The growing trend in non-alcoholic beverages is functionality

More Americans are looking for alternatives to alcohol, and beverage makers touting the health benefits of their drinks are trying to cash in.

According to recent figures from data analytics firm NCSolutions, more than 40% of Americans say they are trying to drink less alcohol in 2024, up from 34% the previous year. That number jumps to 61% for Gen Z, compared with 40% of that age group who said they plan to drink less in 2023.

According to Sherry Frey, wellness expert at Nielsen IQ, as younger consumers become more health-conscious and the generations that tend to drink more get older, interest in non-alcoholic beverages has increased. This has contributed to the rise of so-called functional beverages.

Functional beverages are those that seek to go beyond hydration or the nostalgic taste for alcohol that is often found in non-alcoholic beer and mocktails. Many include adaptogens, herbs that are marketed as having specific health and cognitive benefits, while others include substances like THC, the psychoactive ingredient in cannabis, for its mood-altering properties.

The drinks surged in popularity after the pandemic, filling supermarket aisles and then appearing on restaurant and bar menus.

The phenomenon is global. The global market for functional beverages is expected to reach $249.5 billion by 2026, according to a Euromonitor study for 2022.

According to the latest data from NielsenIQ, U.S. retail sales of functional beverages exceeded $9 billion in the 52 weeks ending March 30, accounting for nearly 10% of total beverage sales. The figures exclude cannabis beverages.

“People want to have an experience, and once brands can create sustainable, consistent, effective and comparable experiences, I think most of the market share will move away from [alcohol] Alternatives to the functional [alcohol] “There are alternatives,” Aaron Nosbisch, founder of adaptogenic and cannabis beverage company Brez, told CNBC.

But the growth of functional beverages does not mean the end of alcohol consumption. About 80% of those who buy non-alcoholic beverages also buy drinks containing alcohol, according to the consulting firm BCG, based on research by NielsenIQ.

“Yes, there is some cannibalization of existing beer, wine and spirits products,” but not a complete replacement of them, Nic Zhou, a managing director and partner at BCG, told CNBC.

“People are drinking [functional beverages] “Because they want more options,” Zhou said. “They want to be able to socialize and look good, feel part of the group, but not necessarily have to consume alcohol.”

Younger consumers are turning to functional beverages. Alcohol penetration among Gen Z consumers aged 21 and over was the lowest of all generations, according to the latest data from Numerator.

But Zhou said it's too early to tell whether the trend will endure or whether it's a product of coming of age during the pandemic, when there were fewer opportunities to socialize in a group setting with alcohol.

Frey added that the interest of older generations should not be discounted.

“We're always focused on the younger generation,” Frey said. “But when you think about how much… [baby boomers] “The fact that consumers are doing well in terms of spending and that they are reducing alcohol consumption and looking for other alternatives, I think that is also a very important element.”

Jake Bullock, founder and CEO of cannabis-based 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 is “encouraging people to consider the harms of alcohol in a way we never would have 20 years ago.”

Consumer concerns about health and wellness increased during the pandemic, and the trend hasn't gone away, Frey said. She added that Nielsen IQ research, which is conducted every six months, finds that health and wellness are a top priority for consumers. But concerns have evolved from a desire to cure specific diseases to a goal of increasing overall well-being to live longer and better, according to Nielsen data.

Frey said the shift has sparked interest in functional beverages. Drinks that promote higher energy levels, better digestive and brain health, and mood-boosting benefits are among the most popular.

Three-quarters of respondents in 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 give them more than one thing. So if you can get great taste but also some functional benefit, you're adding more value,” Jordan Bass, CEO and founder of adaptogenic alternative beer brand Hop Wtr, told CNBC.

Hop Wtr was co-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 loved “cracking open a cold beer,” but wanted a non-alcoholic alternative that would relax them without the health drawbacks of alcohol, Bass said.

Hop Wtr was initially marketed as an alternative to beer because of its hoppy flavor, but Bass said the company's marketing changed after seeing data showing broad consumer interest in functional beverages.

