Plain ol’ water and basic brews don’t cut it anymore for US consumers, who are demanding that their drinks offer more than just a few refreshing sips. This is being driven by nutritional and lifestyle needs. And this is why the spotlight in the US has settled on functional beverages.
The functional drinks category is diversifying from generic claims to a well-informed audience's specialized health and wellness needs.
Matt J. Smith, the Chief Marketing Officer at Brandmilk and a GourmetPro expert, highlights this evolution and shares his insights into the functional beverages market in the US. He also calls out emerging functionalities that American consumers are demanding. From zen-inducing sips to brain-boosting beverages, it’s clear that functional drinks are here to stay and innovation in this space is just getting started.
The US functional drinks market is bubbling up
Drivers for functional drinks
The US is the largest functional beverages market globally. Euromonitor estimated it was worth US$48.4 billion in 2020 and it would grow at a CAGR of 6.6% during 2020-25.
Functional drinks aren’t really that new: energy drinks and sports drinks have long been staples within the category. Prior to the pandemic, functional carbonates and dairy alternatives were expected to see the highest growth, but there was a shift once the pandemic hit.
- The desire for preventative healthcare is now driving purchasing behavior, with “food as medicine” striking a strong chord with consumers.
- They also had time during the lockdowns to discover and experiment with new functional products, which has benefited the category.
“Consumers are moving towards functional beverages for a number of reasons, including the impacts of COVID and societal changes. US consumers have gotten smarter about health and food and beverage. But it ramps up exponentially as you go down in age, down to Millennials, Gen Z. These consumers are much more prone to looking at food labels and ingredients.”
– Matt J Smith
Euromonitor predicts that the fastest-growing functional beverage segments by 2025 will be the following:
Investor interest is on the rise
Given the potential of functional beverages, there is also significant interest from investors. In 2021, startups globally in functional and non-alcoholic beverages raised US$649 million, according to Dealroom, of which investments in the US accounted for US$410 million.
- The Ryl Company, which makes high-polyphenol ready-to-drink teas, raised US$6.7 million in January 2023.
- Odyssey Wellness, which makes sparkling energy drinks, raised US$6.3 million in Series A funding in March 2023.
- PepsiCo invested US$550 million in better-for-you energy drinks maker Celsius Holdings in 2022; Celsius became a billion-dollar brand in April 2023.
As more companies look to capitalize on the growing popularity of functional beverages, there are a number of benefits they can lean into to appeal to US consumers and unlock growth. According to Matt, five key functional benefits for beverage brands to capitalize on are:
5 Emerging Trends in the US Functional Drinks Space
⚡Energy Alternatives to Caffeine
Energy remains a top priority for consumers in the US, but their preferences for energy drinks are changing. Energy requirements have become more nuanced; customized options based on time of day or specific needs will drive innovation.
New caffeine sources
Caffeinated drinks continue to be popular for providing instant alertness, but the growing preference for natural ingredients has led to a shift in caffeine sources.
- 🌿Cacao beans, coffee cherries, guarana, guayusa, kola nuts, and yerba mate are replacing synthetic caffeine as they are perceived as cleaner and better-for-you.
- 🫖 Tea’s lower caffeine content and health halo are boosting its popularity in the energy drinks space; brands like Celsius use green tea and guarana seed extracts as a base.
Consumers also want sustained energy without the crash that comes with caffeine, which is where caffeine-adjacent ingredients like L-theanine shine.
These are becoming popular for offering an uplifting and energizing feeling but without the jitters. They use a range of adaptogenic ingredients for a cleaner and sustained benefit, including medicinal mushrooms, which have taken the health and wellness space by storm. The global market for medicinal mushrooms is projected to reach US$5.94 billion by 2027, growing at a CAGR of 9.96% from 2022.
- 🍄 Coffee replacement brand MUD\WTR incorporates a blend of functional mushrooms – chaga, reishi, lion’s mane, cordyceps, and even mycelium biomass – for energy and focus.
“Consumers don't want to feel fatigued, they don't want to experience that crash they get from traditional energy drinks. So trying to find a non-traditional, more holistic solution, beyond caffeine, is one of the top areas to solve for.”
– Matt J Smith
😌Functional beverages to wind down – or anti-energy drinks – are also gaining traction, targeting stress relief or sleep assistance. Ingredients like chamomile, melatonin, and tart cherries are seen as sleep aids, while some adaptogens promote de-stressing.
