With $20 billion to $30 billion in sales a year, the functional food market offers tremendous growth opportunities for potential investors, according to a new report released by PricewaterhouseCoopers LLP (PwC). The report, titled “Leveraging Growth in the Emerging Functional Foods Industry: Trends and Market Opportunities,” pegs growth for the functional foods category within the range of 8.5% and 20% per year.

“Our study shows the tremendous need for education—for consumers, the industry, the healthcare profession and investors interested in this dynamic space—about what functional foods are and where the opportunities lie across segments,” said Glenn Pappalardo, strategy retail & consumer team leader and director, Transaction Services, at PwC. “This market reflects the broad consumer push to focus on health and wellness. After years of public and private initiatives to recognize the connection between diet and health, consumers increasingly want to achieve health benefits with convenience and get helpful nutrition without drastically changing their behaviors.”

The report defines functional foods as foods fortified with nutritional and disease-preventing qualities that aim to promote better health and well-being, prevent the onset of chronic diseases and increase longevity. As consumers shift their attention to take a more involved, preventative approach toward their health, they will continue adopting functional foods, the report predicts.

According to PwC, the functional foods market represents about 5% of the overall U.S. food market and is estimated to be the largest in the world, representing between 35% and 50% of global sales, with Asia-Pacific being the next biggest market. Combined, the two markets are estimated to account for approximately three-quarters of the current global market for functional foods. Future growth is expected to be attributed to a combination of increasing consumer awareness and changing demographics—including the aging Baby Boomer population and current healthcare trends.

The functional foods market can be segmented in two ways, according to PwC, by food type, or by health benefit. Soft drinks and dairy products constitute 60% of the market, by food type. The soft drink category includes enhanced water, which has grown in popularity as consumers seek alternatives to carbonated beverages, and sports drinks. Between 2002 and 2007, the market researcher claims U.S. functional beverage revenues grew at about 12% annually, to about $10 billion. Dairy, the second highest growth segment, is gaining in popularity, largely due to innovation in functional yogurts. In the same time period, the report says dairy grew to almost $7 billion at about 8% annually.

PwC notes that energy is the largest segment by health benefit with 29% of the market, largely due to the fact that these products tend to have attributes the consumer can feel quickly. In the U.S., the energy segment grew more than 6% annually between 2002 and 2007 to nearly $8 billion.

Lastly, private label brands may be poised to gain traction in the functional foods market during the current recession by appealing to price-sensitive consumers, the report states. In 2008, overall sales of private-label food and other consumer products increased 10%, compared with 3% growth for branded products, a trend that could extend to functional foods.

“This is a fast-changing industry where investors have to realize the great need for careful due diligence and legwork before they jump into the category,” said Mr. Pappalardo. “And because functional foods are driven by preventive approaches to maintain wellness, we don’t see this space as a fad, but rather as part of long-term shifts in consumer behavior, which could have implications for investors’ strategies.”