Coca-Cola Eyes Growth In The Sparkling Bottled Water Market

As consumers shift beverage preferences from high calorie carbonated soft drinks (CSD) to healthier alternatives such as bottled water, industry giant The Coca-Cola Company (NYSE:KO) has looked to keep up pace with this current trend by diversifying its portfolio. But unlike the CSD market in the United States, where the company accounts for over 40% of the volumes, it trails Nestle Waters with a share of only 15% in the fast growing bottled water market. In fact, bottled water is expected to become the largest segment of the U.S. liquid refreshment beverage (LRB) market by the end of this decade, toppling sales of CSDs. ^[1] Thus, Coca-Cola will look to advance in this budding segment in order to maintain market share in the overall LRB industry.

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

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Sparkling Water To Drive Growth

The bottled water market consists of still water (including flavored), sparkling water (including flavored) and bulk still water. Still or non-carbonated water forms the largest segment of this market accounting for over 80% of the overall $11.4 billion sales in fiscal 2013 (ending August). Sparkling/mineral and bulk still water, each of which constituted ~10% of the sales during this period, represent the top and bottom segments of the bottled water market respectively. ^[2] 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.

While growth in the still water and bulk still water divisions has remained flat to marginally positive in the last couple of years, most of the growth in bottled water has come from sparkling/carbonated water. Sales of sparkling water rose by 16.3% in 2011 and by a further 34% in 2012. This category is expected to swell in the coming years due to increasing disposable incomes and low per capita consumption figures in the U.S. ^[3] The country ranks only eleventh in the global per capita consumption of bottled water with 116 liters per person in 2012. Another reason why we expect sales of sparkling water to surge is the decline in demand for CSDs. Consumers are likely to switch to the natural and healthier low calorie carbonated water in order to meet their beverage requirements.

Competition In The Sparkling Water Market

Unlike the CSD market where Coca-Cola reigns with a massive 42% share, the company has a small market share of less than 5% in the sparkling water market. The only Coca-Cola brand which has made an impact in this category is the zero calorie Glaceau Fruitwater, which managed to gain a market share of 2.4% within three months of its launch in May 2013. Fruitwater along with Vitaminwater (still water) and Smartwater (still water) are part of Glaceau, an energy drinks brand purchased by Coca-Cola in 2007. In order to further penetrate this market, Coca-Cola announced the launch of a sparkling water variant of its flagship brand Dasani in December. The company aims to expand in this category as the distribution of its zero calorie flavored carbonated Dasani spreads nationwide by February this year. ^[4]

The main competitor for Coca-Cola in sparkling bottled water is Nestle Waters. The latter has four major brands in this category, namely Perrier, San Pellegrino, Poland Spring and Arrowhead, which together account for over 30% of the overall sparkling water volumes. However, Nestle Waters’ market share has decreased by nearly 15% from 2011 owing to small brands and new entrants. ^[5]

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 ~21% of the overall sales in FY2013. Its market share increased by nearly 10% year on year during this period. LaCroix, Topo Chico and Cascade Ice water are other brands which together constitute ~11% of this market. In addition to strengthening its portfolio, Coca-Cola might also consider acquiring any of these established small companies to further its reach in the sparkling bottled water market.

Coca-Cola and its peers also face a stiff competition from private labels, which account for over one-fourth of this category. Private labels offer relatively cheaper prices and thus appeal to price sensitive consumers. Going forward, the beverage giant will look to leverage its wide distribution channels and compete with private labels on the pricing front in order to advance in the sparkling bottled water market.

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1. “Bottled water sales rising as soda ebbs“, October 2013, nytimes.com [↩]
2. “Sparkling water outpaces bottled water category“, October 2013, bevindustry.com [↩]
3. “Bottled water 2011: the recovery continues“, International bottled water association [↩]
4. “Dasani sparkling“, November 2013, bevindustry.com [↩]
5. “2012 state of the industry: bottled water“, July 2012, bevindustry.com [↩]