By John G. Rodwan, Jr.
As the second-largest commercial beverage category by volume in the United States, bottled water continues to experience steady growth. For several consecutive years, volume production has accelerated, and per capita consumption has increased significantly. In recent years, U.S. volume has been increasing more rapidly than dollar sales, but in both respects, the industry’s performance is unrivaled.
The characteristics driving bottled water’s growth are clear: It is healthy, safe, and a great beverage alternative. As a ready-to-drink commercial beverage, bottled water is relatively inexpensive and, with competitive pricing, it’s becoming increasingly affordable for consumers. Bulk and single-serve packaging options facilitate a variety of uses. A continued, growing interest by consumers in healthy, low-calorie products that confer benefits above and beyond refreshment also contributes to bottled water’s performance in recent years. As concern about obesity grows more widespread and intense, bottled water’s calorie-free contents appear that much more attractive to consumers.
Domestic nonsparkling water continues to be the largest and strongest part of the U.S. packaged water industry, consistently outperforming other segments. The retail premium PET segment is driving overall category enlargement and now accounts for more than half of total volume. Recently, consumers have a renewed interest in sparkling waters, causing some growth in that segment. Imports, however, declined in 2005. Bulk and direct delivery volumes have not enjoyed the levels of expansion that characterize the PET water. Outside the United States, home and office delivery (HOD) continues to be a growth segment.
The U.S. numbers
In 2005, total U.S. bottled water volume exceeded 7.5 billion gallons, a 10.7 percent advance over 2004’s volume level, according to the latest edition of “Bottled Water in the U.S.,” a comprehensive study of the market published annually by Beverage Marketing Corporation (BMC). That translates into 26.1 gallons per person. With the exception of carbonated soft drinks (CSDs), U.S. residents now drink more bottled water annually than any other beverage. The gap between the two top categories is narrowing as bottled water ceaselessly advances, and CSDs either barely grow, as was the trend in recent years, or decline, as was the case in 2005. Average intake of bottled water has grown by at least one gallon annually, thereby more than doubling in a decade. Per capita consumption of CSDs has dipped slightly for several consecutive years.
While CSDs still have volume and average intake levels more than twice as high as bottled water, the soft drink market has been struggling recently, in no small part because of competition from bottled water. Moreover, bottled water’s share of the U.S. beverage market is poised to grow, while CSDs’ will continue to lose ground. According to “The Future of Liquid Refreshment Beverages in the U.S.,” a new report by Roger Dilworth, BMC’s senior editor, bottled water’s share of the non-alcoholic beverage market could advance from 21.7 percent in 2005 to 28.5 percent in 2010, when the bottled water market would be stronger than regular CSDs, which are on track to see their share erode from 29.8 percent to 24.7 percent during the same five-year period. The overall CSD market (including regular and diet volume) would remain larger, with a 38.1 percent share (down from 43.3 percent in 2005), but bottled water would have achieved another significant hallmark and further gained in the largest beverage category.
The U.S. bottled water market reached new highs not only in volume but also in wholesale dollar sales, which surpassed $10 billion in 2005. Sales grew more quickly than they did in the previous two years, but did not advance at as fast a rate as volume. That trend reflects the impact of price promotions, especially on PET multipacks, which are increasingly the focus of such promotions as well as central to volume growth. Once primarily a tactic used on the West Coast, lowering prices to attract buyers is now seen throughout the United States.
Weather always affects the beverage industry, and natural disasters, such as Hurricane Katrina, contributed to demand for bottled water in 2005. Barring a repeat of such events, volume is likely to grow more slowly in 2006. Preliminary numbers suggest that volume could approach 8.3 billion gallons and that producer revenues will advance at a slightly faster rate than in 2005.
U.S. category developments
Domestic nonsparkling water’s 7.2 billion gallons represented 95.1 percent of total volume in 2005. The segment, which comprises diverse components with very different performances, grew at a faster rate than the overall market in 2005.
The most vital piece of the nonsparkling segment is the retail PET segment. PET volume increased from 1.4 billion gallons in 2000 to almost 4 billion gallons in 2005, boosting its share of volume from 29.0 percent to 52.8 percent. The segment is on track to increase share again in 2006. (See chart below.)
As consumers increasingly opt for convenient PET multipacks in large format retail channels instead of larger (1 to 2.5 gallon) sizes, retail bulk volume has slowed. Its share eroded from nearly one-quarter of the category volume in 2000 to less than one-fifth by 2005, largely as a result of competition from PET.
While HOD volume declined in 2003 and 2004, the segment was essentially flat in 2005. The segment accounted for approximately 18 percent of bottled water volume in 2005.
Domestic sparkling water has revived, with a solid 10.9 percent volume growth in 2005, which was the first year the segment achieved double-digit growth since 1990. Leading brands, such as Aquafina, now offer sparkling versions along with their still waters.
