NOTES
AGRICULTURAL & RURAL DEVELOPMENT 37683
Functional Foods: Opportunities and
Challenges for Developing Countries ISSUE 19
BY: MELISSA WILLIAMS, EIJA PEHU, AND CATHERINE RAGASA SEPTEMBER
2006
Functional foods have been the topic of considerable foods. Thus, in addition to the health benefits, func-
interest in the food and nutrition industry for years, tional foods present new economic opportunities.
but the term currently lacks a common definition.1 Functional foods sell at higher prices and contain larg-
A practical definition adopted here includes products, er profit margins than conventional foods, which make
in food or drink form, that influence specific functions the sector attractive for the players in the supply chain.
in the body and thereby offer benefits for health, Retail prices of functional foods are typically 30 to 500
well-being, or performance beyond their regular nutri- percent above the comparable conventional foods.
tional value. Confusion over the definition of functional foods
makes it difficult to estimate the exact size of this sec-
These functional food products result from: techno- tor--global market size has been estimated between
logical innovation2 at the processing level, such US$30 and US$60 billion depending on the definition,
as cholesterol lowering spreads, xylitol-sweetened with Japan, the United States, and Europe as the
chewing gum, and dairy products fermented with biggest markets. Regardless, the global functional
specific lactic acid bacteria; technological innovation foods sector grew exponentially over the past years
at the production level such as genetically modified with an approximately 10 percent annual increase in
crop seeds3 (e.g., Golden rice) and planting materials value. As a result, developing countries have started to
derived through conventional breeding (e.g., orange- emerge as exporters to cater to the increasing demand
fleshed sweetpotato); or crops that naturally contain in the developed countries (see Box 1 for examples).
components that have a physiological function (e.g.,
soy bean and oats, which are good for cardio-vascular Moreover, demand for functional foods within the
health). See Table 1 for examples. developing countries is growing, presenting a lucrative
ECONOMIC OPPORTUNITIES opportunity to develop domestic markets (see Box 2
FROM FUNCTIONAL FOODS for examples). The economic returns from functional
foods can offer improved opportunities for all mem-
bers in the supply chain: from raw material producers
Functional foods entered the global markets with force
and processors to retailers.
in the past decade and rapidly gained market share
conservatively estimated to exceed that for organic Functional foods can be an opportunity for economic
growth for many developing countries endowed with
rich biodiversity and traditional knowledge of the
health effects of certain indigenous plant species. Some
developing countries can also be competitive in pro-
duction due to lower labor costs (e.g., 10 percent lower
soybean production cost in China's northeast region
than in mid-west U.S. (Ford et al. Forthcoming)).
Besides the opportunity for diversified and high-value
production, farming for the functional foods industry
can benefit primary producers and rural communities
in other ways. Poorer communities can benefit from
growing functional food markets through domestica-
tion of wild plant species; enhanced links to the
private sector, for example, through contract farming;
employment or business opportunities from processing
functional foods; and employment on plantations
THE WORLD BANK
Table 1. Selected Examples of Functional Foods
Functional Food Benefit to Health and Well-being
Oats (beta-glucan) Heart health
Eggs with increased omega-3 content achieved by altered chicken feed Heart health
Margarine fortified with plant sterols Improved cholesterol levels
Fermentation with specific bacteria to yield bioactive peptides Lowers blood pressure
Chewing gum sweetened with xylitol instead of sugar Helps prevent dental caries
Golden rice Pro-vitamin A
Orange-fleshed sweetpotato Pro-vitamin A
Source: Authors
(see Box 3 for examples). Moreover, some of the crops especially the upfront costs associated with high-value
with health-enhancing features may be native to marginal food processing and exporting (search for markets,
areas, where more traditional farming is difficult and product research and certification, meeting regulatory
returns are low. Lastly, functional properties can increase demands, consumer research, and public relations).
the value of otherwise rare plant species, which can aid
in biodiversity conservation if their sustainable use is care- Below are some of the major challenges and recom-
fully managed. mendations for how a country might tackle them.
Still, relatively little is known about the current status of The regulatory framework. Most countries lack a
functional food production, products, and market devel- suitable regulatory category for these `hybrid' function-
opment in most developing countries. A recent study al food products, which makes market development
(Kotilainen et al. 2006) sought to narrow this knowledge much more complicated. A clear regulatory system for
gap by reviewing the status of the functional foods sector production, sales, certification, and advertising of func-
through a literature review, in-depth studies of India and tional foods, together with consistent enforcement are
China, and an assessment of the sector in five countries-- critical factors in building consumer trust in functional
China, India, Brazil, Peru, and Russia. foods. A credible system can also help to provide a level
CHALLENGES AND SUCCESS playing field that fosters competition and encourages
FACTORS IN THE SECTOR innovation. In many cases, development of institutional
capacity is necessary. These institutions include food
research centers, advisory services for producers, educa-
Even though developing countries are a rich source tors in food sector marketing and management, and
of raw materials for functional food products because of authorities approving health claims for functional foods.
