As part of its newsletter on equity research - Healthy Living Monthly - the firm highlighted an increased consumer focus on health and wellness as a key driver of new trends in the beverages. The group predicts that while traditional soft drinks still account for most of the market, growth and innovation will stem from more alternative segments.
There will as such be opportunities for functional beverage and ingredients manufacturers alike as these categories grow. But it depends on how they align their resources and efforts.
"The beverage industry has become a leading delivery vehicle for functional nutritional ingredients, is a major beneficiary of the convenience movement in the US, and is desperate, in our opinion, for any new ideas to offset the stagnant market for carbonated soft drinks," write the report's authors.
Canaccord Adams valued the US nonalcoholic beverage market at $100bn in 2005. Carbonated soft drinks (CSDs) take up the majority of this market, with a reported $64.7bn in sales. However, the analyst says growth in the nonalcoholic segment is coming from categories other than soft drinks as consumers move towards healthier options or, at least, options that are perceived as healthier.
The firm conjectures this interest in healthier beverages is in part due to the fact US consumers are increasingly overweight.
An estimated 66 percent of adults in the US are either overweight or obese, based on results from the 2003-2004 National Health and Nutrition Examination Survey (NHANES). The rate of obesity more than doubled from the previous NHANES survey - increasing from 15.0 percent (1976-1980) to 32.9 percent (2003-2004).
In terms of recommending how manufacturers large and small ought to innovate in this market, the report repeatedly highlights the example of the rise of energy drink.
"The history of the energy drink category in the United States illustrates both the opportunities and the risks that exist as change occurs within the beverage industry," write the analysts.
While Canaccord Adams has identified emerging trends in the beverage market as being fortification, functionality, and a shift towards premium, "green" and organic products, it indicates that knowing when to buy and when to sell is key to succeeding in this market.
For instance, instead of water, beverage manufacturers should now look out for 'enhanced' water.
"Don't buy commodity bottled water today, despite its enormous profitability," states the report. "It is late in the trend, and the early adopters are telling us that."
Waters fortified with healthy ingredients hold the biggest potential and are being cashed in on by the beverage giants. Coca-Cola this year forked out $4.1bn to acquire vitamin water company Energy Brands for the manufacture and marketing of new nutritionally enhanced vitamin water lines.
These fortified categories are the way of the future, according to Canaccord Adams, and are not limited to water.
"We recommend buying energy and all types of "functional" categories - buy tea, meal replacements, zero-calorie beverages and emerging calorie-free sweeteners, while selling carbonated sodas, high-calorie daily beverages and yes, even milk."
The analyst states that though dairy was once the bastion for beverage fortification, it has given way to alternative drink sources that come with perhaps less calories or fat.
While the beverage giants may be good at purveying continuous pipelines of tried and true brands, Canaccord Adams implies in its report they would be best to stick with this and leave it smaller companies to innovate. The larger players can then step in and engulf successful brands through acquisitions only they can dream to afford.
"Legacy industry leaders such as Coca-Cola and PepsiCo are not innovators, and they actively utilize consolidation to add premium brands to their product offering."
According to Canaccord, only two percent of all new launches in the US food industry ever reach $50mn in sales - meaning it makes more sense for the larger established companies to let smaller ones incur the risks until a brand is established.
