for the rural sectors to make stronger links with consumers, retailers, foodservice and other market-led initiatives based upon innovations around nutrition and health.

32 Within the context of market activity in functional foods, smaller industries have unique strengths in to differentiate themselves with respect to health-enhancing foods. . To date the lessons from the marketing and innovations in processed and packaged functional foods have not been widely applied to the types of products produced by rural industries.

As Dr Mark Lawrence pointed out to me: “Now for possibly the first time in history, people are beginning to question whether fruit and veg are as good as, for example, heavily fortified breakfast cereals with antioxidant vitamins. I find that preposterous, but that is the sort of challenge fruit and vegetables face and these industries have to address, let’s get back to basics.”

How to compete

The objective of developing a competitive nutrition strategy for Australia’s rural industries is to Leapfrog functional foods as currently positioned in the market. Professor D’Aveni calls this Counter- Revolution strategy ‘annulment’, that is making a ‘revolution’ irrelevant, in this case by ‘Leapfrogging’ one revolution with another.

In this respect there are two strategic steps for Australia’s rural industries:

1. The rural industries should look to develop a ‘vision’ and a nutrition strategy framework for Australia’s rural industries

As quoted earlier, both Nestlé and Unilever are setting out new ‘visions’ based on nutrition and ‘wellness’, so why not Australia’s rural industries. In terms of building a nutrition strategy for Australia’s rural industries Section 4 discusses the Three Paradigm Model and its implication for health. Assuming these ‘models’ have validity, they would suggest that the nutrition strategy for rural industries should be developed in the context of the framework described as the Ecologically Integrated Paradigm, that is, building a long-term vision that integrates both human and environmental health goals throughout production. The long-term objective would be to raise the whole industry towards these goals, to increase accessibility of fresh produce to a wider population as part of a national health and nutrition policy. In other words, adding certifiable meaning, practical measures, and building consumer trust towards firmly exploiting Australian rural industries as ‘clean and green.’

2. Supporting new business development, innovation and products within the context of the nutrition strategy

Building on the broad vision of the nutrition strategy, Australia’s rural industries could facilitate business development from within this framework for creating value-added fresh produce, through product differentiation, sophisticated marketing communications, new product innovation and application of new technologies (such as packaging or supply chain logistics). Case Studies 2, 3, 4, 5 and 6 below on MotherHemp, Arbor International, BioForce, Burnbrae Farms, and Zespri provide examples of how such innovation can be developed in practice. All these businesses aim to combine, in different ways, environmental and health goals, with consumer-led products, marketing, and innovation.

Situating human and environmental health issues together with nutrition in the context of a ‘total diet’ nutrition strategy the rural industries should benefit at both the macro-level – lifting the whole industry, and micro-level – creating new innovative small and medium-sized businesses.

As Linda Tapsall, at Australia’s SMART Centre puts it: “We are very interested in the whole diet approach, in bringing groups together, and in trying to help industries see that food is good relative to other foods…because there is no magic bullet in food and nutrition, but there are certainly very good

33 foods and ways in which we can enhance existing foods, they really get their total benefit from their position within the whole diet…(our goal should be) trying to integrate things.”

Or as Dr Lawrence commented: “As part of a nutrition paradigm, processed foods could not touch them (fresh produce).”

By looking anew at the competitive landscape, working to integrate nutrition and health (human and environmental) at the core of rural production, a whole host of new market opportunities, especially for small and medium sized enterprise, opens up.

The key lessons from successful processed foods functional foods product development that have yet to be applied in a systematic manner to rural production and innovation with respect to nutrition are:

1. Sound science – products need to scientifically support their health benefits and health claims (for example, more emphasis could be placed on research on the health benefits of fruit and vegetables as consumed). 2. Bio-availability – delivering “nutrient bundles” that have proven efficacy, for example developing new crop varieties or logistic chains that preserve and deliver higher levels of nutrients and supporting science and technology in this area. 3. Making interesting, highly differentiated, great-tasting, convenient to use, consumer products which match targeted lifestyles based on nutrition and health6 on Zespri is included as an example of such targeted ‘lifestyle’ marketing and Case Study 3 on how Arbor ‘branded’ a new vegetable – Tenderstem - including marketing its health properties. Australia’s rural industries could investigate such market opportunities based on its own strengths and resources. 4. Developing sophisticated communications and marketing packages built around food, health, and lifestyle ‘values.’ 5. Communicating effectively to health professionals and the medical profession. 6. Developing constructive and on-going dialogue with policy-makers and regulators, (particularly towards developing potential approved health claims for fresh produce). 7. Often working through new or unusual distribution channels to build new markets. 8. Creating new categories built around specific health benefits (for example, ‘gut’ health, ‘eye health’ etc.).

