As the popularity of nonalcoholic drink alternatives grows, more manufacturers are emphasizing health benefits to market their products.

• According to Nielsen IQ, both younger and older consumers are driving the increasing demand for nonalcoholic drinks and the growth of the functional beverages market.
• Beyond basic hydration and the nostalgic taste factor for alcohol, functional beverages are nonalcoholic drinks that offer additional benefits.
• Some products are advertised as providing particular health and cognitive advantages, and they may contain substances like THC to affect mood.
• Despite the growing interest in the beverages, their legality is still unclear and often depends on legal loopholes.

Beverage makers are capitalizing on the growing demand for alcohol alternatives by promoting the health benefits of their drinks.

In 2024, 40% of Americans aim to reduce their alcohol consumption, an increase from 34% in 2023, while 61% of Generation Z plan to drink less, up from 40% in the previous year, according to NCSolutions' data.

The increasing health consciousness among younger consumers and the aging of generations that traditionally consume more alcohol have contributed to the growth of interest in nonalcoholic drinks, which has in turn driven the popularity of functional beverages, according to Sherry Frey, a wellness expert at Nielsen IQ.

Functional beverages are drinks that aim to provide more than just hydration or the taste of alcohol in nonalcoholic beer and mocktails. They often include adaptogens, herbs that are marketed as having specific health and cognitive benefits, while others include substances such as THC, the psychoactive ingredient in cannabis, for their mood-altering properties.

After the pandemic, the popularity of drinks increased, resulting in crowded grocery store aisles and their inclusion on restaurant and bar menus.

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

In the 52 weeks ending March 30, the U.S. saw $9 billion in retail sales of functional beverages, which accounts for nearly 10% of total beverages, according to NielsenIQ's latest data. This figure does not include sales of cannabis drinks.

According to Aaron Nosbisch, founder of Brez, a cannabis and adaptogenic drinks company, once brands can provide sustainable, consistent, effective, and comparable experiences, the majority of the market share will shift from alcohol alternatives to functional alcohol alternatives.

Despite the growth of functional beverages, alcohol consumption is not completely eliminated. In fact, about 80% of those who purchase non-alcoholic beverages also purchase drinks that contain alcohol, according to BCG, based on research from NielsenIQ.

Cannibalization of existing beer, wine, and spirits products is occurring, but they are not being completely replaced, according to Nic Zhou, BCG managing director and partner, who spoke to CNBC.

"Zhou stated that people are consuming functional beverages because they desire more options, to socialize and appear fashionable, yet not necessarily have to drink alcohol."

Younger consumers drive the trend

Gen Z consumers aged 21 and above have the lowest penetration of alcoholic beverages, according to recent data from Numerator.

Zhou stated that it is uncertain whether the trend will persist or if it is a result of growing up during the pandemic, when there were limited chances to socialize with others in a group setting while consuming alcohol.

Frey added that interest from older generations shouldn't be discounted.

"Frey stated, "While we often concentrate on the younger generation, it is crucial to consider the significant impact of baby boomers on spending and their shift towards healthier alternatives, which should not be overlooked.""

Jake Bullock, CEO of cannabis drink company Cann, stated that consumers now have more health and wellness information on devices such as Apple Watches or iPhones than ever before. He believes that the data is motivating people to view the negative effects of alcohol in a new light, something that was not possible 20 years ago.

Consumers are looking for health benefits

Nielsen IQ's research shows that health and wellness remains a top priority for consumers, with concerns shifting from curing specific ailments to improving overall well-being for a longer and better life.

Functional beverages have gained popularity due to their ability to promote higher energy levels, better digestive and brain health, and mood-enhancing benefits, as stated by Frey.

In a 2023 survey by Datassential, three-quarters of respondents believed that functional foods and beverages could improve their health and longevity without requiring a significant dietary change.

Jordan Bass, CEO and founder of adaptogenic beer alternative brand Hop Wtr, stated to CNBC that consumers are seeking products that offer multiple benefits. As such, if a product can provide both a great taste and a functional advantage, it adds more value.

