Buoyed by increasingly active and health-conscious consumers, the international functional beverages market is beginning to develop the diversity and mainstream acceptance that has been commonplace in Japan for the past two decades.
Japan was a pioneer in functional beverages and foods. According to UK-based Leatherhead Food Research Association (LFRA), the Japanese in 2000 consumed nearly twice as many functional beverages as any other nationality—20.7 litres per capita compared with 12.3 litres per person in the US. Germany's 6.1 litres per capita consumption was the highest in Europe, and France's 0.6 litres was the lowest. (By comparison, Germany's per capita beer consumption is 126 litres.)
LFRA found that, in 2000, consumption of functional beverages in eight countries it surveyed came in at 7.2 billion litres, worth an estimated $13.86 billion. Those countries were Japan, the US, the UK, Germany, Spain, Italy, France and Australia. Japan and the US shared 83 per cent of the total market volume. Except in Japan, where functional beverages accounted for more than 16 per cent of all beverages consumed, the market share of functional drinks was marginal even in the US, where the market share was only 3 per cent. In France it was 0.3 per cent.
The Japanese functional beverages market is characterised by a steady stream of new products coming to market and being marketed toward all sectors of the population. As notes Carole Burke, an industry expert and publisher of UK-based JapanScan, a monthly periodical whose beat is the country's functional foods and beverages market, "The big push in Japan remains with younger people, but a lot of older people are now being targeted as well. As the population is ageing, so more new products are targeted at this sector."
In Japan, canned teas are more popular than cola and other carbonated drinks, functional or not, and price premiums are rarely found on Japanese functional beverages. "Functional beverages are the same size and the same price as regular beverages in Japan, and that's one of the reasons why they are so popular," Burke says. "A lot of them are packaged in soft pouches, which gives them added appeal. They look good. The Japanese like change, they like to try something new."
"The Japanese have always made the direct connection between what you eat and drink and what you are, and they've long viewed their diets as being a primary source of health and medication," says Craig Sams, founder and president of UK-based natural products manufacturer Whole Earth Foods.
It's a mentality that is spreading fast throughout the Western world and one that is fuelling a rapid expansion in the number of functional beverages available.
"People understand that almost everything we take in has some kind of effect—this is a new kind of knowledge. Consumers are more empowered because of this knowledge, and companies are responding to that," Sams notes.
Western markets are being flooded with a range of products that are innovative in both their design and content, as well as in the manner in which they are being marketed. Sports drinks and energy drinks are leading the way and moving swiftly into the mainstream. There is also increasing demand for functional soft drinks with general or specific health benefits.
Energy drinks, established in Japan for decades and known as tonic drinks, such as Taisho's Lipovitan, have become popular in North America, Europe, Australia and New Zealand. Brands such as Smithkline Beecham's Lucozade and Red Bull GmbH are leading the way, but a host of new products are also vying for market share. Red Bull holds sway in most countries where it is available, except in Japan, where Lipovitan dominates. Initially targeted at young consumers (and routinely used by this demographic as alcohol drink mixes), these drinks are now being aimed at people of all ages who need a healthy energy boost. Caffeine-level restrictions have limited their availability in some markets, such as France and, until last year, Australia.
Most energy drinks favour ingredients such as caffeine, taurine, guarana, vitamins and minerals and are typically packaged in slimline 250mL cans. Other products—such as the Austrian-based BOMBAenergy which comes in a grenade-shaped bottle with a ring pull—employ design principles more commonly found in the herbal beverages category, while other developments include celebrity endorsements, film tie-ins and an ever-growing range of retailer own-label brands.
Meeting consumers halfway
Other market sectors are continuing to expand. Enriched juices and juice-based drinks fortified with vitamins and minerals are gaining in popularity, as are herbal-infused beverages such as Whole Earth's Gusto and Pepsi's SoBe. In turn, these drink styles are overlapping the energy drinks sector.
All this bodes well for the functional beverages industry. According to Sams, "We are closer to understanding what the consumer wants in a beverage. We've gone more mainstream, but the consumer has become much more holistic-minded, so we have met them in the middle. There is a consciousness out there now that very small amounts of something can have a very significant effect. This is why the Japanese have long led the world in this area—they know there is a direct connection between what you eat and what you are."
