By Henry R. Hidell, III

During the last decade the bottled water industry has experienced unprecedented growth while at the same time experiencing major consolidation activity and declining margins. The popularity of bottled water has never been higher or more rewarding in terms of volume growth. For example, between 1994 and 2004 the volume of sales of bottled water grew an average of approximately 7.5 percent per annum. Today, 2004 bottled water sales in gallons is projected to be in excess of seven billion gallons and wholesale dollars are expected to be $ 8.7 billion.

Soda makers take over the top spots
Although it is understood that consumers are turning to bottled water as a refreshment beverage reflecting a healthier life style, the growth is being driven by the simple component of availability. A decade ago Pepsi launched its Aquafina brand of bottled water. Today, it is the number one PET brand in the U.S. market with sales in excess of $936 million according to Beverage Marketing Corporation (BMC). Its sales have surpassed the older more established brands that had easily dominated the market for three decades. Coca-Cola launched its Dasani brand a few years after Aquafina and today Dasani is the number two brand in the market with sales in excess of $834 million. These are both processed drinking waters made by major soft drink players while the older, well-established natural spring water brands have become less important in the consumers’ decision of choice, natural versus processed. For example, Poland Spring, the former number one brand in the U.S., owned by Nestlé, had sales of $650 million. While this sampling of bottled water numbers certainly reflects an outward appearance of healthy performance, there is a more sinister underlying business trend that is being driven by a complex mixture of tactics, strategies and ultimately, consumer expectations.

Changes with growth
The traditional bottled water industry in the U.S. is the familiar five-gallon polycarbonate bottle delivered by a route salesman on a regular schedule and often referred to as home and office delivery (HOD). The bottle was placed on top of a dispensing unit referred to as “the cooler.” Although there were other options for bottled water in the early days of growth, such as Perrier and Evian in small, upscale packages, these were not considered mass retail market products but rather “upscale” on-trade products in finer restaurants, hotels and perhaps in similar high-end grocery retailers. But once Aquafina was launched, the genie was out of the bottle and since 1996 or thereabouts, the industry has been chaotic, unpredictable and less rewarding to its manufacturers in terms of products and margins.

What happened?
The consumer became less concerned about natural spring water as opposed to processed water. The mass retailer has become a major venue for purchase of bottled water, as opposed to the former popularity of HOD. Finally, the convenience of where and when to consume bottled water with easy access to the product became the overall market driver and price began to be a less important factor when compared to convenience. The convenience stores have taken a major role in distribution of water. The American consumer has experienced a fundamental transition from stationary consumption in the home and office to “on the go” consumption of bottled water. The American manufacturers have responded to the frenetic lifestyle of the contemporary consumer by providing packaging alternatives. Today it is all about convenience. Although consumers remain concerned about health and good drinking water, they have accepted water as being conveniently available nearly everywhere.

Now, the convenience size packages of 0.5 L, 1.0 L and 1.5 L in PET plastic have begun to scavenge the HOD sales of those companies that produce both the HOD five gallon package and the small convenience package(s). Sales of the HOD segment in 2003 are estimated by Hidell-Eyster to be about $2.1 billion. In 1993 the HOD share of the bottled water market was 37 percent and by 2003 it had declined to 18 percent. In 2003 it had lost 2.3 percent. Controversy among forecasters abounds as to the future growth rate of HOD. It is Hidell-Eyster’s opinion that HOD will remain an important part of the mix of bottled water but will certainly experience pressure from the small package products, point-of-use devices and emerging technologies for dispensing safe, healthy drinking water.

Costs and consumer mindset
The consumer has been introduced over the last five years to low pricing and convenience. Conditioning the consumer in this manner has impacted what the consumer is willing to pay for a bottle of water. Today cost per bottle in a 24 pack for the 0.5 L PET is about $0.19 to $0.23 when on sale, which has been most often the case. Although the price for a delivered (HOD) five gallon bottle of water averages about $7 across the nation, a retail discounter will offer a price of between $1 to $2 below the HOD price. The consumer has been conditioned to purchase bottled water largely on sale and at relatively low prices. This is the industry’s own doing, and as a result many bottlers have experienced significantly lower margins and greater difficulty in making their corporate sales targets. Although the industry has matured to a point in the U.S. market where sales are somewhat less sensitive to seasonal changes, in a summer when the weather has been cold and rainy, and outdoor activities are curtailed, the industry feels the impact of lower pricing more acutely. 2004 has been that kind of year in many areas, and Hidell-Eyster expects to see overall lower industry performance figures at year end as a result.

Lagging performance notwithstanding, there is little doubt that bottled water continues to be a major growth beverage in terms of volume. The struggle is maintaining margins. As consolidation continues and major bottlers continue to compete for market share, pricing has more or less disintegrated from a predictable frame of reference to chaos as share scrambling occurs among the major players. Obviously, in the longer term, it is reasonably anticipated that as market share stabilizes, pricing will enter a more rational and profitable base. However, the damage will have been done in terms of the smaller and medium size bottlers. Some industry leaders have prognosticated that at the end of the road there will be three major bottlers left standing in the U.S. market: Nestlé, Pepsi and Coca Cola (with its Groupe Danone partnership). For the moment in the turf battle the consumer is benefiting at least in terms of price—not necessarily choice.