🧃Gut-Health Boosting Beverages
Gut health is emerging as one of the most important benefits within functional beverages. Research indicates that a healthy gut could have a positive impact on a range of health concerns, including obesity, immunity, cognitive and mental health, and even skin health.
In the 2023 Food and Health Survey by International Food Information Council, 32% of US respondents highlighted digestive health as the fourth most desired benefit from food, drink, or nutrients. Millennials showed a particularly strong interest in gut health.
- 🦠In terms of ingredients, American consumers perceive probiotics as having the strongest link to gut health. In the 2022 survey, 67% of respondents said they were familiar with probiotics and 32% said they actively tried to consume them.
- 🥛Fermented beverages like kombucha, kefir, and yogurt drinks naturally contain a healthy dose of probiotics and are very popular functional drinks for gut health.
In light of this interest, Matt says that there’s a lot of potential for other beverage segments to offer probiotics-enhanced products.
Probiotics have not always been easy to incorporate into beverages as they are quite sensitive to heat, processing, and gastric acids. However, new technologies are emerging that address these issues, thus allowing newer beverage categories to offer probiotic benefits.
💧Water: Karma Probiotic Water, for example, uses GanedenBC30, a highly stable probiotic that can survive most of these stressors with proven health benefits.
Carbonated soft drinks: Culture POP uses Bacillus subtilis, also a very durable probiotic that allows the soda to be shelf stable.
🥛Milk: Good Culture has launched the first lactose-free, ultra-pasteurized milk with the BC30 probiotic, added after the milk is UHT-treated so it will not be compromised. The probiotic remains stable so long as the milk is not heated past 70ºC/158ºF.
“Probiotics are definitely climbing. Consumers want to find more gut health and probiotic benefits in food and drinks. I think there's a big need there and still a lot of potential. People want to look beyond just your typical yogurts and kefir and similar products; consumers want broader options.”
– Matt J Smith
Other ingredients for gut health
There are opportunities for other ingredients that boost gut health, including prebiotics and postbiotics. Prebiotics act as food for the “good” microbes in our gastrointestinal tract, and typically comprise non-digestible fibers. Postbiotics, a newer class of ingredients, are the bioactive compounds produced when gut microbes consume prebiotics. Functional beverage brands use prebiotics or a combination of prebiotics and probiotics to call out gut health benefits.
Sugar reduction continues to be a pivotal trend within beverages.
Matt says, “Consumers are getting smarter to look beyond just calories. They will peel back the onion to see how much sugar a product has, and how much added sugar.”
Natural sweeteners are in
Over the last decade, sweetener options have diversified, especially natural low-calorie options. Their prominence is set to rise further with recent news of the potentially harmful impacts of artificial sweeteners.
- The WHO recently designated aspartame, used in many diet sodas in the US, a possible carcinogen (albeit with limited evidence).
- A study by North Carolina State University has found that sucralose can damage the cell lining of our gut walls, potentially resulting in a leaky gut.
Increasingly, government bodies like the US FDA are also taking a stronger stance towards sugar reduction for better health. Some of the measures introduced in the US include sugar taxes, redefining “healthy”, and incorporating “added sugars” on nutrition labels.
Formulating low-sugar beverages
Functional beverages present unique challenges for sugar reduction. Active ingredients usually have off-notes that can impact the taste of the final product. Sugar helps mask these notes while also improving the organoleptic (sensory) properties of the drink.
Replacing sugar with sweeteners isn’t a simple substitution; finding the right formula can be costly and time-consuming. The key to innovation lies in creating naturally low-sugar, flavorful products and using a combination of natural sweeteners (with or without sugar).
- 🍃Natural sweeteners becoming popular include stevia, monk fruit, erythritol, rare sugars like allulose and tagatose, and designer sweet proteins like thaumatin and brazzein.
- 🪴For example, AlluSoda is a craft cola that uses a blend of allulose, Reb M stevia, and monk fruit extract to sweeten. It has 10 calories and zero net carbs per serving.
“There's still an opportunity for drinks with lower calories and great taste, not just for zero calorie or zero sugar. There's a middle ground for consumers who don’t like the taste of artificial sweeteners or for those who just want slightly less sweet tasting products.”
