Pierce Hollingsworth

Little more than a decade ago, when the Coca-Cola Co. was touting New Coke and PepsiCo was lauding Crystal Pepsi, entrepreneurs began to put spring water into single-serve plastic bottles, touting its purity, portability, and cachet.

The fad caught on with the trendy and the health conscious, and followed the early success of Nestlé’s Perrier, the lightly carbonated water in the green bottle. While Nestlé’s Perrier Group of America began to acquire regional brands and French bottler Groupe Danone SA’s Evian led the market to noncarbonated water, both Coca-Cola and PepsiCo remained on the sidelines. They were convinced that bottled water was a low-margin fad, subject to price wars and difficult to brand. Water offers no tangible value-added proposition and posed little threat to the traditional soft drinks, they reasoned.

As with New Coke and Crystal Pepsi, they were wrong. Media alarms over such contaminants as arsenic and cryptosporidium in municipal water supplies, pollution of lakes and rivers, and skepticism about safeguards at water treatment facilities fueled the trend. In addition, bottled water appeals to a generation that is more health conscious and mobile than its predecessors.

By the mid-1990s, bottled water was not just a trend, it was a gusher. Retail shelf space grew, and bottled water quickly became commonplace in vending machines, convenience stores, and even fast-food restaurants. Today, bottled water is a $5.2-billion market, growing at nearly 30% per year, and both Coca-Cola and PepsiCo have entered the fray in a big way. PepsiCo’s Aquafina brand commanded a 13.8% share of market last year, Coca-Cola’s Dasani brand was right behind at 12%, Danone’s Evian and several other brands combined was nearly equal at 11.8%, and Nestlé’s Perrier Group, which consists of many regional brands, commanded 37.4%. The remaining quarter of the market consists of hundreds of smaller regional brands, according to Beverage Digest.

The most significant growth for both Coca-Cola and PepsiCo last year came from noncarbonated beverages, particularly bottled water. PepsiCo’s noncarbonated sales grew by 35% and Coca-Cola’s by 23%, according to Beverage Marketing Corp. At the same time, carbonated soft drink sales are almost stagnant. Both companies are looking to international markets to sustain this growth rate. In addition, they are testing “enhanced waters” that contain functional ingredients, such as vitamins, calcium, magnesium, and zinc, combined with natural flavors. This follows the functional beverage trend that has been well established in international markets such as Japan for decades.

In the U.S., enhanced waters run the gamut from lightly flavored spring water to caffeinated water. BEVsystems International, Inc., claims that its Life O2 SuperOxygenated Water, which contains 15 times more infused oxygen than ordinary water, improves athletic performance, increases energy, and promotes greater awareness and concentration. Such innovations are necessary for smaller companies that want to stay in the game against major players that now see bottled water as a key ingredient in their future financial performance. Today the market has about 800 brands.

Distribution is a key concern. Earlier this year, Danone announced talks with both Coca-Cola and PepsiCo aimed at striking a distribution agreement for its Evian water. It currently distributes to about 60% of the U.S. through Coca-Cola Enterprises, Inc., Coca-Cola’s largest independent bottler. The introduction of Coca-Cola’s Dasani in 1999, however, has put pressure on shelf space and marketing attention. If Coca-Cola brought Evian into its corporate distribution through a licensing agreement, it could serve as a premium-priced complement to Dasani’s mainstream positioning.

Clearly the market is poised for a shakeout. The larger brands will continue to consolidate, and the smaller brands will begin to feel their shelf space squeezed even as sales expand. By 2005, Coca-Cola, PepsiCo, and Nestlé will control 75% of the market and garner 85% of its profits, according to Goldman, Sachs.

It’s not just the smaller bottlers who are unhappy. Environmental groups and many smaller municipalities where water is being pumped out of the ground are concerned. Perrier, for instance, draws water from 75 spring sites across the country for its 15 brands. In some locations, the company pumps more than 720,000 gal/day, causing concerns about depleting the water table and the supply of water for municipal use. The International Bottled Water Association counters that bottling companies have a vested interest in maintaining a viable water table for long-term bottling operations and provide jobs.

The only potential threat to this rising tide is the product itself. Water is water. It may be purified, filtered, and put in a fancy plastic bottle, but as the market matures, consumers will be tempted to view it as the commodity it is and spur ferocious price wars that will erode profitability. For now, the big players are willing to ride the tide.

Contributing Editor
President, The Hollingsworth Group, Inc.
Wheaton, Ill.