Report in Focus - Growth in functional drinks set to ramp up

The functional soft drinks market looks set for further growth over the next few years, according to a new report from just-drinks. While the recession and competition from other functional foods represent challenges, the sector offers many opportunities for growth. Ben Cooper reports.

New product launches announced in the last couple of weeks show once again that the functional soft drinks (FSD) sector is still one of the hottest areas of the soft drinks market.

Two weeks ago, Hansen Natural announced it was rolling out a low-calorie, functional, ready-to-drink beverage called Self Beauty Elixir, containing vitamins, minerals and botanical extracts, which the company says is designed to "promote and support healthy skin and overall wellness". This was followed last week by the announcement of a tie-up between Dr Pepper Snapple Group and All Sport Inc. to launch a sports drink in the US, containing a natural sweetener derived from the stevia plant. The drink, All Sport Naturally Zero, will be marketed as a zero-calorie sports drink and will be launched next month.

With the health and wellness trend well set, the FSD market is forecast to continue growing over the coming five years, according to a new report from just-drinks. Indeed, the report, Global market review of functional soft drinks - forecasts to 2014, predicts that the rate of growth will increase.

The global FSD sector, which comprises a range of sub-categories from sports and energy drinks to products categorised by which health concerns they target, grew by 48.42% in value terms between 2001 and 2008 to reach US$30.3bn. This represented a compound annual growth rate (CAGR) of 5.07% in that seven-year period.

However, just-drinks forecasts global FSD value sales will increase by a CAGR of 5.84% between 2009 and 2014, to a total value of $49.9bn.
Saturation in more developed markets, such as Germany, UK, Japan and the US, will be offset by growth in markets such as Australia, Eastern Europe and the Netherlands, the report states.

The value share of FSDs within the total global soft drinks market is also set to increase, from a predicted 9.0% in 2009 to 10.3% in 2014, with share being taken from more traditional products, such as carbonated soft drinks (CSDs).

It is little wonder that major drinks companies have looked to move into the FSD category. Not only has the market grown over the past five years but these specialist products command premium prices. The report states that growth in global FSD volumes was slightly slower than value growth between 2001 and 2008, with a CAGR of 4.64% versus 5.07% in value.

"Premiumisation, consumer demand for added value health drinks and innovation in terms of the unique and exotic ingredients used in more and more FSDs has led to strong value growth in many sectors. FSDs have been responsible for a lot of the value growth in the total soft drinks market over the review period," the report states.

However, market maturity is forecast to temper this trend somewhat over the next five years, the report forecasts. "Over the next five years, volume growth in the global FSD market will begin to outstrip value growth. This situation will not happen in each and every country, but the global market will become influenced by the maturity and development of more mature and saturated soft drinks markets such as North America. FSDs will continue to attract a premium in general, but as consumers become more interested in getting value for money, and the global economic downturn continues in the first half of the forecast period, brand owners will be forced to consider the real and perceived value of their premium products more than ever before."

Furthermore, the economic downturn is cited as one of five key factors affecting the progress of the FSD segment going forward. In particular, the recession in the US has caused particular problems for sports drinks advertisers. "The recession in the US in 2008 and early 2009 provided challenging conditions for advertisers in the sports drinks sector," the report points out.

Another key factor affecting progress in the FSD market is cannibalisation, both from within and outside the sector. "The FSD market is made up of many sub-categories including smoothies, ready-to-drink (RTD) iced tea and dairy drinks. Whole and natural FSDs, such as smoothies, which target general health, have performed very well in the past two to three years, increasing their value and volume share within the FSD market and stealing share away from other traditional [FSD] sub-categories."

Aside from cannibalisation within the FSD market, other food categories, notably energy foods, pose a challenge to market growth for FSDs. Indeed, the report forecasts that energy foods will expand their value share in the total energy food and drink market in France, Germany, Netherlands, and the 'rest of Europe' over the coming five years.

Other factors identified as likely to have a strong influence on the sector in the coming few years are changes in regulations regarding health claims, technical issues related to maintaining nutritional value throughout a product's shelf-life and rising raw material and fuel costs.

Nevertheless, there remain a plethora of opportunities for companies to exploit in the FSD market, the report concludes. Highlighting the particularly strong potential for products aimed at improving digestive health, the report also identifies drinks designed to help with the immune system, weight management and mental performance as key growth areas. In addition, cosmeceutical beverages and functional drinks made specifically for children or the elderly are expected to provide excellent growth opportunities going forward.