Nick Taranto, a former Marine and competitive athlete, and Bass, who was preparing for a triathlon, founded Hop Wtr. The two friends enjoyed drinking beer but wanted a nonalcoholic option that would help them unwind without the negative health effects of alcohol, Bass stated.

Initially, Hop Wtr was advertised as a substitute for beer because of its hoppy taste. However, Bass stated that the company's marketing strategy changed after they discovered consumer demand for functional beverages.

The beverage contains various adaptogens and nootropics, which are herbs and substances, respectively, that are believed to enhance the body's response to stress, anxiety, and fatigue, as well as boost mood, focus, and energy.

Bartender Elliott Edge joked that adaptogens and functionals are marketing terms for drugs used by sober individuals.

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

Initially, Abby Ehmann believed she would need to create everything from scratch, but she was pleasantly surprised to discover that new alcohol-alternative products emerged "every week."

The bar is always bustling, particularly during Sober October and Dry January, when customers are packed shoulder to shoulder. The clientele varies from elderly locals to New York University students, and not all of them abstain from alcohol.

Many people use alcohol to change their mood or act as a social lubricant, and centuries ago they drank it for supposed health benefits. However, as more consumers become aware of the negative health effects of alcohol, they are open to trying alternatives.

It appears that people are growing weary of relying solely on alcohol to achieve feelings of calmness and sociability, as stated by Edge.

Functional drinks can be a healthier alternative to both alcohol and soda, as consumers become more conscious of their sugar intake.

The claims made by beverage manufacturers are not subject to FDA review, similar to the health benefits attributed to vitamins and supplements.

Zhou stated that it's not a simple space where things should be accepted without question.

A lawsuit has been filed against Poppi, a soda advertised for its digestive benefits, challenging its claims of prebiotic properties.

The Poppi spokesperson stated that the company supports the product in a statement to CNBC.

Poppi stated to CNBC that the lawsuit is without merit and they will strongly defend against the accusations.

The rise of cannabis drinks

The issue with many nonalcoholic beers and spirits is that they offer the taste but not the enjoyment, according to Brez founder Nosbisch. Individuals who aim to improve their health and avoid hangovers may still desire the "social buzz" associated with alcohol.

Nosbisch believes that our success is largely due to individuals seeking a genuine alcohol substitute that provides a similar sensation to alcohol, rather than simply mimicking its taste.

"The healthy hedonists" is the largest customer group for Cann's Bullock, as agreed by the company.

Bullock told CNBC that these are the individuals who shut down the dance floor but also participate in morning workout classes.

Another survey from Numerator shows that Gen Z is also driving the trend of adopting THC-infused beverages.

Microdosing THC and CBD can be achieved through cannabis drinks, which function similarly to alcohol or coffee consumption. This enables individuals to control their intake, with effects that onset and dissipate more rapidly compared to edibles.

The majority of Brez customers are non-cannabis users seeking a non-alcoholic alternative, according to Nosbisch. He believes the true business opportunity lies in capturing market share from alcohol.

Bullock stated, "We are at the crossroads of both sober and cannabis curiosity."

Since its launch in 2019, Cann has sold more than 9 million cans and expects to sell the same amount this year. The company has experienced 60% growth year over year and now sells to more than 3,000 points of distribution, including liquor stores and convenience stores, in addition to the 60% of its sales that come direct to the consumer via its website.

The extent of cannabis legalization will determine whether big beverage manufacturers will buy-in, which will ultimately shift consumer behavior for the better.

The cannabis market is expected to generate $42.98 billion in revenue by 2024, with growth prospects increasing due to President Joe Biden's administration's efforts to relax federal restrictions on marijuana and categorize it alongside drugs like Tylenol with codeine and testosterone.

Cannabis drinks made from hemp use THC derived from the plant, which has no limits on the amount of THC in pre-harvest.

One of the safety questions the functional beverage industry will need to address as it expands is only one aspect of the issue.

Nosbisch stated that ensuring safety while introducing functional alternatives is crucial, which will be discussed in the next chapter.