The second part of a report on the Indian soft drinks market from analysts Euromonitor examines the progress of non-carbonated sectors, looking at the growth of the bottled water category and the potential for other types of beverages such as fruit and vegetable juices and functional drinks.

While carbonates make up the largest sector in terms of volume sales, bottled water is the market driver in the Indian soft drinks arena, with total volume sales growing by 564% between 1997 and 2004. However, the establishment of other non-carbonated sectors in the Indian soft drinks market is likely to be a slower process.

The robust growth in bottled water has attracted numerous market entrants, but the chaotic market conditions of bottled water have raised an alarm about the quality of water for sale. In particular, multinationals have been challenged by new standards for bottled water, introduced in 2003.

Contesting the CSE findings of the Centre for Science and the Environment (CSE), major players like Parle Bisleri Ltd, The Coca-Cola Company and PepsiCo have claimed that their facilities meet WHO norms. The Bureau of Indian Standards (BIS) has taken action against 30 water bottling units, including those of Pepsi and Bisleri. It closed down a few local manufacturers and issued warnings to a Coca-Cola water bottling plant. However, all the major players still remain in business despite such legal notices, and without having to take much action to meet the BIS norms.

Nevertheless, in spite of the controversial debate about the BIS measurement, the tremendous growth potential of bottled water has attracted many new players. Newcomers include beer and liquor companies such as United Breweries and Shaw Wallace and the manufacturer of water purifying equipment, Zero-B. In 2004, the Indian Railways launched its own bottled water under the brand name Rail Neer to capitalise on the huge portion of sales which take place on railway premises and trains. As the competition in the small packaging format has intensified, PepsiCo made its foray into the bulk water business in September 2003, with the launch of 25-litre packs of Aquafina.

In search of volume growth, multinationals are also investing in niche products such as fruit/vegetable juice and functional drinks. In the wake of the controversy over bottled water and carbonates, fruit juices enjoyed a little progress in 2003, with total volume sales increasing by 6%. The Coca-Cola Company and PepsiCo have wasted no time in exploiting the fruit juices category, with the two majors controlling a combined 52% share of the total volume sales in 2004.

Fast food giant McDonald's has begun advertising their standard food offerings together with fresh fruit juices, giving increased exposure to commercially packaged fruit juices. That said however, it is mainly consumers from the upper income group who are switching to commercially packaged fruit juices, since these are still far too expensive for the mass market.

In 2004, sales of RTD tea, RTD coffee and functional drinks remained negligible. This is largely due to the fact that such products were only launched recently. While brands such as Lipton Iced Tea, Seasons and Nestea Iced Tea are now available in retail stores, there has been a dearth of marketing and promotional efforts. Nestlé India has only recently begun developing RTD tea with trial testing on selected sites.

Similarly, there is negligible demand for functional drinks in India, as there is a general lack of product awareness and appreciation, despite the sporadic presence of The Coca-Cola Company's local brand; Shock. In September 2004, PepsiCo launched its sports drink Gatorade. The product will be imported initially, and depending on the volume sales, it may later be manufactured in India. Sports drinks are generally unheard of in India and it remains to be seen if PepsiCo with its distribution reach, and with the help of endorsements by cricketers, is able to take the brand forward in India. As well as the carbonate giants' initiatives, Red Bull has been eyeing the Indian market for years and finally launched Red Bull in March 2004.

Niche products are unlikely to be the main focus for major manufacturers in the short to medium term, although the investments in non-carbonates are noticeably increasing. Euromonitor predicts that total volume sales of soft drinks in India will reach 7.28bn litres by 2008. Again, carbonates and bottled water are expected to be the market drivers and rural penetration will continue to be the focal point for multinationals.

However, in the medium term, manufacturers may introduce functional soft drinks such as functional juices in their search for growth. Products could be designed for children's consumption but marketed to health conscious parents. In other major emerging markets such as China, Mexico and Brazil, the well-being of children is the focus of urban middle class parents. And as the economy grows, the number of middle class households rises and with it the number of consumers who can afford functional beverages.  The next few years is also expected to see growth in sales of Asian juice drinks, flavoured with ingredients such as soya bean, lemon barley and aloe vera drinks. These products are already popular in other Asian countries and are expected to appeal to India's urban consumers.