Imported water’s three-year streak of double-digit annual volume growth came to an end in 2005, when volume plummeted.
The industry leaders
Nestlé Waters North America (NWNA) remained the largest bottled water company in the United States, with $3.1 billion in wholesale dollar sales. The purveyor of major regional brands such as Poland Spring, Arrowhead, and Zephyrhills accounted for more than 31 percent of total bottled water sales in 2005. The United States-based subsidiary of the Swiss-based food and beverage giant Nestlé, NWNA derives a significant amount of revenues from its HOD business, as well as its retail bulk water, while also focusing on its retail in the fast-growing PET water business. Poland Spring remained the third-largest selling brand in the United States, and several of the company’s other brands, such as Deer Park and Ozarka, achieved strong double-digit sales growth. In 2005, NWNA launched its Pure Savings Plan, which sets fixed monthly fees for water delivery, in a bid to boost HOD volume. The company achieved significant growth in the segment.
NWNA, an early entrant into the U.S. bottled water market, has earned a reputation as an innovator in important areas such as PET packaging. It offers its various brands in an array of package types and sizes. It has plans to launch a 3-liter PET package in 2006.
Soon after acquiring Guelph, Ontario-based Aberfoyle Springs in 2000, NWNA transformed the company’s namesake brand into Nestlé Pure Life, as part of an effort to make Pure Life a global brand. It also started producing the brand in the United States, which affected imports of bottled water from the Canadian market.
The leading CSD companies have the top two bottled water brands in the United States, as measured in producers’ revenues. In 2004, Pepsi-Cola’s Aquafina, which has reigned as the number one brand for several years, became the U.S. bottled water business’s first billion-dollar brand. The brand sustained strong growth in 2005, when wholesale dollar sales neared $1.3 billion. In 2005, Coca-Cola’s retail PET brand, Dasani, joined Aquafina with sales greater than $1 billion (although Aquafina remained the leading brand). Both companies now offer flavored iterations of their brands, but those currently account for a small part of their sales. Although Dasani could be described as Coca-Cola’s standard-bearer in the bottled water business, the brand serves as part of a multifaceted strategy that entails distribution of several brands of various price levels.
Merge matters
After announcing in 2004 that it was reviewing its joint ventures with Suntory and Coca-Cola, Danone pulled out of both deals in 2005. In September 2003, Danone created DS Waters Enterprises with Suntory Water Group. DS Waters comprised all of Suntory’s Water Group activities and Danone Water North America’s (DWNA’s) HOD bottled water business. Brands involved included Alhambra, Sparkletts, and Crystal Springs. In 2004, Danone agreed to buy out Suntory’s share of the struggling enterprise. The following year, Danone sold DS Water’s assets to Kelso, an investment fund. The company’s revenues declined in 2005, albeit at a slower rate than in 2004.
In April 2002, Coca-Cola and DWNA formalized a deal under which Coca-Cola would manage all marketing execution, sales, and distribution for Evian in the United States and Canada. Evian is now dispersed through a direct store delivery (DSD) distribution network. Groupe Danone retained responsibility for global product development and brand strategy efforts for Evian. Whereas Dasani represents Coca-Cola’s mid-priced offering, the imported Evian is a premium-priced brand. However, so far, Coca-Cola has not been able to revive the brand, which saw sales contract in 2004 and 2005.
In June 2002, the two companies established a partnership to produce, market, and distribute most of Groupe Danone’s other U.S. bottled water brands. The CCDA Waters venture did not include Danone’s import brand, Volvic; Coca-Cola’s Dasani; or Danone’s HOD bottled water business (which became part of DS Waters). The earlier agreement concerning Evian also remained intact and separate from the later pact. Reportedly paying $128 million for a 51 percent interest in the venture, Coca-Cola gained five production facilities, a license for the Dannon and Sparkletts bottled water trademarks, and ownership of “several value brands” in the AquaPenn roster. The deal provided the soft drink company with various lower-priced spring and purified waters. Although the overall volume of the brands Coca-Cola carries in connection with Danone declined in 2004, the Dannon brand revived after a couple of off years. It enjoyed strong growth in 2005.
In April 2005, Coca-Cola bought out Danone’s 49 percent share of CCDA Waters. Coke gained full ownership of the five plants, and it continued to license the Dannon and Sparkletts trademarks. The company also agreed to increase marketing spending on Evian.
International developments
In practically every major region of the world, bottled water has been one of the most dynamic beverage categories. While bottled water as a sizeable commercial beverage category got its start primarily in Western Europe, it is now a truly global beverage, found even in some of the more remote corners of the globe.
Global bottled water consumption is estimated to have topped the 1.6 billion hectoliter mark in 2005, meaning that bottled water is more voluminous than beer across the globe, according to data from the latest edition of BMC’s “The Global Bottled Water Market” report. Global consumption increased by 6.2 percent in 2005 over 2004’s level. Per capita consumption was 6.7 gallons, up from 2004’s 6.4 gallons.
