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Drinks with benefits

As consumers look for an extra hit of nutrition and functionality, functional beverages are booming

At Pete's Frootique in Halifax, the front beverage cooler is stocked with a bevy of functional beverages. There’s carbonated tea made by a local producer, numerous lines of coconut water, watermelon water, vitamin waters, cold brews (cold coffees) and kombucha, by far the biggest seller. “It’s crazy how that trend has exploded,” says Frank Yunace, operations manager at Pete’s. “Kombucha out-sells the bottled water.”

Yunace’s experience isn’t unique. Across Canada, grocers are watching the functional beverage market grow exponentially—with some products like kombucha surging in sales. They’re tapping into the trend of consumers looking for healthy, nutrient-filled drinks that are easy to access, act as a vitamin-packed “meal,” and make them feel good about themselves.

“There’s been explosive growth over the past couple of years,” says Jo-Ann McArthur, founding partner and president at Nourish Food Marketing in Toronto.

In 2016, the Canadian functional beverage market had $1.4 billion in sales—a figure that’s expected to reach $1.6 billion in 2021, according to Euromonitor International. And according to Mintel’s figures, 14% of Canadians say they drink “hybrid/fusion drinks” on a typical day.

That means these beverages are now popping up everywhere. “You’ll see them at the checkout sections of convenience stores now,” says McArthur.

Consumers ranked “functional” as fourth in importance among a list of key characteristics of the food they’re buying, according to Mintel. Joel Gregoire, associate director of food and drink at Mintel in Toronto, says consumers want that extra hit of protein, vitamin or energy to get through their day.

Part of the appeal of functional beverages is that they tap into the societal shift towards all things natural, says Gregoire. He says there’s a clear movement away from old-school sodas, which are high in calories and sugar, towards drinks with all-natural ingredients that are sourced ethically or produced locally.

In particular, these beverages have attracted the attention of socially conscious millennials who are prepared to part with their disposable income on a $4 bottle of kombucha. “We tend to see that younger consumers have an interest in functional beverages,” says Gregoire.

Yunace adds that younger consumers are savvy about all things health. “Millennials are very knowledgeable about products—they’re dialled in.” Social media also plays a big part with this demographic, he says, as younger consumers want to feel like they’re not only consuming a healthy product, they’re also making a positive impact socially. The new packaging on these functional drinks is hip and environmentally friendly—and often includes hashtags.

“The thinking among millennials,” says Ron Szekely, vice-president of marketing at Montreal-based Rise Kombucha, is that “by taking care of themselves, they are able to better take care of the world.”

Functional beverages can also fill the holes in one’s diet, and can do it at an affordable price. Many of the heartier beverages—such as smoothies, cold-pressed juices or coffee-infused drinks—can act as a meal replacement, making them popular with the younger set who can spend $5 and get a lunch out of it, says McArthur. Millennials don’t want to waste time; they want something quick and convenient. “We’ve turned into a generation of snackers,” she says. “And a functional beverage is faster to consume than a functional food.”

At the other end of the spectrum are the baby boomers, a generation that’s laser-focused on health. They want to ensure they’re making their calories count, says Yunace. This demographic is also looking for a hit of energy to get themselves through the day—whether it’s a protein-enhanced smoothie, a bulletproof coffee (with coconut oil) or a tea-infused drink. Some, too, are using functional beverages to relax. McArthur says some functional beverages now promote relaxation, boasting ingredients such as lavender and lemon balm.

Then there’s kombucha, which promises to regulate digestive health and improve energy levels. “It’s something that’s been growing 20% year over year,” says Szekely, adding that it’s popular among adults of all ages. The kombucha market increased nearly 41% to reach $534 million wholesale last year, finds a report from the New York-based Beverage Marketing Corporation. “Sugary juice and pop drinkers discover kombucha as a low-sugar alternative,” says Szekely. “Across the U.S. and Canada, it’s becoming more mainstream.”

“The primary demographic still does tend to be in the 20 to 40 age range,” adds Dane Robertson, a spokesperson for Greens Organic + Natural Market in Vancouver, noting that women are more likely to drink kombucha.

Grocery chains across Canada are waking up to the revenue opportunities functional beverages offer. At grocery stores catering to middle-class or higher-income shoppers especially, coolers filled with functional beverages are often on display close to the store entrance. Yunace says his beverage cooler is designed for a grab-and-go crowd. And at a Longo’s location in Toronto’s east end, each check-out aisle has a beverage cooler stocking vitamin waters, cold coffees and kombucha.

Yunace says grocers have to keep on top of the ever-changing functional beverage industry. “We try to keep one ear to the ground—we watch these trends,” he says, adding that each department manager does all the purchasing for their respective section, allowing them to track and adapt to trends. “You have to be nimble to survive in this business,” he says.

With the massive popularity of functional beverages, big manufacturers like Nestlé, Coca-Cola and PepsiCo are getting in on the action, investing in and acquiring smaller beverage firms. In 2016, for instance, Coca-Cola obtained a minority equity stake in Aloe Gloe, a line of organic aloe-water beverages, and PepsiCo acquired KeVita, a maker of sparkling probiotic beverages.

The larger players are also modifying their existing products. Yunace says he’s seen the big players such as Coca-Cola, PepsiCo and Ocean Spray change their language on beverage packaging to tout health benefits, list more natural ingredients, promote less sugar and feature larger images of fruit.

Grocers will see no shortage of functional beverages hitting their shelves in the next while. Allison Phelps, a spokesperson for Whole Foods in Chicago, says kombucha has “opened doors for a variety of diverse beverages to come into the market, like probiotic-enhanced juices, sparkling tonics with herbal adaptogens and apple cider vinegar-based teas.”

Phelps says powders like matcha, maca root and cacao are becoming more popular because they’re so easy to incorporate. “They’ve found their way into lattés, smoothies, nutrition bars, soups and baked goods,” says Phelps. She adds that another ingredient showing up in beverages is functional mushrooms such as reishi, chaga, cordyceps and lion’s mane.

McArthur has also seen a dramatic pick-up in liquid concentrates that, when added to water, can replace lost electrolytes after a workout. “It’s an innovative way to combine convenience and customization,” says McArthur.

What’s up next for functional drinks? A lot more growth, experts concur. In the meantime, grocers would be wise to pay close attention to this market segment. “Retailers have to be sensitive to these trends,” says Szekely.

This article appeared in Canadian Grocer’s May 2018 issue.

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