A Comparative Analysis of Functional Foods Sector in China, Japan and South Korea

In Japan, foods can be divided into regular food and health functional food. And health functional foods can be further categorized into three parts:

• Food for specified health uses (FOSHU): scientifically recognized as helpful for maintaining and promoting health and are permitted to bear claims such as “slow cholesterol absorption.” Such products are with limited function claims and require registration, which is subject to stringent regulatory requirements.

• Food with function claims (FFC): Under the food business operator’s own responsibility, foods with function claims can be labeled with function claims based on scientific evidence, e.g. “help maintain good GI condition.” However, unlike FOSHU, the compliance barrier for these products is significantly decreased and usually only requires filing.

• Food with nutrient function claims (FNFC): can be used to supplement or complement the daily requirement of nutrients (vitamins, minerals, etc.) and labeled with the functions of nutritional ingredients, vitamins and minerals. E.g., Calcium is a nutrient which is necessary to form bones and teeth.

As for the health functional food system in South Korea, it is quite different and mainly a system established based on functional raw material or ingredients. Products can be made into thirteen measured forms, such as tablet, capsule, pill, granule, liquid, powder, paste, jelly, film, etc. The allowed health claims can be categorized as:

• Nutrient function claims

• Disease risk reduction claims (limited to the use of vitamin D, calcium and xylitol)

• Thirty-two other function claims, such as “improvement of cognitive functions.”

Health functional food in Japan can be divided into three groups, food for specified health uses (FOSHU), food with function claims (FFC) and food with nutrient function claims (FNFC).

The first type, “Food for specified health uses,” adopts an individual approval system that Japan introduced in 1991. The government will evaluate the safety and efficacy of the product. And the Secretary-General of the Consumer Affairs Agency will approve the product labeling when it satisfies requirements. In addition to “regular” FOSHU, the following types of FOSHU are also available. They are qualified FOSHU, standardized FOSHU and reduction of disease risk FOSHU. (View further explanation here ^[1]) Usually, products under this category (FOSHU) will bear a long registration cycle, an average period of over three years. The registration cost is high (over 1.85 million dollars - except for standardized FOSHU). Only products from well-known brands, with established and strong distribution channels, can cover the high costs involved. Most competitors in this field are all giant companies selling FMCGs like tea beverages, coffee, etc. Up to the end of March this year, Japan approved 1074 products. The market scale in 2019 was valued at 649.3 billion Japanese Yen (6 billion dollars).

The second type of functional foods in Japan is “Food with function claims.” These products are subject to a filing system Japan implemented on April 1st, 2015. Stakeholders shall submit a notification to the Consumer Affairs Agency (CAA), showing that the products meet safety requirements and that any claims made are backed by a sufficient body of high-quality scientific evidence. After getting filed in the CAA, products can be sold and labeled with the filed functional claims. Compared to the registration of FOSHU, this system is fast and cheap and allows the use of a wider scope of function claims. This system is more suitable for SMEs. Up until the end of March this year, over 700 enterprises had filed 2854 products. The market scale in 2019 reached 264 billion JPY (2.45 billion dollars).

The last type of functional food in Japan is “Food with nutrient function claims (FNFC),” whose supervision system was implemented from 2001. Foods added with certain nutrients at dosage specified in regulations and standards can use labels bearing corresponding nutrient function claims without filing, which is similar to China’s management system of GB 28050 “National Food Safety Standard General Rules for Nutrition Labeling of Prepackaged Foods.” At present, the scope is mainly limited to twelve vitamins and five minerals. The market performance is quite stable, with a market scale of around 120 billion JPY (1.1 billion dollars).

South Korea focused on regulating the active ingredients used in functional foods. Active ingredients in South Korea can be divided into two types:

1. ingredients notified in the Codes of Health Functional Foods

2. ingredients individually recognized (case by case basis) by the government. “Individual recognition” means enterprises need to provide safety and efficacy documents to MFDS.

After getting approval, individually recognized ingredients can only be used by the enterprise, who is granted the approval. Up until May 2019, South Korea approved 605 individually recognized ingredients.

*CL Note:

According to the Health Functional Food Code ^[2], individually recognized functional ingredients can be added into the Health Functional Food Code and are considered notified ingredients six years after the first approval date, etc.

