Pierce Hollingsworth

The functional beverage market has been pouring it on for the past several years. Double-digit growth for sports, New Age, fortified, dairy, and other alternative drinks has far outpaced the beverage category as a whole and led all other functional food segments. Last year, the market in the United States for all noncarbonated soft drinks was $13 billion. Functional Beverage Juggernaut Faces Tighter Regulations

Propelling this wave of popularity is a two-prong marketing thrust that promotes an edgy, active lifestyle and myriad health benefits of added ingredients such as herbs, vitamins, and minerals. These marketing themes have been successfully fine-tuned, as have the products themselves, to appeal to virtually every major demographic category, from skate boarders to pregnant women. Because of the relatively low barrier to entry, regional bottlers are introducing virtually overnight herbal-laced, exotic soft drinks and juices aimed at niche markets. They feature exotic names, like Whooppee Cola, Dark Dog, Acqua Della Madonna, Blü Botol, and Rocket Juice—with label designs and bottle shapes to match.

And while the market in the U.S. remains superheated, the trend is global. The Japanese actually invented functional beverages more than 20 years ago, with elixirs aimed at counteracting the effects of stress, fatigue, and alcohol. Today, Australia and Europe are major producing and consuming markets.

Concern Being Voiced
This runaway freight train may be facing some rough tracks, however. The frenzied growth of the category is based largely on the implicit—and increasingly explicit—health claims associated with these beverages. For the most part, these claims relate to the properties of popular herbal supplements like St. John’s wort, ginseng, ginkgo biloba, kava kava, ma huang, and ginger. Soy, antioxidant vitamins, and minerals—even super-oxygenation—also are popular additives.

An increasing number of critics are voicing concern over the apparent escalation of overblown claims and lax regulatory climate. In what may be a harbinger for the U.S. market, the Swiss government launched a legal challenge against a milk advertisement in September that could redefine the standards for functional foods in the European Union. The ad, sponsored by the Association of Swiss Milk Producers, features a milk cow snapping a pile of boards with its hoof using a bovine karate chop. A voiceover intones, “Milk builds strong bones.”

The ad is tame by advertising standards on either side of the Atlantic, but the Swiss Federal Office of Public Health claims that it crosses the line in making specific health claims. “We say that a food product cannot be advertised the same way as if it were a drug,” stated Sabine Kraut, a Swiss government spokeswoman. The Public Health Office contends that the ad violates Article 19 of the Swiss Ordinance on Foodstuffs by claiming that milk helps prevent osteoporosis.

Swiss global giants Nestlé SA and Novartis AG both have a major stake in the functional foods market and are watching the case closely. Nestlé, for example, markets in Switzerland LC1 Go, a line of dairy products containing a culture which it claims supports the human immune system. However, the company walks a fine line in marketing this claim.

“They approved our claims, which are soft claims. But it is clear that there is obviously a problem as we go further in our research,” stated Hans-Joerg Renk, a Nestlé corporate spokesman. “We wouldn’t want our products to be declared medical drugs.”

Novartis faces the same challenge with its Oclea and Ovaltine brands in Switzerland, both of which are marketed as functional beverages. In addition, it is testing a line of products under the Aviva brand, which the company claims provide benefits to bone, cardiovascular, and digestive health, putting them in the “hard claim” area.

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Because of the global nature of the functional beverage market and the similarity of health claim regulations, this action in Switzerland is also being watched closely in the U.S. To date, functional beverage marketers have enjoyed considerable latitude in making health claims because of the provisions of the Dietary Supplement Health and Education Act of 1994 (DSHEA). The Food and Drug Administration’s 1999 Guide to Dietary Supplements states, “In passing DSHEA, Congress recognized first, that many people believe dietary supplements offer health benefits and second, that consumers want a greater opportunity to determine whether supplements may help them. The law essentially gives dietary supplement manufacturers freedom to market more products as dietary supplements and provide information about their products’ benefits—for example in product labeling.”

As for the use of these supplements in beverages, most fall in the category “Generally Recognized as Safe” (GRAS). In some cases, this leads to claims that beverages relieve pain, improve memory, stimulate sex drive, prevent cancer, or detoxify the body. Under DSHEA, FDA has the responsibility for showing that a dietary supplement is unsafe before it can take action to restrict the product’s use. Beverage marketers can make nutrient content claims, disease claims, and nutrition support claims, which include “structure–function” claims. The greatest area of controversy centers on disease claims, which tend to escalate in a hot, competitive market. FDA requires that beverage marketers base claims on an authoritative statement from recognized scientific bodies, such as the National Academy of Sciences, that recognizes or describes a well-established diet-to-health link.

This also applies to structure–function claims, such as “Calcium builds strong bones.” The Swiss cow is safe in the U.S., as long as an accompanying disclaimer is in place: “This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease.”

This gray area—and the escalating popularity of functional beverages— has led to an increasing call for tighter review and approval procedures. Last summer, the Center for Science in the Public Interest (CSPI) predictably called on FDA to halt sales of most functional beverages containing herbs such as St. John’s wort, echinacea, ginkgo biloba, and kava kava.

While CSPI is noted for its highly publicized, graphic crusades against such foods as movie popcorn, Chinese take-out, Mexican fast-food, and big burgers, it is joined in its attack on functional foods by the Connecticut attorney general, Richard Blumenthal. He has called for an investigation in his state to determine if any beverage marketers have violated consumer protection laws.

