Nestle USA continues the rush by mainstream food companies into the natural and "functional foods" niche today by introducing a dietary supplement that claims to bolster the immune system
The Glendale-based U.S. unit of the Swiss multinational food giant, which also agreed last week to purchase energy bar maker PowerBar Inc. of Berkeley, is moving to offset sluggish sales in its core business by catering to the health and wellness concerns of affluent baby boomers.
That strategy is sweeping the food business. In recent weeks, H.J. Heinz Co. formed an organic and nutritional foods unit to oversee its expansion into healthy ventures, including its recent investment in organic foods mainstay Hain Food Group Inc. And Quaker Oats Co. announced an alliance with drug maker Novartis to sell so-called functional foods, or products designed to provide consumers with specific health benefits beyond basic nutrition.
General Mills Inc., Kraft Foods Inc. and Kellogg Co. had already staked out their territory in the wellness arena, purchasing some of the most recognizable names in health food in recent months.
"Food safety is really beginning to resonate in a big way with consumers as they learn more about pesticides and GMOs [genetically modified organisms]," said Karen Raterman, editorial director of the trade publication Natural Foods Merchandiser. "Obviously, these food companies now think this is a trend worth jumping on."
Sales within the organic and natural food category have been growing at a 15% to 20% clip during the last five years, surpassing $5 billion last year, while sales of traditional grocery items have inched up 1% to 2%, according to the Grocery Manufacturers of America. And sales of natural foods are accelerating even faster in Europe, where the hue and cry over genetic engineering has taken center stage in the last year.
Indeed, Nestle extracted the acidophilus bacteria, or "good" bacteria, in its LC1 supplement from a yogurt it had been selling in Europe for six years.
Dried to a colorless, tasteless powder and packaged in a 30-day supply, the product--one of Nestle's most expensive--is selling for $30 at General Nutrition Center stores in the western and southwestern U.S and on Drugstore.com Inc. LC1 also will eventually be mixed into food products sold by Nestle and other food manufacturers.
"Dietary supplements are not only an attractive business from a sales standpoint, but also from a profitability standpoint," said Amit Desai, marketing manager for Nestle's nutrition division.
However profitable, natural and functional food products such as these aren't likely to become a major part of any of these large companies' core businesses, analysts say. But they could eventually add several hundred million dollars to their revenues in coming years as natural foods begin rolling into more supermarkets.
With retail markups on such niche products almost double that of traditional grocery items, retailers are beginning to make more space for these products on their shelves, adding some of the industry's hottest items such as organic produce and dairy, nutrition bars, and soy milk. Albertson's Inc., for instance, now carries about 30 natural food products in its Central and Southern California stores.
Big food companies "are going to help the entire industry by building awareness of the quality of organic products and by converting more acres to organic produce," said Katherine DiMatteo, executive director of the Organic Trade Assn. "We need to have large corporate brands laying the groundwork for us in mainstream supermarkets."
That said, DiMatteo and others have some concerns about the effect that competition from big food companies will have on small farmers and independent health food producers. "It becomes a very difficult marketplace when you have someone with that kind of capital and collateral competing with you," she said.
A decade ago, most large food makers would have scoffed at acquiring organic food brands. Then, the business was a cottage industry composed largely of entrepreneurial Birkenstock-clad individuals who had dabbled in organic farming in their backyards. But as natural food companies grew and gained legitimacy, big food companies, especially cereal companies, began courting them.
Phone calls from big food companies and financial analysts began trickling in to Carpinteria, Calif.-based Balance Bar Co. a couple of years ago, said Chief Financial Officer Thomas Flahie. At the time, they were only asking questions about the company's marketing efforts and distribution of its energy bars.
But as soon as Balance Bar surpassed $80 million in annual revenue, the acquisition offers started rolling in. And last month, Philip Morris Co.'s Kraft Foods agreed to purchase Balance Bar for $268 million, 37% more than its shares traded for a day earlier. The same week, Kraft struck a deal to buy Boca Burger, a maker of soy-based meat alternatives.