Managing the Food Chain During New Product Introduction: The Case of a High Selenium Food Product

1. Managing the Food Chain During New Product Introduction: The Case of a High Selenium Food Product 15th Annual Food and Agribusiness Symposium Cheryl J. Wachenheim Department of Agribusiness and Applied Economics North Dakota State University (701) 231-7452 cwachenh@ndsuext.nodak.edu

2. Introduction Assume the role of a consultant to the South Dakota Wheat Commission working to evaluate the feasibility of marketing high-selenium products.

3. Functional Foods Foods or dietary components that may provide a health benefit beyond basic nutrition. International Food Information Council Foundation, May, 2004

4. ”Commodity” Products Regulation Science & Technology Food Processors & Distributors Pillars of Marketing New Product Development Promotion Distribution Pricing Consumer Marketplace Mass Markets Segmented Markets

5. Functional Food Sales • Considerable growth during the past decade • Increased offerings in main-stream markets • Global sales of $10.9 billion (2002) with approximately 10% annual growth. • Motivated by consumer interest in nutritional content of their food and search for improved health through diet.

6. Consumer Trends • International Food Information Council Survey, 2002 • 93% of adults believe that some foods offer more than nutrition, i.e., they are functional • 85% want to learn more about these foods • Sloan Report, 2003 • One-third of US households increased use of fiber products during the previous year • Eight in ten reported trying to PREVENT a condition through a food purchase; up 10% in one year • More than half tried to treat or manage an existing condition through foods • Nine in ten said healthy eating was a better tool than medications for illness

7. Functional Food Market “It is widely accepted that the future for functional foods is assured because of consumers’ interest in how their diets can positively impact health. J. Mellentin, November, 2002, Dairy Industries International “This industry is also loaded with hurdles, including a high rate of product failure, difficulty in defining the type of food and product labeling for functional products, and tricky marketing tactics.” International Food Ingredients, no. 6, 2003

8. Functional Food Market Segments • Medically-driven “boomers” aged 45 plus • “Swing segment” aged 65 plus • 18 - to 34 - year old age category • Represent the “core” of the market due to receptivity to functional concepts Mintel Consumer Research, October, 2003

9. Selenium in the Diet • Largely favorable health press in part due to 12-year epidemiological study. • Trace element is an antioxidant that helps protect the body from damaging effects of free radicals and is a source of metabolites which inhibit tumor growth.

10. Evidence: • Some cancer risk inversely correlated with Se status. • Se can reduce tumor yields in animals. • Inorganic and organic forms are efficacious. Dr. Gerald Combs, Selenium Symposium, November 3, 2004, Grand Forks, North Dakota

11. Dr. Gerald Combs, Selenium Symposium, November 3, 2004, Grand Forks, North Dakota North Dakota wheat superior source of Selenium

12. Selenium - Based Functional Foods Today, few in number (excluding dietary supplements) despite widespread and largely favorable health press

13. The First Sale: The TradeWorking Assumptions • Organic an option for some producers, some product markets • Organic food sales growing (Mintel/ERS) • $ 5.3 billion in 2004, about 2% of total foods • Forecast to achieve $11.5 billion in 2009 • Preference among producers / trade for natural as opposed to fortified • Ease/cost of production, clinical efficacy • Preserve promotional edge

14. Public health posture from the trials? • Scenario A - favorable trials: Public Health push for fortification? Implications: • Market narrows to “natural” or organic customer base • Distribution points limited to “natural” (e.g., Wild Oats, GNC, Whole Foods), and / or FF areas of grocers • Scenario B, favorable trials: No effective public health action? • Potential for dual market structure to expand • Fortified foods proliferate • Natural growth speeds, aided by favorable press • Scenario C, unfavorable trials… • Market development slows/stops

15. Scenario-Dependent Options Biofortification not allowed Biofortification allowed Health claims verified Co-exist as “natural” niche product Biofortification delayed Today Health claims not verified

16. All in the strategy • What is our product? e.g., wheat, bread • How is the high-selenium feature of our product specified? • Guaranteed level of selenium • Identity-preserved product

17. About the marketing channel Developing a market for a new functional food is likely to be high cost and of substantial risk Few are currently interested so you are starting from scratch There are substantial barriers to entry • Research, product development, marketing • FDA approval for health claims • Rapid, accurate test for selenium level shows promise but not yet commercialized. • The marketing channel needs educating

18. Questions 1. Outline the marketing channel for wheat. • Identify the key functions and the decision makers / participants. • Include constraints faced (particularly in that they will affect industry coordination and information flows, and align incentives of various participants). • Identify potential partnerships. 2. Identify specific products within the marketing channel (e.g., wheat versus bread). What factors affect the decision regarding product development?

19. Questions 3. A high-selenium product can be brought to market with a guaranteed level of selenium (based on testing) or simply grown on high-selenium soils (based on identity preservation). What type of channel relationships are necessary for each? What option is most appropriate? 4. What additional information is necessary to decide whether it will be profitable to bring a high-selenium product to market? 5. What are the risks associated with introducing and marketing a high-selenium product?

20. Some instructor notes

21. Partnerships will be important • Who is well-positioned for partnership? • Check-off groups are an option to provide coordination of production issues, generate market data, assist with trade partnerships, interact with scientific communities • What will define the partnership? • Can that / those partnership(s) be developed now?

22. Wheat Marketing Channel Selenium is currently not a preferred wheat characteristic (opportunity cost idea) Issues • Defining your product and consumer • Testing • Storage • Transportation • Blending

23. Wheat Marketing Channel SJH & Company, Inc. recommended the following steps • Implement identity preservation of selenium wheat • Obtain FDA health claim approval • Develop a brand concept • Develop a marketing strategy • Develop a business plan • Find a sound business partner

24. Issues – Information needs • Testing • Cost • Need (number of tests, point of testing) • Accuracy • Labeling (what are the rules? what will the market accommodate?)

25. Market research needs Will be product specific • Value of high-selenium attribute (including stacked with other traits) • Value of natural source of selenium • Effectiveness within existing marketing channels, of marketing and promotion strategies • Push versus pull marketing strategies • Products of particular interest and with particular economic promise.

26. According to SJH & Company, Inc. Key success factors (selected and paraphrased) • Avoid focus on prevention of specific disease promotion and rather focus on overall health / well - being • Use an extensive marketing campaign to communicate / educate your market • Rely on science, but do so simply • Work on FDA approval for health claim • Secure broad and dependable channels for product placement / distribution

27. Take home messages • We need to change the way we do business, but models exist for us to follow. • This is a high cost / high risk venture. Share the cost / risk. • There is money available -- use it • Incorporate educating the marketing channel • Keep an eye on competition from outside and within the marketing channel