Mimi Lam, co-founder and CEO of Superette, arranges cannabis-infused drinks at the Superette Sip ‘N’ Smoke cannabis dispensary in Toronto, Ontario, Canada, Monday, October 25, 2021.
Della Robbins | Bloomberg | Getty Images
More Americans are looking for alternatives to alcohol, and beverage manufacturers touting the health benefits of their drinks are trying to capitalize on that.
More than 40% of Americans say they are trying to drink less alcohol in 2024, a jump from 34% a year ago, according to recent figures from data intelligence company NCSolutions. The figure rises to 61% for Generation Z, compared to 40% of that age group who said they planned to drink less in 2023.
As younger consumers become more health-conscious and generations who typically drink more grow older, interest in soft drinks has increased, according to Sherry Frey, wellness expert at Nielsen IQ. This helped lead to the rise of so-called functional drinks.
Functional drinks are drinks that aim beyond hydration or the nostalgic taste of alcohol that non-alcoholic beer and mocktails often aim for. Many include adaptogens, herbs marketed as having specific health and cognitive benefits, while others include substances such as THC, the psychoactive component of cannabis, for its mood-altering properties.
The drinks surged in popularity after the pandemic, filling grocery store aisles and then popping up on restaurant and bar menus.
The phenomenon is global. The global functional drinks market is expected to reach $249.5 billion by 2026, according to a 2022 survey by Euromonitor.
U.S. retail sales of functional beverages topped $9 billion in the 52 weeks ended March 30, according to the latest NielsenIQ data, nearly 10% of all beverages. Figures exclude cannabis beverages.
“People want to have an experience, and once brands are able to create sustainable, consistent, effective, comparable experiences, I think most of the market share will move away from [alcohol] alternatives to operating [alcohol] alternatives,” Aaron Nosbisch, founder of cannabis and adaptogen beverage company Brez, told CNBC.
But the growth of functional drinks does not signal the end of alcohol consumption. About 80% of those who buy non-alcoholic beverages also buy alcoholic beverages, according to BCG consulting firmbased on NielsenIQ research.
“Yes, there is some cannibalization of existing beer, wine and spirits products,” but not a complete replacement, Nic Zhou, managing director and partner at BCG, told CNBC.
“People drink [functional beverages] because they want more options,” Zhou said. “They want to be able to socialize and look cool, feel part of the group, but not necessarily drink alcohol.”
Younger consumers are driving the trend
Younger consumers are fueling functional drinks. Alcohol penetration among Gen Z consumers over 21 was the lowest among all generations, according to the latest Numerator data.
But Zhou said it is too early to tell whether the trend will last or is a product of coming of age during the pandemic, when there were fewer opportunities to socialize in a group environment with alcohol.
Frey added that interest from older generations should not be ignored.
“We all always focus on the younger generation,” Frey said. “But when you think about how much [baby boomers] they deserve in terms of their spending and the fact that they’re cutting back on alcohol and looking for other alternatives, I think that’s also a very important element.”
Jake Bullock, founder and CEO of cannabis beverage company Cann, said consumers now have more health and wellness information available than ever before on devices like Apple Watches or iPhones. He said he believes the data “encourages people to look at the harms of alcohol in a way we never would have 20 years ago”.
Consumers are looking for health benefits
Concerns about consumer health and wellness increased during the pandemic, and the trend hasn’t gone away, Frey said. He added that the Nielsen IQ survey, conducted every six months, finds that health and wellness are a top priority for consumers. However, concerns have evolved from the desire to cure specific diseases to the goal of increasing general well-being to live longer and better lives, according to Nielsen data.
Frey said the change has spurred interest in functional beverages. Drinks that promote higher energy levels, better digestive and brain health, and mood-enhancing benefits are among the most popular.
Three-quarters of respondents to a 2023 survey by Datassential said they believed functional foods and beverages would help them live longer and be healthier without having to radically change their diet.
“Consumers are looking for products that do more than one thing for them. So if you can achieve a great taste, but also some functional benefit, you add more value,” said Jordan Bass, CEO and founder of the adaptive alternative beer brand Hop. Wtr, he told CNBC.
Hop Wtr was founded by Nick Taranto, a former Marine turned competitive athlete, and Bass, who said he was training for a triathlon at the time. The duo liked to “crash a cold beer” but wanted an alcohol-free alternative that would relax them without the health downsides of alcohol, Bass said.
