Tickers in this Article: KO, UL, WMT, K, GIS, KFT, DPS
If there is a demand, you can assume that a company will step up to supply it. While the seemingly unstoppable rise in obesity may make one consider how much Americans really care about what they eat, there is undeniably strong interest in so-called "functional foods". It is not enough anymore to just call your product "fresh", "natural", or even "organic" - no, these days consumers want your product to prevent their heart disease, clean their colons and give them shiny, healthy hair.

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Trouble is, the science behind many of these claims is (to be charitable) lacking and seldom meets the standards of the major peer-reviewed journals. Consequently, the FDA and FTC have stepped up their attempts to enforce rules about unsupported nutritional claims. That could be bad news for packaged food companies ranging from Coca-Cola (NYSE:KO) to Unilever (NYSE:UL), as these claims are often baked into the ad campaigns and constitute what the companies hope will be enduring ways to differentiate their product in the aisles at your local Wal-Mart (NYSE:WMT).

The Latest Controversy
The latest example of the give-and-take between industry and the government comes courtesy of privately-held POM Wonderful LLC, maker and marketer of POM juices and POMx supplements. The FTC has come down on the company with allegations of unsubstantiated claims regarding heart disease, cancer and erectile dysfunction. The company, however, is firing back with claims that include the allegation that this violates the company's rights to free speech and they have the right to "share" this information with consumers.

A Long History Of Pushing The Envelope
If POM ultimately decides to back down, they will certainly not be the first company to do so. Kellogg (NYSE:K) has gotten smacked more than once by the FDA for health claims attached to breakfast cereal, as did General Mills (NYSE:GIS) over claims that Cheerios lowered cholesterol. Years ago, Kraft (NYSE:KFT) tangled with the FDA over the contents and labeling for its cheese products. More recently, Coca Cola has faced a federal judge over the FDA's problems with past labeling for Vitaminwater, while Dr Pepper Snapple (NYSE:DPS) and Unilever have been warned about claims attached to their green tea beverages.

Sizable Money At Stake
So-called "functional foods" are big business - upwards of $130 billion according to the Nutrition Business Journal - and a fast-growing opportunity for packaged food companies struggling to rev up single-digit growth. Unfortunately, mislabeled foods can lead consumers to waste money on higher-priced food that gives them little more than a false sense of security. That is why the FDA and FTC have gotten more aggressive in recent years. Their actions fall short of Europe, though, where the Food Safety Authority has been much more aggressive - so much so that Danone does not make the same sort of health claims for its Activia yogurt in the EU that it does in America.

The Bottom Line
Oddly enough, the government often gets more criticism than praise for pursuing these claims. It does not take more than scant research to come up with numerous claims that the FDA/FTC is "in bed" with Big Pharma and simply looking to force consumers away from supposedly healthy foods in favor of high-priced medication. For those who believe this, it is unlikely that evidence will ever sway their opinions.

For the packaged food companies, though, much is at stake. There are only so many tools at their disposal to convince grocery shoppers to put their products in the cart, and claims that their food will make you healthier are certainly powerful. While it is unlikely that the FDA and FTC will ever completely squash these efforts, shareholders ought to be wary of growth stories in this sector predicated on functional food claims. (For more, see Prepare Your Portfolio For Higher Food Costs.)

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