Where Is The Functional Beverage Category Headed?

Food & Drink

While zero-ABV beers and spirit-free liquors continue to command more attention, there’s one segment of the non-alcoholic category that holds a huge amount of potential according to experts: functional beverages.

“Over the next few years we’ll see the non-alcoholic beverage sector grow in the RTD category and on-premise with a heavy emphasis on functionality,” says Alexi Chialtas, the co-founder and CEO of cannabis beverage brand Wunder. “People will continue to seek alcohol alternatives, but they’ll want to feel something from their beverage while also knowing they’ll have a great tomorrow without a hangover.”

These Goop-ish beverages offer more than just good taste; they’re packed with vitamins, minerals, dietary fibers, probiotics, adaptogens, CBD, THC, and other body-beneficial or mind-altering offerings. 

According to Research and Markets, the functional beverage market is expected to reach $173.23 billion in 2025 at a CAGR of 7%.

Major producers are taking note, embracing functionality in the beverage space. PepsiCo

PEP
has Driftwell, a functional water dosed with L-theanine. In 2019, Coca-Cola invested $20 million in Health-Ade Kombucha and launched Coca-Cola Energy, a caffeinated cola riff containing guarana extracts and B-vitamins.  

“The non-alcoholic beverage trend started before the pandemic,” continues Chialtas. “The pandemic accelerated the movement as people slowed down and began to examine what does and does not serve them in their lives—health maintenance, stress reduction and sleep continue to be areas of importance.” 

“Many health and wellness trends are emerging across center stores that are causing alcohol consumers to take a second look at their beverages,” explains NieslenIQ’s SVP of Account Development Kim Cox. “While non-alcoholic beer has been available to consumers for many years, there are now more no/low alcoholic wines, spirits and beer options available than ever before. These new innovations better meet health and wellness desires of certain consumers such as lower ABV, lower sugar, lower calorie or sustainable sourcing practices.”

How is the functional category forming and where is it headed? Experts weigh in. 

Better-for-You Beverages

“As the pandemic became a part of our daily lives and consumers spent more time on their overall health choices, several brands anchored in non-alc with existing distribution started to see triple-digit growth,” explains Bill Meissner, president and CMO of Splash Beverage Group. “As consumers are returning to their routines and reengaging in more normal social settings we’re seeing this settle down a little bit, but the foundation of the movement is rooted in younger Americans’ desire to live a healthier lifestyle. This is a macro-trend we don’t see fading.”

He finds that while big brands are jumping in with mass non-alcoholic, hyper-functional offerings, the major innovation is from smaller companies; start-ups offering craft and small-batch companies. 

More accessible canning and production methods mean small brands have a chance to weigh in on the trend. “Canning machinery is much smaller and less expensive than it was 10 years ago,” says Matt Vincent, owner of CBD-infused seltzer brand Oh Hi Beverages, Ska Brewing Co., and Ska Fabricating. “This opens up many options for beverage startups to get their product into the hands of consumers at a much lower cost to determine market viability.”

Though the category is exploding, Bambucha Kombucha’s CEO Michael ZonFrilli finds that the functional beverage category has some groundwork to do. “We are still surprised that some retailers and foodservice operators are reluctant to add high-quality non-alcoholic drinks to their alcoholic offerings. Obviously, the costs are higher than that of a soda or iced tea, but consumers are starting to expect and demand drinks that they are excited to consume, even when abstaining from alcohol.” 

He notes that the major players like Molson Coors

TAP
and Pepsi are investing in functional beverage producers “because they too see that consumers are moving towards non-alcoholic beverages that still deliver a healthier, satisfying drinking experience.”

CBD’s High Potential

In Drizly’s annual report, the e-commerce platform notes that retailers are “very bullish” about cannabis- and CBD-infused products. Over 50% of retailers surveyed believed that cannabis- and CBD-infused beverages have the industry’s biggest growth potential. 

“Rapid change is the nature of the beverage industry,” Jeng co-founder Christopher Lackner shares. “Thirty years ago, bottled water was inconceivable. Ten years ago, alcohol seltzers were mostly unheard of. Five years ago, CBD wasn’t on anyone’s radar. Today, we’re seeing a growing sober-curious movement that is normalizing an alcohol-free lifestyle and a culture that is increasingly perceiving hemp and cannabis as healthy alternatives. The opportunity is there.” 

Many beverage experts are expecting the CBD beverage category to continue to expand. “Not only have consumers realized that their alcohol consumption has increased and needs to be dialed back, but they have also spent more time online, getting educated on new ingredient trends such as CBD, and the benefits that a full spectrum cannabinoid can deliver to the body,” says David Knight, the chief beverage officer of CBD bioscience company CFH, Ltd. He’s seen that the most successful products put a greater focus on flavors, and employ ‘craft’ packaging techniques — glass bottles, designer labels, Millennial branding — to elevate the RTD experience.

He’s surprised at how quickly the trend evolved. “I do think that Covid-19 has played a role in the acceleration of this NA beverage trend. Not only have consumers realized that their alcohol consumption has increased and needs to be dialed back, but they have also spent more time online, getting educated on new ingredient trends such as CBD, and the benefits that a full spectrum cannabinoid can deliver to the body.”

There’s also the proliferation of more high-octane, cannabis-infused beverages. 

“We know that a growing number of consumers are moving away from, or at least lessening, their consumption of alcohol, which has raised an interest in alternative options, including Cannabis-infused beverages (CIBs),” explains Lori Hatcher, the head of marketing for Truss Beverage Co, a Canadian cannabis leader. “In our focus group, we learned that one of the biggest appeals to CIBs was the absence of negative components that are common in alcoholic beverages, like sugar and artificial flavors.”

Wunder’s Chialtas notes that the expansion of adult-use cannabis legalization across the continent has sparked a wave of cannabinoids in RTDs. “The cannabis-infused beverage category is already taking off in states like California and Nevada, and consumer adoption in other states will continue. The form factor of cannabis-infused beverages is familiar and innovation in the category has led to a safe, predictable and consistent experience, making it appealing to the canna-curious and those looking to replace alcohol with a healthier option. We’ll likely see large and multinational beverage companies launch THC and minor cannabinoid beverages over the next few years.” 

Truss’ Hatcher finds that the beverages appeal not just to the regular cannabis user, but the canna-curious. “From our previous studies, we discovered that 43% of Canadians who have tried cannabis-infused beverages did so because it meant they could still consume cannabis, but without smoking it,” Hatcher continues. “This is likely because 71% of Canadians cite smoke as the primary barrier to consuming cannabis, with 74% saying the lingering odor of cannabis flower is an issue.”

To that note, Truss rolled out a broad range of lines to capture the spectrum of drinkers intruiged in cannabis beverages. Their Mollo brand is a beer substitute (pair it with tacos, the brand proclaims), while Little Victory is more lifestyle-angled; low in calories and high in Millennial branding. House of Terpenes is a mixology-ready line, while XMG is a high-potency line for the more experienced cannabis users. Their newest line Bedfellows was crafted in partnership with a local non-alcoholic brewery to mimic the flavors of craft beer. 

“We know there is huge potential for the cannabis beverage category,” Hatcher continues. “Consumer awareness levels are at an all-time high at 87% in Canada, and there is no sign of slowing down. With that said, innovation and product education are vital for the continued growth of this category. The tastes and preferences of consumers are evolving as they learn more about cannabis beverages, so it’s important that as an industry we continue to listen and innovate to meet their needs.”

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