Functional soft drinks are no longer confined to obscure avenues of soft drinks consumption and are steadily edging towards the mainstream, according to a new report from drinks consultancy Zenith International.
Functional soft drinks consumption across the United States, Japan and 16 West European countries passed the 12 billion litre mark in 2002, reveals the report. The international market grew by 11 per cent on 2001 and functional soft drinks now represent 6 per cent of soft drinks in these markets, compared with just 4 per cent in 1998.
Zenith also claims that functional soft drinks are now being embraced by the major soft drinks multinationals alongside small, localised entrepreneurs.
"Products such as Powerade, Red Bull, Danone Activ' and Sunny Delight are very much household names and are helping to shape the destiny of functionality within soft drinks," writes Gary Roethenbaugh, research and development director at Zenith.
The 2003 International Functional Soft Drinks Report breaks down the market into four categories: enriched beverages (such as juices and waters with added vitamins and minerals); sports drinks; energy drinks; and finally nutraceuticals (products with added ingredients targeted at specific medical or health benefits). Nutraceuticals embrace a multitude of specific claims, ranging from digestive and detox through to aphrodisiac, nicotine craving relief and cholesterol lowering.
Functional drinks, said to have originated in Japan, are now most mature in this country. The traditional so-called medicinal drinks packed in small glass bottles and primarily aimed at businessmen have partly embraced the concept of the more recent energy drinks phenomenon in West Europe and North America. Taisho Pharmaceutical, the first to establish the medicinal/health drinks concept, still dominates in Japan with its Lipovitan brand. But in this more mature market, growth rates have been slower compared with the United States and West Europe.
Although sports drinks are not traditionally classified as functional drinks, they constitute the largest functional drinks category in Japan, reveals the report, accounting for more than 50 per cent of the total Japanese functional soft drinks market in 2002. The category is dominated by Coca-Cola Japan's Aquarius and Otsuka Pharmaceutical's Pocari Sweat.
Despite its maturity, the Japanese market still attracts a constant flood of new products, writes Roethenbaugh, explaining the 'hit product system'. "Here, a product may see huge volume growth by becoming the latest craze and receiving a great deal of exposure on Japanese television and widespread listings in sales outlets. Japanese consumers are certainly willing to try something new and innovative."
Japanese marketers have the advantage of a voluntary regulation system, FOSHU (Foods for Specific Health Uses). FOSHU approval does, however, allow product specific health claims to be made.
In the United States, sports drinks is also a major growth area, taking 62 per cent of the US functional soft drinks market in 2002. New flavours and packaging innovations have boosted annual volume gains.
Enriched beverages have likewise been available for decades in the United States and have nationwide coverage. The largest producers of enriched fruit drinks include Procter & Gamble with its Sunny Delight brand, Coca-Cola with Minute Maid enriched varieties and Tropicana with its orange juice with calcium. The recent emergence of enhanced waters has added new offerings qualified to fall into the enriched beverages category, such as PepsiCo's Aquafina Essentials and Coca-Cola's Dasani Nutriwater.
In the last two years bottled water has increasingly become the vehicle for nutraceutical functionality. The nutraceuticals sector, including enhanced teas, claimed more than 9 per cent of the total US functional soft drinks market in 2002. With a wide variety of more than 15 different products, SoBe Beverages, which was acquired by PepsiCo in 2000, leads the category, says the Zenith report.
And energy drinks, the most recent addition to the functional soft drinks arena in the US, have advanced almost tenfold since 1998, albeit from a small base. "This dynamic sector has attracted the interest of international companies such as PepsiCo, Coca-Cola, Anheuser-Busch and Cadbury Schweppes - yet pioneering energy drinks stalwart Red Bull still holds more than 60 per cent of the category by volume," writes Roethenbaugh.
With tighter regulations than the US and Japan, functional soft drinks in West Europe have at times fallen foul of industry regulators. Red Bull, notes the report, is still not active in the French, Danish and Norwegian markets, due to restrictive regulations on the content of energy drinks. But despite these hurdles and a flood of new contenders, the product still leads the well established West European energy drinks market by some margin.
The report adds that European energy drinks companies have expanded their distribution into interesting and innovative channels, such as Burger King outlets, cyber cafés and cinemas, to move away from the tradition of targeting bars and clubs where they face increasing competition from flavoured alcoholic beverages.
Unlike Japan and the United States, the leading functional drinks category in West Europe is enriched beverages, especially fruit juices and nectars with added multivitamins or calcium, fruit nectars and drinks with added vitamins, such as ACE drinks, and other drinks enriched with vitamins, minerals or fibre.
Functional waters are the latest addition to the functional soft drinks arena and are starting to make their impact on both the enriched beverages and nutraceuticals sectors. Meanwhile, nutraceuticals are starting to take off - thanks to a flurry of product launches from companies such as Hero, Juver, Marli and Valio.
"European sports drinks consumption per person remains very low in comparison with the more sophisticated markets of the United States and Japan, which indicates that sports drinks do present a tremendous opportunity in West Europe," writes Roethenbaugh.
The recent support for Coca-Cola's Powerade in seven European countries has subsequently provided West European sports drinks with added impetus.
Balancing out continuing high growth in some categories and countries, and a degree of maturity in others, alongside a potential tightening of industry regulation on the use of certain ingredients, Zenith expects strong growth rates in the coming years.
By 2007 total functional soft drinks volumes, in the 18 markets covered by the report, should have grown 45 per cent on 2002 levels, according to the company. Functional soft drinks clearly represent an opportunity for both short term and medium term value and volume gains.
"As consumers' consumption occasions become more varied, and the targeting of these becomes more sophisticated, functionality looks set to shape the destiny of soft drinks overall," concludes Roethenbaugh.