The Bottled Water Industry Prepares for a Global Water Fight

by Tony D'Altorio

The Bottled Water Industry Prepares for a Global Water Fight

by Tony D'Altorio, Investment U Research

Wednesday, December 15, 2010

They said the bottled water industry was in trouble...

First, it was health and environmental issues, including what to do with the used plastic.

Then the global recession hit and people really started to bash the business. Everyone expected cash-strapped consumers to turn to the tap for their drinking needs.

Yet somehow, despite those reasonable predictions, bottled water became one of the food and drink industry's star performers.

  • Danone ADR (PINK: DANOY), with its Evian brand, increased sales by 8.7% last quarter.
  • And Nestle ADR (PINK: NSRGY), its biggest competitor, saw a 7.8% boost.

In both cases, bottled water sales outpaced the larger company's sales by two percentage points. And for Nestle, with brands like Pure Life, such figures mark a sharp difference from the hits it took in 2008 and 2009.

Coca-Cola (NYSE: KO), the world's third-biggest bottled water supplier with brands like Dasani, didn't break out segment sales. But it did flag water as one of its growth drivers.

That could be due to Europe and Japan's unusually hot summers. And U.S. sales did notably bounce back after 2009's depressed levels and cooler seasons.

But bottled water producers point to a more fundamental change... Once again, it seems that emerging markets are driving demand...

Emerging Market Consumers Hit the Bottled Water

For all intents and purposes, it appears that emerging market consumers have hit the bottle.

For instance, Nestle saw bottled water demand there grow at a 20% annual rate. And top-line growth from its production and distribution emerging markets network helped it lift margins in its water division by 10 basis points in the first half of the year.

That makes sense considering emerging market growth has run at roughly double the developed world's 4% to 5% rate over the past five years.

Rick Haffner, head of global beverage research at Euromonitor, sees this trend continuing.

  • He believes bottled water sales will continue to grow on a long-term basis, largely "driven by emerging markets."
  • Haffner attributes the trend to rising incomes and a desire for clean drinking water.
  • He estimates long-term emerging market growth running at 5% to 7% per year in volume terms... compared to a meager 1% in the developed world.

And developing markets will outpace developed markets in bottom line terms too.

Euromonitor projects the North American market growing 13% in value terms into 2014. Meanwhile, Latin America is projected to grow by 85%.

But that's not to say that companies have any plans to abandon the developed markets. Quite the contrary, in fact...

Developed Markets: Fizzy Drinks Out and Bottled Water In

Developed markets are still maintaining modest volume growth levels. With the push for healthier lifestyles, fizzy drinks are out and water sales are up.

Nestle leads the market in U.S. bottled water sales. Along with private label brands, it accounts for most of the volume growth in the U.S.

Additionally, it increased its market leadership there to a 36% share in the first nine months of the year, according to Beverage Digest.

Meanwhile, Coke and PepsiCo (NYSE: PEP) seem fine focusing on higher margin sales through convenience stores and vending machines. Still, that led to Pepsi's market share falling to 10.7% and Coke's Dasani to 7.2%.

Gerry Khermouch of Beverage Business Insights says those companies "are losing share in part because they're voluntarily walking away from that business. They're not going to play in the lowest price case segment, where they sell their product for $2.99 a case."

That gives the competition plenty of room to gain. Nestle, for one, sees big potential in the U.S. due to its healthier lifestyle trend.

The company has a point too, since Americans still drink 170% more carbonated drinks than bottled water. Europe, on the other hand, turns to the latter much more often.

Nestle therefore wants to become the dominant player in water in the U.S. It would then introduce its customers to more innovative and profitable water-based products.

Many analysts agree the value of water sales in the developed world will climb. As more innovative, healthier drinks hit the market, profits should rise.

On this subject, Haffner says, "It is not so much the mainstream still driving water growth, but more of the niche areas in functional bottled water, like sports waters or those with various additives for health benefits."

So whether it's in the developed or emerging markets, it appears bottling water will remain strong for the foreseeable future.

Good investing,

Tony D'Altorio

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