For many consumers, coffee is the original functional beverage. The drink’s natural caffeine content has made it a top global commodity for centuries and in the modern era the fast-growing market for ready-to-drink coffee — over $3.2 billion in retail sales for the 52-week period ending Jan. 15, according to market research firm IRI — shows many consumers still like to get their energy from a cup (or can or bottle) of joe.
The emergence of cold brew in the U.S. market this past decade has driven new consumer interest in the coffee category and inspired a wave of startup brands looking to build on the innovation. Today, the cold brew trend, though far from mature and still emerging, appears to have cemented itself as a category mainstay, according to Euromonitor consultant Matthew Barry, who said that despite its small size is helping drive sustained overall category growth.
While indulgent coffee drinks still dominate sales growth, they’re growing at a much slower rate; with cold brew now established, innovation among entrepreneurial brands has turned toward what Barry calls “emerging functionality,” meaning any added functional ingredient that goes beyond caffeine, such as MCT oil, collagen, protein, nootropics, or CBD.
Though Barry is careful to note that functional coffee is still a small sliver of the overall category, just “a few percentage points” compared to the leading indulgent and energy-focused sectors, the trend towards functional innovation presents one of the biggest opportunities to sustain continued category growth over time, he said.
“The development of cold brew has enabled the functional segment to exist,” Barry told BevNET. “Before, it was still all indulgent products, you weren’t really going to have a Frappuccino with MCT oil, it didn’t make a lot of sense as a functional beverage. But now cold brew gives you that potential there. Cold brew’s emergence was necessary for this next segment to come out.”
When Bulletproof 360 launched in 2013, the company’s high-fat spin on low-carb diets helped popularize adding butter to coffee to increase satiety and promote weight loss, along with functional ingredients such as collagen, which promotes beauty and skincare, and MCT oil, which can aid in weight loss and provide mental stimulation. The company, which launched its own RTD line in 2017, has since been joined — and in some cases eclipsed — in the functional coffee space by a number of brands such as Kitu Life Super Coffee, Picnik, Koia, and Califia Farms, the latter of which released a Keto Coffee SKU in January at Winter Fancy Food Show 2020. Meanwhile, brands like High Brew and STOK have released coffees with added protein and protein drink makers such as Iconic and OWYN have been able to broaden their product portfolios with caffeinated SKUs flavored with cold brew.
For brain boosting function, brands such as Pop & Bottle, Vitacup, Humblemaker, Coffee Boosters and pre-launch startup Taika have tapped into ingredients like L-theanine, antioxidants and vitamins to promote a controlled energy boost and provide added health benefits. And with CBD standing tall as one of the top breakout trends of 2019, small brands such as Good Day, Cuvee Coffee, and Abracadabra Coffee Co. have looked to combine the purported benefits of cannabidiol with caffeine; meanwhile, one of the country’s largest emerging cannabis producers, Caliva, is taking steps into food and beverage with CBD-infused coffee brand Soul Grind.
Mike Burgmaier, managing director and co-founder of Whipstitch Capital, told BevNET that functional brands are already having an impact on the category. Many functional coffee products, he said, are reporting strong direct-to-consumer ecommerce sales in addition to growing retail sales. As well, functionality has given startups a key point of differentiation from strategics, which broadly continue to focus on indulgent (Starbucks Frappuccino or McDonald’s McCafe, for example) or energy-focused products (Java Monster or Starbucks Double and Triple Shot).
“There’s a huge opportunity for all these brands to become an authentic offering,” Burgmaier said. “When you’ve got the elephants in the room with Starbucks and other established brands, but more and more, even though they’re gigantic, they are going to get marginalized by the up-and-coming brands and the alternatives that consumers have to get their coffee with that functionality.”
MCTS LOOK TO PLAY BEYOND KETO
While other brands have followed more closely in the footprints of Bulletproof — Austin, Texas-based Picnik and Los Angeles-based startup Grass Fed Coffee have both sought to gain a foothold in the natural and specialty channel through cold brew butter coffees — Bulletproof itself has focused on creating a diet-based, cross-category lifestyle brand which also sells supplements and bars. The company reported $1.9 million in annual retail sales for its RTD line (which doesn’t include its robust online sales), according to IRI, but Barry noted that the brand’s success is likely more reflective of the popularity of keto-adjacent diets than it is on a demand for functional coffee.
“Bulletproof didn’t emerge from coffee trends rather than it was keto finding its way into coffee,” Barry said.
But other coffee brands with keto-friendly products are now looking to make broader appeals to mainstream consumers.
Among the current leaders in functional coffee is Kitu Super Coffee, the maker of a line of zero sugar MCT oil-infused coffees containing 80 calories, 10 grams of protein and 200 mg of caffeine per 12 oz. bottle. According to IRI, the brand reported $13.9 million in retail sales in the 52-weeks ending January 15. While many functional coffee brands still compete primarily online and in the natural and specialty channel, Super Coffee has made headway in conventional retail outlets, with expansions into retailers such as Walmart and Target, co-founder and CEO Jim DeCicco told BevNET.
