The functional market is at the forefront of technology, innovation and growth within the soft drinks industry. But although already a dynamic proposition, the potential for future growth remains significant, with many underdeveloped categories. A recent report by just-drinks.com examines these issues and predicts continued rapid expansion. Chris Brook-Carter reviews the evidence.

As the age of the world's population continues to grow, so too do the number of aches, pains and ailments associated with old age. Though we are not yet a world full of hypochondriacs, this phenomenon is changing the way we eat and drink, with significant consequences for the soft drinks industry.

Health awareness has contributed to a slowdown in the sales of carbonated soft drinks, which are perceived as unhealthy. But the flipside of this coin is the explosion in alternative soft drinks which are perceived as good for you, including the range of functional soft drinks and water.

"In relation to functional soft drinks, the trend in health awareness has contributed to a recent slowdown in carbonates sales, focusing consumer attention to other sectors. This means that growth opportunities over the next five years are more likely to be found in alternatives to carbonates that are perceived as healthy, including the range of functional soft drinks and water," says a newly released report from just-drinks.com called The global market for functional soft drinks - forecasts to 2008.

But despite the success of a number of these functional drinks, this is still a fledgling market and significant activity in the functional arena is at present confined to a number of key markets, in particular Japan, China, the UK, France, the US and Canada.

No other countries make major contributions to the functional food market via fortified drinks. Australia provides the only other quantifiable market, reportedly selling less than 5m litres a year with a value of under AUS$30m (£10.7m) in 2002.

The dominant brand across the functional market remains Red Bull, but the potential in the sector is in no way better demonstrated than by recent moves by soft drinks giants Coca-Cola and PepsiCo to take a share of the action.

In the US, Coca-Cola officially entered the functional beverage market with the acquisition of teas, juices and carbonated soft drinks manufacturer Mad River Traders for an estimated US$7m and Odwalla for an estimated US$181m in 2001. Meanwhile, in the sports drink sector Coca-Cola has the established Powerade brand, which is one of the leading four brands that dominate the US sports drink sector.

Meanwhile, in Japan Coca-Cola has a presence in the sports drink sector with the Aquarius brand. The company also has a player in the expanding Japanese RTD tea sector with its Marocha brand, as well as a strong presence within fruit and vegetable juices sector with its Qoo fruit juice brand.

PepsiCo diversified its reach in 2001 by acquiring The Quaker Oats Co., a union that added Quaker's Gatorade brand to the Pepsi stable. In another functional move, PepsiCo acquired the cutting-edge 'new age' beverage producer South Beach Beverage Co., otherwise known as SoBe.

"SoBe, coupled with Tropicana (incorporating fortified juices) and Gatorade, have enable Pepsi to establish a firm foothold in the functional market," says the just-drinks report.

The Markets
Japan is by far the most advanced market in the world when it comes to regular use of functional foods and drinks and the sports drinks sector is the largest functional sector in the Japanese market.

"Elixirs have been the star performer of the functional beverage sectors in Japan in recent years, having recorded growth of nearly 12% between 2000 and 2003 and forecast to display growth close to 6% to 2008 - moving up from the fourth largest sector to third place in the Japanese market," says the report.

However, in Asia, like so many other drinks sectors, all eyes are also on China. At present most consumers in China are primarily engaged in work, with little time for sporting activities, for example, and so have little interest in functional offerings. But despite this, the markets for energy and sports drinks are anticipated to show growth to 2008. Indeed the just-drinks report anticipates that sports drinks could grow by as much as 22.1% by 2008, with energy drinks showing an even more considerable leap of 33%.

In Western markets, the UK and the US dominate the functional markets at present. The UK is the largest market in Western Europe for functional food and drink, with all sectors of the functional beverages market enjoying good growth in recent years, as consumers become more familiar and accepting of the functional proposition. The UK functional beverages market is currently experiencing a period of expansion that is expected to continue to 2008.

In the US, sports drinks dominate the functional drinks market, although energy drinks have driven recent sales growth. Future sales to 2008 are expected to continue to perform well overall, although the greatest growth is anticipated to continue to come from the smaller energy and elixir sectors.

By comparison, the other significant markets, France and Canada, are both still held back by regulation and legislation.

Sales of functional soft drinks are currently at a relatively low level in the French market, constituting only a small niche sector. Within this market, sales of energy drinks dominate with sports drinks the second largest sector, although sales of sports drinks are on the rise and challenging the dominance of energy drinks. Meanwhile sales of more specialist functional drinks, such as elixirs, are negligible.

Sales of energy drinks are currently hindered by legislation in France, which does not allow the use of taurine and limits the caffeine content of products, which are staples in the energy drinks sector. As a result of these restrictions international energy drinks brands that contain restricted ingredients, such as Red Bull, are not sold in France, which has contributed to the lack of growth.

The situation is similar in Canada. Sales of sports drinks dominate while sales of other functional drinks, such as energy drinks and elixirs, are limited by government regulations prohibiting drinks containing caffeine and taurine. As a result of the regulatory limits, energy drinks in Canada often use guarana, which has similar properties to caffeine but is not regulated.

Future trends
Most interesting, as this report points out, is that although already a profitable sector, there is huge potential for growth with many categories within the functional drink sector still under-exploited.

"For the functional market, the potential to target an ageing consumer base is great, with four key propositions that can be used to appeal: joint health; eye health; skin health; and brain function," predicts the report.

"There have been a few innovations in these areas in the functional market, although most have been in the area of food or non-food sectors such as cosmetics, in relation to skin health, with functional beverages largely left out of the picture.

"just-drinks anticipates that this will change in the future, as consumers become more comfortable with these types of health propositions and seek convenient and portable options, which drinks can often offer over many food products that currently incorporate functional benefits," the report concludes.

As well as the topics discussed in this feature, The global market for functional soft drinks - forecasts to 2008 report also covers the sports drink market, the growth in functional water brands, advances in technology, the potential of weight loss and anti-ageing drinks and much more.

Expert Analysis

The global market for functional soft drinks - forecasts to 2008

The trend for improving health through diet is gaining popularity, giving modern meaning to the phrase 'you are what you eat'. Examples of this trend can be seen from the government five-a-day initiative, to vitamin-fortified drinks or functional products that claim specific health benefits. This report starts by examining the current state of the market globally. Chapter 3 then studies each region, highlighting the key trends in the major markets including Europe, North America and the Far East. Chapter 4 provides sales figures and brand share data, followed by market forecasts to 2008. This report goes on to give you a detailed techincal review and concludes with a chapter on manufacturers. This section outlines the main functional brands operating in the markets under review, as well as giving details of current company activity in the functional arena.

To find out more about this report or to order your copy, please follow this link.