Three trends driving product development in the food and beverage industry are convenience, portability and health. The fact bottled water, particularly in the single-serve variety, has a foothold in each of the trends underscores why the market has grown and bottlers are continuing to innovate.
Within the liquid refreshment category, the carbonated soft drink brands Coca-Cola and Pepsi remain the largest players from a gallon and share of volume perspective, according to the Beverage Marketing Corp., New York. But bottled water brands Aquafina and Dasani, which are owned by PepsiCo, Inc. and The Coca-Cola Co., respectively, are gaining ground.
Both brands are among the fastest growing bottled water brands, according to the B.M.C. In 2006, bottled water was the second-largest beverage category by volume, growing by nearly 10% in 2006. In that year, bottled water had a share of volume of 27.8% in the beverage market, representing a total of 8.3 billion gallons, or 27.6 gallons per capita.
"The bottled water market may be broken into three categories, single serve, which includes bottles with 1.5 liters or less, jug and home office," said Gary Hemphill, spokesman for the Beverage Marketing Corp. "All of the growth in the bottled water market has been in the single-serve segment. During the 1990s it was growing at 20% annually, but has slowed. That, however, has more to do with the size of the category more than anything else. It’s a matter of inertia."
Four companies lead the single-serve bottled water segment in North America, including Nestle, which owns the Poland Spring, Arrowhead, Deer Park, Pure Life, Ozarka, Ice Mountain and Zephyr Hills brands; PepsiCo, Inc. (Aquafina and Propel); The Coca-Cola Co. (Dasani and Glaceau); and Groupe Danone (Evian and Dannon).
"The market is dominated by the big companies," Mr. Hemphill said. "It is very difficult for a newer, smaller company to come into the market today and compete directly with the large companies. There are smaller companies in the market, but they are trying to compete in other ways, such as using enhancement as a platform for innovation."
That is not to say companies are not making inroads into the single-serve segment. This past July, the Anheuser-Busch Companies, St. Louis, announced it had entered into an agreement with Icelandic Water Holdings ehf, Iceland, to become the master distributor for Icelandic’s Icelandic Glacial brand of bottled water. As part of the agreement, Anheuser-Busch also took a 20% equity stake in Icelandic Water Holdings, which also announced plans to build a new bottling facility in Iceland to meet increased consumer demand.
"Icelandic Glacial is pure natural spring water imported from one of the cleanest, most natural environments in the world, which gives it a competitive advantage in the United States’ high-end bottled water market," said August A. Busch IV, president and chief executive officer of Anheuser-Busch. "Our business landscape is changing, and we are looking for opportunities outside the alcohol beverage category to fuel additional growth for our company and our wholesalers. We believe Icelandic Glacial natural spring water has tremendous potential in the United States when combined with the strength of our distribution network."
Jon Olafsson, chairman of Icelandic Water Holdings, said the agreement essentially stemmed from a shared objective between the two companies.
"Anheuser-Busch was looking for a high quality premium water as part of their distribution strategy and we on our part were looking for a high quality distributor to handle the U.S. market for us," Mr. Olafsson said.
With regard to expectation, Mr. Olafsson said the company is not providing any forecast estimates but did state its expectations are high and referenced the construction of the new plant in Iceland as an indicator of its outlook
Mr. Hemphill noted that as the traditional bottled water market has grown, marketing has not been a big focus of the segment’s leaders.
"As the market has consolidated to a handful of companies, it is becoming a bigger issue," he said. "It is playing a bigger role with companies trying to provide a unique identity with respected brands."
Icelandic Glacial, for example, is capitalizing on its efforts to become a steward of the environment.
"There are numerous differentiation factors with Icelandic Glacial," Mr. Olafsson said. "These include but are not limited to the source, bottle and label design, packaging, marketing and overall brand messaging.
"Our carbon neutral status certainly provides further strong differentiation but this was not a strategic move to highlight any differentiation. We genuinely care about the environment, which comes naturally to Icelandic companies. We have always been regarded as an environmentally friendly company and have relied solely on natural energy since the day our company was formed."
