What's Driving Functional Beverages

Innovative ingredient combinations, key benefits and whole new subcategories
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New Seasons Market beverages
Portland, Ore.-based New Seasons Market does a strong business in kombucha and other functional beverages.

In 1996, Red Bull turned heads when it hit the U.S. market. Its unique formulation of ingredients had never been marketed on a grand scale — caffeine, sugar, taurine and B vitamins, to name a few. The hip, aggressively promoted product was a hit among young adults. Other energy and hydration drinks quickly followed.  

Today, the functional beverage category racks up $1.2 billion in sales in grocery alone, according to analysis from New York-based Alix Partners, and continues diversifying with new ingredients and segments. It seems that the sky is the limit. In addition to energy and hydration, newer products emphasize benefits like gut health, other vitamins and minerals, and, more recently, stress relief and relaxation. Some combine multiple benefits, come in tasty on-trend flavors, have no artificial ingredients, and contain little or no sugar. 

“Functional beverages has been a fascinating, fast-evolving segment,” says Jennifer Saenz, EVP and chief merchandising officer at Boise, Idaho-based Albertsons Cos. “For a few years, shoppers have been looking for beverages that do more than quench thirst. This desire for more than just refreshment accelerated during the pandemic, creating a surge in new attributes, functional ingredients, vendors and brands.”

While the original Red Bull was popular among the stay-up-late club crowd, newer functional beverages are favored by workout enthusiasts, the nutrition conscious and those who just want to live a healthy lifestyle. Some products are marketed as alcohol alternatives. 

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“Years ago, we thought we’d be taking ‘pills’ for everything,” notes Ryan White, program category manager at Portland, Ore.-based New Seasons Market. “That’s kind of what functional beverages offer. It’s more than flavor and taste. Beverages offer a benefit and an experience. There’s a pretty broad list of beverage types: caffeine, energy, hydration and gut health. They combine convenience with an enjoyable experience. Being in Portland, people here are into being fit and healthy.”

For retailers, functional beverages’ higher price tags make them very important versus traditional soft drinks. “They’re extremely valuable to retailers compared to a bottle of water,” says Benjamin Witte, founder/CEO of New York-based Recess, whose relaxation beverages go for a suggested retail price range of $2.99 to $3.49.

Tapping into a growing relaxation trend, Recess' magnesium-infused mood beverages are marketed as alcohol alternatives.

Most functional beverage consumers are young adults in a category driven by newness and innovation. “Brands often target young, often educated females who are a bit higher income,” adds New Seasons’ White. “New products are more important in this category, where there’s much innovation and a lot being introduced. While they don’t always generate sales, new products allow customers to try things. With just 20 stores, we can jump on trends. We’re a good gateway. Conventional grocers typically take a while.” 

New products are so important that functional beverages are part of the second annual Albertson Cos. Innovation Launchpad competition. The contest searches for emerging independent specialty and natural food, beverage and pet brands in the $2 million-to-$8 million sales range. Fifty applicants are chosen to present brands. Three winners will receive prizes valued at $300,000-plus. Top brands will be considered for retail distribution.

Relaxation and Gut Health

One of the category’s newest segments involves beverages that promote relaxation. Recess’ magnesium-infused mood beverage is positioned as an alcohol alternative. The relaxation trend began about five years ago, notes Witte, who adds: “It’s still early in its lifecycle. These are increasingly stressful times. People are prioritizing mental wellness and moving away from alcohol and cigarettes.” Recess also offers Mocktails, a line of “virgin” cocktails, as well as CBD-infused beverages.

Kombucha and other probiotics continue making inroads. With sales of $469 million, kombucha is the largest functional beverage category in grocery, according to Alix Partners. Kombucha and other products appeal to shoppers who want to augment gut health with “good” bacteria. White observes that beverages containing probiotics have “staying power,” with Olipop, Culture Pop and Skinpea among the popular brands. “It’s a really big category,” he adds.

