Soda vs. Everyone: Functional Beverages Have Taken Over

If the drinks section at your local grocery store wasn’t a dead giveaway, consumers are turning their backs on sugary sodas, confusing retailers, creating an opportunity for beverage startups, and causing headaches for the likes of Pepsi and Coke.

Water, soda, coffee, and alcohol aren’t what they used to be. Now, sparkling water, ready-to-drink coffee, and “functional” beverages are taking over. As PepsiCo’s incoming CEO Ramon Laguarta put it in a recent video to staff, “The consumer is moving to this triangle of taste, nutrition, and convenience…”

The result is a top-to-bottom reinvention of the beverage category.

So long soda

In the US, sales of soda drinks have been falling for the last 12 years in a row. With obesity and diabetes on the rise and new sugar taxes coming into effect, consumers are opting for healthier, lower-calorie options with lots of flavor. To offset the sales slump, the biggest makers of soft drinks are pulling out all the stops.

In recent years, PepsiCo has been on a mission to become more health-conscious by revamping their beverage and snack businesses. Some of the more headline-worthy moves include their acquisitions of Bare Snacks (~ $200M) and SodaStream ($3.2B). Don’t forget they also purchased KeVita—a leader in fermented probiotic and kombucha beverages—back in 2016. And earlier this year, PepsiCo launched Bubly, a fruit-flavored sparkling water.

Hello sparkling water

Consider this: according to data from Beverage Marketing Corp., as reported by The Wall Street Journal, Americans will buy approximately 821 million gallons of sparkling water this year, bringing total sales of non-alcoholic sparkling water to $2.7 billion in the US in the year that ended June 30. No wonder everyone from upstarts to established players in the beverage space are trying to chase down LaCroix, the market leader in sparkling water and seltzer sales.

Coca-Cola has tried some sleight of hand to target millennials consumers — there’s Diet Coke, Coca-Cola Zero, Coca-Cola Zero Sugar, and Coca-Cola Life. As if that wasn’t confusing enough, the company also rolled out fruit-flavored Diet Coke, hoping sleeker cans and cooler names can win over consumers. Still, not willing to chance the company on diet everything, last year, Coca-Cola paid $200M+ for Topo Chico, a sparkling water bottled in northern Mexico with a massive cult following in Texas.

Bolstering their existing sparkling offerings, which include S.Pellegrino and Perrier, Nestlé recently introduced sparkling water line extensions for Poland Spring, Deer Park, Ice Mountain, Arrowhead, and other regional brands.

Not to be outdone, beer giant Anheuser-Busch got in on the action with their purchase of Hiball/Alta Palla, makers of a line of sparkling waters, as well as energy drinks and sodas.

But don’t expect the sparkling surge to slow down any time soon. Data from Pitchbookshows that some $152 million has been invested in sparkling water companies in 2018 alone — see Spindrift and Waterloo. As Quartz put it, “The only people more obsessed with sparkling water than millennials are venture capitalists.” And if this sparkling water subscription says anything, it’s that sparkling is just getting started.

Cool Brew

Cold brew is the new cool. Whether it’s iced coffee, actual cold brew, nitro, or some other ready-to-drink (RTD) coffee concoction, consumers are going crazy for cold coffee.

Why? Convenience, for one thing. The grab and go aspect of many RTD products has contributed to growing popularity in the US. As a result, RTD coffee has become the fastest growing segment of the $13.6 billion retail coffee market. In all, US retail sales of refrigerated cold brew coffee grew 460% from 2015-17 to reach an estimated $38.1 million. Looking ahead, Mintel forecasts the RTD coffee segment will see 67% growth from 2017–22.

Coffee giants like Starbucks, Peet’s, and Blue Bottle (owned by Nestlé, who also owns Chameleon Cold Brew) have RTD versions of their coffeehouse beverages. Same goes for Stumptown and La Colombe, the latter of which has managed to capture 1% market sharewithin one year of announcing their RTD coffee. But VC-backed upstarts are hot on their heels.

At the head of the pack is CAVU Venture Partners. In the food and beverage category, they’re killing it. And they’ve set their sights on cold brew coffee, backing High Brew, Bulletproof, and REBBL. But they’re not confining themselves to coffee. CAVU’s entire portfolio, including Health-Ade, WRTMLN WTR, and Mighty Swell reflects the broader trends within beverage industry — the rise of enhanced and functional drinks.