Consumer Trends Shaping Functional Beverage Market and Presenting Investment Opportunities

Developing a taste for healthier alternatives

Although overall global consumption of sugar-based drinks has increased by roughly 16 percent since 1990, consumer attitudes toward these beverages have changed in recent years as consumers become more health conscious. According to IBISWorld senior industry research analyst Arielle Rose in a Beverage Industry article, health concerns around carbonated soft drinks have caused a sharp decline in US sales. The downturn is also supported by a 2020 study led by the Harvard T.H. Chan School of Public Health, which found that American consumption of sugar-based drinks steadily declined between 2003 and 2016.

In the article, Rose said that producers have started diversifying product portfolios in an effort to stay afloat as the market for carbonated soft drinks continues to sink. Many large brands have released low- and zero-calorie versions of their most popular products, while others have started exploring non-carbonated options like bottled and flavoured water as well as teas.

Additionally, consumers are increasingly seeking beverages that serve a purpose beyond a refreshing taste. Food and beverage industry consultant Dr. Bryan Quoc Le believes this is largely a result of the pandemic, which caused people to re-evaluate their diets.

As a result of evolving consumer preference, the functional beverage market is expected to grow from US$148.26 billion in 2023 to US$203.42 billion by 2028 at a compounded annual growth rate of 6.53 percent, according to a report by Mordor Intelligence.

Formulated for function

Functional beverages are drinks designed to improve health, wellness and energy. Generally non-alcoholic, these solutions are typically marketed on the specific outcome they produce when consumed.

Caffeinated beverages such as coffee represent the largest segment of the functional beverage market by far, consumed by roughly 94 percent of US adults. Additionally, 32 percent of people aged 18 to 29 and 35 percent of people aged 30 to 49 regularly consume energy drinks. According to FedUp Foods CEO Zane Adams, there are a few reasons for this.

"There's an increased focus on caffeine and cognitive-boosting benefits," Adams explained in an article in the Food Institute. "We believe this is a continuation of trends that offer ‘value add’ to the foods and beverages, so ‘food is thy medicine.'" The CEO stated later in the article, "Exercise is the number two reason why people are drinking more energy drinks … The sports and energy categories are continuing to blur."

Yet the functional beverage category expands far beyond energy drinks and sports drinks and there are considerable growth opportunities in areas like rapid hydration, digestive health and cognition.

As a result, electrolyte drinks have emerged as an alternative to both energy drinks and traditional sports drinks. Valued at US$1.42 billion in 2022, the global electrolyte hydration drinks market is expected to reach US$1.82 billion by 2028, according to a report by Market Data Forecast. Functional waters, organic ingredients, plant-based drinks and plant-based beverages have also increased as category sizes.

Flavourful innovations

According to two consumer surveys conducted in-house by biotech company Kyowa Hakko, subsidiary of Kyowa Kirin (TSE:4151), there are five primary purchase drivers where energy beverages — and by association, functional beverages — are concerned.

Taste is the top consideration by far, indicated as a purchase driver by 92 percent of respondents. This was followed closely by effectiveness and safety (89 percent) and purity (82 percent). The use of natural ingredients (80 percent) and scientific backing (80 percent) were also crucial.

In light of this, many recent developments in the functional beverage space are focused on flavour. Beverage producers seek to provide drinks that taste just as good as brands with high sugar content without sacrificing nutrition, health and wellness benefits. Their goal is to provide consumers with the same level of novelty and variety of choices offered by traditional soft drink producers.

This has resulted in the emergence of innovations such as new taste refinement systems, bitterness blockers, natural sweetener alternatives and new characterising flavours.

Flavour aside, there has also been considerable development in formulation and delivery. Innovation has enabled the use of ingredients that previously were difficult or impossible to include in most functional beverages, such as mushrooms and adaptogens. Probiotics, plant-based protein and branded ingredients such as Immuse and Cognizin are also becoming more widespread.

Promising brands in the functional beverage market

Because the functional beverage category is so broad, there's no shortage of investment targets, including the companies below that are focused on the sector. The list does not include larger companies such as PepsiCo (NASDAQ:PEP) and Danone (OTCQX:GPDNF,EPA:BN); though prominent, these companies originally established themselves in other verticals before branching into functional beverages.

Hydralyte International

Hydralyte International's (ASX:HPC) rapid rehydration product was developed based on the World Health Organization's recommended formula for rapid rehydration. Available as a tablet, pre-made drink or powder, Hydralyte's unique formula contains roughly four times more electrolytes and 75 percent less sugar than most sports drinks.

The company also benefits from a robust supply chain, manufacturing approach, sales trajectory and product strategy, and it saw its 10th straight quarter of sales growth in Q3 2023. Hydralyte has expanded internationally, including in North America and the UK. In the UK, the company’s products are now appearing both on Amazon UK and store shelves in Whole Foods and Chemist Warehouse stores.

Ultima Replenisher

Ultima Replenisher is a privately owned producer of hydrating drink powders based in the United States. Available on Amazon and at thousands of retail locations, its products are non-GMO, vegan, keto and paleo-friendly. Additionally, the company's powders contain no sugar, soy or gluten.

The Ryl Company

The Ryl Company produces ready-to-drink high-polyphenol teas. The startup's branding and marketing strategies focus on sustainability and wellness, emphasizing the presence of plant-based extracts in all its products. In March 2023, it raised US$6.3 million in Series A Funding.

Chr. Hansen

Based in Denmark, Chr. Hansen (CPH:CHR) develops and produces enzymes, cultures, probiotics and natural colors for both foods and beverages. The global bioscience company also produces plant health and animal health products. It may well be one of the oldest players in the functional beverage industry, with a history that spans more than 150 years.

Investor takeaway

Consumer attitudes toward beverages have fundamentally shifted. As a result, they are increasingly seeking out drinks that provide greater benefits than taste and hydration, which is excellent news for the functional beverage market — and for anyone who wants to invest in the sector.

This INNSpired article is sponsored by Hydralyte International (ASX:HPC). This INNSpired article provides information which was sourced by the Investing News Network (INN) and approved by Hydralyte Internationalin order to help investors learn more about the company. Hydralyte International is a client of INN. The company’s campaign fees pay for INN to create and update this INNSpired article.

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