In the context of the strategy proposed here, there are a number of steps to move towards a broader based nutrition strategy for rural industries. Many of these fall outside the core of RIRDC’s activities, but are areas where RIRDC can and should have an input or could take on a more specific role. In this context the steps listed here need to be undertaken by a range of research and development corporations and industry promotion bodies and not RIRDC alone. There will be a need to develop:

• an industry body to take a leadership role to develop and implement nutrition strategy, RIRDC can be part of such a body • a long-term educational program with growers and industry to identify nutrition and health opportunities within rural industries • strategies that understand how to move commercialization from niche to more mainstream • regional specializations and marketing • domestic markets in conjunction with export nutrition-based opportunities – for exports target East Asia in short-, to medium term • demographically defined nutrition opportunities (such as targeting school meals) • market opportunities to enable fresh produce to become more accessible to wider population – such as investigating pricing issues, promotional and marketing activity • business development opportunities with retailers and foodservice operators – first to develop product and distribution opportunities, but also to link more closely growers with consumers

• to understand what role and place Australia’s organic industry should play as part of a broader food and health strategy • provide market data and insight on the competitive nutrition landscape, especially in an international context, in relation to rural industries and nutrition markets, and identify role models and markets to emulate and opportunities • strategies to promote small business development and understand the needs and growth strategies of these types of business, especially in facilitating export opportunities • research to find out what are the rural industries core ‘brand values’ in relation to human and environmental health and nutrition, build these into the nutrition strategy • more effective connections, networks, and create the necessary ‘spaces’ for different actors to participate in a wide ranging nutrition strategy and exchange ideas and business lessons

To these ends, RIRDC should set up a Nutrition and Health Strategy Unit to co-ordinate and integrate science and nutrition activity that relates to rural production, marketing and communications, and to identify research and marketing needs, and to develop networks, especially in co-ordinating Australian expertise. The Unit can be almost virtual, commissioning expertise and inputs from the resources already current in Australia.

In conclusion, developing a competitive nutrition strategy for rural industries is as much a creative challenge (thinking ‘outside the box’, marketing in new ways, innovations, communicating, educational initiatives, and new product development) as much as a scientific, technology and agronomic challenge.

35 8. Case studies

Case study 1: Bioriginal Food & Science Corp.

Canadian Company Bioriginal Food & Science Corp. was established in June 1993 through an amalgamation of the Vitality Health and Science Corp. and PGE Canada Ltd.

Vitality Health and Science Corp. was formed by the Government of Saskatchewan in the late 1980s to bring industry and government agencies together to pursue opportunities in the health food industry. PGE Canada Ltd. (created in 1986) was owned by Frederick Kulow Sr., Frederick (Rick) Kulow Jr., and the Saskatchewan Wheat Pool (SWP).

Bioriginal supplies the essential fatty acid oils and powders derived from rural production including borage, evening primrose, black currant, flax: Bioriginal's core rural based product line includes:

• borage oil (containing up to 24% GLA) • evening primrose oil (containing up to 10% GLA) • flax seed oil (containing up to 55% ALA)

All the company’s oils are GMO free and independently tested to ensure that products are free from pesticides, herbicides, heavy metals, and PCBs. Seed oils are expeller pressed without hexane or other harsh chemicals. All products are manufactured to Canadian pharmaceutical grade GMP (Good Manufacturing Practices) and WHO (World Health Organization) Codex standards for edible oil safety. The company delivers a certificate of analysis with every shipment.

Those elements have made Bioriginal the leader in the production and marketing of Essential Fatty Acids (EFAs) and other natural plant products with therapeutic benefits..

Bioriginal serves wholesale customers in five key product categories:

• Nutritional Supplements • Cosmetics • Pet and Veterinary • Over-the-Counter Pharmaceuticals • Functional Foods

Key success factors include: • focus on quality EFAs, herbs, and other nutritional supplements; • establishment of long-term relationships with growers dedicated to producing top quality inputs. The company’s ability to contract with hundreds of carefully selected farmers, primarily in Western Canada, is viewed as one of its natural and major advantages. In 1999, Bioriginal had almost 400 farmers producing borage, flax, and herbal crops; • active in research and development, creating new products to meet the specific needs of their various customers; and, • development of relationships with companies throughout the world. Bioriginal is sourcing from various regions around the globe and has a manufacturing presence in Asia and Europe. These relationships also provide Bioriginal with international marketing information.

