Functional Foods As Differentiated Products

Food products providing health benefits beyond nutrition, or functional foods, draw consumers’ attention and promise growth opportunities for innovator food manufacturers. European functional food manufacturers may be facing future challenges, mainly due to the European Union Regulation (EC) No.1924/2006 regulating food products’ health-claims. However, in spite of the interest shown by academics to understand the acceptance of these products no study exists that analyzes the profitability of functional foods. Using a relatively novel methodology – an adaptation of the LA/AIDS model by means of Pinkse Slade and Brett’s (2002) distance metric (DM) method – this article treats functional foods as differentiated products and provides estimates of demand and profit margins for both conventional and functional alternatives sold in the Italian yogurt market. The results indicate that, in this market, the demand for functional products is often more inelastic than that for conventional ones and that brand loyalty plays a major role in consumers’ adoption of the functional alternatives. Results also suggest that, on average, functional yogurts deliver higher margins than their conventional counterparts, and that the increased profitability is due in large part to the specific presence of the functional attribute.