The drink includes several adaptogens and nootropics. Adaptogens are herbs like ashwagandha, which proponents claim help improve the body's response to stress, anxiety, and fatigue. Nootropics are popular substances like L-theanine and caffeine, which are claimed to improve mood and provide focus and energy.

“Adaptogens and functional are marketing terms that were invented to refer to drugs for sober people,” joked bartender Elliott Edge.

Edge is a bartender and manager at Hekate, a witchcraft-themed sober bar in New York City’s East Village. Hekate was the city’s first sober bar when it opened in January 2022.

Owner Abby Ehmann initially thought she would have to make everything from scratch, but said she was pleasantly surprised to find that over time, new alcohol-alternative products began popping up “almost every week.”

The bar stays busy, especially during Sober October and Dry January, when, according to Edge, “if you smile here, your cheeks will touch someone else’s.” Patrons range from 80-year-old residents to NYU college students, and not all of them are sober, Edge added.

Alcohol is the original functional drink. People use it to change their mood or as a social lubricant, and centuries ago they drank it for its supposed health benefits, from aiding digestion to warding off the plague. But as more consumers become concerned about the negative health effects of alcohol, 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 to get them the moods and feelings they want, which are calmness but also sociability,” Edge said.

Functional beverages serve not only as a potentially healthier substitute for alcohol but also for soft drinks, as consumers become more cautious about sugar.

But like health benefits claims made about vitamins and supplements, many of the beverage makers' claims are not subject to FDA review.

“It's certainly not a simple space where you can take everything at face value,” Zhou said.

This uncertainty is already causing legal problems. Poppi, a functional soft drink that promotes its digestive benefits, now faces a lawsuit challenging its claims about 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 ourselves against these allegations,” Poppi told CNBC.

One problem with most non-alcoholic beers and spirits is that you enjoy the taste but “there's no fun involved,” said Nosbisch, founder of Brez. People who want to be healthier and eliminate hangovers don't necessarily want to give up the “social high” of alcohol.

“I think a lot of our success comes from people looking for a real alternative to alcohol – something that not only tastes like alcohol but also gives them a little something special,” Nosbisch said.

Cann's Bullock agreed, saying the company's biggest customer group is “healthy hedonists.”

“These are the people who shut down the dance floor, but also your morning workout class,” Bullock told CNBC.

Generation Z is also leading the way in adopting THC-infused beverages, according to a separate survey by Numerator.

Cannabis beverages offer a way to consume THC and CBD in microdoses, similar to how consumers regularly drink alcohol or coffee. This allows the drinker to dose their intake, with effects coming on and going off more quickly than with edibles.

According to the companies, this makes the experience more attractive to non-cannabis users. Eighty percent of Brez's customers are non-cannabis users and are looking for a real alternative to alcohol, Nosbisch said, adding that he believes the real business opportunity is in gaining market share through alcohol.

“We're at the intersection of sober curiosity and cannabis curiosity,” Bullock said.

Cann launched in 2019 in cannabis dispensaries. But as legalization spreads, it now sells to more than 3,000 distribution outlets, including liquor stores and convenience stores, in addition to 60% of its sales going directly to the consumer through its website. The company has seen 60% year-over-year growth and has sold more than 9 million cans since launch, a figure it hopes to match this year alone.

Zhou said the acceptance of big beverage manufacturers will determine whether consumer behavior changes forever. And that will depend on the degree of legalization of cannabis.

Cannabis market revenue is projected to reach $42.98 billion by 2024. Growth potential is increasing as President Joe Biden’s administration moves to ease federal restrictions on marijuana and reschedule it to place it alongside medications like Tylenol with codeine and testosterone.

Marijuana remains illegal at the federal level, so cannabis beverages use hemp-derived THC. While there are limits on the amount of THC in hemp before harvest, there are no limits on products made from the plant.

This is just one of the safety issues the functional beverage industry will have to address as it grows.

“If we're going to introduce all these functional alternatives, how do we ensure safety in that process? That's what will be developed in the next chapter,” Nosbisch said.