Bottled Water Is A Potential Growth Category That Can’t Be Ignored

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The Coca-Cola Company

While major soft drink companies continue to battle declining carbonated soft drink (CSD) sales, another segment continues to grow volume sales, and is now expected to overtake CSDs as the most consumed beverage worldwide this year. This beverage is none other than packaged water. According to the Canadean, consumption of packaged water will reach 233 billion liters in 2015, more than the intake of CSDs, which is estimated to be around 227 billion liters. [1] The Coca-Cola Company (NYSE:KO), PepsiCo (NYSE:PEP), and Dr Pepper Snapple (NYSE:DPS) have struggled to ramp up volumes in the ailing carbonated category in the U.S., which declined for the tenth consecutive year in 2014. Seeing how bottled water remains a high growth category, these companies might look to strengthen their water lineup and launch new products in this category to boost beverage sales going forward.

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While growth in the bottled water category is expected to continue outpacing growth in the CSD category in the next few years, most of this growth will come from emerging markets such as China, India, and Mexico–where clean tap water is not as easily available. In contrast, developed markets might not contribute much to the global bottled water growth. Packaged water in Germany, Italy, France, and Spain is forecast to grow at a CAGR of merely 1% between 2015-2020. However, an exception to this is the U.S., which remains the fastest growing bottled water market outside Asia, mainly as customers have grown more health conscious and look to trade-in their sugary soft drinks with healthier and more natural drinks–which bodes well for water. This is a trend that these large soft drink multinationals can’t ignore.

beverage volume sales in the U.S.

While trademark carbonated drinks Coke, Pepsi, and Dr Pepper all saw volume declines last year in the U.S., major water brands kept growing, as seen in the table below.

growth in volumes 2014

 

According to Beverage Digest, Nestlé Waters passed Dr Pepper as the third largest player in the U.S. liquid refreshment beverage market behind Coca-Cola and PepsiCo, increasing volumes by 9.1%, compared to a de-growth of 0.1% for Dr Pepper, mainly as the overall bottled water category continues to grow strongly. For Coca-Cola, while sparkling beverage volumes declined 1% in North America last year, packaged water grew 8%, and this category continued solid growth in Q1. The company’s water brand Dasani sells approximately 16% of the net volumes sold by the drink Coke in the U.S. On the other hand, PepsiCo’s North America beverage volume declined 1% in Q1, primarily on a 2% decline in CSD volumes, while the bottled water category grew by a mid-single-digit percentage. The company’s leading water brand Aquafina sells less than one-fourth the net volumes sold by Pepsi in the U.S.

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Coca-Cola’s still water brands Dasani, Glaceau Vitaminwater, and Glaceau Smartwater had combined sales of roughly $2 billion last year, and PepsiCo’s Aquafina had sales of $0.86 billion, with both companies holding market shares of 21.4% and 9.2%, respectively, in the still water category (the largest bottled water category) in the U.S.  However, the leader in this market is Nestlé Waters with a share of ~24% owing to successful brands such as Nestlé Pure Life, Poland Spring, Deer Park, and Ozarka.

Although water is a volume product and is growing at a fast pace, why the leading soft drink companies haven’t looked to aggressively expand into the bottled water category, is because this is a relatively low margin business. According to an analyst at Berenberg, the packaged water business has operating profit margins of approximately 10% at Nestle, compared to the group’s average of 15%, making water dilutive to the overall margins. [2] However, innovations in this category such as value-added water, added minerals and carbonation, and premium brand perception, has allowed some brands such as Glaceau Smartwater to rake-in higher revenues due to a greater average revenue-per-unit.

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….Sparkling Water Is Growing At A Fast Pace And Could Be Accretive To Profits 

The still water category is 7.5x the sparkling water category in terms of volumes, but the latter is one of the fastest growing beverage categories in the U.S., and presents huge growth opportunities for manufacturers, especially as customers continue to look for replacements to the calorie-fueled CSDs. Sparkling water also contains added flavors and sugars, but carries a relatively positive perception, which is why the sparkling category grew by 32% in 2013, and 22% in 2012. While bulk or jug still water is sold in large bottles holding 1 to 2.5 gallons and is relatively cheaper, sparkling water is considered premium and sold at a higher price per gallon, compared to both still and bulk water. This is why sparkling bottled water has heftier margins compared to the other segments, and could be a potential growth driver for beverage companies.

Unlike the mature CSD market which is dominated by two or three big companies, small individual brands have a stronghold in the carbonated water segment. Sparkling ICE owned by Talking Rain is the largest individual brand in carbonated water with ~27% of the overall sales in FY2014. LaCroix, Topo Chico, and Cascade Ice water are other brands which together constitute ~11% of this market. In addition to strengthening their portfolio, Coca-Cola, PepsiCo, and Dr Pepper might also consider acquiring any of these established small companies to further their reach in the sparkling bottled water market. The CSD giants also face a stiff competition from private labels, which account for over one-fifth of this category. Private labels offer relatively cheaper prices and thus appeal to price sensitive consumers.

Water might be a low-margin business compared to CSDs, and other segments such as juices, but at a time when sugar-fueled drinks continue to witness declining sales, the growth potential in bottled water can’t be ignored. In addition, penetrating the sparkling water category, or introducing premium products, might also help protect the profitability of these companies.

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Notes:
  1. Global packaged water consumption to overtake carbonates in 2015 []
  2. Bottled water flies off shelves as fizzy drinks go flat []