Zenith Report: Part 2. Information Flow
Friday, September 23rd, 2005
By Kirstin Gradl
Still growing.” “Sparkling performance.” “Water surges.” The years may pass, but the headlines relating to the performance of the bottled water sector remain the same. It goes without saying that 2004 was another good year for the sector, with a global advance of nearly nine billion liters—despite the fact that consumption fell by nearly two billion liters in West Europe. This means that nearly 50 billion liters has already been added to bottled water consumption in the new millennium and it now stands at nearly 165 billion liters.
Almost 20 billion liters of this increase has come from Asia, which has risen from being on a par with Latin America at around one fifth of the total to a leading 26 percent share. As recently as 2003, Asia trailed West Europe by more than four percentage share points, but the combination of a 2004 decline in West European volume and a strong 2004 upturn in Asian volume has seen an eight billion liter ‘swing’ sufficient to take Asia past West Europe.
The source of this growth by segment raises a few surprises, with only around 40 percent coming from bulk water. Five percent has come from sparkling waters, but the majority—perhaps unexpectedly, given that we are talking volume here and not value—has come from convenience and take-home packs in the size range from 20 centiliter to 2 liters.
This is quite an achievement. For every five-gallon (18.9 liter) container added, there would need to be just over one and a half cases of 50 centiliter convenience size bottles sold—definitive evidence of the robustness of convenience growth relative to bulk.
Examining segment growth from a regional perspective, 60 percent of bulk’s uplift has come from Asia Pacific, a further fifth from Latin America and one eighth from Africa and the Middle East. Europe—West and East—accounts for only about six percent of the gain and the stagnating North American market for just two percent. All sparkling growth has come from Europe.
However, when it comes to still water in packs up to two liters, all regions are making contributions—the most significant, at around one third each, from Asia Pacific and North America. Europe combined accounted for around half that, with Latin America and Africa and the Middle East contributing seven percent and six percent respectively.
The Big Four
What of the leading players? By volume, Danone has maintained its position as the global number one, with its Asian interests providing a sizeable platform. Asia was responsible for more than a third of its global sales at the turn of the new millennium. That share is now above 40 percent. Asia thus accounts for around half of the volume that the group has added since 2000.
Another trend within Danone’s portfolio has been the increase in the importance of HOD/bulk packs. In 2000, one fifth of its volume came from HOD/bulk, primarily from Aqua in Indonesia and its U.S. interests. The intervening years have seen many acquisitions in China, the U.S., Mexico, Poland and West Europe, with the result that HOD/bulk’s contribution has doubled to just over 40 percent. Around 70 percent of the company’s volume increase since 2000 has come from HOD/bulk. By value, of course, the contribution is considerably smaller.
However, there is some question as to whether 2005 and 2006 will see Danone remain the global leader. Last year it sold Italaquae in Italy, representing a drop of over 700 million liters of its global sales. The group has also ceded its North American small pack interests to Coca-Cola through the sale of its 49 percent stake in DWNA. On top of this, the future ownership of the U.S. HOD business held jointly with Suntory has yet to be resolved—and the sales total more than two billion liters. Some of this shortfall will be made up by organic growth in the developing world, but continued global leadership is by no means guaranteed.
Nestlé lays claim to global leadership by value, but is now presenting a closer challenge by volume after having been overtaken by Danone in 2003. North America, France, Germany and Italy have always accounted for the greater part of Nestlé sales. North America made a 36 percent contribution in 2000, with the West European trio taking a further 44 percent.
In 2004, the combined volume share of these five markets was down to 74 percent. North American success has enlarged its share to 44 percent. Despite French, German and Italian sales moving ahead by 22 percent, their share has now fallen to 30 percent. By value, of course, the role played by these five countries is considerably higher.
In common with Danone, Nestlé has made a number of acquisitions at the beginning of the 21st century. Like Danone, it has bought into HOD in Poland and West Europe. Previously both groups’ interests had been almost exclusively in the United States. Acquisitions have also been made in Canada and the U.S. as well as—alongside Danone—in Argentina. Nestlé is now number one in Russia and Hungary. Until recently, it was also more likely to be adding interests in the Middle East—Turkey, Lebanon, Jordan, Saudi Arabia, Qatar, Bahrain and Egypt—than in the Far East.
Danone definitely ‘stole a march’ in Asia and this helped to underpin its assumption of global volume leadership. However, Nestlé has long been the dominant player in Pakistan and last year it developed joint ventures in South Korea with Pulmuone and in Indonesia with Coca-Cola. It has also registered strong organic growth in China and, to a lesser extent, India.
Nestlé has focused in particular on the expansion of Nestlé branding—notably Pure Life as an affordable purified water for the developing world and Aquarel as a good value pan-European spring water. With the transition of Aberfoyle in North America to Nestlé Aberfoyle Pure Life, Pure Life is now a brand nearing sales of two billion liters a year, while in 2000 it barely existed. It is currently in 19 countries in small pack, 13 of these in HOD too. Aquarel is in more than 16 markets, with HOD in three.
