Dys Functional

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Despite projections to the contrary, forays into so-called "functional" foods haven't improved the health of food marketers' less-than-robust earnings.

Campbell Soup Co.'s home-delivery meal program, Intelligent Quisine, proved anything but that when the line of more than 40 frozen meals, supported by $30 million in marketing, was pulled after a limited test in 1998.

Kellogg Co.'s Ensemble, a raft of cholesterol-lowering foods across multiple categories, also failed to catch on despite extensive expenditures. The much-touted cholesterol-lowering margarine brands from McNeil Consumer Products and Unilever have faded into oblivion for all but a few consumers. Altus Food Co., the functional-foods joint venture formed by Quaker Oats Co. and Novartis Consumer Health shuttered its doors last year.

"What you're seeing now are more conservative [approaches],"said Patrick Rea, research director for Nutrition Business Journal. "Instead of $20 million behind a marketing campaign launching 20 new products, marketers are only introducing one product-line extension, hoping not necessarily to revolutionize the industry but to gain market share from their competitors."

Growth of functional foods, now defined by little more than the addition of calcium to existing products, does outpace that of traditional foods, with 2001 sales up 7.9% to $18.5 billion, according to Nutrition Business Journal. But those foods still represent a mere 4% of total food sales in the U.S. and are expected to grow only to 5% by 2010. Hardly the stuff profit dreams are made of.

Natural and organic foods, too, were initially attractive because of double-digit revenue growth. Among the many investments: H.J. Heinz Co.'s stake in natural-foods company Hain Celestial Group, Kellogg Co.'s purchase of meat-alternative products maker Worthington Foods for $307 million and Kraft Foods' purchase of nutrition-bar marketer Balance Bar Co. for $268 million and meatless marketer Boca Burger for $100 million.

But over two years later, Hain has hit hard times. Its stock fell from the $30 Heinz paid to just under $20-a figure still overvalued at more than 30 times earnings, according to Banc of America Securities analyst Bill Leach.

Heinz isn't alone. According to Information Resources Inc. data for 2001, Morningstar Farms' sales have dropped roughly $2 million to $156 million, Balance Bar sales rose less than $5 million to $45 million. Boca, although it posted 35% growth, remains only a $50 million business.

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