Consumer trends and investor ‘thirst’ for drinks

The increasing interest in better-for-you products has created new dynamics in the drinks segment. NutritionInvestor takes a closer look at the driving forces behind fast-growth challenger brands

By Murielle Gonzalez

Much has been said and done to support challenger food brands in the name of feeding the growing population with sustainable products – more than €88 million in venture capital has been invested in plant- and cell-based start-ups this year, for example. But what is the investor ‘thirst’ for drinks, and what are the driving forces in this category?

“Just like in food, health is a very strong trend in the drinks category,” says Robert Lambert of ingredients manufacturer Ulrick & Short. He argues the trend has been focused on sugar reduction with significant strides in the soft drinks sector.

Lambert notes that fat and calorie reduction are top manufacturing trends, particularly in more viscous application like breakfast drinks, milkshakes, sports nutrition products, and meal replacements. “Additionally, consumers are looking for products with added value nutrition – protein and fibre.”

Based in the UK, Ulrick & Short is a designer and global supplier of clean label ingredients for food and drink applications – starches, flours, fibres and proteins. The company’s new fat replacer, delyte 12, and high solubility, low-flavour protein, complex 23, were specifically designed to tackle drinks formulation challenges.

“We have also seen a massive rise in the proportion of plant-based and dairy-alternatives,” says Lambert, noting that a growing number of new product development and reformulations in this category are now coming to market as vegan or plant-based propositions.

The move by Impossible Foods to enter the drinks category with a plant-based alternative to milk proves Lambert right. The burger and sausages producer unveiled its dairy-free prototype in October, signalling its intent to make a mark on the drinks shelf as well.

Health trends

Drinks brands consultant Hamish Clarke of Klynk Ventures knows the category like the back of his hand. He has been working with brands and partners for the past four years, conducting market studies and launching brands into the market. He believes that wellbeing and gut biome are two areas of innovation and growth.

Clarke notes that Covid-19 has brought to light the validity of mental health. While we have seen drinks focus heavily on energy, a shift is coming towards drinks that can play a role in maintaining mental health – be it by stimulation or relaxation, depending on the individual and time of day.

Gut health and immunity have been growing trends since the onset of the pandemic. Clarke says that along with the better scientific understanding of the gut biome, more brands will be tapping into this space. “[Prebiotics, probiotics, and postbiotics] represent an interesting growth area, as research unveils how the gut biome influences both the immune system on an individual level, as well as its links to mental wellbeing.”

ADM Ventures, the corporate venture capital arm of ingredients giant ADM, joined Seventure’s Health For Life Capital (HFLC) Fund II in November, proving the investor appetite for the microbiome space – the fund invests in health, nutrition, microbiota and digital health.

Since 2018, ADM has worked closely with the Seventure team to identify opportunities with microbiome solutions that can ultimately help with dietary supplements and food and drinks applications to serve as functional or proactive solutions.

For Clark, hydration will also be a top trend moving forward. “Water continues to grow, which combined with other trends, such as functional additives, will see a range of new solutions.”

The Covid-19 backdrop

The way people shop for food and drinks and what they purchase has dramatically changed since the onset of Covid-19 – everyone and everything is now online. This changing landscape has impacted the drinks category in various ways.

“The current pandemic has taught us that in times of distress, consumers reach to comfort food and drink,” says angel investor and food entrepreneur John Stapleton, also co-founder of business accelerator Mission Ventures. He argues that consumers consider soft drinks a treat, often consumed in the afternoon as a grab-and-go indulgence.

Stapleton, an early investor in soft drink challenger brand Nix & Kix, concurs with Lambert about the low-sugar trend. He notes that legislation in the UK has shaped the dynamic of the category, moving consumers and manufacturers alike from high sugar, calorie-laden snacks to healthier treat alternatives.

“New generation drinks now deliver good taste yet are low in calories and do not contain artificial sweeteners,” he says, noting that soft drinks are recognised as a good carrier of functional ingredients, hence delivering health benefits.