The other major global players, Coca-Cola and PepsiCo, have also favored the international brand route, although neither of the two appears yet to have settled on a single brand strategy.
Coca-Cola appears to have a number of candidates. Bonaqua/Bonaqa is currently present in the largest number of markets, primarily in Europe. The water is now sold in Spain under the name Aquabona.
However, Dasani has been canvassed as a preferred contender and is now available in more than 20 countries, roughly half in Central America and the Caribbean, and a further half dozen in Africa—Burundi, Egypt, Ghana, Kenya, Liberia and Uganda. Ciel is another significant brand, predominantly in Mexico and Angola. It features a bottle shape shared by at least three other water brands from Coca-Cola—Turkuaz in Turkey, Arwa in the Middle East and Joy in Vietnam.
Coca-Cola’s bottlers are also displaying a commitment to bottled water. The most notable is Coca-Cola HBC, which has made a number of acquisitions in the last three years, mainly in East and Central Europe. FEMSA Panamco in South and Central America and Coca-Cola Amatil in Australasia have both been active, too.
At first glance, PepsiCo has more than one possibility for international brand status, with Aqua Minerale present in nearly a dozen East European markets and Aqua Diamant in a further two. However, there is little doubt that Aquafina will be in the vanguard of any new expansion of PepsiCo’s bottled water interests.
Sold in more than ten countries now, 2004 saw Aquafina become a near two billion liter brand. Whilst more than 80 percent of this volume was derived from North America and a still higher proportion by value, notable bridgeheads have been made in India, Vietnam and the Middle East, as well as more marginal sales in Spain. PepsiCo is taking some of its biggest strides in non-carbonates and has perhaps yet to develop a fully international—as opposed to regional or national—strategy for Aquafina.
Flavored and functional
While the bottled water market is not without innovation and product development, flavored and flavored-functional waters are proving to be even more dynamic in this regard. Zenith quantifies this market at 4.8 billion liters globally; 24 percent of this is from Japan, a further 23 percent from West Europe, with the U.S. (10 percent), China (eight percent) and Argentina (five percent) also key markets.
Once again, the leaders are the usual suspects, with Danone out in front of Coca-Cola, Nestlé and PepsiCo. Each fields a number of brands, Danone’s portfolio is dominated by Volvic Touch of Fruit, Mizone and Ser and also includes Badoit, H2Go, Primavera, Shape, Taillefine and Vitalinea, with a number of these also available in plain versions. Nestlé has long offered flavors for Perrier and Vittel, but has added more esoteric brand development in Perrier Fluo and Vittel + Energie. Its Contrex brand has an Eaux Plus range, while brands such as Nestlé Pure Life, Poland Spring and Fürst Bismarck have more straightforward flavored variants. One of the latest slow burners is Nestlé Wellness, launched in Germany and now available in some neighboring markets. Nestlé Water Care is another newcomer in China.
Coca-Cola has its own wide selection from Dasani flavors in the United States to flavored and sports water variants of Bonaqua in Europe, as well as Aquana, Aquarius and most recently Powerade Option sports water. PepsiCo has had particular success with Propel fitness water, which is now being extended beyond its U.S. origins. Like Coca-Cola and Nestlé, it is also exploring its North American flavored water options with Aquafina.
Other important players include Suntory and Kirin in Japan, Römerquelle and Vöslauer in Austria, Spadel in Northern Europe and the trio of Fruit20 (Kraft), Clearly Canadian and Glaceau in North America. At a global level, the Czech brand Podebradka also makes an appearance thanks to the popularity of such products in the Czech Republic, where consumption per person stands at 57 liters per year—against a three-liter European average and 0.8 liters globally.
What of the future? We expect the strong growth seen between 2000 and 2004 to continue, with at least 10 billion liters being added in each of the next five years. More than 40 percent of this is expected to come from Asia, which should rise to represent 30 percent of the global total. West Europe could slip to 22 percent, with North America up a little to 17 percent, overtaking Latin America. Such a profile would give North America just under one fifth of the extra volume overall.
By segment, 63 percent of this increase is forecast to come from convenience/take-home packs and only one third from bulk. Underpinning this success, Zenith believes, will be greater availability through improved distribution infrastructure and channel reach, high consumer confidence in product quality and the ongoing spread of bottled water’s hydration message. Bottled water’s multi-occasion appeal will become more evident, particularly in relation to other soft drink alternatives.
However, price competition will also play a part and while branding and industry margins may improve, commodi-tization may exacerbate pressures at the bottom end of the market. The growth will still be there, but each and every business will need to consider its own offering and positioning carefully. If companies produce what the consumer wants where it is wanted, in the appropriate format and to the requisite quality, branding will be reinforced and profits realized. If it becomes just water, bottled—branding and margins will be difficult to sustain. The future of the industry remains in its own hands.
About the author
Kirstin Gradl is a Senior Market Consultant for Zenith International Ltd. She may be contacted at tel: +44 (0) 1225 327900; fax: +44 (0) 1225 327901; or via email: firstname.lastname@example.org