Hop Wtr was originally released as an alternative beer due to its hop flavor. But Bass said the company’s marketing changed after seeing data showing strong consumer interest in functional drinks.
The drink contains several adaptogens and nootropics. Adaptogens are herbs like ashwagandha that proponents claim help the body’s response to stress, anxiety, and fatigue. Nootropics are popular substances such as L-theanine and caffeine that are claimed to improve mood and provide focus and energy.
“Adaptogens and functionals are marketing terms made up to mean drugs for sober people,” joked bartender Elliott Edge.
Edge is a bartender and manager at Hekate, a sober witch-themed bar in New York’s East Village neighborhood. Hekate was the first sober bar in the city when it opened in January 2022.
Owner Abby Ehmann initially thought she’d have to make everything from scratch, but said she was pleasantly surprised to find that over time, new alternative alcohol products started popping up “like every week.”
The bar stays busy – especially during Sober October and Dry January, when Edge says: “If you smile in here, your cheeks will touch someone else’s.” Customers range from 80-year-old locals to New York University undergraduates, and not all are sober, Edge added.
Alcohol is the original functional drink. People use it to change their mood or act as a social lubricant, and centuries ago it was drunk for purported health benefits, from aiding digestion to warding off the plague. But as more consumers worry about alcohol’s negative health effects, Edge has found that people are open to trying many alternatives.
“People are curious. They seem to be tired of relying solely on something like alcohol for the moods and emotions they want, which is calmness but also sociability,” Edge said.
Functional drinks serve not only as a potentially healthier substitute for alcohol but also for soft drinks as consumers become more sugar-conscious.
But like the health benefit claims made about vitamins and supplements, many of the claims made by beverage manufacturers are not subject to FDA review.
“It’s definitely not a simple space where you can take everything at face value,” Zhou said.
This uncertainty is already leading to legal problems. Poppi, a functional soft drink that touts digestive benefits, is now facing a lawsuit challenging its claims of prebiotic benefits.
In a statement to CNBC, a Poppi spokesperson said the company stands behind the product.
“We believe the lawsuit is without merit and will vigorously defend against these allegations,” Poppy told CNBC.
The rise of cannabis drinks
One problem with most non-alcoholic beers and spirits is that you get the taste but “none of the fun,” said Brez founder Nosbisch. People who want to be healthier and eliminate hangovers don’t necessarily want to give up the “social buzz” of alcohol.
“So I think a lot of our success comes from people really looking for a true alternative to alcohol: something that doesn’t just taste like alcohol, but actually gives them a kick,” Nosbisch said.
Cann’s Bullock agreed, saying the company’s biggest customer group is “healthy hedonists.”
“These are the people who close the track, but then also in their morning workout class,” Bullock told CNBC.
Gen Z is also leading the trend in adopting THC-infused beverages, according to another survey by Numerator.
Cannabis drinks provide a way to consume THC and CBD in micro-doses, similar to how consumers regularly drink alcohol or coffee. This allows the drinker to pace themselves, with effects appearing and wearing off more quickly than with edibles.
That makes the experience more appealing to non-cannabis users, the companies say. Eighty percent of Brez’s customers are non-cannabis users and are looking for a real alcohol alternative, Nosbisch said, adding that he believes the real business opportunity is to gain market share from alcohol.
“We sit at the intersection of sober curiosity and cannabis curiosity,” Bullock said.
Cann was launched in 2019 in cannabis dispensaries. But as legalization spreads, it now sells in more than 3,000 distribution points, including liquor and convenience stores, in addition to 60% of its sales coming directly to the consumer through its website. The company has seen 60% year-over-year growth and has sold more than 9 million boxes since its launch, a number it expects to match this year alone.
Zhou said buy-in from major beverage makers will determine whether consumer behavior changes for good. And that will depend on the extent of cannabis legalization.
The proceeds from the cannabis market are forecast to reach $42.98 billion in 2024. The potential for growth is increasing as President Joe Biden’s administration moves to loosen federal restrictions on marijuana and reclassify it to be placed alongside drugs such as Tylenol with codeine and testosterone.
Marijuana is still federally illegal, so hemp drinks use hemp-derived THC. Although there are limits on the amount of THC in pre-harvest cannabis, there are no limits on the products produced from the plant.
This is just one of the safety questions the functional beverage industry will have to figure out as it develops.
“If we’re going to introduce all these functional alternatives, then how do we ensure safety in that process and that will unfold in this next chapter,” Nosbisch said.
