US headed for further functional growth
Functional drinks have been a growth area of the US soft drinks market since the late-1990s. Roger Dilworth reports on the development of the sector and current brand activity.
The US functional drinks market - consisting of energy drinks, sports beverages and nutrient-enhanced drinks - has grown by more than 10% per year since 1998, with wholesale sales of functional beverages reaching US$4 billion in 2003. What is more, driven by the American consumer's willingness to embrace healthier beverage choices, the double-digit annual growth trend is expected to continue at least until the end of the decade.
Red Bull North America created the energy drink segment in the US when it established an office in California in 1997. Another California-based company, Hansen Natural Corporation, followed that year with Energy and other functional drinks. The segment has attracted new players in the past few years, including Coca-Cola, Rockstar, AriZona and PepsiCo. Wholesale sales of energy drinks grew to US$653m in 2003.
In the US, Red Bull has used distribution as a marketing tool, initially restricting the product to fashionable nightclubs in order to influence cultural tastemakers. This "opinion leader" strategy has contributed to its success, with Red Bull controlling more than 60% of the energy drinks market in 2003. The brand has not relied solely on underground marketing, however, raising its advertising spending in the US from US$2m in 1998 to more than US$40m in 2003, according to Competitive Media Reporting.
Diet energy drinks have emerged as a small sub-segment, which has expanded the consumer base. In addition to bars and nightclubs, energy drinks' primary distribution channels are convenience and gas stores.
Hansen Energy and Red Bull are packaged in the 250-ml (or so) slim cans that have come to characterise energy drinks throughout the world. However, energy drinks packaged in 16oz cans have increased segment share because of their lower price per ounce. Hansen has enjoyed a significant growth in sales due to its 16oz Monster line of energy drinks, while its slim-can drinks have stagnated. Similarly, in early 2005, Coca-Cola introduced Full Throttle, a 16oz energy drink, to replace its slim-can product, KMX. PepsiCo, which sells SoBe Adrenaline Rush and Mountain Dew Amp slim-can energy drinks, also markets a 16oz energy drink under the SoBe No Fear name. Last but not least, independent beverage company, Rockstar, notched about US$50m in sales for its 16oz energy drinks in 2003.
As in Europe, sports beverages are positioned and marketed as fluid replacement or thirst quencher beverages. Gatorade has enjoyed an 80%-plus share for most of the last decade. In 1994, both Coca-Cola and PepsiCo rolled out competitive brands - Powerade and All Sport, respectively. The cola giants grabbed most of the remaining 20% or so of the sports beverage market. However, the story changed in 2001. That year, PepsiCo sold the rapidly declining All Sport to Monarch Beverage Company and, more important, acquired Quaker Oats and Gatorade. In 2003, wholesale sales of sports beverages were US$2.7 billion.
In the last 20 years, Gatorade has pursued a science-and-sports marketing strategy. Gatorade has conducted a long-running 'Is It In You?' advertising campaign, which features non-famous athletes "bleeding" coloured sweat. It has also employed myriad celebrity athletes - Michael Jordan being the most famous - and sewed up the most prestigious sports-related sponsorships.
Sports beverages have expanded their consumer base and usage occasions through the proliferation of package sizes and formats. For example, in 2001, Quaker expanded availability of 'EDGE,' a new-fangled 'ergonomic' sports cap plastic bottle that allows for easier gripping and handling. Gatorade has also created several extensions of its core Thirst Quencher line, ensuring a stream of new flavours to keep consumers loyal to the franchise.
In addition to its strong presence in supermarkets, Gatorade, like Coke's Powerade, has strong distribution in immediate consumption channels such as convenience stores, small groceries, drug stores and delis.
PepsiCo's SoBe was instrumental in establishing the nutrient-enhanced drink segment. Nutrient-enhanced drinks are marketed as refreshers, with healthy ingredients added as a bonus. While brand owners stress beverages' nutraceutical ingredients as selling points, they do not want the products confined to health food or specialty stores. Marketers highlight the presence of nutraceuticals but do so conservatively, usually without making definite, direct health claims, in order to avoid running foul of the US Food and Drug Administration and other government regulators.
The nutrient-enhanced drink segment has been a difficult one to predict in the past several years. The task is made more difficult by the fact that the category is very much image-driven. SoBe cultivated a ribald, anti-establishment, 'extreme' sports image, with relatively little advertising expenditures, but cynics wondered whether PepsiCo, which acquired SoBe in 2001, would be able to continue the juggernaut without extinguishing the entrepreneurial spirit that made the brand what it was. Although its high-growth days appear to be over, PepsiCo has enjoyed modest growth of SoBe in the past three years.
Nutrient-enhanced fruit drinks constituted nearly 70% of segment sales in 1998. By 2003, that number dropped to 24.4%. Nutrient-enhanced ready-to-drink teas fell from 28.8% of the segment in 1998 to 14.9% in 2003. Picking up some of the slack has been nutrient-enhanced dairy drinks, growing from 3% of segment sales in 1998 to 6.6% in 2003.
Enhanced waters grew sales from virtually nothing in 1998 to over US$300m in 2003 when they constituted more than half of the over US$600m enhanced drink market that year. Propel, a vitamin-enhanced water under the Gatorade trademark, is the leading enhanced water brand, with wholesale sales of US$160m in 2003. Energy Brands Inc.'s Glaceau Vitaminwater is the second-largest brand, with wholesale sales of about US$65m in 2003.
Nutrient-enhanced drinks are distributed in a multitude of channels. In the mid- to late-1990s, SoBe established itself in immediate consumption, cold drink channels before branching out into supermarkets. Under the Gatorade distribution system, Propel has found broad distribution in both future and immediate consumption channels. Glaceau Vitaminwater started off as an immediate consumption brand, like SoBe, but can also be found in clubs stores and supermarkets.
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