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Bottled Water in 2014: Packaging, Branding, and the Search for Value

February 17th, 2014

With total volumes expected to eclipse 300 billion litres in 2014, bottled water will pass tea as the world’s most consumed packaged beverage. In examining both emerging and developed markets, the commoditisation of bottled water is at an all-time high, causing manufacturers to re-examine their products and give reasons for consumers to pay more. This search for premiumisation takes on many forms, with emerging countries in Latin America, Asia, and the Middle East and Africa focused on growth via access and single-serve packaging while North America and Europe seek to grow value with a renewed focus on branding.

Searching for Value via Serving Size in Emerging Markets

In many emerging markets, the scarcity of clean water makes bottled water a necessary staple rather than a value-added refreshment beverage like juice or soda. The price per litre of bottled water reflects this commoditisation, ranging from US$0.11 in India to US$0.27 in Mexico, whereas carbonates and juices range from US$0.61 to US$1.27. The same is true in the Middle East and Africa where still bottled water has seen double digit average annual growth, yet value cannot keep pace due to unit price remaining stagnant at US$0.24 per litre. Contributing to this low unit price and commodity positioning is how bottled water is packaged. Unlike developed markets where over 75% of all still bottled water sales came from pack sizes less than 2 litres, bottled water in containers 2 litres and over accounted for over 60% of 2013 off-trade volume in emerging markets.

This unit price gap results in lower margins when compared with other soft drink categories. Although bottled water is one of the cheapest beverages to manufacture (especially when sourced locally), there is still a fixed cost in packaging and distribution. This is especially costly in the more rural areas of emerging markets, where clean, safe water is most needed. Given these low margins, bottled water companies in emerging markets rely on reducing production and distribution costs while increasing availability to maximise profits. Brazil provides a key example. Here, regional players leverage proximity to nearby water sources and regional distribution networks to lower the high freight costs that would serve as barriers to global brands. A regional manufacturer is in a much better position to produce bulk packaged bottled waters, ship them to central areas, and have consumers purchase them under a direct selling model. Unable to compete with such low price points and still maintain profitable margins, Nestlé and Danone recently acquired regional brands (purchasing not the name, but the distribution networks and access to local springs) instead of competing directly to expand market share.

While growth of bulk water sales favours smaller, regional manufacturers, the more profitable single-serve segment favours brands capable of stronger spending more on marketing. Such is the case in in China where bottled water pricing grew by nearly 2% in real terms since 2008, while carbonate and juice unit prices have declined. The difference here is the growth of higher unit priced single-serve water in PET bottles. Over the past five years, sales of 301-500 ml packaging units grew 96%, surpassing 501-750 ml sizes as China’s most consumed bottled water pack size. A booming economy that helps sustain single-serve beverages and a growing demand for healthier on-the-go drinks are the main drivers for this growth, with natural spring water brands such as Nongfu Spring and C’estbon seeing robust volume and value share growth since 2008. These brands invested heavily in marketing campaigns to highlight the quality of their waters and the on-the-go lifestyles of their single-serve bottles. This appealed to the growing urban and working class consumers of China, contributing greatly to brand and category value growth. Such positioning could hold the same promise in Brazil and other growing markets, where on-the-go packaging could appeal to newly enriched, health conscious consumers.

The Branding Challenge of Europe and North America

Unlike bottled water sales in many emerging markets, clean, municipal water is widely available in many developed countries. In these markets, bottled water trades on quality and convenience rather than safety and consumer access. Overall, the category experienced a recent boom thanks to consumers moving away from high calorie soft drinks, yet the types of bottled water consumed varies region to region. The importance of mineral water across much of Europe is indicative of a consumer willing to pay a premium based on sourcing, whereas a the boom of single-serve water in North America has put pricing and convenience at the forefront. While premiumisation is a factor in each region, this difference in positioning creates different pathways for growth.

For Western Europe (and many markets in Eastern Europe), natural mineral and spring bottled waters are the dominant water types. This is attributable to consumer appreciation for water sourced from natural springs and wells. Because of this, high margin, premium lifestyle brands such as Evian, Volvic, Cristaline and Vittel lead the region, with private label and economy brands accounting for a relatively small, but growing segment. With the economy recovering, many Europeans can once again afford the luxury touted by these premium brands. This luxury positioning helps drive sales, but makes both the brands and the category highly susceptible to regional economic depression, as evidenced by an off-trade value decline of 1.5% from 2008-2009. Danone and Nestlé should continue to promote the premium nature of their products by touting their sourcing, but it may also be time for companies to explore economy or mid- tier brands to protect against economic concerns in the future and the threat of private label.

Private label and economy brands already play a large role in North America due to the recent bottled water growth across the region. A mid-2000 surge as consumers moved away from sugary sodas saw bottled water replace carbonates as household soft drink staples. The economic recession slowed this growth. Post-recession, newly value-conscious consumers returned to bottled water but favoured economy brands and private label due to low value add from mid-tier brands. This has served to commoditise bottled water as high volume, low value products with little value add outside of convenience. The result is a category where retailers are willing to take hits on margins to sell bottled water and increase foot traffic, evidenced by CVS’s 2013 sale of Nestle Pure Life for US$1.99 for a 24 pack of 500 ml bottles.

Not wanting to be caught up in the low value, high volume price war of economy and private label products, manufacturers such as Coca-Cola and PepsiCo are focusing on premium brands that distance themselves from their cheaper rivals. Coca-Cola’s SmartWater, an electrolyte fortified functional water, has grown over US$400 million since 2008 thanks to such premium positioning. SmartWater focuses on its fortification, luxury packaging, and celebrity advertising to drive growth. PepsiCo is set to launch a similar premium water in 2014 with “Qua”. While details of the product are still scarce, sleek packaging and heavy marketing seem to distance Qua from PepsiCo’s Aquafina brand and position the product to compete with SmartWater. Commodity bottled water is unlikely to go away, but by focusing on these new offerings, manufacturers hope to increase value.

While the global volume growth of bottled water is unprecedented, the near 100 billion litres of growth forecast from 2013 to 2018 will surpass the previous five year period by over 25 billion litres, making bottled water the world fastest growing soft drink. The main driver behind this growth is health: a demand for clean sources of water in emerging markets and a demand for a healthier soft drink in developed ones. This ubiquitous nature of bottled water makes it a commodity, with brand names easily replaceable by cheaper versions absent a compelling reason for consumers to pay more. As manufacturers move into 2014, the focus on adding value to their products is more apparent now than ever.

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