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Nestlé has a wide range of business lines, including powder and liquid beverages (including hot drinks), bottled water, milk powder and ice cream, nutrition and healthcare, prepared dishes and cooking aids, confectionery and pet care. According to the company, bottled water accounted for around 7.3% of the group’s sales in 2013, and 10% of trading operating profit. At corporate level, bottled water is centrally managed as a global business under Nestlé Waters. All the signs are that the company’s bottled water brands do not always receive the same level of development attention as other high growth and more attractive categories, such as Nespresso coffee pods or skin care. This is also reflected in the fact that Nestlé has engaged in little acquisition activity in bottled water in recent years, even divesting some of its regional French brands. Euromonitor International’s data show that the company faces plenty of challenges in its overall soft drinks business, alongside a ray of hope in premium bottled water.
Bottled water growth in volume terms over 2013-2018 will be dominated by Asia Pacific. Growth will be led by China, although the Indian and Indonesian markets are also set to perform well. Nestlé ranked eighth in bottled water in China in 2013, with its sales remaining way below those of Danone. Both Danone and Nestlé face formidable competition in Hangzhou Wahaha, whose leading position is underpinned by strong rural distribution. China Resources Enterprise and its C’estbon brand have also made significant share gains in urban areas, thus putting extra pressure on international brands.
Nestlé’s sales in India and Indonesia are currently negligible, which remains a concern. Nestlé has not announced any specific entry plan for India, although it has been fairly active in Pakistan’s bottled water market in recent years. In India, local player Parle Bisleri remains the undisputed leader, although it is facing share erosion due to heavy investment in marketing and distribution from second- and third-ranked PepsiCo and The Coca-Cola Co, respectively. Danone outperformed Nestlé in major emerging markets in 2013 and maintained its leading position in bottled water in both Indonesia and Mexico. Without a prominent position in major volume growth markets, Nestlé will find it challenging to retain its global position over the long term. As a side note, Chinese companies collectively raised their global profile and their status is likely to remain unchanged on the back of continuously rising demand for bottled water in the years to come.
Nestlé’s soft drinks portfolio is based primarily on its bottled water brands, which are joined by its Nescafé coffee and Nestea RTD tea. In bottled water, the company has a broad range of global, pan-regional and local labels. Nestlé has three groups of brands – sparkling brands (Perrier), regional brands and Nestlé Pure Life. These span the entire price spectrum, from Nestlé Pure Life and Aquarel at the bottom, to Vittel and Poland Spring in the middle and S Pellegrino and Perrier at the top. This strategy helps to attract a wide range of consumers in different markets.
In developed markets, bottled water has increasingly come under fire from those concerned about the build-up of plastic waste from packaging. Various media have reported that bottled water in most developed countries is no safer than tap water and creates considerable waste. It is also a challenge to educate consumers as to the importance of bottled water and the improvements being made in packaging materials and formats to reduce energy usage and transportation. Faced with competition and external pressures, in 2012/2013 Nestlé re-focused on its national and international brands in France and divested some small French regional brands. For example, Nestlé’s Val St Lambert and Carola were sold to Société des Eaux Minérales d’Ogeu (SEMO) and Belgian group Spadel, respectively.
Nestlé Waters reported that exports accounted for 5% of its sales, with five of its 63 brands having an international presence, with neighbouring countries often being their major customers. For Vittel, which is produced in France, the German, Belgian and Swiss markets account for 90% of the brand’s exports. The borders of these countries are less than 200km from the spring, which can help cut transportation costs, thus limiting environmental impact and reducing consumer prices. This is perhaps one of the reasons why Nestlé has been able to maintain its leadership in bottled water in Western Europe.
While many bottled water brands appear to be struggling to cope with this backlash, Nestlé’s Perrier and S Pellegrino brands seem to be insulated from the criticism and are enjoying solid growth in many countries thanks to their premium positioning and healthy image. In the US, Perrier and S Pellegrino jointly accounted for more than a 40% value share of carbonated bottled water in 2013, with the country set to see solid category growth over the next few years. Nevertheless, as Nestlé increases the sales of its premium brands across continents, it is crucial that it communicates effectively with consumers and its business partners with regard to its efforts to reduce its environmental impact.
In RTD tea, Nestlé’s Nestea suffered a further decline in sales in the US in 2013 following revised BPW terms. Nestea was withdrawn from China, the world’s largest RTD tea market, as the company changed its strategy towards China, adopting an ‘ if you can’t beat them, buy them’ approach. Nestlé acquired a majority stake in local player Yinlu and instantly assumed leadership of the Asian speciality drinks category. While Nestea enjoys good global coverage, it appeared to be a neglected brand, lost in Nestlé’s vast brand portfolio. When an FMCG brand does not shine in both the US and China, it is at risk of losing its importance to its parent company. From an overall soft drinks perspective, Nestlé has no specific plan as to how to revitalise Nestea although its Nestea Zero variant appears to be doing well in Canada, its largest market. However, the category is too small in Canada to have any significant bearing on its global position. Therefore, Nestlé needs to look for alternative growth avenues. This week, Nestlé announced its plan to set up a joint venture with South Korea’s Lotte Foods to make and distribute Nescafé coffee, powder chocolate and beverages in Korea. This represents another move towards expansion in Asia and widening its beverage revenue streams.