The health functional food industry in Japan is the most advanced in Asia with clear market segments. Giant enterprises like FANCL invest heavily in R&D of active ingredients. An overriding attitude of preciseness and discipline contribute to the excellent reputation of Japan’s health functional food industry. In 2019, the market was valued at 17 billion dollars.

China is a huge market. As revealed by Euromonitor, the health food market was around 162.7 billion yuan in 2018 with a YOY growth rate of 9.8%. China has a large senescent demographic which regularly purchases functional foods. Wider health trends have seen a marked increase in purchases amongst younger consumers in recent years.

However, China’s market is extremely challenging due to complex regulatory issues and fierce market competition. Stakeholders are often wary of investing heavily in R&D. The majority of registered health foods use a very limited scope of functional claims on labels. The most popular claim used is “enhancing immunity” due to the ease of registering products with this claim. Wider health trends and a growing awareness of the role diet and nutrition play in health and functional capacity are fueling a revolution in China. Scientific content marketing has become mainstream and consumers are increasingly become advocates for their own health and searching online for the latest research on health and nutrition. For this reason, we can expect ordinary foods fortified with cutting edge active ingredients to become more popular in China.

In terms of the future development of the sector, we anticipate significant progress facilitated by the development of China’s new health food filing mechanism. The filing system in China was implemented in July 2016 and applied to products whose functions are listed in the Function Claim Directory for Nutrition Supplement ^[4] and whose raw materials are listed in Raw Material Directory for Health Foods ^[5]. Currently, the filing system is mainly applicable to products containing vitamins and minerals. Along with the expansion of the filing scope, we are looking forward to rapid development in this sector.

The market in South Korea is relatively small. South Korea has a population of around 52 million, the health functional food sector grew 16.7% in 2018 and achieved a valuation of 1728.8 billion SKW. Among all health functional foods, red ginseng accounts for 39.1% of the sector value, following by individually recognized products (14.2%), vitamin and dietary minerals (12.4%), probiotic products (11.0%) and milk thistle extract (3.1%). In 2018, the production value of probiotic products increased by 27%. Compared to the market in Japan, the industry development in South Korea is still at a developing stage and lacking innovation.

In China, we lack data on market segments. The most popular registered health food products are those using claims of “enhancing immunity,” the market share of which accounts for 30% of all registered health foods. Although probiotic health foods have been a segment undergoing rapid growth, the overall market share of probiotic health foods is still small.

The largest market in Japan’s health functional food industry is the lactobacillus market. With strong media promotion, the concept of “gastrointestinal microbiota” is well accepted in people’s daily life and this acceptance has translated into a large, growing and stable market. As revealed by data from TPC MARKETING, the lactobacillus market in 2019 reached 863.9 billion JPY (8 billion dollars), with a YOY growth of 2.7%. In 2018, the market size was 841.4 billion JPY (7.8 billion dollars), in which functional yogurt accounted for 62.7% of the market, followed by lactobacillus beverage (26.8%), dietary supplements (4.3%) and regular food (1.9%).

The best-seller in South Korea is red ginseng products accounting for 39.1% (2018 data) of the total sector value. In 2018, the production value of red ginseng accounted for 676.5 billion SKW (550 million dollars).

In my opinion, the homogeneity in China’s health food sector is mainly influenced by the following factors.

• First of all, the stringent registration approvals and limited scope of permitted function claims. Enterprises tend to choose claims which have an easier path to product registration.

• Second, consumer education on scientific evidence supporting active ingredients is still limited.

• Third, distributors often chase after the hot products in the market. When one concept gets popular, a large number of enterprises will engage in the sector and fight for market share.

• Fourth, the lack of IP protection. Heavy investment in R&D is not rewarded or protected.

CBEC has injected new life into China’s health food industry by introducing a range of new imported products into the market. These products do not need to comply with China’s strict regulatory regime and, as such, are often formulated using novel and innovative active ingredients.

In Japan, health functional foods form a much larger part of people’s daily diets. Take lactobacillus as an example, the market share of functional yogurt added with lactobacillus and lactobacillus beverages accounts for 89.5% of the whole lactobacillus market size. These products form part of the daily diet of Japanese people. The market share of dietary supplements containing lactobacillus accounted for 4.3% of the market.

