Main article

1. What are functional foods and natural health products?
2. Sector Profile
3. Aggregate comparison with 2004 data
4. Firm Characteristics
5. Regulations
6. Products
7. Summary
8. Methodology

1   What are functional foods and natural health products?

There is no universal consensus in the definition of the terms functional food or natural health product, although they are commonly used around the world.

According to Health Canada, a natural health product

“is a product made from natural sources, often sold in dosage form and are designed to maintain or promote health; to restore or correct human health function; or to diagnose, treat or prevent disease." ¹ 

Examples include vitamins and minerals from natural sources, herbal remedies, homeopathic medicines, traditional medicines such as Chinese medicine, probiotics and other products like amino acids and essential fatty acids.

Similarly, a functional food

“is similar in appearance to, or may be, a conventional food that is consumed as part of a usual diet, and is demonstrated to have physiological benefits and/or reduce the risk of chronic disease beyond basic nutritional functions." ² 

Examples of functional foods include fruit juice with calcium, yogurts with probiotics, and omega-3 eggs, milk and meat.

In the 2007 survey the term nutraceuticals was replaced by natural health products. Qualitative testing was conducted to obtain feedback from respondents and concluded that the broader term natural health products was most commonly used and accepted by the industry. This change in terminology also suited the regulatory environment in this sector and would facilitate a better understanding and ease in the reporting on the survey.

For the purpose of the 2007 Functional Foods and Natural Health Products survey the Health Canada definitions were used along with the requirement that the functional food and/or natural health product reported were intended for human consumption.

This working paper will show results from the Functional Foods and Natural Health Products Survey undertaken in 2008 to collect data for the year 2007. The survey was sponsored by Agriculture and Agri-Food Canada (AAFC) with content development in partnership between Statistics Canada and AAFC.

The population studied in this survey is functional food and natural health product firms. These are firms that engage in activities such as research and development, production of goods (intermediate or final), sales or distribution of goods (intermediate or final) and/or provide services to the industry. Firms range in size from multinationals to SMEs where all or part of its business come from functional foods and natural health products. Statistics reported here refer to firm’s activities in Canada during the fiscal year 2007/2008, unless otherwise stated.

This is a census survey with a response rate of 80%. Weights are given to each firm in order to account for non-response. Therefore the total population represents a weighted estimate.

2   Sector Profile

2.1  Number of firms

The survey obtained responses from 689 firms developing, producing, selling or providing services relating to functional foods or natural health products. A breakdown of these firms by sub-sector is shown in Table 1.

The FFNHP sector comprises firms within seven sub-sectors:

1. firms dealing with functional foods (FF) only
2. firms dealing with natural health products (NHP) only
3. firms engaging in services only specific to FFNHPs
4. firms dealing with both FF and NHP only
5. firms dealing with FF and providing services in either FF or NHP
6. firms dealing with NHP and providing services in either FF or NHP
7. firms dealing with both FF and NHP and providing services in either FF or NHP

What is evident in the breakdown of firms by the seven sub-sectors is that natural health product firms are heavily engaged in service activities for either FF or NHP products. Of the 290 NHP firms, 207 (71%) indicated that they provided some type of service to either the FF or NHP industry.

For the purpose of this report, the 7 sub-sectors above will be collapsed into 4 categories; functional food firms, natural health product firms, firms active in both fields (all of whom may provide services to either FF or NHP) and service only firms.

Table 2 represents the 689 firms by type of functional food or natural health product, of them 174 dealt with functional foods, 290 with natural health products, 177 were active in both areas and 48 provided services only.

2.2  Revenue

Results from the survey show that FFNHP revenue from among the 689 firms was $3.7 billion in the year 2007 out of a combined total of $21.5 billion from all sources (Table 3).

Functional food firms had $621 million of revenue from FFNHP, while natural health product firms had $1.8 billion of FFNHP revenue, and $1.3 billion FFNHP revenue was generated from firms active in both fields. The remaining $20 million came from service only firms. It should be noted that these firms did not exclusively develop, produce or sell FFNHP and therefore had other product lines, or provided services to other non- FFNHP sectors.