If there is one singular feature that stands out relative to bottled water company marketing efforts, it is the source of the product. Brand names such as Pure Life, Ice Mountain, Aquafina and Evian conjure images of a natural, pristine source. But Mr. Hemphill said source may not be as big of a factor when it comes to consumer choice.
"We have not seen that a bottled water’s source has made that much difference to consumers," he said. "There are spring waters out there from single sources, spring waters from multiple spring sources, and waters from local municipal sources that go through a series of filtration steps.
"Each of those types of non-carbonated waters has been successful. The consumer might change and become more educated about that, but at this point there are other factors more important to them.
"Price is important. I mean it is expected the product will be pure and taste good. Healthy refreshment is the basic expectation. Once a brand has met that expectation, then it becomes about price, package, bottle size, closure, etc. Consumers recognize brands, but the category is not to the point where consumers will be selective; they will not walk across the street to find their favorite brand. The bottled water market does not have the degree of brand loyalty other packaged goods markets enjoy."
Focusing on enhancement
In the same manner food companies have taken finished food products, like bread or chicken, and attempted to add value by adding whole grains or precooking, bottled water manufacturers have added value to their products by adding flavors or nutritional enhancements like vitamins.
"The larger companies are moving quicker into these niche segments," Mr. Hemphill said. "That is where the greatest growth has been, but it is also off of a smaller base (compared to the single-serve bottled water market). For a smaller company with a unique product proposition, it is the best way to enter the marketplace."
Mr. Hemphill conservatively estimates the sale of enhanced bottled water products, which the B.M.C. tracks separately from traditional bottled waters, will exceed $1 billion during 2007. Between 2005 and 2006, the market grew 50% and achieved $890 million in sales.
During this year, the leading companies have made efforts to establish themselves in the enhanced segment. Coca-Cola, for example, made a splash in the market when it announced it was acquiring Glaceau, the makers of vitaminwater, fruitwater, smartwater and vitaminenergy, for $4.1 billion.
"This is an outstanding opportunity for both of our companies to build an expanded active lifestyle business, first in the United States and then around the world," said Muhtar Kent, president and chief operating officer of Coca-Cola.
But Coca-Cola’s efforts to bolster its position in the enhanced segment did not stop there. In June, the company launched Dasani Plus enhanced waters with no calories and in three varieties, Refresh+Revive, Cleanse+Restore and Defend+Protect, named to connote specific health benefits.
PepsiCo also is attempting to strengthen its position in the enhanced bottled water segment. Earlier this month, the company introduced a new version of its Propel brand and reformulations of its Aquafina Alive and SoBe Life Water brands.
The company’s Propel brand was introduced nationally in 2002. The new Propel Invigorating Water is designed to not only hydrate, but also address a consumer need by providing a boost for active people throughout the day. The new vitamin-enhanced water is mildly caffeinated and lightly flavored, with only 20 calories per 8-oz serving.
Clouds on the horizon?
For all of the success bottled water suppliers have experienced, two events may indicate there are hurdles to overcome in the future. In June, San Francisco Mayor Gavin Newsom announced the city would phase out the purchase of bottled water. The initiative was started after local news reports indicated the city could save money by not providing bottled water.
"All of this waste and pollution is generated by a product that by objective standards is often inferior to the quality of San Francisco’s pristine tap water," wrote Mr. Newsom in an executive order regarding the ban.
The second event occurred this past July when PepsiCo announced it would label its bottled water as coming from public water sources. Currently, the brand labels its source as "P.W.S.," but future labels will spell out "public water source." The decision was made as a group called Corporate Accountability International has pressured bottled water suppliers to change marketing practices.
The group has launched a marketing campaign titled "Think outside the bottle" that encourages consumers to consider tap water and the environmental impact of bottled water products.
The International Bottled Water Association has noted that most consumers drink both bottled water and tap water, depending on the circumstances, and that water bottles are 100% recyclable.
This article can also be found in the digital edition of Food Business News, September 18, 2007, starting on Page 43. Click