Functional dairy is the largest segment in the functional foods market. Poised to achieve a valuation of $78.9bn by 2036 at a CAGR of 4.5% (up from around $51bn in 2026 according to Future Market Insights), the space is driven by strong demand for gut-friendly products such as yogurt and kefir.
Consumers strongly associate dairy with digestive health and immunity, positioning the category favourably in both market share and innovation potential.
Below we round-up some of the ingredients that are shaping the functional dairy market.
Plant sterols
Plant sterols are suitable for use in dairy formulations because they naturally complement fat-containing everyday foods where consumers expect satiety and nutritional benefits, while also helping to lower cholesterol as part of a balanced diet.
According to Mintel, new products launched in Europe with plant-sterols from 2020-2025: 44% of the product launches are in spreads (margarines and other), 18% spoonable yogurt, 13% drinking yogurts, 11% plant-based drinks, 7% other (cheese, juices, bars, etc.), and 6% white milk. Sterol-enriched margarine, spreads, and yogurts have built long-term consumer familiarity around cholesterol management, demonstrating that consumers readily associate these formats with heart health when the benefit is clearly explained.
Plant sterols also check key sustainability boxes: they are upcycled, plant-based, and align with ethical label claims.
“Plant sterols work particularly well in dairy because they fit naturally into familiar, everyday foods where consumers already expect nutrition and satiety. When delivered through simple formats like spreads or yogurts, they offer an easy way to support heart health without adding complexity, which is exactly what today’s clean-label-minded consumers are looking for,” says Alessio Tagliaferri, VP Global Business Development at Kensing. “There is space for innovation in both white and flavored milk. These staples serve as an ideal medium to incorporate plant sterols as part of the routine coffee break or in a refreshing shake. This is especially prevalent in those countries with high-fat breakfasts.”
Bioactive proteins
With demand for whey protein ingredients outstripping supply, companies are increasingly looking at other dairy proteins to realise their product development goals.
Casein is increasingly marketed as an alternative to whey for applications where whey’s fast-acting properties aren’t required, with micellar casein in particular gaining attention. “We believe in micellar casein as a growth opportunity,” Ingredia’s senior product manager, Véronique Lhommet, told us. “While whey protein – especially natural whey – has seen significant demand and we produce it ourselves, every year our supply sells out completely. Given this strong growth, we’re encouraging customers to consider micellar casein as an alternative.”
Lactoferrin may also be moving from specialized nutrition into the mainstream food and beverage space. The bioactive protein’s premium pricetag has long stifled its adoption in mainstream food and beverage, but this could be changing as alternative methods of production are becoming more widespread.
Australian biotech firm All G, which derives lactoferrin via precision fermentation, recently forged a joint venture with Savencia-owned Armor Protéines to scale-up production of bovine lactoferrin (from Q1 2026) and human lactoferrin (from Q4 2026). The company has raised more than $8.5m investment from the likes of Döhler, Agronomics, ID Capital and others.
If pricing and availability are addressed, brands would be keen to leverage this bioactive protein as a premium differentiator.
Next-gen probiotics
Next-gen probiotics, a type of probiotics designed to target specific health outcomes for consumers, are frequently viewed as the next frontier of biotics research and innovation.
This field is also fueling M&A activity: with a prime example being Danone’s acquisition of The Akkermansia Company last year. The firm has developed a proprietary biotic strain that’s scientifically-proved to reinforce the gut barrier, reduce inflammation and counteract metabolic disorders such as obesity, diabetes, and cardiovascular disease.
Next-gen probiotics can thus open a new frontier of functional foods and accelerate the ‘food as medicine’ trend.
Meanwhile, dairy foods are considered ideal carriers for probiotics. Milk and milk fats act as natural buffers that protect biotics from being destroyed in the stomach and arrive in those parts of the gut where they can deliver health benefits.
Prebiotic fiber
According to Mintel, the number of food and drink products fortified with high fiber has doubled over the past decade. This growth reflects rising consumer awareness of inadequate fiber intake in Western diets, which is supported by a 9% increase in online conversations about the topic in the past year, says Mintel.
Other mainstream trends such as weight management are also contributing to the rise in fiber-fortified product releases. In dairy, yogurts and yogurt drinks fortified with prebiotic fiber are cropping up to address this demand: with both Danone and Lactalis launching proprietary formulations to appeal to consumers seeking satiety and muscle support, among other health benefits.
Evidence is also emerging that some types of fermented dairy may deliver anti-inflammatory benefits when combined with fiber. A study carried out by University of Nottingham in the UK revealed that kefir and fiber combined reduced whole‑body inflammation more effectively than omega‑3 supplements alone.
Collagen
Well-known from the supplement space, collagen is a popular food and beverage additive today and its use is being accelerated thanks to the high-protein and beauty-from-within trends.
Drinks, such as Lindahls Chocolate Pro+ Protein Milk Drink with Collagen in the UK and Lifeway Foods’ Probiotic Smoothie with Collagen, are two examples of innovation in this space: with the former appealing to both high-protein and functional trends and the latter addressing gut health as well as skin and joint support.
Collagen use has also gathered pace among coffee drinkers in recent years – leading brands such as Vital Protein to launch products such as powdered creamer fortified with collagen.
Similarly, shoppers are increasingly scooping collagen into yogurt. While this isn’t a new trend per se – products such as Danone North America’s Light & Fit Collagen + Antioxidants have been on supermarket shelves since 2020 – new releases have accelerated recently, with both dairy and plant-based options cropping up in the past 12 months. Examples include the Purest Co Collagen Glow Crème Yogurt; Yogurt Planet Collagen Yogurt, and Meiji W Skin Care Yogurt.
And so, dairy’s health halo already lends the category a unique advantage as new functional ingredients enter the market. For manufacturers, the opportunity is only getting bigger.
Want to stay ahead of the biggest shifts in functional‑ingredient innovation?
Join Positive Nutrition’s upcoming broadcast to explore the science, the innovation, and the opportunities shaping functional ingredients.