When identifying the FFNHP segment of revenue by all firms, revenue from functional food products and services were a relatively minor component of total revenue for functional food firms. Considering that total revenue from all sources for functional food firms was $15 billion, 4% or $608 million was generated from sales of functional food products or service revenue.

Natural health products firms on the other hand had total revenue from all sources of $2.5 billion. Sales of natural health products and services accounted for 68% of this revenue.

Revenue from firms active in both fields indicate that twice as much revenue is generated from natural health products or services compared to functional food products or services. The proportion of revenue generated from FFNHP is 13% of overall revenue from all sources.

These findings suggest a major difference between functional food and natural health product firms. FFNHP products or services were a minor component of overall revenue for functional food firms, while natural health products firms derived a majority of their revenue from FFNHP products and services.

Revenue generated from services provided to the FFNHP sector was 8% of the total revenue for service only firms. The distribution of FF and NHP service revenue was relatively equal. It is interesting to observe that there is revenue generated from functional food products by natural health product firms and vice versa. These revenues are a result of service activities in the opposite field.

2.3  Firm activities

When asked what type of participation in the field of functional foods or natural health products firms engaged in directly, most functional food firms (81%) reported product development or scale up of new products (Table 4), while 63% of natural health firms also stated this activity (Table 5). Two thirds of the functional food firms (68%) were engaged in research and development (R&D) activities, compared to half of the natural health product firms (48%).

It appears that a larger portion of functional food firms (70%) manufacture consumer-ready products to be sold without further processing than natural health products firms (44%).

Natural health product firms (60%) have a slightly higher concentration in wholesale operations than functional food firms (51%) and firms active in both fields (41%). Of the surveyed firms, 28% of natural health products firms possessed retailing operations, as opposed to 46% of functional food firms.

2.4  Exports

Firms reported total FFNHP exports of $732 million, which was 61% of total exports from all sources and 20% of FFNHP revenue (Table 6). The bulk of these exports came from firms’ active in both fields, which exported $377 million worth of products, almost double the amount exported by functional food firms and natural health product firms. The majority of the export revenue from firms active in both fields (68%) came from the export of natural health products.

For natural health product firms, exports of NHPs accounted for 87% of the total export revenue and 5% of their total FFNHP revenue.

Firms specializing in functional foods did not see the same concentration in export revenue generated from functional foods compared to all other exported products. Functional food exports accounted for 38% of export revenues and 5% of total FFNHP revenue. While figures may vary among individual firms, overall the importance of functional food exports was not as high as it was for the natural health product firms. Firms that had both functional food and natural health product exports had similar characteristics as natural health products firms. FFNHP exports accounted for 71% of total exports and 10% of total FFNHP revenue. Two-thirds of the export revenue generated was from natural health products.

Out of the 689 active firms engaged in FFNHP, 249 firms (36%) were exporters (Table 7). Three out of four exporting firms exported natural health products.

It appears that natural health product firms are more diversified in their export destinations than functional food firms. Firms were able to report that they exported to more than one destination. Almost all of the functional food firms (95%) exported products to the United States. The bulk of FF export revenue $173.5 million came from the United States compared to a small amount generated from all other countries. On the other hand, natural health product firms’ export revenue from all other countries exceeded their revenue generated from the United States. These other countries were primarily Europe, China, Japan and others. The survey results indicate that while the United States was a major market for exports of functional foods, other countries comprise the major market for natural health products.

2.5  Imports

Twenty-four percent of FFNHP firms were importers of FFNHP products and services. Almost all firms (90%) that were importers imported natural health products (Table 8). Regardless of whether firms imported natural health products or functional foods the most frequent source was the United States.

Import expenditures for FFNHP products totalled $232 million (Table 9). Almost all (95%) of the imports resulted from the importation of natural health products. Of all imports of natural health products, two-thirds came from the United States. Functional food products did not account for much in terms of import expenditures, but again the United States was the preferred source for these imports. The cost of imports of natural health products was considerably higher than that of functional food products. FFNHP import expenditure, accounted for 67% of total imports from all sources.