– Matt J Smith
🥤Hydration Boosting Beverages
Hydration within functional beverages serves a specific purpose – to rehydrate quickly after high-intensity activities. Sports drinks with electrolytes, vitamins, and minerals have traditionally filled this gap; this market was worth US$6.5 billion in 2021 and is projected to reach US$9.4 billion by 2029, according to Fortune Business Insights.
Hydration as a functional benefit is now evolving to address a much wider range of need states, such as:
- To just stay hydrated through the day
- Hydration support during sickness, extreme heat, or hangovers
- Weight management
Consumers’ expectations are also changing, linked to broader trends within food and drink. They want hydration drinks with quick results, clean and natural ingredients as well as those with proven benefits, creating scope for the following innovation:
- Premium blends of electrolytes
- Research-backed nootropic ingredients
- Multi-functionality, added benefits like immunity or gut health
Rapid hydration is becoming an area to watch out for, with a number of new launches just in the last few months.
Launch Hydrate’s range, for example, supports rapid hydration, focus, and faster recovery. It features the nootropic ingredient Cognizin citicoline, which has been clinically shown to improve focus and attention.
BodyArmor Sports Nutrition launched its first-ever rapid rehydration beverage, BodyArmor Flash I.V.. This claims to have more electrolytes than other brands, with added Zinc, Vitamins B and C to support a healthy immune system, and no artificial additives.
🧠Mental Health and Wellness Boosting Beverages
Awareness about the impact that mental health has on overall wellbeing skyrocketed during the pandemic. Consumers have begun to accept that addressing mental health is as important as dealing with physical health.
According to the 2023 Food and Health Survey, 60% of respondents said that they were very or somewhat stressed, with Millennials and Gen Z consumers more stressed than older generations. Just over half of stressed respondents admitted that the impact of stress was driving them to consume less healthy food/beverages.
Many are actively making self-care a priority and are turning to products that help deal with stress, mood, anxiety, poor sleep, and general malaise.
- Adaptogenic ingredients like functional mushrooms and ashwagandha are becoming quite common in functional beverages to enhance mood and relieve stress.
- Nootropic ingredients also are being used for cognitive health and mood improvement.
- Botanicals play a significant role in relaxation beverages, with a skew towards ingredients such as chamomile, lavender, hibiscus, lemon balm, basil, and valerian.
CENTR Enhanced is a sparkling functional water that has a range of nootropic and adaptogenic ingredients for cognitive health, improved mood, and relaxation, including Cognizin Citicoline, gamma-aminobutyric acid (GABA), a panax ginseng and astragalus complex, and a Sceletium tortuosum extract.
Another brand that promotes mood enhancement with adaptogens and nootropics is Kowa. Ingredients used include 5-Hydroxytryptophan, a naturally occurring amino acid that can boost “positive” neural activity, ashwagandha, Rhodiola rosea, and GABA.
Learn more about the US consumer and their shopping preferences, curated by GourmetPro experts in the region.
Tips to Succeed in the US Functional Beverage Market
Strategic pathways to market and distribution are crucial for growing a functional beverage brand. According to Matt, there are no shortages of opportunities as a lot of the channels for distribution are looking to offer healthier options and attract consumers willing to pay a premium for these products.
🛒Grocery retail is a natural channel because of high consumer footfall. Scaling up can be quick in chains like Whole Foods, Sprouts, and Target due to their wide footprint. However, this can require partnering with distributors, which can be a challenge.
🏬Warehouse club chains, like Costco and Sam’s Club, tend to target the more affluent suburban markets and can be a strong channel for functional beverages. They typically attract a well-informed and health-conscious consumer with more money to spend.
📦Online continues to be key, allowing anyone to get their products out there and compete. The challenge here is that beverages are costly to ship, so products do have to be premium to be successful.
Gain more insights from GourmetPro experts about the US grocery market landscape and how to choose a distributor in the US market.
A lot of brands try to scale up too quickly, overextending themselves and outrunning their consumer fan base. Matt recommends starting smaller and ensuring the product works well first, testing out viability through social media promotions, coupons, or sampling. Success with such tactics can help brands leverage better distribution deals to scale and build a data driven story to share with larger retailers.
It’s also important to remember that the US is a large and diverse market that requires tailored strategies, and beginning regionally before expanding nationally. Investing time in identifying the best region(s) to start in the US is therefore essential when establishing your market entry strategy.
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