Tuesday, May 13, 2003

Industry brief: Beverages 3 (In previous postings we've looked at the carbonated beverage and the new-age beverage segments of the market.} Bottled water The bottled water industry in North America is growing aggressively. It is the fastest growing segment in the beverage industry (around 30% annually, compared to 1% or so in carbonated beverages), and the cost of goods sold is almost negligible. Once confined to Perrier and Evian sippers at fancy restaurants or people with bad--tasting local tap water, there's been a tripling of US consumption since 1985. As a recent FORTUNE magazine article put it, The most brutal battle in the beverage industry is the one for dominance of bottled water. With the niche growing at a 30% annual clip, bottled water will likely catapult ahead of coffee and beer to become the second-best-selling beverage--just behind soft drinks--by 2005. (Currently bottled water's barely ahead of No. 5 milk.) Another article in Beverage Marketing notes the conenctration of the market as water gets to be a bigger deal. Supermarketers have revolutionizing the industry. Since the costs of buying and holding shelf space is so expensive, the small, regional firms, which used to be major water suppliers, are being priced out. The only companies that can get their products on the shelves are the new water oligopolists, large national and multinational companies. Four companies now dominate the North American market for bottles water: Nestle, Danone, Coca Cola, and Pepsico. Like other areas of the beverage market, water, once the province of small, local spring bottlers and a few European importers, has now become an oligopoly. While Nestle (originally a Swiss chocolate company) and Danone (originally a French dairy firm) have been in the market for a while, Pepsi and Coke are Johnnies-come-lately to the market, Pepsi in 1995 and Coca Cola in 1999. But they have so much marketing savvy, power in the distribution and bottling area, and store presence, that they have made their two brands, Aquafina (Pepsi) and Dasani (Coke), the top two selling brands in the US market. That's in spite of the fact that, unlike most of the competitors, these are simply filtered and bottled local tap water. Yet bottles of the either of these essentially free liquids sell for almost the same a similar container of soda or iced tea. Not a bad business to be in! Both companies use their vast experience in associating drinks with lifestyle, sharpened during the cola wars. They are ramping up their ad budgets and getting significant growth in volume as they do so. And they have a big opportunity. According to estimates, one third of American households have never tried bottled water, and carrying around a bottle of water has become a status symbol for many younger Americans. Nestle is in fact the overall market leader, with $2.5 billion overall in water sales. It sells a number of brands that are popular in various regions of the country, such as Poland Spring in the Northeast. Arrowhead and Calistoga in California, and so on. These are actual spring waters that have to be trucked to the bottler. Nestle also sells Perrier, San Pelligrino, and some other European imports. Danone is number four in volume, with its imported Evian, Volvic, and others, along with Naya and Sparkletts from the U.S. Of the big four, Danone is the one that is sinking, losing sales to the others. In fact, they just signed an agreement with Coca Cola to market and distribute several of its brands in the US, including Dannon and Sparkletts, and some economy brands. Evian and other European brands will not be affected. (Being #4 can be so hard!) In 2002, these four companies had achieved over 60% of the water sales in the US, and that was rapidly expanding. Only two competitors have shares over 2%: Suntory Group (part of a Japanese conglomerate) and independent Crystal Geyser. Our guess is that minor brands will more and more be crowded off the shelf. (By the way, Cadbury-Schweppes has a limited water role at present.) Supermarket sales of cases of water are starting to show competition, as Nestle, Coke, and Pepsi are starting to compete on price as a Wall Street Journal report noted. Coke and Pepsi are trying to avoid a water version of the cola wars, in which they battled it out with price cuts in the supermarket aisle. That's why they're concentrating some 60% to 70% of their sales in the lucrative business of selling single, cold bottles in convenience stores or vending machines. But the next step is differentiating waters by making them vitamin-enriched nutriceutucals. Pepsi, through its Gatorade subsidiary, now offers Propel, enhanced with vitamins and minerals. It is also selling something called Aquafina Essentials, which is flavored water (some sugar added), doubtless a healthy drink. Coke is selling Dasani Nutriwater, a similar gimmick. Even the water category, only recently discovered by these companies, is now spawn new categories, opening new fronts in the cola wars. Company Select Brands Nestle Perrier, Poland Spring, Arrowhead, Deer Park, Zephyrhills, Ozarka, Ice Mountain, Calistoga, Vittel, San Pellegrino, Acqua Panna, Vittel Pepisco Aquafina Coca Cola Dasani Danone Evian, Volvic, Dannon, Naya, Ferrarelle, Sparkletts, Pure American, Castle Rock   8:16:42 PM

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