2.6  Employment

FFNHP firms employed 13,975 individuals with FFNHP related duties which is 14% of the total number of all individuals employed by this sector (Table 10). Half of the FFNHP employees were employed by natural health product firms (6,303) while 2,887 were employed by functional foods firms, 4,491 by firms active in both fields and 294 by service only firms.

Not surprisingly, in light of the importance of natural health products for NHP firms, 55% of employees in natural health product firms had FFNHP related duties. On the other hand, only 4% of employees in functional food firms had FFNHP related duties. Forty-four percent of employees in firms selling both types of products had FFNHP related duties.

Many firms indicated that they had unfilled FFNHP positions (Table 11). This was most noticeable for dual product type firms, where 39% of respondents indicated unfilled positions. These vacant positions tend to be in the fields of sales, marketing or advertising and scientific research and development. NHP firms also indicated issues in recruitment within sales, marketing or advertising positions as well as in quality control. Firms specializing in functional foods did not indicate as many issues with unfilled positions.

A question arises as to why natural health product firms had difficulties in filling positions. The main issue appears to be lack of qualified candidates (Table 12).

2.7  Research and Development

Total R&D spending for all sources by all firms amounted to $209 million (Table 13). Of this spending, $148 million (71%) was spent on FFNHP products and services. Functional food firms accounted for the largest share of spending at $99 million, 63% of which went to functional food R&D. Natural health product firms had the same proportion of NHP R&D spending in comparison to their overall R&D spending. Service only firms and firms active in both fields had an equal proportion of spending on functional food and natural health product R&D.

2.8  Financing

In 2007, this sector raised a total of $229 million of capital for FFNHP purposes (Table 14).

The main source of funds for all industries came from conventional funds such as banks, initial public offerings (IPOs) and secondary public offerings (SPOs) (Table 15). Other notable sources were angel investors and other sources. It is noteworthy that there were no funds raised from American-based venture capitalists but funds were raised from other foreign venture capitalists.

3   Aggregate comparison with 2004 data

A comparison between totals for the FFNHP sector in 2004 and 2007 reveals a significant across the board increase in all major variables. As evident in Table 16, there was growth in the number of firms, FFNHP revenues, exports and R&D expenditures for FFNHP purposes. What is interesting is the relatively low increase in the number of employees with FFNHP related duties.

These increases can be contributed to an overall growth in the industry. There are other factors such as changes in methodology that would have contributed to some of these changes as well. The methodological changes were the inclusion of the service only firms, the exclusion of not-for-profit organizations, associations, alliances, unions, universities, government agencies, departments and commissions. In addition all firms that only sold (retail and/or wholesale) functional foods and/or natural health products without any development or production were removed from the 2007 survey.

4   Firm Characteristics

4.1  Service Activities

In total there are 471 firms providing services to the FFNHP sector (Table 17). A high percentage of firms (68%) provided service activities for the FFNHP sector as shown in Table 1. The majority of service providers are natural health product firms followed by firms active in both fields.

Manufacturing or production are the most performed services for all firms except service only firms who perform quality control services more. Overall, scientific research and development (R&D) appears to also be a principal service along with sales, marketing or advertising.

Service only firms (those which do not develop, produce or sell their own FFNHP products) account for a small portion of the industry representing only 10% of firms providing services.

4.2  Distribution channels

Major distribution channels used by all firms include direct retailers, wholesalers and “other” (which represent direct selling to other firms, brokerage and third party sellers). Almost half (46%) of all FFNHP revenue from products and services came from firms which used direct retailers as a distribution channel (Table 18).

A major difference between natural health product firms and functional food firms was found in their choice of distribution channels. Fifty-three percent of natural health product firms generated revenue from wholesalers while only 32% came from retailers. In comparison, 27% of functional food firms’ revenues came from using wholesalers while 52% came from the use of retailers. It appears that a greater number of functional food firms profited more from a direct relationship with retailers, while natural health product firms were much more dependent upon intermediaries (wholesalers) to distribute their product.