their vast biodiversity and cost advantages in crop
production, developing a functional foods industry in The underlying science. The development and mar-
these countries faces significant barriers. The cost of keting of functional foods require significant research
bringing a new product to the market can be significant, efforts because most markets require scientific evidence
Box 1. Emerging Functional Foods from Developing Countries
� Brazil: Manufacturers in Japan and the U.S. obtain plant-based physiologically active ingredients such as
� Kenya: There is a potential to develop the camel milk sector for the domestic market and to respond to
antioxidant compounds from acai-berry, guarana, and yacon.
eases such as diabetes, high blood pressure, heart disease, allergies, and peptic ulcers. Camel milk can be
the demand from South America. Camel milk has medicinal properties, especially in management of dis-
� Peru: Purple corn, yacon, maca, and cat's claw are exported to Japan and the U.S. The export value of just
found in a number of supermarkets in Nairobi.
two plants, purple corn and yacon, grew at an average annual rate of 467 percent and 335 percent, respec-
tively, from 1998 to 2002. Dozens of companies are involved in export.
Source: EMBRAPA; BioTrade Peru 2004; Gitonga 2006; Authors.
2
Box 2. Small but Growing Functional Food Market in Developing Countries
� China: The total functional foods market is approximately US$6 billion per year, which is expected to
� India: With its strong tradition of eating healthy foods, India ranks among the top ten nations in buying
double by 2010.
� Brazil: The sector is relatively young, growing rapidly and has significant room for further growth. Sales
functional foods and the market size is expected to nearly double in the next five years.
value is projected to reach US$1.9 billion by 2009, which translates into a growth rate of 29 percent per
� Peru: The sector for health foods, in general, is still in early stages, but has potential for growth because
capita spending on functional foods during this period.
of rich biodiversity in roots and tubers containing diverse sugars and carbohydrates, which can respond to
� Russia: The value of functional foods market was estimated at US$75 million in 2004, with an annual
the demand for low-fat and sugar-free products.
growth of 20 percent expected. The dairy industry took the lead in the functional foods movement and
the largest growth is expected in this sector.
Source: Sun 2006; Ismail 2006; Benkouider 2005; Gutierrez 2004; Drujinina 2005; Spiridovitsh 2005.
and proof of functionality. Even though certain foods strategic decision-making and better coordination and
may have been used for a long time for health-enhance- collaboration between the players in the supply chain.
ment purposes, the definitive scientific support for claims As market demand and the associated regulations differ
as a functional product is often lacking. This involves in different markets, transaction costs in the export mar-
identifying functional compounds and assessing their ket are significant for individual companies. Specialized
physiological effect, taking into account bioavailability in market development and export promotion services
humans and potential changes during processing and might offer a way to address this challenge. Moreover,
food preparation and clinical trials on product efficacy in policymakers need to concentrate on harmonizing regu-
order to gain approval for health-enhancing marketing lations with those of major export markets to reduce
claims. This research requires time, financing, and skilled potential trade barriers and unnecessary duplication of
labor, especially for products destined for export markets. work for different markets.
Lastly, innovation and research capacity is required to
screen local biodiversity to uncover potential new sources Producers, processors, and retailers need to pay attention
for functional foods. This is also a management culture to both domestic and export markets. While in 2003,
challenge for researchers because the best results can be Japan, the United States, and Europe comprised 90 per-
obtained through partnerships between formal science cent of global demand for functional foods (Datamonitor
institutions and indigenous communities. 2004), increased incomes in developing and transitional
economies--especially China, Russia, and Brazil--current-
Understanding demand. As implied above, the ly feed a growing domestic market for functional foods.
requirements of the market will define what regula-
tions, actions, and science are needed in the produc- Understanding supply. As mentioned before, devel-
ing/exporting country. This market information needs to oping countries often have a wealth of biodiversity
permeate through the entire value chain of the product to develop their functional foods sector. However, a
from producer to retailer. This would enable improved sustainable management plan for these resources is
Box 3. Peru: Farmers Gain in Cultivating and Processing Functional Products
The Asociaci�n de Productores de Yacon de Oxapampa (APYEDO), a producers' association, with the
assistance of the International Potato Center in 2002, started producing syrup, juice, marmalade, and dehy-
drated flakes utilizing yacon, which contains an oligofructose, utilized for low-caloric beverages and known
to be beneficial for diabetic patients. Since 2003, several supermarkets in Peru have offered yacon syrup,
have reached markets in Japan, the European Union, and the U.S. High demand for information on yacon
juice, marmalade, and tea leaves.Although small-scale production predominates, exports of yacon products
indicates that there is considerable interest in this crop in various parts of the world.
Source: International Potato Center (CIP) 2004.
3
important so as to avoid dramatic reductions in plant SOURCES
populations and interference in the dynamics of local Benkouider, C. 2005. "The World's Emerging Markets."
biodiversity. On the regulatory level, it is also important Functional Foods & Nutraceuticals 44:8�11.
to have intellectual property rights protection for new BioTrade Peru. 2004. "PROMPEX. Export Promotion Strategy
products developed in-country with equitable benefit- For Natural Ingredients For Food, Cosmetics And
Pharmaceuticals From Peru." May. Available at:
sharing between local communities and developers of
http://www.biotrade.org
the products.