Stapleton warns, however, that the consumer is much more aware and educated, and that brands should be careful when communicating the health claims of their products – benefits should be plausible and science-backed to win consumer trust.

Premiumisation of drinks

The premium segment of the drinks market is growing much faster than the rest of the category, particularly among adults. Stapleton argues that premium soft drinks, for example, have become a real alternative to alcohol for the growing number of health-conscious consumers. “20% of the UK adult population have quit alcohol altogether, mainly due to health reasons,” he says.

For Stapleton, these consumers look for low-sugar drinks with a more sophisticated flavour profile and more interesting functional ingredients. “Nix & Kix fulfils this role by adding botanical ingredients to enhance the taste yet keeping calories low,” he explains.

Based in London, Nix & Kix produces natural soft drinks without refined sugars, artificial flavourings or additives with a kick from UK grown chillies. The start-up claims that all drinks are low in calories, below 5g of sugar in 100ml, and vegan.

Bax Botanics is among the UK brands tapping into the premium, no-alcohol drinks category. The spirits manufacturer took home the bronze at the 2020 Global Good Awards for its eco-friendly credentials, including formulations made of sugar industry waste products and plastic-free packaging.

Chris and Rose Bax launched the company in January last year after two decades of teaching about wild foods and flavours available in their Yorkshire woodland – they distil their drinks in traditional beaten copper stills using ethically sourced and sustainable herbs and botanicals.

“We launched with the backing of an angel investor and mentor,” says Chris Bax, claiming the business has shown steady growth in sales from day one. “We will be seeking funding within the next 12 months as we enter international markets,” he adds. Bax believes the alcohol-free sector is snowballing globally, and his brand is geared up for carving a name in the marketplace.

The Duchess, a no-alcohol brand that entered the market in 2016, has paved the way for newcomers in the segment. A portfolio brand of ZX Ventures, the South African company debuted the world’s first-ever low-sugar alcohol-free gin and tonic. Besides its domestic market, the brand has taken market share in Australia and the Netherlands.

Opportunities in alcohol-free brands

Clarke argues the no-alcohol drinks segment is ‘hot’ and big players are looking to tap into it. “In the UK, we have seen some strong play from big brands such as Pernod, Heineken, Diageo and William Grant,” he says, noting there are gains to be made in this sector, but the range of products needs to change. “It’s no longer good enough for brands just to remove the alcohol,” explains Clarke. “Brands need to consider what they can offer back to the consumer in return.”

He believes that while the no-alcohol segment is exciting, there is a significantly bigger opportunity in the low-alcohol space. “For a long time, we have seen the ‘share of throat’ decrease, meaning people are drinking less alcohol. This, combined with greater transparency of production, the new age of alcohol will be in drinking less but better quality.”

Clarke argues this is white space with very few branded propositions, and there is an opportunity for challenger brands to take ownership.

Strategy and branding

Investors canvassed for this report agree that drinks brands as an investment are no different from food products, but it is a crowded marketplace – and that presents challenges. “The number of drinks brands in the market is incredibly large, so it’s difficult to differentiate between them,” says Andre Schneider, partner at Square One Foods.

Since its inception in 2018, the Austrian private equity firm has invested in six drinks brands to date. Gimber, an alcohol-free brand flavoured with organic ginger essence, is the latest addition to the portfolio.

“Brand differentiation is something we look at in detail,” says Schneider, arguing brands need to have some unique selling point other than functional or health benefits. “The majority of brands today claim health benefits, so that is not a point of differentiation – we see it as a standard.”

Schneider explains that drink brands achieve differentiation through their impact. “Brands that have a social or environmental mission do well in the market.”

Stapleton concurs. “New drinks brand are coming out, so to stand out you have to deliver quality, convenience, health, taste, and purpose,” he says, noting the mission can be on different levels, starting with the brands’ closest community, the society or the planet. He notes that this is not a mere box-ticking exercise, but an authentic proposition that engages the brand with the values and concerns of its customer base.