The group, which also includes Purdue University professor of pharmacognosy Varro Tyler, alleges that herbs should not fall under GRAS and must be considered drugs. Moreover, it claims that marketers are making false and misleading claims about their products.

While FDA said it would review the allegations, reaction from the Herb Research Foundation was more pointed. The Foundation contends that food additive laws apply to food chemicals only, “not to whole foods, like herbs. HRF believes that herbal extracts which are legally and safely sold in tablets or capsules or as liquid dietary supplements are not suddenly dangerous when added to foods like fruit smoothies,” it contended in a position statement issued at the end of September.

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Additional points:
Functional food manufacturers can most effectively educate consumers with specific statements based on solid science and directions that tell people how much of the functional food is required to achieve the benefits claimed.

False or poorly documented claims should not be used to market functional foods.

Consumers can distinguish between marketing language and health benefits claims, and the Federal Trade Commission and FDA have adequate authority to assure safe products and truthful labeling.

These controversies represent the leading edge of a looming high-stakes regulatory debate over the regulation of functional foods and related marketing claims. “These complaints have arisen because it is unclear whether functional foods are to be regulated as conventional foods or dietary supplements in food form,” HRF asserts.

Success Stories
Hanging in the balance is the vitality of a rapidly expanding functional beverage segment in which the brightest success stories seem to be among the niche players, not the major beverage companies. Many of these niche successes are being acquired or bought up by the big players. In September, Hansen Natural Corp., Corona, Calif., a leader in the functional beverage market with $72.3 million in sales for 1999, acquired Blue Sky Natural Beverages, a $6.4 million bottler based in Santa Fe, N.M. Blue Sky markets a range of all-natural carbonated sodas and seltzers. Hansen markets natural sodas, fruit juice smoothies, multivitamin juice products in aseptic packaging, 100% juices, iced teas, lemonades, juice cocktails, and a limited assortment of functional foods. The company’s Immune and Antiox juices were among those targeted by CSPI for removal. Others included California-based Odwalla Inc.’s Serious Energy and Think Drink.

Also in September, alternative beverage pioneer and market leader Snapple Beverage Group was sold again to the Great Britain–based global soft drink giant Cadbury Schweppes PLC by Triarc Cos. Inc., New York. Cadbury is paying $910 million in cash for Snapple.

The acquisition strategy seems to work better than several major branding efforts that have folded recently. Smoothies from Ben&Jerry’s, now a unit of multinational Unilever, pulled its varieties containing ginseng and echinacea because of poor sales. And Spire Energy, a Procter & Gamble Co. creation containing guarana, has yet to make it out of Ohio and Colorado.

Nevertheless, as the market expands and the regulatory debate takes shape, entrepreneurial functional beverage marketers continue to innovate. Talking Rain Beverage Co., Preston, Wash., has sold oxygenated water, with 10 times the amount of oxygen found in common tap water, for the past two years. Caps are electromagnetically sealed to keep the oxygen intact, the company asserts. Health claims include helping “working muscles to metabolize the needed energy.” Since the introduction of Talking Rain, competitors like Oxy Squeeze and Life O2 have entered the now competitive market.

Energy Brands, Inc., of New York, combines the mood-enhancing herbs kava kava and St. John’s wort in a beverage called Bliss. While a number of other functional drinks do the same, Bliss claims to help its devotees find “the eternal relaxation channel.”

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Several new beverages also are using soy protein in innovative new formulations. While soy milk has been in the market for years, new products will blend soy with juices to lower cholesterol levels. Norwegian Nutri-Pharma, a global biotechnology company, announced in April that it will jointly produce a range of cholesterol-lowering fruit juices with Del Monte Foods using Abacor, a combination of soy protein and soy fiber that the company claims will lower cholesterol levels by 15–20% within four months.

Also on the horizon is the introduction of coconut water as a natural energy drink. The United Nations Food and Agriculture Organization (FAO) has been advocating the concept as a way to boost economies in tropical Third World countries. Using a new microfiltration technology developed in Great Britain, FAO has developed a means to bottle natural coconut water without degrading its health and taste qualities.

“Coconut water had a future only if we could invent a new cold sterilization process that retained its flavor and all its nutritional characteristics,” stated Morton Satin, head of FAO’s Agricultural Industries and Post-harvest Management Service. “The answer was filtering the water through a medium such as porcelain or a polyacrylic gel. The filter retains all microorganisms and spores and renders the permeate commercially sterile.”

The resulting beverage is a natural isotonic beverage with the same electrolytic balance as human blood. When fortified with sucrose and L-absorbic acid, it approximates the vitamin and energy profile of most major sports beverages.

What Lies Ahead
The trend shows no sign of cooling off, but the trend may get a chill if regulators decide to tighten the screws on health claims or GRAS status. In any case, the momentum of a truly global market will sustain significant growth in the years ahead. While sales of traditional carbonated soft drinks languish, noncarbonated drink sales are growing at a pace 15 times greater, according to Beverage Digest. Combined with bottled water, they could represent half of overall beverage growth over the next five years, according to Bill Pecoriello, a beverage analyst at Sanford Bernstein & Co., New York.

About the only thing that could slow the functional beverage juggernaut is the potential for excessive health claims and over-the-edge formulations by niche players lured by the appeal of a superheated market. This would give critics the ammunition they need to affect the entire industry.

The author is President, The Hollingsworth Group, P.O. Box 300, Wheaton, IL 60189.