Datamonitor. 2004. Global Nutraceuticals, Industry Profile.
Reference Code: 0104-1759. November.
Besides a well-defined regulatory framework, factors that
Drujinina, A.2005. "Natural Ingredients Pushing Russian
enable a successful market for functional foods include:
Health Food Growth." CEE-foodindustry.com, April 15.
consumer awareness of health issues and their linkage to http://www.cee-foodindustry.com/news/ng.asp?id=59426
diets; consumer acceptance of food solutions to health Ford, K., Yasuo Konishi, Riikka Rajalahti, and Eija Pehu.
issues; sufficient disposable income level; organized retail Forthcoming. "Functional Foods: Country Case Studies of
sector; and mature markets for processed foods. China and India." Agriculture and Rural Development
CONCLUSION Discussion Paper 31, World Bank, Washington, DC.
Gitonga, M. 2006. "Kenya: Firm to Supply Camel Milk." The
Nation (Nairobi). May 16. Accessed on June 6, 2006 at
Developing countries can enjoy the benefits of the func- http://allafrica.com/stories/200605160591.html.
tional food sector to expand options for producers and Gutierrez, V. 2004. "Peru Retail Food Sector Report." GAIN
to promote growth in the sector through partnerships Report #PE4019. Foreign Agricultural Service, USDA,
between research centers, private entrepreneurs, and Washington DC. Available at: http://www.fas.usda.gov.
indigenous communities. However, the success requires International Potato Center (CIP). 2004. "Exploiting Andean Root
and Tuber Crop Diversity: Enhancing Farmer Income through
sufficient proof to establish the health claim and capac-
Product Development." CIP Technical Report for the Government
ity to accurately market functional foods to consumers of Japan covering the period from January 1�December 31.
in high-end markets. Countries that are interested in Ismail, A. 2006. "India: The Land of Opportunity." Functional
this sector should also assess the opportunities at the Foods & Nutraceuticals, January.
national level because functional foods cover such a Kotilainen, L., Riikka Rajalahti, Catherine Ragasa, and Eija
broad group of products and production systems that Pehu. 2006. "Health Enhancing Foods: Opportunities for
Strengthening the Sector in Developing Countries."
some can find demand in the domestic market, while
Agriculture and Rural Development Discussion Paper 30,
others can be targeted for export. Identification of spe- World Bank, Washington, DC.
cific export markets, certification and other regulations, Niba, Lorraine. 2003. "The Relevance of Biotechnology in the
and consumer demand are product and/or ingredient- Development of Functional Foods for Improved Nutritional and
specific, and largely dictate the possibilities for develop- Health Quality in Developing Countries." African Journal of
Biotechnology 2(12): 631-635.
ment. Further studies could establish the most critical
Spiridovitsh, S. 2005. "Toimialakatsaus�Ven�j�n Elintarvikemarkkinat."
bottlenecks in production systems and identify opportu-
Finpro, Helsinki, Finland [Finnish].
nities with the greatest potential for rural employment
Sun, S. 2006. "China: Health Food and Dietary Supplements
creation and competitive advantage for small-scale Market Industry Overview." United States Commercial Service
farmers as producers of functional foods. of the United States Department of Commerce, January.
1 Functional foods fall in the grey area between conventional foods and medicine, which creates confusion in defining functional
foods. This confusion permeates to all areas of production, processing, certification, and market development. Typically, the dis-
tinction is based on intended use: Products that are used to treat or prevent a condition are considered medicine, while those
used to improve health and reduce a risk of developing a disease could be classified as functional foods if they are presented in
the form of food or drink, and meet other safety and quality conditions set for this category. Distinguishing functional foods from
dietary supplements and natural or herbal medicine is especially difficult, and cultural perceptions on this vary. Further compli-
cations are the large number of terms often used interchangeably and in a confusing manner such as health foods, nutraceuti-
cals, designer foods, pharma-foods, and so forth.
2 Much of the basic fortification (such as iodization of table salt) is no longer considered "functional food" but new specialized extracts
and ingredients for functional food fortification have emerged, including dietary fibers, plant stanols, and sterols and probiotics.
3 There is growing research on the potential of biotechnology to develop functional foods for improved health effects of the staple
foods in developing countries--for example, high-iron rice, high-vitamin A rice, improved oil content in oil crops, and improved pro-
tein content in legumes (Niba, 2003). To date, none of these genetically modified products have reached large-scale production.
This note is based on Agriculture and Rural Development Discussion Paper 30, entitled "Health Enhancing Foods: Opportunities for
Strengthening the Sector in Developing Countries," written by Liisa Kotilainen, Riikka Rajalahti, Catherine Ragasa, and Eija Pehu. The text
of the report and this note can be downloaded at www.worldbank.org/rural or email ard@worldbank.org.
THEWORLDBANK 1818 H Street.NW Washington, DC 20433 www.worldbank.org/rural