Brands with a purpose

BrewBike is a drinks brand with social impact in the US. Launched in 2015, the Austin-based start-up sells cold-brewed coffee at university campuses, empowering college students to launch and drive the business.

“In 2015, a group of Northwestern freshmen launched BrewBike because it was too hard to get great coffee on campus – they wanted to offer delicious coffee that didn’t involve long lines,” says chief marketing officer Sierra Bloodgood. “So, they started Northwestern’s first fully student-run coffee shop and sold coffee from a mobile coffee bike.”

The business has expanded to multiple locations on four different campuses – the University of Texas in Austin, Texas State, University of Miami, and Northwestern University. Its online direct-to-consumer channel went live on 1 April, two weeks after campuses shut down due to Covid-19.

“We launched our online direct-to-consumer channel to give students insight into the world of e-commerce and currently ship cold brew packets and merch around the globe,” says Bloodgood. “By choosing us, our customers are not only helping students build skills to succeed, they’re investing in our future leaders, go-getters, and entrepreneurs.”

Flawsome Drinks is winning market share through the sale of cold-press juices produced with ‘wonky’ fruit and vegetables. “I think consumers value taste and quality – this is essential in any drinks brand! However, we have seen an increase in customers looking for something deeper with brands,” says Karina Sudenyte, co-founder and chief marketing officer.

She notes that a 2018 report by Campaign Live showed that 65% of consumers buy on the basis of their beliefs and that 57% are buying or even boycotting brands based on the brand’s position on a social or political view. “This feeling has only grown, especially in recent months, as people are turning towards more sustainable and independent brands. On social media, there has been a big push towards supporting local and small businesses.”

For Sudenyte, customers are becoming more conscious about the environment and food waste, and their purchases reflect this. “We have developed sustainable, delicious and purpose-driven drinks that have a low carbon footprint, exceed in taste, quality and environmental impact.”

Flawsome entered the UK market in 2016. “We are on a mission to inspire millions of Flawsome! drinkers with 75 million drinks by 2025, saving 20,000 tonnes of wonky fruit and veg,” says Sudenyte. The company is well on track to its goal – it secured a listing with Spinneys stores in the United Arab Emirates, and from this month its products will be sold in 28 stores across the country.

Refreshing the crowded drinks market

While investment appetite is focused on strong brand proposition, investors agree that the make-or-break deal boils down to how drinks entrepreneurs tackle the direct-to-consumer channel.

“[E-commerce] is a big challenge for drink brands because customers are not easily switching this purchase to online – they are losing a whole channel,” says Schneider, noting online has been the fastest-growing channel during the Covid-19 pandemic.

“Drinks brands are very dependent on traditional retail, and we have seen the impact of Covid-19 in our portfolio,” says Schneider. He explains that Saturo, a meal-replacement brand in Austria, has sold well online because the consumer sees it as a food product. However, Seicha, a sparkling matcha drink in its portfolio, has not benefitted from the online channel.

Clarke concurs on the challenging task that is selling drinks online. He notes, however, that fragmentation and choice will be a decisive factor in the marketplace as more brands come into play.

Coined ‘democratisation of choice’ by Klynk Ventures, this trend underpins the tremendous change we have witnessed in the ability of consumers and brands to connect via social media and routes to market such as Amazon.

For Clarke, the ‘democratisation of choice’ has illuminated the variety of needs consumers have, breaking the traditional model of consumer-brand-supermarket.

He explains: “The direct-to-consumer model has been talked about for some time now with some great results in categories such as pet food, but I believe that we will see more focus on this for drinks, particularly as some of the new brands won’t have any shelf space in stores, and will want to hold onto their margins by not giving it to either Amazon or retailers.”

Clarke argues that supermarkets, where most of the drinks are and will most likely continue to be, have to adapt and become more agile on the front foot – else they run the risk of losing shoppers.

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