Functional Drinks – Part II: Growth Potential, Investment and Challenges
By Ben Cooper | 20 October 2011
According to Leatherhead Food Research, the global market for functional food and beverages, currently worth around US$23bn, is set to grow by between 3% and 5% over the next five years. Both specialist and mainstream drinks manufacturers have fostered that growth and are seeking to capitalise on it.
However, it is arguably the mobilisation of multinational food and drinks manufacturers which is now driving growth in the functional drinks market, notably with the development of functional variants to existing brands. In addition to meeting changing consumer needs and improving the nutritional profile of a company’s overall portfolio, such brand developments frequently offer premiumisation opportunities.
Innovation and new product development have been critical to the establishment of the sector and will continue to be clear drivers for the market going forward.
Investment in innovation
A notable example of multinational investment is PepsiCo. In October 2010, PepsiCo announced the creation of a global nutrition group aimed at delivering "breakthrough innovation" across a number of better-for-you product areas, including functional offerings.
With the company committed to grow its better-for-you/nutrition businesses from about US$10bn in revenues in 2010 to US$30bn by 2020, functional drinks are clearly a key growth driver. The Tropicana range, for example, includes functional range extensions aimed at bone, gut and heart health and aiding the immune system.
Meanwhile, the development of functional supplements and food and drink products plays a central role in Nestle’s wide-ranging and extensive Nutrition, Health and Wellness platform. The company has complemented innovations in nutrition supplements targeted at specific health needs, with functional products, notably its Boost range of energy drinks. Interestingly, Nestle has so far not introduced functional extensions to any of its numerous bottled water brands.
In addition to its participation in functional market through its sports drink brands, Powerade and Aquarius, the Coca-Cola Company is also developing functional offerings for other beverage brands. For instance, last year it added a new variant to its Minute Maid range in China called Minute Maid ShifenV, containing ten functional ingredients, including vitamin B6, vitamin C and taurine. It also markets Minute Maid Heartwise, Dasani Plus, a vitamin-fortified version of its purified water brand,
However, the company’s Vitaminwater functional water brand has been the subject of considerable controversy because of the amount of added sugar it contains.
As mentioned earlier, Danone is a key player in the functional drinks market with its range of yoghurt drinks but the company has also introduced functional variants in other areas of its business, notably water. Indeed, Danone reports that its Mizone brand showed 40% growth for the third year in a row in China, and leads the Chinese market for flavoured and vitamin-fortified waters. This success is also being repeated in Indonesia, Danone reports.
While the investment in functional drinks by multinationals underlines the growth potential the sector offers, functional brands face some significant marketing challenges.
Arguably the most challenging issue facing the functional drinks sector is the debate over health claims. Recent events in the EU, which are discussed in greater depth in the following section of this briefing, suggest the regulatory environment in the EU at any rate is likely to become tougher for functional drinks.
Tighter controls governing what marketers can and cannot say regarding the health-giving attributes of their products will present a new challenge to marketers who may come up with more creative and ingenious ways of differentiating their products.
Brand success may therefore to a degree be dependent on finding the right balance between the required scientific accuracy and marketing creativity.
Addressing consumer scepticism
As the functional drinks market develops matures and consumers become more accustomed to products being marketed on healthy and functional criteria, consumer scepticism – already a challenge – will become an even more pressing issue factor for marketers to address.
While the negative reputational impact of consumers being misled by deceptive or exaggerated claims – the disrepute and notions of snake oil which that confers on the sector – is clearly a concern, an equally worrying issue for functional drinks marketers is that consumers do not believe the claims of functional products at all.
The probiotic sector, a key area of the functional market with regard to beverages, is a key example. According to a report on the probiotic market, published by just-food, one of the primary hurdles the functional food producers need to address is the “high degree of consumer scepticism” about health claims. As the market develops, consumers are becoming increasingly demanding of more robust evidence to back up claims, the report suggests.
Research by the EU Commission supports this, showing that 77% of European consumers do not trust health and nutrition claims made by food and drinks manufacturers on behalf of their products. Moreover, in a survey of UK consumers' attitudes to functional foods and drinks commissioned by business research company Key Note last year, 51.9% of respondents said they did not tend to believe health claims made by manufacturers.
The just-food probiotics report also suggests that around of the population in the US find health claims either confusing or misleading, while only a minority are believed to pay much attention to them. Meanwhile, only around 25% of Australian consumers firmly believe the health claims on functional foods, according to the same report.
Retaining differentiation and dealing with consumer fatigue
Tighter regulation on what can be said on labels and in advertising may put increased constraints on how functional drinks can present themselves but the scale of general reformulation could also have a bearing on the development of the functional food and drinks market. Conceivably, as food and drink in general is made healthier, functional foods marketers may have more of a challenge differentiating themselves but, as constraints on what kinds of claims can be made on packaging and in advertising, this may be no easy task. This again makes the debate over functional food health claims critically important in forecasting the development of the category.
Another facet to this question is consumer fatigue in the functional category, as the just-food probiotics report suggests: “Another possible hurdle for the industry to overcome is the issue of rising consumer fatigue resulting from multiple health claims on products. In parts of the world, sales of certain probiotic dairy products have experienced a dip within the last year, mainly as a result of consumer confusion regarding the range of health benefits offered. For this reason, the current trend towards combining probiotics in foods with other functional health ingredients such as omega-3 oils may not continue.”
Sustaining premium pricing
Functional products and range extensions often present a premiumisation opportunity for drinks manufacturers. However, whether premium price opportunities will continue to be so readily available has been questioned by some analysts.
The fact that the market for functional and better-for-you products is attracting increasing numbers of consumers has been extremely positive, allowing the market to grow prodigiously. But, as products offering health benefits become more and more commonplace, competition will increase and, some suggest, premium pricing will become harder to justify.
According to Future Directions for Functional Food, a report from Leatherhead Food Research, consumers still prepared to pay a premium for food or drink they believe to offer healthy benefits “if they can see immediate results”. The report continues: “For those new innovations not offering immediate benefits, competitive pricing is imperative.”
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Functional Drinks – Part II: Growth Potential, Investment and Challenges