In the “Food with function claims” segment in Japan, only 49.5% of the filed products are dietary supplements. Processed food accounts for 48.1%. For example, the company “UHA” has filed thirty-six products, which are all functional candies, and are labeled with functional claims like “help protect eyes,” “ease fatigue,” “help skin retain moisture,” “weight loss,” etc. The remaining 2.4% of the market of “foods with function claims” is occupied by fresh foods. For example, there is an egg product bearing the claim, “Contains EPA·DHA. According to a report, EPA·DHA can help to reduce triglyceride levels.” After the implementation of the “food with function claims” system in 2015, consumer acceptance has steadily grown, and the whole sector has expanded quickly.

Oral beauty nutraceuticals are tipped to be a key growth area in future. According to 2018 data from INTAGE, 60% of health functional foods and dietary supplements are consumed by females. The topic of beauty nutraceuticals is now trending in Japan. There are huge opportunities in this sector, particularly for products purported to help with skin lightening, water retention, and anti-aging. Over 90% of beauty nutraceuticals used in foods with specific functions in Japan bear functions retaining skin moisture, repairing dry skin, etc. and are often formulated using ingredients such as collagen peptide, hyaluronic acid, and ceramide. Last year, Japan also approved a filing application for a food formulated with astaxanthin and probiotics bearing the functional claim“helps reduce ultraviolet-induced skin damage.”

Anti-glycation is another key segment in the beauty nutraceuticals sector and is closely related to anti-aging products. These products are promoted by giant companies like POLA. In China, the concept of anti-glycation is set deep in consumers’ minds. Oral liquid products related to this function have become very popular. POLA B.A., an anti-glycation pill and an anti-glycation oral solution, are leading products in this segment. In 2019, Japan approved the filing of five anti-glycation products, all of which used the functional ingredient Rhodanthenone B and bore the same function claim, “This product contains Rhodanthenone B. As revealed by reports, Rhodanthenone B can help attenuate glycation stress to maintain skin moisture.”

The health functional food market in South Korea is quite stable, led by red ginseng, etc. South Korean companies have been researching and commercializing innovative active ingredient delivery technologies.

In China, direct selling accounts for half of the market. The market share of traditional stores (drug stores, franchised stores, etc.) declined quickly. Influenced by the market environment, marketing via meetings and conferences is shrinking seriously, but online sales are developing fast, especially the sales via CBEC. At the same time, retail modes like WeChat business, celebrity endorsement of commodities, live streaming have all developed fast as well. China may increase the supervision of these channels in future.

The largest sales channel in Japan is communication sales, through which enterprises can directly sell products to consumers via phone calls, online platforms, TV shopping, etc. The market scale of this channel is around 550 billion JPY (5 billion dollars). Next is direct selling, the market share of which is 50% less in Japan than ten years ago and only reached 250 billion JPY (2.3 billion dollars). The performance of nutraceutical stores has grown steadily and reached a market size of 350 billion JPY (3.2 billion dollars). The rest of the market valuation is split as follows: 55 billion JPY for drug stores, 50 billion JPY for meeting marketing, and 30 billion JPY from doctors’ recommendations. In Japan, medical institutes can sell dietary supplements to “help the recovery of patients.”

South Korea mainly relies on traditional channels. In 2017, the market share of each sales channel (by sales value) was direct-selling (36%), door-to-door sales (21.4%), franchised stores (9.6%), malls (5.5%), network (4.7%) and TV shopping (4.1%), etc. The market size of online sales is relatively small.

In China’s CBEC channel, Japan and South Korea have benefited a lot from exporting their products to China via CBEC. There is little interest in Chinese products in Japan and Korea. According to data from Japan’s Ministry of Economy, Trade and Industry, in 2018, Chinese consumers spent 1534.5 billion JPY (14 billion dollars) buying health food products imported from Japan via CBEC. Chinese exports to Japan only totaled 26.1 billion JPY (0.24 billion dollars).

The answer is China, without a second thought. China has the largest market in the world. Chinese consumers prefer high-quality imported products. Moreover, CBEC also gives preferential conditions to overseas products. In 2018, the global E-commerce market was around 20,000 billion yuan (2,816 billion dollars) and China took over 52%. In terms of the CBEC market, Chinese consumers spend 100 billion yuan (14 billion dollars) on Japanese products and 112.5 billion yuan (15.8 billion dollars) on products from the U.S in 2018.