Case study 2: MotherHemp Ltd.

MotherHemp are the only commercial hemp seed grower in the UK and the company farms, processes and distributes organic hemp food products. It is a three year old company and has developed a unique range of new food products with health benefits. All the products are based on crushed hemp seeds to make a ‘hemp milk’.

The unique health benefit of the company’s products is that they are high in Essential Fatty Acids (omega 6, 3 and GLA). They use a specially bred patented seed for their hemp production (developed in Finland) which produces a crop especially rich in GLA (gamma-linolenic acid) which is unique to MotherHemp. In addition all products have the additional positive consumer health benefit of being certified organic

Products to date include red pesto, green pesto, hemp and spelt pasta (tagliatelli and fusilli), hempseed oil. New products include Hemp Ice and a recently launched a Hemp Nutrition Bar.

One of the most interesting of these products is the newly launched (in 2002) Hemp Ice, a non-dairy frozen dessert, containing 10% shelled hempseed. The product is gluten free, has no artificial flavorings or colorings, is dairy free, lactose free and cholesterol free as well as being high in essential fatty acids.

The nutritional benefits of hemp based food products is also starting to build up and the company works closely with Dr JC Callaway at the Department of Pharmaceutical Chemistry at Kuopio University, Finland, where clinical trials are underway on the benefits of hempseed oil on the human body.

In short, MotherHemp is a rural industry that is offering a unique nutrition and health package with truly innovative food products, including being based on organic production, with health benefits increasingly being backed by scientific evidence.

Case study 3: Arbor International

Arbor International specializes in growing and air-freighting fresh vegetables and fruit, from around the world in order to maintain year round supply in the UK. It has chosen to deal in specialty items and to pioneer new lines rather than handling commodity lines. This gives the company stronger market differentiation for its products but also means it often has to educate consumers and develop the consumer’s need for the product.

Arbor was founded in 1995 with the initial purpose of marketing produce imported from Gordons Country Fresh (GCF) in Zimbabwe to the UK multiple retailers, thus cutting out the middle men who often delayed the product getting to market and who diluted the communication between farm and multiple retailer. In a short space of time their remit expanded and it began to source product from Zimbabwe, Kenya, South Africa, Thailand, Egypt, Europe, Central America and the UK. The company’s product range includes: baby leaf and fresh herbs, organic raspberries and blueberries (November to February), sugar snaps, butternut squash, baby leeks, chilies and peppers, passion fruit, samphire, baby pumpkins, mange tout and fine beans, hand-shelled broad beans, petit pois & garden peas, Brussels sprouts, runner beans, Jerusalem artichoke, babycorn, baby courgettes, wild & exotic mushrooms, baby carrots, Tenderstem and asparagus.

Arbor is a major supplier to UK retailer Marks & Spencer and works closely with many of the quality retailers. An innovative, market leading supply chain allows all its produce to be delivered within 48

37 hours of harvest, guaranteeing freshness and quality to retailers and consumers. Salvesen Logistics, under contract to British Airways World Cargo, handles all the products through to final distribution.

Since 1995 sales have grown from £3 million to £8.1 million. Arbor has won quality awards from Waitrose two years in a row and is also fully registered and certified by the Soil Association and Eco Cert as an importer of organic produce. Dedicated to ethical sourcing, environmental responsibility and technical innovation, all its supply sources will exceed the ETI (Ethical Trading Initiative) base code and meet EUREPGAP requirements for good agricultural practice.

New products developed by Arbor: Tenderstem

A major innovation by Arbor in its key market has been the development of Tenderstem. Tenderstem is a unique sweet and peppery hybrid originated from broccoli and Chinese kale. It is only available in the UK and Europe through Arbor. Arbor was chosen to develop the supply of Tenderstem to the UK, Europe and Africa as its business had started by handling sensitive products like asparagus. Tenderstem is even harder to handle than asparagus requiring major investment and innovation in the cold chain between farm and supermarket.

The product needs to be kept in the chill chain as much as possible from when it is picked until it is consumed. Arbor has worked hard at educating its farmers and customers about caring for Tenderstem so it reaches consumers in perfect condition. Additionally, the company has had to create consumer awareness for the product and encourage people to purchase Tenderstem.