Evidently, service only firms profited most from the “other” channels of distribution, such as direct selling to other firms and brokerage and third party sellers.

It is interesting that the use of direct selling or internet sales or mail order only accounted for 4% of revenue.

At the same time, 36% of FFNHP sales from functional food firms came from final consumers (Table 19), while only 5% from natural health product firms’ sales did so. A little less than half of the natural health product firms’ (48%) sales came from wholesales, while more than half of the FFNHP sales generated from firms active in both areas came from retailers. The majority of FFNHP sales from service only firms came from private label customers.

4.3  Partnership agreements and contracting out

Twenty-three percent of firms stated that they had partnerships or collaborative agreements (Table 20). Partnerships involve the active participation in projects between firms, and do not include work that is contracted out. Firms active in both fields had the most number of firms (34%) reporting some type of partnership or collaborative agreement along with the most number of arrangements by purpose and partner type. Functional food firms had 22% of firms reporting some type of partnership or collaborative agreement while there were 18% of natural health product firms doing so. Both firms had a similar number of arrangements by purpose and partner type.

Functional food firms and firms active in both fields chose to partner and collaborate with “other firms” not in the FFNHP sector more often, in comparison to natural health product firms who preferred to partner and collaborate with FFNHP firms.

Functional food and natural health product firms partnered and collaborated primarily for the purpose of production (Table 21). Firms active in both fields allied for the purpose of accessing markets or distribution channels and conducting scientific R&D.

An area where there was a difference in partnerships in terms of purpose pertained to firms active in both fields. These firms, more than the other two types of firms, had more arrangements for regulatory affairs, clinical trials and access to other intellectual property.

Service only firms did not report any significant number of partnerships or collaborative arrangements. When asked, 25% of firms reported they were currently seeking to form new partnerships or collaborative arrangements.

Contracting out of work was also a significant activity for these firms (Table 22). Fifty-three percent of natural health product firms contracted out work, usually for manufacturing or production and regulatory or clinical trials. Comparatively 37% of functional food firms contracted out work. Functional food firms sought assistance in scientific research and development and intellectual property (Table 23). Firms active in both fields (65%) had the highest percentage of contracting out. The main purposes were for sales, marketing, advertising or market research and regulatory or clinical trials.

Functional food firms sought very little contracting work with foreign companies whereas natural health product firms and firms active in both fields contracted abroad several activities such as manufacturing or production and regulatory or clinical trials.

4.4  Intellectual property

Roughly 5% of firms reported granting FFNHP licensing agreements. This was consistent whether firms produced functional foods, natural health products or both; service only firms did not grant any licensing agreements (Table 24). Only 5% of functional food firms acquired FFNHP licensing agreements whereas the other two firm types reported double this amount.

Functional food firms (41%) and firms active in both fields (46%) developed the most trade secrets. Twenty-one percent of natural health product firms and 8% of service only firms developed trade secrets. A little more than one third of functional food and natural health product firms registered trademarks in comparison to almost half of all firms active in both fields. Thirteen percent of service only firms registered trademarks.

The vast majority of firms (87%) did not have patents. For firms that did pursue patents, natural health product firms had the most, with 543 existing patents (Table 25). Functional food firms reported the most pending patents. Overall natural health product firms had the most combined number of existing and pending patents.

5   Regulations

5.1  Contacting Health Canada or the Canadian Food Inspection Agency

Overall seven out of ten firms reported that they had some type of contact with either Health Canada or the Canadian Food Inspection Agency in the fiscal year 2007/2008 (Table 26). The proportion of firms having contact with these government agencies did not vary by type.

Labeling and advertising was by far the area where the most contact was sought from both the Canadian Food Inspection Agency and the Health Canada Food Directorate (78%). All other areas did not receive as many inquiries as represented by the higher percentage of ‘not applicable’ responses (Table 27).