Japan is a very challenging market. Domestic players dominate the market, and competition is fierce, making it difficult for new entrants to gain any traction. Japanese consumers are also unwilling to choose overseas products. It’s even quite difficult for products from the U.S. and European countries to succeed in Japan.

As for the market in South Korea, it is dominated by red ginseng products. And sales channels like direct selling and door-to-door sales account for 60% of the market share. It’s not easy for overseas enterprises to make any inroads into the market.

*CL Note:

The imported health functional foods are developing gradually in South Korea. According to the MFDS data, the import value of health functional food in South Korea reached 672.7 billion SKW in 2018, 17.1% higher than that in 2017. Vitamin and dietary minerals occupied 34%, EPA and DHA products occupied 15.3%, and probiotics occupied 11.2%.

Overseas enterprises looking to enter China’s market should invest heavily in a feasibility assessment involving investigation and research first, including the investigation of regulations, policies, market performance, consumption habits, etc. An integrated market access strategy is also necessary. At the early stage, enterprises can export the products to China via CBEC channels to test the water, and it’s also easier to manage the risks and costs.

Products that comply with China’s regulations for general food can be exported to China via general trade directly. Or enterprises can also take advantage of their brand value and design a series of products that are more suitable for Chinese consumers based on relevant regulations. In the meantime, it’s crucial to get some key products registered or filed as health foods. The strategy here is to use a combination of different routes to market.

Why is health food registration or filing so important? It is because only health foods can bear function claims in China. Usually, it will take over three years to register a health food. But it only takes around half a year to get the products filed and it is also much cheaper.

In future, the registration requirements of health food will be more stringent in China. Currently, the scope of the filing system is quite narrow. The current restrictions have resulted in a highly homogenous market with little differentiation between products. Five ingredients: coenzyme Q10, melatonin, fish oil, reishi shell-broken spore powder and spirulina, are likely to be added into the raw material directory in the near future. (View more at China SAMR to Append Health Food Positive List with 5 New Functional Ingredients ^[6]) The scope of filing is expected to keep expanding gradually. We can also expect the scope of active ingredients with functional properties used in general foods also to expand. Overseas enterprises in Japan, the U.S. and European countries have a head start in this field. We also hope premium imported products can help activate the nutraceutical sector in China.

In Japan, although the lactobacillus market is quite mature, it is approaching saturation. The further growth of the industry will rely on the development of functional active ingredients used in regular food, such as functional snacks, beverages, etc. Products designed to combat chronic diseases will also be popular.

From an industry perspective, Japanese enterprises are also active in entering China’s market. In 2017, FANCL signed a sales agent protocol with a subsidiary of Sinopharm, which is the largest medicine company in China. In the first stage, FANCL entered China’s market via CBEC, and later it will enter the market via general trade.

The COVID19 pandemic has precipitated a spike in demand for foods purported to enhance the human immune system and decrease the risk of contracting COVID19. Demand for certain foods, particularly health foods, fortified foods, nutrient supplements, and related products, has surged. Consumer interest in health-promoting foods is at an all-time high, fueled by anxiety about contracting COVID19 and emerging scientific evidence supporting the role of specific nutrients such as Vitamin D, Zinc, Selenium, and polyphenols with potent antioxidant and ionophore activity (e,g EGCG and quercetin).

*CL Note:

There is a theoretical role supported by strong mechanistic rationale and a strong correlation between the use of these nutrients as low-risk low-cost interventions to improve hard endpoints such as mortality and morbidity. On retrospective analysis of consumer behaviors during both the 2003 SARs epidemic and the 2009 H1N1 pandemic, there was a clear correlation indicating increased purchases of health-related foods such as functional foods, fortified foods, and nutrient supplements.

Covid-19 has a major impact on all links in the supply chain. Bricks and mortar retail channels have been worst hit by the crisis whilst e-commerce has grown rapidly. At this stage, new retail modes like live streaming in China are developing rapidly. Generally speaking, well-recognized brands do better on live streams. Our advice on retail is to focus on e-commerce. Our advice on product development is to focus on using active ingredients supported by strong scientific evidence.