Some regional and national markets differ dramatically from the global consumption average. Several Western European countries, for instance, boast per capita consumption levels several times higher than the global rate. However, much of the developing world, where the bulk of the world’s population resides, finds its per capita consumption figures far lower.
While the global per capita consumption figure may belie dramatic regional differences, bottled water’s global growth is indicative of a number of noteworthy trends. First and foremost, bottled water has been able to make tremendous volume gains during the last decade by successfully tapping into some divergent consumer trends around the globe. Bottled water is in many respects the ideal category for beverage manufacturers worldwide. It is characterized by high gross margins, the ability to segment the market, the possibility of trading up, and high growth. Yet, the bottled water market is still highly fragmented, leaving the window open for acquisition and investment opportunities.
In developed countries such as the United States and Canada, bottled water has become the fastest growing and most dynamic major beverage category by tapping into a growing health and well-being consciousness on the part of consumers. Increased health awareness has helped position bottled water as an alternative not only to tap water, but also, and perhaps most significant, as an alternative to CSDs and juice drinks as well.
Simultaneously, in the developing world, bottled water is increasingly positioned as a safe and relatively affordable alternative to the often-unsafe tap water found in many countries.
While much of the world’s bottled water market is still highly fragmented and controlled by local brands, consolidation is rapidly occurring, as four companies have come to dominate much of the market. Swiss food and beverage company Nestlé and French entity Danone are the traditional leaders of the bottled water pack. Both companies centered their operations around the core markets of Western Europe and, to some extent, the United States. However, as water growth is increasingly coming from the developing world, Nestlé and Danone have taken their battle to the new competitive fields of Asia, Latin America, and other areas. In fact, Danone has retreated from the U.S. market to focus on some of those other markets.
Now challenging the two European leaders in the bottled water arena are the CSD stalwarts Coca-Cola and PepsiCo. Beginning with their resounding success in the United States, both companies are increasingly devoting resources and energy to developing their global bottled water businesses. PepsiCo and Coca-Cola already claim the top two brands in the U.S. bottled water market, and, while they do not pose an immediate threat to Danone and Nestlé in Western Europe, they must both be considered serious threats in the less developed and often high-growth bottled water markets of Asia, Eastern Europe, and South America.
Trends
A number of other trends will also be evident in the next few years as companies increasingly use new product development to differentiate themselves in the eyes of consumers. In Europe, the key question in the next five years will be whether or not consumers will trade down, as North Americans have, and embrace cheaper waters (such as those sold by Coke and Pepsi in the United States). That trend has already started to manifest itself on the continent. Another key trend to watch is the rise of nutrient-enriched waters. For example, both Danone and Nestlé have developed calcium-enhanced waters in Europe in the hopes that those products will become a new growth frontier for the industry. Finally, perhaps the most widespread trend in the industry has been the appearance and proliferation of flavored waters. Almost every company now has flavored versions of its leading brands. In the mature Western European market, such new innovation will be a key growth determinant.
Market leaders
While Europe may be the leading regional consumer of bottled water, on a country basis, North America boasts the two largest markets: the United States and Mexico. Those markets combine for a 28.9 percent share of the world market. The U.S. bottled water market has been a catalyst for much of the global growth during the past five years, rapidly growing in size from 4.7 billion gallons in 2000 to 7.5 billion in 2005—a five-year compound annual growth rate (CAGR) of 9.8 percent. Mexico accounted for 11.5 percent of the global volume with nearly 5 billion gallons in 2005. In 2005, China remained in third place with 3.4 billion gallons. Brazil’s bottled water volume increased by 5.3 percent, reaching 3.2 billion gallons. In 2005, Italy and Germany grew by 4.2 percent and 2.3 percent, respectively. Italy ended the year at 2.9 billion gallons, and Germany at 2.8 billion gallons.
Ten of the top 15 bottled water consumers on a per capita basis are European countries, three are Middle Eastern, and two are North American. At more than 50 gallons per person in 2005, Italians consumed 2.8 gallons more than the United Arab Emirates, the number-two market, and 3.2 gallons more per capita than Mexico, the third largest in terms of average intake. The Belgium-Luxembourg market was the only other market with per capita consumption higher than 40 gallons. In 2005, Spain’s per capita consumption rate was 38.7 gallons; France’s was 36.6 gallons; and Germany’s was 33.8 gallons. Lebanon ranked eighth, just ahead of Switzerland. Other markets with high per capita consumption included Lebanon and Saudi Arabia in the Middle East and Cyprus, the Czech Republic, Portugal, and Slovenia in Europe. The United States ranked tenth in terms of per capita consumption in 2005, one notch higher than in 2004.
About the author
John G. Rodwan, Jr., is editorial director at Beverage Marketing Corporation, a New York-based research, consulting, and financial services firm.