Why retailers should pay attention to functional beverages.

In today’s grocery aisles, retailers are facing what can be described as a “battle of the fittest” as new functional beverages compete for shelf space alongside traditional carbonated soft drinks and other drinks focused on hydration and refreshment. This shift has prompted retailers to rethink their merchandising strategies, making room for more functional beverages as consumers increasingly seek drinks with added health benefits.

Amy Brophy, a spokeswoman for Natural Grocers by Vitamin Cottage, explained, “Bottled water, seltzer—and in some of our stores, alcohol—were all products that regularly claimed prime merchandising space. Now, functional beverages have politely elbowed their way in.” Many of the retailer’s stores have expanded their functional beverage assortments in grab-and-go areas, ensuring they are easily accessible for consumers.

Christina Schmidt, category manager of shelf-stable beverages at KeHE Distributors, mentioned that retailers are adopting various merchandising approaches, such as incorporating functional beverages into established categories like water or ready-to-drink tea and coffee. Others are creating dedicated sections within the beverage aisle or using cooler space to store both refrigerated and ambient functional drinks.

To further boost sales, some retailers have started creating case-stack displays for secondary exposure or utilizing endcaps during peak seasons, Schmidt noted.

Functional Beverages Are Gaining Popularity

At FreshDirect, the functional beverage assortment has doubled in recent years, said Juliana Bilodeau, associate category manager for snacks and non-alcoholic beverages at the online retailer. “Functional beverages are growing faster than every other subcategory in beverages,” she added, highlighting the rising popularity of coconut water, energy drinks, and functional sodas.

One of the reasons for the boom in functional beverages is consumers’ increased focus on nutrition, which gained traction during the pandemic, according to Roger Dilworth, senior analyst at Beverage Marketing Corp. While refreshment and hydration remain key drivers, the demand for functional drinks that provide tangible health benefits continues to evolve.

Among the top-performing functional beverage subcategories are protein drinks, meal replacement drinks, performance energy drinks, and gut-health drinks, Dilworth said. “The unifying theme is a concrete benefit perceived by the consumer rather than vague claims like ‘rich in antioxidants,’” he explained.

The Growing Market for Functional Beverages

The North American functional beverage market is expected to grow to $70.8 billion by 2028, compared to $50.7 billion in 2023, according to research from beverage ingredient supplier American International Foods. This represents a compound annual growth rate of 6.9%.

One major driver of this growth is consumers’ desire to reduce sugar intake. Brophy noted that many customers at Natural Grocers visit frequently in search of functional beverages with no or reduced sugar. “You can hydrate with something that’s good for you, and often it’s less expensive than stopping for coffee,” she said. “During the lunch rush, you’ll see high school students reaching for these drinks, much like some of us used to grab a Slurpee.”

In addition to sugar reduction, consumers are gravitating toward beverages with clean labels and natural ingredients. “Brands are getting more creative with their ingredients and packaging,” Brophy said. “Customers want transparency, now more than ever.”

Bilodeau also noted that more brands are emphasizing attributes like “natural,” “free of additives,” and “clean.” Ingredients such as prebiotics, probiotics, adaptogens, vitamins, and minerals are increasingly being used to highlight the health benefits of these beverages and encourage trial.

The Rise of Functional Waters

Another trend is the emergence of functional waters, which include vitamin waters, alkaline waters, and protein-infused waters. While these beverages initially saw significant interest, Dilworth pointed out that they have slowed in popularity recently due to challenges in masking functional ingredients.

Despite this, Dilworth remains optimistic about the growth of functional beverages. He predicts that the category will continue to grow, albeit in the low- to mid-single digits. “Functional beverages should continue to gain market share from ‘non-functional’ beverages, though the demand for refreshment will likely remain strong,” he concluded.