A Year of Improvement and Changing Dynamics for Bottled Water Fortunes

More than other soft drinks categories, bottled water is a volume driven category based on Euromonitor International data. At a global level, bottled water total volume sales surpassed carbonates for the first time in 2010. Off trade only sales achieved this first in 2007. However, unit prices remain relatively low and private label competition is a growing threat in developed markets. So carbonates remains, by far, the leading soft drinks category in total value.

In the future, bottled water represents the biggest global volume growth opportunity for soft drinks. From 2005-2010 global bottled water total volume grew by over 50 billion litres, accounting for over half of global soft drinks growth. This is more than double the volume contribution of carbonates during this period. Euromonitor International projects that bottled water will maintain this growth trajectory through 2015. However, in the future developing markets, particularly in the Middle East and Africa will be more important to growth than in the past counterbalancing bottled water’s declining fortunes in North America.

Total Global Absolute Value Growth 2010-2015

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Source: Euromonitor International

The underlying developments driving this trend in the developing world are increasing incomes, urbanization of the population and the desire for cleaner drinking water. We will examine the impact of these broad based demographic and economic trends. While developed markets will still see growth, environmental and sustainability issues will present headwinds.

Bottled water category in perspective

The sharpest growth over the 2005-2010 period was in the niche categories of flavoured and functional water, reflecting increasingly dynamic new product development activity and growing consumer affinity with better for you beverages. While these two categories are niche in volume, they have the highest off-trade price per litre of all bottled water categories. Each category’s price per litre is more than double the price of still bottled water.

Functional bottled water has effectively emerged as a new soft drinks category over the course of the decade, with volume surges in both European and North American markets. However, during the recent economic crisis the unit price of the beverage was a stumbling block. North America represents 58% of global sales and saw volumes more than quadruple from 2005-2008, but is expected to experience a decline in volume sales through 2015 as consumers opt for lower priced still bottled waters. This is a key value-enhancing category, fuelled by a growing trend toward health and sport profile beverages. When belts were being tightened during the recession years, consumers began to scrutinize the ingredients and label claims of functional waters with a renewed scepticism. Clearly communicating the functionality of the product and the authenticity behind it is vital to ensure future volume sales.

Carbonated bottled water showed the weakest 2010 growth, reflecting negative consumer perception of the category in many markets. 55% of global volumes were sold through four markets in 2010 – Germany, Italy, Argentina and Russia.

With all the activity in bottled water, still bottled water remains the dominant category, accounting for nearly 80% of category volume in 2010 and almost 90% of category volume growth through 2015. However, from a value perspective, still bottled water is quite inexpensive with an average off-trade price per litre of US$0.4 in 2010 (compared to US$1.0 for carbonates). There are two key factors fuelling the volume growth- growing volume of high volume/bulk containers in emerging markets where the supply of potable water is poor and developed markets on-the-go consumption of bottled water in smaller packaging sizes. Of these two factors the desire for improved drinking water quality in developing markets is by far the more important contributor to volume growth.

The potential of developing markets

Global volume growth was impressive over the 2005-2010 period, with the category winning many exiles from carbonates due to a healthier profile of bottled water. In addition key companies are linking developed market consumption with developing market provision; for example, every one litre of Volvic consumed in the UK will provides 10 litres of drinkable water in Africa.

Asia-Pacific and Latin America are driving still water volume growth, reflecting the poor quality of potable water in many markets plus growing consumer sophistication in urban areas. High growth in the urban population is forecast for China (12%), Indonesia (14%), and Mexico (7%) over the 2010-2015 period. All developing regions (Asia Pacific, Eastern Europe, Latin America and Middle East/Africa) will add more volume from 2010-2015 than they did from 2005-2010. However, because of a higher base, only the Middle East and Africa is predicted to see a acceleration in the growth rate of still bottled water sales through 2015.

In fact the top five growth markets in absolute volume terms are all developing markets; India, China, Mexico, Turkey and Indonesia. In these markets, bulk bottled water, primarily for home delivery, is projected to contribute a disproportionate amount of growth. Increasing incomes and a desire for cleaner drinking water are driving much of this growth. A potential threat to this growth could be growing popularity of purified tap water. India is the exception where bulk bottled water is not projected to contribute as much to growth due to purified tap water in the home market already being popular.

Larger Sizes Contribute Majority of Growth

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Source: Euromonitor International

Asia-Pacific became the top consumers of bottled water in total volume terms in 2010, dethroning Western Europe. India and China are forecast to drive 60% of absolute volume growth over the 2010-2015 period.

While both the US and China are key bottled water markets moving forward, they are key for very different reasons. The US is key because it is so large today being the number one market accounting for 15% of global bottled water total volume in 2010. China is also a key market today accounting for 9% of global volume. However, in per capita terms these markets are polar opposites with Chinese per capita consumption about one seventh of the US. China will be driven by volume growth, this coupled with a self-medication and traditional medicinal culture will aid both still and functional water growth. China’s growth rate is projected to exceed the global growth rate with their share of global volume growing to 10% by 2015 while the US’s share of global volume declines to 12%.

The bottled water challenge

Demographic and economic factors favour rapid volume growth in developing markets. While this will stretch bottled water’s lead over carbonates in terms of volume , for bottled water to challenge carbonates on value, manufacturers will need to grow the niche categories of flavoured and functional bottled water. An aging population in developed markets may help this development. However, the developed markets are also saturated so growth in functional bottled water will necessarily come from other categories. This means market segmentation and brand positioning will be key to functional and flavoured bottled water growth in developed markets. While the nimbleness of entrepreneurial companies could be an important attribute in developing markets, the marketing muscle of multi-nationals is likely to be the key in developed markets for bottled water.