Of the functional food firms and firms active in both fields that contacted the Health Canada Food Directorate, the top three areas of inquiry citied included: novel food designation, labeling and advertising, and submission for a health claim on food. Contact with the Canadian Food Inspection Agency was also frequent for the above mentioned areas along with inquiries concerning allergies and sensitivities, and adverse reaction reporting for functional food firms and export and import of food products for firms active in both fields.

Almost one third of all natural health product firms and firms active in both fields that contacted the Health Canada Natural Health Products Directorate, did so with respect to seeking information regarding site licenses, product licenses and health claims for natural health products (Table 28). Labeling and advertising inquiries also generated contact with the Health Canada NHP Directorate, more so for dual firms then NHP firms.

Forty-one percent of service only firms reported that they had contact with the Health Canada NHP Directorate concerning inquiries regarding site licenses for natural health products (Table 29). Submission for health claims on food was the principal reason for contact with the Health Canada Food Directorate by service only firms.

6   Products

6.1  Number of products

There were 22,062 FFNHP product lines on the market in the year 2007 (Table 30). Natural health product firms accounted for the bulk of these with 17,656 products. The 3,704 product lines sold by firms active in both fields included both functional food and natural health products. There were 703 product lines on the market for functional food firms.

Natural health product firms have significantly more product lines than functional food firms (see Table 30). The breakdown of distribution of product lines on the market by firm type are as follows; 3% for functional food firms, 80% for natural health product firms and 17% for firms active in both fields.

The vast majority of product lines were sold exclusively in Canada (74%) with 7% sold only outside of Canada and 19% sold both in and outside of Canada. Service only firms did not report any product lines.

6.2  Product Area

A large number of firms producing, developing or selling functional food products reported that health purposes in four main areas were of major importance to the firms’ Canadian operations; vascular health, weight control, energy and overall health and well-being (Table 31). Overall health and well-being was also considered of major importance to firms producing, developing and selling natural health products together with immune system, energy and vascular health (Table 32). This happens in part due to the fact that firms specializing in natural health products tended to have a wider product line than those specializing in functional food.

7   Summary

The functional foods and natural health product (FFNHP) sector in Canada continues to grow. Results from the Functional Foods and Natural Health Products Survey 2007 estimate that 689 firms were active in this sector with total revenues of $3.7 billion, of which over $700 million worth was exported. A total of 13,975 employees had FFNHP related duties. FFNHP import expenditures were $232 million. This sector has a wide range of products with over 22,000 product lines currently being sold on the market both nationally and internationally.

This dynamic sector of food processing continues to enhance its growth through the spending of $148 million in research and development. New developments of value added processing and extraction of nutritionally valuable components, produce products with increased health benefits, usually in the area of overall health and well being, vascular health and improving our immune system.

Our understanding of this emerging sector and the firms active in the development, production and sales of FFNHP products and services are further examined in detail tables which can be made available upon request.

8   Methodology

Description

The objectives of the survey are to produce statistical information on the functional food and natural health product sector and a profile of firms engaged in functional food and/or natural health product related activities in Canada. Information from this survey may be used by businesses for economic or market analysis, by trade associations to study industry performance, by government departments and agencies to assist policy formation, and by the academic community for research purposes.

Subjects

1. Biotechnology
2. Food, Beverage and Tobacco
3. Manufacturing
4. Science and Technology

Target population

All firms participating in functional food and/or natural health product related activities (for the purpose of human consumption) in Canada, as identified by Agriculture and Agri-Food Canada, and firms that indicated they were involved in such activities in the 2007 Survey on Emerging Technologies. The establishments of an enterprise located in the same province were grouped to form the statistical unit. Excluded from the survey were not-for-profit organizations, associations, alliances, unions, universities, government agencies, departments and commissions.

Instrument design

The questionnaire was prepared in active co-operation with partners and in consultation with a group of functional food and natural health product experts offering a range of expertise and interests. Following the initial design work, the questionnaire was field-tested with potential respondents, whose comments on the design and content were incorporated into the final version.

Sampling

This is a census survey with a cross-sectional design.