“We’re trying to bridge that gap,” DeCicco said of the brand’s retail strategy. “On one side, you have novel ideas like a Bulletproof or a REBBL that’s really focused [respectively] on biohacking or adaptogenic ingredients. I think there’s a very small target for that in the Erewhons and the Whole Foods of the world. On the other side of the spectrum you have familiarity — that might be a Starbucks Frappuccino. We’re trying to be the middle ground. We need to build a brand for Walmart, rather than Whole Foods.”
Though Super Coffee does have strong placements in the natural and specialty channel, DeCicco said that the brand has honed its messaging to fit different consumer needs. Although the popularity of the keto diet has been a boon for Super Coffee, he said, keto followers are “low-hanging fruit” for the brand and marketing in retailers such as Whole Foods requires less consumer education. In mainstream outlets, however, the brand focuses less on explaining MCTs and more on emphasizing that the drink features strong flavor with zero sugar, a move that DeCicco believes allows the company to not rely on the keto trend long term should the diet’s popularity ever fade.
“More than functionality, more than convenience, a product still has to taste good,” DeCicco said. “And that’s the challenge functional brands face — how can you still promise the flavor of a mainstream product, like a Starbucks Frappuccino that has 36 grams of sugar and 300 calories? People expect that indulgent flavor, so for us we need to be able to provide that flavor without any of the sugar or unnecessary calories before we can focus on MCT oil or lactose free protein.”
Chris Hunter, CEO of plant-based protein drink maker Koia, which in December launched a coffee line containing 5 grams of MCT oil, said his brand aims for “shock value” during sampling efforts; Consumers trying the product for the first time, he said, see the low sugar and high protein content of the drink and prepare themselves for poor flavor or texture only to be surprised by the taste.
According to Hunter, “people are expecting to have to sacrifice flavor for health,” but consumers still crave indulgence. By mimicking the flavor profiles of Frappuccinos and other high calorie coffees, Koia is focused on being a better-for-you alternative.
CBD CREATES A CHILL OPPORTUNITY
Just as keto found its way into coffee, cannabis and CBD have also charted a course for the drink, Barry said.
The purported calming effects of CBD may at first seem like a counterintuitive addition to the caffeine buzz of coffee, however brands looking to marry the two claim the interaction creates a more level, less jittery energy. While some smaller coffee makers such as Abracadabra and Cuvee have introduced CBD (or hemp oil) SKUs to their existing coffee portfolio, others such as Good Day and Caliva’s Soul Grind have come out with coffee lines as part of a broader CBD play.
According to Chris Cuvelier, CEO of Zola and head of beverage at Caliva, Soul Grind is the California-based company’s first CBD-infused beverage for what will eventually be a broad, cross-category portfolio of cannabis drink brands. The company chose coffee as its first category, he said, due to the strong market performance of cold brew but intends to leverage its experience within the cannabis industry to emphasize CBD as the key functional ingredient.
“We’ve got a very unique opportunity to be able to leverage our depth within the cannabis market that no other coffee company can do,” Cuvelier said. “The flip side of that is if you have a company with expertise in coffee coming into the market with a CBD SKU, it becomes another entry point for the consumer. For us it’s about the overall functional experience.”
Good Day, which also sells CBD-infused sparkling water and chamomile tea, has focused on marketing a platform brand with multiple use occasions. For the company, coffee provides an energy play while the additional products focus on refreshment and relaxation.
As CBD coffee brands hit the market, however, they face the challenge of federal regulations. The continued lack of guidance from the U.S. Food and Drug Administration (FDA) has limited growth opportunities for CBD food and beverage brands across the board and although some states have moved to clarify the law on CBD beverage products, in most markets brands are subject to search and seizure by government organizations.
In January 2019, CBD beverage maker Kickback (formerly Kickback Cold Brew) had its stock of its flagship cold brew latte line seized by the California Department of Public Health, which raided the company’s copacking partner, CEO Pierre Real told BevNET.
According to Real, the company now views the government crackdown as “a blessing in disguise” as the company took time to reassess its product line and ultimately dropped the coffee line to focus on developing CBD-infused lemonades. While CBD in beverage remains a legal risk for the foreseeable future, coffee proved to be an even more difficult category for Kickback to navigate due to the small company’s inability to develop a shelf-stable product that retained its flavor. Working with CBD, Real said, exacerbated the challenge of scaling within the cold chain and most distributors currently partnering with CBD brands don’t have refrigerated warehousing.
GROWING OUT OF THE NICHE
While Euromonitor’s Barry believes functional coffee may provide long term growth for the category, the fact is that it still occupies a niche, he said. Standard cold brew products are expected to continue growing for the foreseeable future, but it’s more likely that any functional offshoots beyond the core caffeine effect won’t be a commanding growth driver until cold brew reaches maturity.
“We talk about cold brew all the time — it probably takes up over half of all the discussion about coffee — but in terms of actual sales it’s still pretty small,” Barry said. “All the cold brews together don’t equal the Frappuccino yet.”
But as consumers are faced with more options in the market, coffee drinkers are likely to embrace diversity, whether it’s iced versus cold brew, unique bean blends, or function.
“At the end of the day, coffee is so interesting compared to other categories,” Burgmaier said. “You look at Keurig Dr Pepper, which is committed to having many different coffee brands on their trucks and on the shelf, and that’s because that’s how consumers are. People want diversity with their coffee and they’re absolutely open to functionality, almost like becoming different dayparts of use with your ‘morning coffee.’”