China was arguably home to the world’s first functional drinks in the form of TCM-based (traditional Chinese medicine) tonics that have been around for as long as Chinese culture. The first commercial drink explicitly based on TCM was Wanglaoji, which has a history stretching back to the early 1800s and remains one of the most popular drinks in China today.
In terms of foreign brands, Red Bull was the first to enter the market in 1995, working with a local JV partner, and helped to build the category in China. Red Bull has remained the market leader ever since. Danone’s China-only Mizone brand was launched in 2003 and also remains popular. However, despite being foreign-owned, both brands are produced in China, as are most of the midrange and lower premium foreign brands available in China.
The growing spending power of Chinese consumers along with lifestyle and health concerns has seen a boom in functional drinks sales in recent years with the off-trade market being worth RMB43 billion ($6.5 billion) in 2019 according to Euromonitor, an increase of 49% from 2013. Growth is expected to slow down but remain consistently high, reaching RMB53 billion ($8 billion) by 2024.
Growth Drivers
Productivity and anti-fatigue remain the key selling points for functional drinks in China. On the other side of the spectrum, drinks that are either sleep inducing or promote healthy sleep are also experiencing strong growth as long working or studying hours, commute times and high levels of smartphone usage mean that sleep deprivation is a major concern for many people in China, especially among the younger demographics. Drinks that specifically help with women’s health issues, such as urinary tract infections, are also seeing strong growth.
However, the major driver for growth among functional drinks in China is rising levels of health consciousness among consumers. This can be seen in the fact that across the beverage sector sales of low-sugar and sugar-free drinks increased 13% in 2019 while total beverage sales only increased 1% (Kantar). According to Euromonitor, 56% of Chinese consumers actively monitor their dietary intake for weight management, while 60% of under 40s closely read nutrition labels.
Red Bull Losing Market Share
Red Bull has long been the dominant player among functional drinks in China, accounting for 57% of the market in 2019. However, despite experiencing strong growth, Red Bull’s market was down from 77% in 2015.
While Red Bull is a great drink for the consumers looking for an energy boost, consumers’ reasons for buying functional drinks have expanded rapidly in recent years and Red Bull does not particularly attract the more health conscious consumers. Therefore, we have seen a large amount of new local brands successfully filling these gaps in the market.
Sales Channels
Off-trade sales account for over 90% of functional drink sales in China. Among the off-trade channels, convenience stores present an ideal selling point. Convenience is a channel often underutilised by foreign brands. There are well over 120,000 convenience stores in China, responsible for over 226.4 billion yuan ($33.3 billion) in sales and the average store’s sales are increasing by 7% annually (KPMG).
Most city blocks in China will have multiple convenience stores and they are located closer to the communities where people live and the offices where they work than supermarkets, as well as being quicker to navigate. Also, the innovation in the convenience store market in China sets it apart from the traditional corner shop that people in Britain and other countries would be familiar with. Facial recognition, unmanned stores and mobile payments are just some of the new retail innovations that convenience stores are at the forefront of in China. This is why many mid-priced and premium local brands will see convenience stores as a key part of their launch strategies.
Online is also a channel not to be overlooked given the scale of e-commerce in China. Functional drinks in larger sizes or in multipacks in particular have a market online due to the number of heavy users in China. According to Statista, 32% of consumers buy a functional drink several times a month, 37% will buy several times a week and 7% will buy daily. These consumers will be looking to stock up on their favourite drinks and are looking to buy online to get a better price than in convenience stores or supermarkets. Of course, this strategy will work better for brands with an existing presence that heavy users are specifically looking for.
The market for functional drinks is set to continue its rapid expansion in China. The diversification of consumers’ desire for functionality beyond energy and anti-fatigue coupled with the high levels of health consciousness in China create opportunities for brands that can offer a broad range of functional benefits relevant to consumers in China.