Global opportunities for functional drinks

Global opportunities for functional drinks

Euromonitor International’s global briefing on functional drinks aims to identify markets and brands for functional drinks that offer the greatest growth opportunities. The briefing looks for ways to accelerate trends where functional drinks are growing the fastest. Insights on how to develop the identified opportunities are also offered. The data and analysis are specific to the key functional drinks sectors of sports drinks, energy drinks and functional bottled water.

Key findings include:

Overall

Although functional drinks is a relatively small segment, it has experienced the second highest growth rate over the past five years (behind RTD tea). Functional drinks’ high growth rate is attributable to it being a relatively new segment. Functional drinks manufacturers have been expanding geographic distribution and successfully introducing products targeted at new consumer segments. The forecast growth rate is lower than historical growth due to the maturing of sports drinks and the impact of the economic crisis in the early years of the forecast period.

Sports Drinks

The US accounts for almost half of global sports drinks volumes. The category has been present in the US for many years and shows signs of maturity. Category growth rates over the past five years have steadily declined and turned negative for the past two years. The category is highly segmented and new launches from existing brands are now resulting in cannibalisation, whereas in the past new launches added incremental volume. Since the US accounts for almost half of global sports drinks volume, growth in the future will need to come from other markets.

Western Europe is likely to be the most interesting region. The Coca-Cola Co may have a broader opportunity due to the competitive nature of sports drinks in this region; it has two brands in the region (Aquarius and Powerade) and a strong distribution system. The surprise contender could prove to be Suntory. By purchasing Frucor from Danone, the company acquired Mizone, a relatively small brand primarily available in Indonesia, and by purchasing Orangina, Suntory has acquired a distribution network in Western Europe. Alternatively, Suntory could acquire distribution rights for Pocari Sweat in Western Europe (or purchase the brand outright from Otsuka).

The briefing proceeds to identify potential scenarios for increasing sports drink volumes in high opportunity markets.

Energy Drinks

The energy drinks segment should have more opportunities for growth than sports drinks. Segment growth is faster for energy drinks than sports drinks. From 2004 to 2009, energy drinks posted a CAGR of just over 16% versus just over 5% for sports drinks. Each region, with the exception of Asia Pacific, is forecast a per capita consumption CAGR of at least 4% from 2009 to 2014 compared to sports drinks where no region, with the exceptions of Eastern Europe and Latin America, is forecast to grow that quickly.

Europe (Eastern and Western) has over half of the highly developed, rapidly growing markets. In Western Europe, there is currently no branded competitor to Red Bull. In Eastern Europe, Red Bull has a relatively low share and there is no other significant brand from a global company.

While North America and Australasia are highly developed, rapidly growing markets, they are highly competitive.  In both regions, the major opportunity is for existing brands to fight for share by creating new market niches. North America may be worth the risk, but Australasia probably does not have enough volume opportunity to justify the risk.

In summary, energy drinks growth is faster than sports drinks growth, geographic opportunities are more diverse and branded competition is less structured. All of this adds up to more potential opportunities. The briefing presents some alternative ways that manufacturers could develop these opportunities.

Functional Waters

An interesting characteristic of the major functional bottled water brands is that they are not broadly distributed. Most brands derive the majority of their volumes in only one or two countries. More interesting than the brands themselves is where they are sold and the potential for introducing functional bottled water to more countries.

The top three countries, the US, Japan and Germany, accounted for 83% of global functional bottled water total RTD volume in 2009. Both the US and Germany had strong CAGRs from 2006 to 2009 (32% and 20%, respectively) and while growth is forecast to slow from 2009 to 2014, it will still be strong (8% CAGRs for both countries). In Japan, functional bottled water sales are declining in off-trade RTD volume terms.

Functional bottled water is a small category because it is present in only a very limited number of countries. The biggest opportunity is to expand distribution. The challenge is to identify the countries with the most opportunity. Functional bottled water tends to claim health and wellness (HW) benefits and countries that currently have high functional bottled water CDIs tend to also index high on HW products. Therefore, one way to identify potential opportunity markets could be to identify markets where consumers index high on HW product purchasing.

As the soft drinks category matures, particularly in developed markets, functional drinks are likely to become increasingly important to overall category growth.