Agriculture and Agri-Food Canada (AAFC) provided the Science, Innovation and Electronic Information Division with a list of firms involved in functional food and natural health product related activities. This list was further modified to exclude not-for-profit organizations, associations, alliances, unions, universities and government agencies, departments and commissions. Furthermore firms that were considered to only develop or produce organic foods, fortified flour, gluten free foods and cosmetics were taken off this list. The Science, Innovation and Electronic Information Division of Statistics Canada also provided a list of companies that had indicated they were involved in functional food and/or natural health product related activities from the 2007 Survey on Emerging Technologies (ETS). All firms that responded “yes” to developing, producing or selling fortified foods, foods with added active ingredients, and foods with a functional component and/or natural health products were included in the sample. Firms from the ETS that responded they only sold (retail or wholesale), therefore no development or production activity for the above mentioned foods and/or natural health products were removed from that list. Firms that responded in the 2005 Functional Foods and Nutraceuticals Survey (FFN) and those found from external sources comprised another list. All these lists were merged and duplicate units were identified. Pre-contact was conducted for those firms appearing on the AAFC list, those from the 2005 FFN survey and external list as well as firms that did not respond to the ETS coded to NAICS 311990: All Other Food Manufacturing.

Data sources

Responding to this survey was compulsory. Data were collected directly from survey respondents.

Data were collected using a paper mail-out, mail-back questionnaire. Pre-contact was made by telephone prior to the mail-out. Follow-up was also conducted by telephone.

Error detection

Questionnaires were manually edited and outliers detected as they were received during collection. A series of edit rules were developed and invalid or inconsistent entries were corrected using these rules. Follow-up was conducted for missing entries that could not be manually edited.

Imputation

Donor imputation was used to impute qualitative questions. It was also used, combined with ratios, to impute some quantitative questions. Thus, a donor was randomly selected within a receiver's imputation group when required. Imputation groups were based on question 1a), 2a) and 3a) that had seven possible values: functional foods only, natural health products only, services only, functional foods and natural health products, functional foods and services, natural health products and services, and functional foods, natural health products and services.

Donor imputation was also used to impute quantitative questions. A donor is found based on a distance between it and the receiver. The donor with the smallest distance is selected. This is called the nearest neighbour method.

Estimation

All tables were produced with the Generalized Estimation System (GES) in Excel. Totals and proportions were estimated.

Quality evaluation

Data quality was evaluated on the basis of the quality standards in force at Statistics Canada, namely the standards for data relevance, accuracy, timeliness, accessibility and interpretability. Data quality was evaluated in co-operation with methodologists and subject matter experts. In the event of poor quality, the data concerned are not published. Comparisons between the results from the 2004 and 2007 databases should be attributed in part to differences in the methodologies of the two surveys.

Disclosure control

Statistics Canada is prohibited by law from releasing any data that would divulge information obtained under the Statistics Act that relates to any identifiable person, business or organization without the prior knowledge or the consent in writing of that person, business or organization. Various confidentiality rules are applied to all data that are released or published to prevent the publication or disclosure of any information deemed confidential. If necessary, data are suppressed to prevent direct or residual disclosure of identifiable data.

Data accuracy

The data accuracy indicators used for the Functional Foods and Natural Health Products Survey are the standard error and the coefficient of variation.

The standard error is a commonly used statistical measure indicating the sampling error of an estimate. The standard error and the coefficient of variation (standard error expressed as a percentage of the estimate) were used in statistical tables to provide an indication of the data quality level of the estimates. Please note that the coefficient of variation (CV) was not calculated for percentage tables.

The results were weighted to reflect the entire count of firms in the selected industries. Estimates were vetted for compliance with confidentiality rules. Data quality was assessed in consultation with the methodology team, and when the data were unreliable, they were not published.

Alphabetic symbols representing the size and range of the standard error and the CV were used in the statistical tables to provide an indication of the extent of the sampling error of the estimates. Some data with a higher standard error or CV (in the 'E' category) are sufficient enough for some purposes; however one should proceed with caution. The letter 'F' indicates that the estimate has a high standard error and was not published.

The response rate for this survey was 80%.