Future hurdles
While all of the market share battles take place, there is another significant battleground being defined. The other battleground is the political arena in the name of the public good and the protection of the nation’s water resources. Here bottled water has been a clear target of “green groups” and regulators. It is this battle ground that will msot likely be the deciding factor as to which bottlers will be left standing as major players. The preeminent bottler(s) left standing will be so by default. Those companies with the deepest pockets will in large part be the dominant player by virtue of having the resources to participate in negotiations of water rights, litigation, legislation and developing codes of regulatory enforcement. Although the effort of participating in the restructuring of water rights by the larger players can possibly benefit the small bottler interests in an egalitarian sense, the amount of capital which is required to fund the contests in the sociopolitical arena is vast and in the end, the small industry player simply does not have the financial resources to protect their rights through case law development and the testing of presumed Constitutional rights to water resources. These bottlers will possibly be more the victim than the victor.

The bottled water industry overall is an extremely small user of groundwater. In 1995, the United States Geological Survey (USGS) estimated that while 27,600 billion gallons of groundwater was extracted from the nation’s aquifers, bottled water withdrawals accounted for only 0.019 percent. Compared to other freshwater users such as agriculture, the steel and automobile industries, the beer and soft drink beverage industries, bottled water was not quantifiable. It should be noted that the groundwater aquifers of the nation are constantly recharged by precipitation and therefore considered renewable by the USGS. When the component of aquifer recharge is taken into account, bottled water accounts for only 0.0012 percent of the nation’s renewable supply. When these types of numbers are taken into account (and additionally it is noted that less than one percent of all municipally treated water is used for human ingestion) the impact of human thirst is miniscule when compared to all other water uses. This leaves bottled water as one of the most efficient means for getting safe, healthy drinking water to the public. There is no running of the tap to get the cold water, there is no rinsing of the glass, there is simply ingestion. Yet, the bottled water industry has become the target of public outcry and legislation to restrict bottled water companies from withdrawing groundwater or shipping bottled water across state or provincial boundaries in some instances in the name of risking the future water resources of a region.

Major issues
As I write this article, a water rights conflict that will potentially impact every landowner, bottler and municipality in the United States and Canada is being defined. The longstanding and legally well-established constitutional water rights laws will be tested to their core on the battleground called the Great Lakes Basin. Here the definitions of “water diversions” and “consumptive use” of water resources will likely be defined. The Great Lakes Basin is admittedly one of the most important watersheds in North America. It is the lifeblood of eastern Canada and the upper mid-west and northeast of the United States. It runs through some of the most populated regions of the two nations. Currently, the existing Great Lakes Basin water law is based on the doctrine of riparian rights. Industrial users of ground and surface water have relied on this doctrine for 300 years.

There is an effort on the part of those jurisdictions in the U.S. and Canada which fall within the Great Lakes Basin to severely restrict the use of water and on the face of the effort, it appears to be directed at the bottled water industry. In a recent series of suits brought against Nestlé Waters in Mecosta County, Michigan, an attempt was made to invoke the “doctrine of public trust” and elicit a definition of the “reasonable use” through the effort to stop the Nestlé water production facility construction through restrictions on groundwater withdrawal. The potential application of the public trust doctrine on a more global basis and stipulating that the aggrieved party must seek relief not in the local jurisdiction of the state where the actionable event took place, but in the federal court of the District of Columbia allows “any” aggrieved party to bring an action. In situations like this a question of who has legal standing becomes extremely cumbersome and possibly removes control from the local state government, which should have the highest quality standing.

Potential for disaster
For a bottler to defend a suit in this type of environment is not only nearly impossible, but beyond the financial reach of all but the wealthiest defenders. It is in such a judicial business environment that the American consumer will be the loser at the end of the day. Product choice will become miniscule and purchase prices could well eliminate a stratum of society. If these types of modifications to the basic water rights doctrines that seem to be under consideration in the Great Lakes Basin are invoked, they will rapidly be transferred to every other jurisdiction and the result will impact every industry, municipality and individual seeking to use this renewable resource or to exercise the traditional rights of reasonable benefits of ownership. The process for gaining a permit to employ the resource would take years and possibly have no end if the present proposals are approved. The final judicial structure of the water rights in the Great Lakes Basin Water Resources Compact will control the future of the water resources in North America and not necessarily in a manner that will result in the wise stewardship or use of the resource.

Conclusion
In summary, in 2004, bottled water represents one of the most efficient means to distribute drinking water to consumers. It represents an industry adjusting to consumer demands for convenience while maintaining a level of profitability that will assure product quality, ease of access and consumer friendly pricing. In this year, bottlers will face a test of public understanding of the industry and its desire to administer resource stewardship practices that preserve the integrity of the resource into future generations. The industry is in the defining moments of its future.

About the author
Henry R. Hidell, III, is the founder and President of Hidell-Eyster International. Hidell-Eyster has been providing professional financial, technical and marketing consulting services to the bottled water and beverage industries for nearly four decades. The company has overseen the development of water sources, bottling facilities, product development/marketing activities globally including the U.S., Asia, Latin America, Europe and the Middle East. Hidell was inducted into the Beverage World “Bottled Water Hall of Fame” in 2001. He is the author of numerous articles regarding the beverage industry in both technical subjects and financial matters. The company is headquartered in Hingham, Massachusetts. Readers may contact him via email at hidell@hidelleyster.com

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