Launched in 2018, Olipop was initially marketed as a “sparkling tonic.” Two years later, it was rechristened as a “new brand of soda.” Functional ingredients include eight botanicals, plant fibers and prebiotics, and it’s low in sugar. “People love soda,” says Steven Vigilante, director of growth and partnerships at the Oakland, Calif.-based company, “but they wanted a soda that wasn’t bad for them and has functional benefits.” Olipop comes in 14 permanent flavors. The suggested retail price is $2.49 per 12-ounce can.

Jel Sert's Pure Kick energy/ hydration
Jel Sert's Pure Kick energy/ hydration beverages come in stick powder form, making them very affordable — at around 20 cents per stick — and portable.

New Twists on Energy

Meanwhile, the three-decade-old energy drink category is seeing new twists. At Celsius, ingredients are “a little cleaner” than those of some competitors, notes Kyle Watson, EVP of marketing at the Boca Raton, Fla.-based company. Its Live Fit With Essential Energy line contains seven vitamins and zero sugar. The newest flavor, fizz-free Blue Razz Lemonade, is a refreshing combination of sweet blue raspberry and crisp, zesty citrus. Celsius also unveiled a 16-ounce package size. “It’s a refreshing flavor profile that pairs well with food and isn’t medicinal tasting,” adds Watson.

Fort Lauderdale, Fla.-based Odyssey Elixir offers a proprietary blend of 2,750 milligrams of lion’s mane and cordyceps (both functional mushrooms) per serving to support mood and provide sustained energy. Its three lines contain varying caffeine levels (0 milligrams, 85 milligrams and 222 milligrams per serving). Other ingredients include adaptogenic botanicals like L-theanine and panax ginseng root. Beverages contain no added sugar, preservatives, and artificial flavors or sweeteners. 

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“Three lines provide options for every scenario, delivering sustainable energy, mental clarity and mood-boosting benefits,” says Scott Frohman, founder/CEO. “Products are positioned to replace traditional energy drinks, which give an immediate boost, then result in an energy crash after a few hours. Odyssey was formulated for sustained energy.”

Continues Frohman: “The functional beverage category has experienced a notable shift over the past year as consumers seek products with health benefits and high-quality ingredients. Our product contains natural ingredients and added benefits beyond conventional taste, hydration and energy.”

Energy beverages also come in more affordable stick powder forms. Jel Sert’s Pure Kick hydration/energy drink mix retails for about $1.25 for six sticks — about 20 cents each. Sticks should be dissolved in 500 milliliters of water. Key ingredients are B vitamins and caffeine.

Many ready-to-drink functional beverages retail for $10 to $14 per six-pack, about the same price as IPAs and other upscale beers, according to Ken Wegner, president of Chicago-based Jel Sert. “Pure Kick is affordable functionality,” adds Wegner. “Seventy-five percent of the country lives from paycheck to paycheck.” Pure Kick also requires less retail display space and is easily transported in a pocket or gym bag. 

Wegner cites an uptick in the powder form of functional beverages, with other companies also offering this option. Jel Sert’s powder business is heavily driven by flavors that it licenses from branded suppliers, including Skittles, Starburst, Sun-kist, Margaritaville and Sonic drive-thrus’ limeade. “Brands get us acceptance,” he observes. “Consumers already know what it tastes like.”

Social Media and Sampling

Promotions are important when it comes to driving functional beverage sales, particularly social media and influencers. This is how young adults discover the latest products and trends. Sampling in stores and at special events is also key. While retailers call out new products, “talking about benefits is tough to do in stores,” admits White.

Albertsons’ Saenz identifies social media and digital platforms as “critical communications channels, adding that “with shoppers spending limited time at the shelf, these are the best and most targeted ways to get messages to the most relevant consumers. Popular and top products would include a heavy social and digital approach, along with appropriate in-store tactics like sampling, display and promotion.”

Looking toward the future, the functional beverage category should continue diversifying, with newness always the name of the game. What comes next is anyone’s guess. Organic salad in a can, maybe? 

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