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Related topics: health, drugs, food and beverage, investing strategy, Jim Jubak

Nobody can accuse these companies of thinking short term.

Along with its third-quarter earnings report Oct. 7, PepsiCo (PEP, news) announced it was creating the Global Nutrition Group "to deliver breakthrough innovation in the areas of fruits and vegetables, grains, dairy and functional nutrition." The goal is to grow PepsiCo's nutrition business from $10 billion in revenue now to $30 billion by 2020.

Yes, only 10 years from now.

A few days before, on Sept. 27, Nestlé (NSRGY, news) announced the creation of Nestlé Health Science, a wholly owned subsidiary that will incorporate the company's existing nutrition business, and the Nestlé Institute of Health Sciences, which will conduct research into nutritional strategies for improving health and longevity. Nestlé said it will invest hundreds of millions of Swiss francs in the institute over the next decade.

There's that 10-year thing again.

I don't know exactly what to call this food trend, but it's big. Food companies such as PepsiCo and Nestlé and drug companies such as Abbott Laboratories (ABT, news) and Bristol-Myers Squibb (BMY, news) are targeting it.

image: Jim Jubak

Jim Jubak

This has traditionally been called the "nutritionals" market. But that doesn't seem adequate anymore.

The old name better fits the days of nutritional supplements being sold only through health food stores or products designed to supply nutrition in a liquid, powder or concentrated form to the old (Ensure) or the very young (Similac).

The new market -- and it's still in the early stages of taking shape -- has been termed the "nutriceuticals" market to emphasize the greater degree of interaction between the processed-food and drug industries, and the ramping up of spending on designing specific nutritional enhancements into traditional foods or food products.

Better than natural?

You can see that evolution in PepsiCo's Tropicana orange juice line. The company has gone from advertising the basic health benefits of orange juice to enhancing those benefits by adding extra vitamin C, vitamin D and calcium to CEO Indra Nooyi citing the Tropicana line as one of the stable of enhanced products that fits within its Global Nutrition Group strategy.

The fact that the definition of the market is a little fuzzy hasn't prevented market research groups from projecting its potential size. Does the market include what are called functional foods, for instance? (A functional food is any food aimed at having a health-promoting or disease-preventing property beyond supplying nutrients. It includes such things as vitamin-enriched Froot Loops and yogurts with live cultures.) How about organic foods? Some organics? All organics? Only processed organics?

With all those caveats, here are projections of future market size:

  • Global Industry Analysts projects that the global nutriceuticals market will exceed $243 billion by 2015. (That doesn't seem totally outrageous if PepsiCo is saying that it can grow its nutrition business to $30 billion in revenue by 2020).
  • BCC Research estimates the global market for functional food will reach $177 billion by 2013, with compound annual growth averaging 7.4%. What's especially intriguing about that research is BCC's projection that the traditional supplement sector will be the slowest-growing part of the market (at a 3.8% compound average annual growth rate) and that the functional beverage sector will be the fastest-growing, with a 10.8% compound average annual growth rate.

3 ways to grab this market

So how do you invest in this growing market, whatever it's called? You've got three alternatives.

First, you can go with the food companies that are building out their nutritional businesses. The strengths here:

  • Marketing clout. Think the company that created the Nescafé franchise and the owner of Frito-Lay can get shelf space for its products?
  • Experience at mass consumer marketing. Which would you rather bet on to push product to a mass consumer market: the industry that brought you the Cialis bathtub on the beach or the industry that has brainwashed generations of children into being cuckoo for Cocoa Puffs? (The cereal has been around since 1958, by the way. And the cuckoo in the ads is named Sonny, just in case you were wondering, and he was originally voiced by Chuck McCann.)
  • The belief that it's important to tailor products for individual markets, a commitment to that strategy and increasing expertise in doing that, especially in emerging economies.