Arbor has organized a number of promotions with suppliers to encourage people to experiment with Tenderstem. All the packs have clear cooking instructions on them and they have developed a website www.Tenderstem.org to enable consumers to find out about the product and some of the different meal occasions it can be used for. Arbor has produced a number of different styles of photography for the product, which are made available to the press and orchestrated several promotional features in relevant store magazines.

The company ran a full-page advert for Tenderstem in Aware, the prostate cancer charity magazine, which was a tongue in cheek recreation of the American Beauty film shot of the model lying on the bed, naked except for Tenderstem. Tenderstem is rich in phytochemicals, which have been associated with cancer prevention and has received a lot of press coverage as a result. Arbor has tied up with Pink Ribbon and Aware to raise money for charity and increase awareness of these cancers and of the beneficial properties of Tenderstem and other vegetables in fighting cancer. Clever marketing and awareness of the final consumers’ needs and likes has meant that Tenderstem now accounts for 15% by volume of Arbor’s annual sales just two years after it was launched in the UK.

Case study 4: BioForce AG

Bioforce AG and was founded in Roggwil in the Swiss canton of Thurgau by A.Vogel in 1963. Back then Dr Vogel’s aim was to supply a growing number of patients with natural remedies and other health- giving products which met his own high standards. BioForce is grounded in the medicinal properties of plants and today makes a range consumer products including supplements, foodstuffs and personal care (cosmetic) products.

The company is privately owned (largely by family shareholders) so not much public information is available, but it has sales of around 130 million Swiss Francs (84 million US$) and roughly 600 employees worldwide; the Bioforce workforce in Switzerland numbers 200 employees.

Bioforce AG is the largest producer of plant medicines in Switzerland and besides the manufacturing plant at Roggwil, products are also produced at factories in Elburg in the Netherlands and in Colmar in

38 France. The company is represented in over thirty countries by five Bioforce affiliated companies in Germany, France, Finland, Canada and South Africa; eight partner companies in Holland, Australia, Denmark and the United Kingdom, Sweden, Spain, USA and India as well as 18 agents and exclusive sales agents including Japan.

Besides herbal and homeopathic medicines, Bioforce also produces organic foodstuffs and dietary products as well as body care products, all prepared from Alfred Vogel’s own recipes and according to his specifications.

Bioforce AG makes use wherever possible of fresh plants from the company’s own crops or from examples of the plant growing in the wild. The fresh medicinal plants are cultivated using strict organic controls. At present roughly 15 hectares of land are cultivated according to the directives of BIO SUISSE (Association of the Swiss Organic Agriculture Organisations).

Case study 5: Burnbrae Farms

Burnbrae Farms is a family owned and operated group of companies dedicated to the production, processing and distribution of quality table eggs and egg products throughout Canada. Incorporated in 1959, with its head office in Lyn, Ontario, Burnbrae is involved in egg production, grading, processing, packaging, and distribution. It employs approximately 400 people and sells eggs and egg products to many of the major grocery chains and large bakery customers in Ontario, Quebec and Manitoba. It continues to be privately owned and operated by the Hudson family. Burnbrae Farms has become a leader in Canadian Agribusiness through its award winning new product innovation. Four years in a row Burnbrae has been nominated for a Canadian Grand Prix New Product Award by the Canadian Council of Grocery Distributors and Canadian Grocer Magazine. Grand Prix products include Naturegg Omega 3 (winner 1997), Naturegg Simply Egg Whites (nominated 1997), Naturegg Break Free (winner in 2 categories 1999 including All-Canadian new product of the year) and Naturegg Omega Pro (winner 2000). Burnbrae's products also carry the Health Check logo, having been accepted into the Heart and Stroke Health Check program.

Burnbrae Farms’ products fall under two general categories: shell eggs and liquid eggs, both that contain functional products. All of the functional products are marketed under the Naturegg brand. Liquid products include Simply Egg Whites, a fat and cholesterol free product, Break Free, a low fat and cholesterol product, and Omega Pro, which contains 40% of the recommended daily allowance of omega-3 polyunsaturated fatty acids in a reduced fat and cholesterol product. Functional shell egg products under the Naturegg brand include Omega 3, with 20% the RDA of omega-3 fatty acids, Free Run, eggs produced by free range chickens fed without medications, additives, preservatives, antibiotics, or hormones, Organic Eggs, similar to Free Run, VitaPlus, eggs enriched in Vitamin E and B12 as well as Folic Acid, and Prestige top quality eggs. Enrichment in the eggs in each product comes as a result of additions to the hen feed.