The functional beverages industry has attracted the attention of traditional beverages manufacturers keen on expanding their product ranges in the face of falling sales of staples such as carbonates. Pepsi's purchase of Gatorade and South Beach Beverages Sobe, Cadbury Schweppes' swoop on the Snapple and Mistic brands and Coca-Cola's acquisition of Mad River Traders are a few examples. That said, specialty health and dietetic foods suppliers, pharmaceutical companies, and food and drinks importers and brokers are still prominent in the industry.
From sports to wellness
The sports drink market is also dominated by large multinationals. Gatorade leads the way with nearly one-third of the world market, ahead of Coca-Cola's PowerAde and Aquarius brands and Japan-based Otsuka Pharmaceuticals' Pocari Sweat. Most activity in the sector has been confined to companies broadening their flavour ranges and redesigning packaging to make it more suitable for 'on-the-move' mainstream consumption.
Products affiliated with major sporting brands, such as Reebok and Umbro sports and performance drinks, also are infiltrating the market. More sophisticated products, such as fast-rehydration drinks, are becoming popular, especially in Japan, where 'stamina' sports drinks with added ingredients to aid performance are taking off. A range of rehydration drinks, such as Trek by Canadian beverage manufacturer Leading Brands Inc., was recently launched in North America. Heavy marketing emphasis was placed on Trek's 'sports packaging.'
Other functional drinks are harder to categorise and often are produced by smaller health food and drink-specialising companies. However, multinationals are making moves into this arena. Coca-Cola's fortified Minute Maid range, Tropicana's calcium-fortified and multivitamin brands, Proctor & Gamble's Sunny Delight and Danone's Activ calcium-fortified water are some examples. Pepsi's SoBe has made inroads into the US herbal-infused drink market, as has the Cadbury Schweppes' Snapple range of products.
Wellness and nutraceutical drinks comprise a small part of the market but show strong signs of growth, especially due to regulation changes in Japan and the US that allow on-pack health claims. These products are increasingly being targeted at specific segments of the population, for example, age, gender, lifestyle and particular health conditions. Examples include Sunny Delight for children and drinks for women such as T&T's Santesse.
Ingredients suppliers such as Illinois-based Archer Daniels Midland have developed new lines to meet these needs. ADM's Global Business Manager Phil Fass notes: "Targeting specific segments of the population has been the driver for many new products—for example, women-specific products. Issue-oriented products, for example, prostate and breast cancer prevention bone health, will be the next big driver of new products."
At present, the sports drink market is the most mature and therefore presents little opportunity for growth, which has become apparent already in the US and Japanese markets. Development possibilities exist in the European market, especially in countries such as France, where the population up until now has shown little interest in such drinks, despite several companies' promotional activities.
The future is functionality
Across all functional beverage lines, energy drinks have been the fastest-growing sector, a trend that shows no sign of abating in the immediate future. However, the effect of clone products now coming on-market has yet to be fully determined but may have a detrimental effect if consumers react negatively to inferior products in what is a premium sector.
The nutraceutical-wellness drink sector is the least developed but possibly the most exciting category, with drinks containing ingredients such as probiotics, prebiotics, soy proteins and phytosterols. Japan still rules the roost and accounted for 60 per cent of volume and value in this sector in 2000. In many other markets, development is being curtailed by health-claim restrictions (particularly in Europe) and by the lack of mainstream promotional activity and consumer education initiatives.
Over-the-top premium pricing policies have also restricted sales in some circumstances, although a recent US survey showed 40 per cent of consumers were willing to pay a premium for products containing added nutritional benefits.
The same study ranked these benefits and found energy enhancement, illness prevention, heart health, anticancer effects, relaxation, mood enhancement and sexual enhancement were the most desirable. With interest in these kinds of products higher than ever, the future looks bright for this category.
Functional soft drinks have traditionally been sold through on-trade and alternative outlets such as leisure centres, but mainstream retail outlets including supermarkets and grocery stores are taking a greater interest in them.
"These products are moving to the mainstream because of the retail platform that supplies convenience and ease of use," says Fass.
Concentration of ownership within the industry is likely to continue, since many functional beverages investments made by major soft-drink multinationals have proved lucrative. Overall, double-digit growth is expected to continue for at least the next five years in the eight countries cited above. The market value is expected to increase to $24 billion by 2005, a 70 per cent increase on 2000 figures. That's the kind of news that makes functional beverages suppliers and manufacturers positively salivate.