Functional soft drinks are relatively undeveloped in Latin America in comparison with Europe but there is significant growth potential. Hope Lee of industry analysts, Euromonitor International, examines the opportunities.

Functional drinks remain a niche sector in the Latin American soft drinks market, accounting for less than 1% of total soft drinks volume sales, according to Euromonitor International, owing to the limited availability of products and their high retail price. But this at least offers significant growth potential, underlined by the recent dynamic sales growth.

Total volume sales rose by 105% between 1997 and 2004, in contrast to 17% growth for carbonates during the same period. However, per capita consumption remains very low at 1.1 litres, compared with 74 litres for carbonates and 60 litres for bottled water.

Euromonitor's research shows that sports drinks dominate the Latin American functional drinks market, with total volume sales amounting to 545m litres in 2003. Sports drinks have also underpinned the strength of the functional drinks market in Mexico - the largest functional drinks market in Latin America.

This is down to several factors. First, the major consumers of sports drinks are young people who in Latin America constitute a large proportion of the total population. In Brazil, for example, the number of those aged 15 to 30 represents nearly one third of the population. Second, sports drinks are a fashion symbol, associated with modern, successful lifestyles, particularly in markets such as Mexico. They are perceived as a pick-me-up drink and and a better hangover cure than regular water. Argentina saw retail value sales of sports drinks increase by 46% in local currency terms between 2003 and 2004 chiefly due to the recovery of the economy.

The dominance of sports drinks is also attributable to an expansion in the consumer base. As the market expands, manufacturers are looking to create a buzz amongst new consumers. In some countries, such as Argentina and Colombia, sports drinks are increasingly consumed as an alternative to carbonates. More school children taking sports drinks to school instead of carbonates. This change was largely the result of a strategic marketing policy by manufacturers, especially Gatorade, which projected a 'cool image' making the brand desirable to children. PepsiCo's Gatorade is the undisputed market leader in the Latin American functional drinks market, making up nearly 80% of the regional retail volume sales.

As well as heavy brand marketing, manufacturers have also introduced a variety of flavours targeted at school children. In Brazil, PepsiCo's local partner, Ambev, launched Gatorade Fierce in 2003 with several flavours, including Purple Wave, Crazy Orange and Mad Green to appeal to consumers aged 12 to 19.

Moreover, the introduction of small single-serve packaging has also boosted sales. In Argentina, Gatorade's introduction of the carton format in 2004 effectively targeted school children. Packed in 200ml cartons, it is available in apple, grape and orange flavours.

According to Euromonitor International, energy drinks is a small soft drinks category in the Latin American region, with total volume sales of 51m litres, with per capita consumption of 0.1 litres, considerably below the world level of 0.3 litres.

The premium price of energy drinks has deterred consumption of the product in Latin America, with the average retail price of energy drinks eight times higher than that of sports drinks. In fact, research shows that Latin America has the highest retail selling price of energy drinks in the world - 1 litre costs US$8.8 in contrast to US$3.9 in North America and US$3.5 in Asia Pacific. This is due to the high cost of ingredients and the fact that in some countries energy drinks are imported. They are also a relatively recent introduction.

Target consumers for energy drinks are aged mainly between 18 and 25. Consumption is highly impulsive and is associated with parties, night-clubs or group activities. Unsurprisingly, volume sales of energy drinks through the foodservice channel outweigh that of the retail sector and Euromonitor expects this trend to continue in years to come.

There are also concerns about the high levels of caffeine, taurine and sugar in energy drinks. There have been mixed messages from a number of sources about these ingredients, which can be confusing and misleading to consumers. Some products warn customers on their labels that they should be drunk in moderation. Furthermore, some doctors have said the consumption of such products could be harmful to health, and have advised people not to consume them, or just drink one serving per day.  The safety of energy drinks is something that needs to be clarified by manufacturers or by health authorities.

Informed sources have commented that the main challenges for energy drinks marketers are to educate consumers about the functionality of the ingredients, increase consumption occasions and promote consumption among young professionals. Strengthening brand image, building awareness and establishing the correct retail distribution network beyond foodservice could also improve sales further.

The functional drinks market in Latin America is expected to continue to grow strongly during the next few years, in contrast to the stagnant growth of the carbonates sector. Euromonitor International forecasts that total volume sales of functional drinks will reach 880m litres by 2008.

Argentina is expected to see the fastest growth, on the back of the predicted rapid economic recovery. As things stand, elixirs - the least developed functional drinks category in Latin America - may emerge in most countries in the next few years.

Euromonitor believes that the low penetration of functional drinks in Latin America offers great potential. The large population of young people will offer solid growth opportunities, with energy drinks expected to grow slightly faster than sports drinks. Consumer awareness of energy drinks is expected to grow as major manufacturers continue to educate consumers. The emergence of new brands is expected to raise the profile of the sector, increase awareness and stimulate product development. Also, projected stable economies and stable exchange rates may help attract impulse purchases from middle-class Latin Americans.

For further information on Soft Drinks International, go to www.softdrinksjournal.com