Case study 6: Zespri

Learning from the Kiwi fruit model, Zespri is a new fruit, one that is golden and with an edible peel. Zespri is the only company that knows how to grow this ‘new kiwi’. The product, as well as being innovative in its own right, has used innovative marketing to create added value and market entry. The company has targeted up-market Latino groceries in the US to reach consumers used to exotic produce such as mangoes and papayas, but who also have the time and inclination to discover something new. With no advertising, but with aggressive in-store tasting, in 2002 Zespri managed to sell US$100m of the golden fruit through this route.

Case study 7: The global market for organics set for double digit growth

International Federation of Organic Agriculture Movements (IFOAM) latest research published in February 2003 found that the total organically managed area of agriculture is 22 million hectares world-wide, with an additional area of 10.7 million hectares of certified ‘wild harvest plants’.

The major part of this area is located in Australia (10.5 million hectares), followed by Argentina (3.2 million hectares) and Italy (1.2 million hectares). The large land area in Australia is explained by the development of extensive livestock systems with most of the organic land used for grazing. Ironically, Australia still has to import organic products.

In the European Union (EU) together with the 12 accession countries around five million hectares are under organic management which corresponds to almost two per cent of total agricultural land. In North America more than 1.5 million hectares are managed organically representing around 0.25% share of total agricultural area.

The global market, in retail sales for organics is estimated at around US$23-35 billion in 2003, growing to $29-31 billion by 2005. The largest markets are the US and Europe, where organic sales represent anything from 1% to 2.5% of total food sales, depending on the country. Annual growth rates to 2005 are expected to average between 5-15%, with the most notable growing market being the United States, but it should be noted that in some countries, like Denmark, organic sales appear to be stagnating.

While organic sales declined slightly in Denmark and in Germany in 2002, in other countries there was positive growth, such as the UK where the market increased 15% in 2001/2002. The Dutch market grew 20% in 2001, but slowed down in 2002. Sales in Italy, France, Sweden, Austria, Belgium, Norway, Finland, and Ireland likewise all grew over 2001-2002, creating an estimated European market of around $10-11 billion in 2003, up from $9 billion in 2001.

Outside Europe, the United States is the world’s biggest organic market with retail sales of around $9.5 billion in 2001. Retail sales are expected to reach $11-13 billion in 2003, with annual growth rates of between 15-20% over the next few years.

For other markets organic retail sales are a lot less – estimated as $350-450 million in Japan for 2003 and in the range $75-100 million for Australia and New Zealand in 2003.

In the 15 EU countries 142,348 farms were managed organically representing 3.2% of the EU agricultural area and 2.04% of EU farms. Since the 1990s the strongest growth is found in Scandinavia and the Mediterranean countries. There are also substantial differences between individual countries regarding the importance of organic farming. In Austria, more than 11% of agricultural land is organic, in Switzerland 10%, other countries have yet to reach 1%. Italy, leads the EU, with more than one quarter of the EU’s organic land and almost one third of its organic farms, located here. But key European markets are still very import dependent, led by the UK which imported 70% of its organic needs in 2002, followed by Germany and France which imported up to 50% of their organic food.

One point is striking about the world organic statistics, that is just how recent the growth in organically managed agriculture has become. Despite the concept of organics being around and practiced for many decades, its base remained minute. Land under organic management has only started growing exponentially from the mid- to late 1990s, from this small base. In other food areas, this would be seen as potentially the early signs of an innovation market take-off.

40 9. Appendices

Appendix 1

List of people who agreed to be interviewed as part of the consultation process:

Dr Bill Pritchard Lecturer in Economic Geography University of Sydney

Dr Mark Lawrence: Deakin University

Dr Sasha Courville Regulatory Institutions Network ANU

Steve Marshall RIRDC Director

Lyndon Kurth Commercial Manager for Food Science Australia (FSA):

Judy Marcure Strategic Marketing Manager, FSA.

Geoffrey Annison Goodman Fielder, Research and Technology Director,:

Linda Tapsell Managing Director, SMART Foods Centre, Uni. Of Wollongong

For more information about the Position Paper contact:

Tony Byrne Research Manager Rural Industries Research and Development Corporation PO Box 4776 Kingston ACT 2604

Ph 02 6272 5472 Fax 02 6272 5877 Mobile 0413 840 931