From protein coffee to CBD soda: How brands are cashing in on the functional beverage boom

Functional drinks are gaining traction with younger consumers, with EY finding around 75% of millennials and 80% of Gen Zers already consuming them and more than half willing to pay up for health benefits. Starbucks is expanding protein coffees across the U.S., Canada, and Europe, while PepsiCo and Coca-Cola have also moved into prebiotic soda and Danone acquired Huel in a reported $1.15 billion deal. The category is increasingly premium-priced, but there is also regulatory scrutiny, including the U.K. ASA banning a TRIP ad over misleading health claims.

Analysis

The near-term winners are the scaled incumbents that can layer functionality onto existing distribution without rebuilding the category from scratch. That favors SBUX first: wellness add-ons carry materially higher gross margin than core beverages, and the mix shift is more important than unit growth because it increases check size while leveraging the same store labor and traffic. PEP and KO benefit more indirectly through retail shelf reallocation and halo effects, but they also face the risk that premium functional SKUs cannibalize legacy soda volumes faster than they can trade up the portfolio.

The second-order dynamic is that this trend is less about “new drinks” and more about who owns consumer trust. If shoppers start treating beverages as snacks or meal substitutes, the winner set expands to brands with repeatable efficacy cues, strong social proof, and premium packaging; that is structurally better for startups like TRIP than traditional colas, but also makes them vulnerable to regulatory enforcement and formulation scrutiny. The biggest supply-chain implication is input scarcity and margin volatility: botanicals, protein fractions, and specialty ingredients are less commodity-like than sugar and carbonated water, so gross margin dispersion should widen across the category over the next 12-18 months.

The market may be underestimating how quickly regulation can reset the economics. These products are being priced like branded wellness services, but if authorities tighten claim standards or ad enforcement, the category can see a sentiment air pocket even if consumption remains intact. The contrarian read is that demand is real, but the premium attached to “function” is vulnerable; brands that can keep the benefit story while avoiding explicit health claims will compound, while those leaning on aggressive promise language will be more exposed.

Key Decisions for Investors

• Long SBUX for 3-6 months: best direct lever to premium beverage mix; upside comes from check expansion and margin accretion, with downside limited to modest cannibalization of existing drink sales.
• Long PEP vs. KO over 6-12 months: PEP has more optionality from functional beverage adjacency and better portfolio flexibility; KO is more exposed if premium functional soda steals share from core sparkling.
• Short TRIP on any strength, 1-3 months: valuation is most vulnerable to regulatory headline risk and social-driven demand normalizing; use as a tactical short against elevated narrative premium.
• Pair trade long SBUX / short TRIP, 3-6 months: captures the difference between scaled monetization and regulatory-fragile growth; favors the company with distribution, pricing power, and less single-brand risk.
• Buy call spreads on PEP 6-12 months out: upside tied to broader functional portfolio expansion, while defined risk helps if the category cools or health claims face scrutiny.