Beverage Companies Go Green In Hope To Sell More Water

January 29th, 2014 by Trefis Team
+6.88%
Upside
60.63
Market
64.80
Trefis
KO: The Coca-Cola Company logo
KO
The Coca-Cola Company

Unlike the surge in sales of sparkling bottled water in the U.S., sales of still bottled water have remained flat to marginally positive in the last few years. Sparkling water has benefited from growing consumer health concerns over the intake of carbonated soft drinks (CSD). On the other hand, consumption of still or functional bottled water has been discouraged due to the extensive use of plastic in bottles, which is non-biodegradable. Still water sold in PET (polyethylene terephthalate) bottles has been likened to tap water with a few additional electrolytes tossed in. This is why retail sales of this segment remained nearly flat in the fiscal year 2013 ending August. [1]

We estimate a $44 price for Coca-Cola, which is around 10% above the current market price.

See our full analysis for Coca-Cola

Relevant Articles
  1. Should You Pick Coca-Cola Stock At $60 After Q4 Beat?
  2. Down 10% This Year Is Coca-Cola Stock A Better Pick Over AbbVie?
  3. What’s Next For Coca-Cola Stock After 4% Gains In A Week Amid Q3 Beat?
  4. Down 15% This Year Will Coca-Cola Stock Rebound After Its Q3?
  5. Which Is A Better Beverage Pick – Coca-Cola Stock Or Monster Beverage
  6. Pricing Actions To Bolster Coca-Cola’s Q2?

Environmental Concerns Curb Still Bottled Water Growth

Functional water is the largest category of bottled water, contributing over 80% to the overall sales of $11.4 billion in the fiscal year ending August 2013. However, sales in this category saw a negative growth of 0.4% during this period. Big corporate companies such as Coca-Cola, PepsiCo and Nestle Waters have tried to reverse this trend by introducing eco-friendly packaging and by promoting consumers to drink more water. Last year, first lady Michelle Obama teamed up with these beverage giants to run a campaign called “Drink Up”, urging people to drink more water. Although the U.S. has a fairly healthy per capita consumption rate of bottled water (116 liters per person), there is still room for growth as the country ranks only eleventh in global per capita intake of bottled water. [2]

However, with growing awareness about environmental degradation, consumers have become more conscious about the harmful impact of their lifestyle on surroundings. According to Mintel, in 2010, more than one-third of the survey respondents said that they would spend more for environmentally friendly products. [3] Thus, in order to boost sales of still bottled water, beverage companies have had to come up with recyclable packaging.

Coca-Cola And Competitors Go Green

In 2009, the largest CSD manufacturer in the world, Coca-Cola, introduced PlantBottle for its water brand Dasani. PlantBottle uses about 30% PET resin from sugarcane and is thus more eco-friendly than traditional plastic bottles. [4] Sales of Dasani have increased by 20% since the launch of PlantBottle. The company also plans to introduce bottles made completely out of plant-based resin in the coming few years. This move could further boost sales of Dasani, which currently has a market share of ~10% in the still water category with retail sales of over $900 million in FY2013.

Coca-Cola might also look into the possibility of using PEF (polyethylene furanoate), a bio-based alternative to PET. However, the impact of PEF on the recycling stream is still to be known. As the company is a major user of recycled PET, it wouldn’t want to harm its own recycled material. Coca-Cola is presently working on bottles from PEF with Avantium, a renewable chemicals firm based in Amsterdam. Coca-Cola also experimented with bottles made of ice that could melt away after consumption. The ice bottle is currently available only in Colombia and carries the company’s flagship Coca-Cola CSD. However, these bottles require a higher production cost and put a time limit on consumption. In addition, they might absorb dirt and germs and thus become unsanitary. As of now, there hasn’t been any indication from the company to launch ice bottles in the U.S.

The company’s biggest competitor in still bottled water is Nestle Waters, which is the leader in this segment with over one-fourth of the market share. Last year, Nestle Waters produced a new “ReBorn” water bottle made with 50% recycled PET (rPET). [5] The company uses this bottle for its brand Arrowhead, which gained a market share of 2.1% in the sparkling bottled water segment in FY2013. There isn’t enough recycled plastic available to produce 100% rPET bottles currently, as more PET bottles are thrown away than recycled.

PepsiCo also announced its 100% renewable bottle made entirely from plant-based resources in 2011. The bottle is made from bio-based raw materials including switch grass, pine bark and corn husks. In future, PepsiCo expects to include potato peels, orange peels and other agricultural byproducts from its Frito-Lay snacks division to broaden the renewable sources used to create the green bottle. The company is waiting to test this product further before large scale production and commercialization.

Still Water Business Less Profitable

As compared to almost every other beverage category, still bottled water is a low margin business. This is because bottled water is sold at relatively low prices. For example, CSDs are almost eight to ten times more expensive than still water bottles. With growing need for innovating bottling techniques, this segment also demands higher research and development costs. As usage of recycled bottles becomes economically more feasible, Coca-Cola and its peers will aim to accelerate the development process of eco-friendly packaging in order to realize any meaningful growth from this division.
Notes:
  1. “Sparkling water outpaces bottled water category“, October 2013, bevindustry.com [↩]
  2. “US consumption of bottled water shows continued growth“, April 2013, bottledwater.org [↩]
  3. “Are Americans willing to pay more green to get more green?“, mintel.com [↩]
  4. “The race for developing plant-based renewable plastics“, enn.com [↩]
  5. “Nestle waters’ reborn bottle made with 50% recycled pet plastic“, environmentalleader.com [↩]