Coca-Cola and PepsiCo are looking to expand their presence in the European water market, where they both lag some way behind market leaders Danone and Nestlé. Coca-Cola has made a number of important acquisitions over the past year, writes Catherine Mars of Euromonitor International, and PepsiCo is looking to make up ground.

This year has seen a flurry of acquisition activity in the European bottled water market as Coca-Cola has looked to expand its presence. Following last year's purchase of several Eastern European water brands, recent acquisitions in Italy and Germany are further evidence of the company's strategy to develop its business in this high-growth sector. Moreover, Coke's expansion is likely to be a spur to PepsiCo to accelerate its own European development plans.

Over the last five years, global bottled water sales have recorded an average annual growth rate of 10%, outpacing the soft drinks category as a whole, which grew annually at 6%. Global volume bottled water sales in the off trade grew by 59.8% between 2000 and 2005 to reach 50.82bn litres. In fact, bottled water was the fastest growing soft drinks sector in actual terms between 2000 and 2005, a trend that Euromonitor International forecasts will continue between 2005 and 2010.

Coke and PepsiCo have made inroads into this attractive market over the last five years. Between 2000 and 2005, both companies significantly outperformed the market as well as the two other leading players, Danone and Nestlé.

For Coca-Cola, growth has largely been driven by gains in North America, Asia Pacific and Latin America, while the company is also strong in Australasia (where it has a 34% share in the off trade in value terms) and Eastern Europe. Western Europe stands out as the one region where the company has less of a presence.

Coca-Cola is the number three bottled water company in the world, but only number seven in Western Europe. In addition to being the market leader in Australasia, it also has top spot in Eastern Europe, while it is the second largest player in North America, the third largest in Latin America and the second biggest in Asia Pacific.

PepsiCo, the fourth largest player in the global bottled water market, has also relied on North America, where it is also the fourth largest player, to drive growth. While the company is well positioned in Eastern Europe, second behind Coke, it is much weaker in Western Europe where it ranks a lowly 31st, with a 0.3% share in retail volume terms. It is also comparatively weak in both Latin America and Asia Pacific - ranked 11th largest in both regions.

In July, PepsiAmericas purchased the remaining 51% stake in the Romanian bottler and distributor Quadrant-Amroq Bottling Co., who currently rank 11th in the Romanian market in volume terms. This purchase may signify renewed interest in the Eastern European market which Euromonitor International forecasts will experience strong growth over the next five years.

Russia is a high-growth market where PepsiCo might consider boosting its share through acquisition. The company, which already leads the Russian market for bottled water with a 16% share in total volume terms, is rumoured to be in talks with juice producer Wimm-Bill-Dann. Should that deal go through, PepsiCo would acquire the company's Essentuki, Yasnogorskaya and Zapovednik water brands, which collectively account for 3% of the bottled water market in total volume terms.

With the second highest forecast growth in Eastern Europe behind Russia, Ukraine is another attractive market. The number one player Georgian Glass & Mineral Water Holding accounts for 20% of the market in off-trade volume terms followed by Coca-Cola with 8%. Despite not having a presence in bottled water, PepsiCo is in a strong position in Ukraine due to its early entry into the market. Buying Wimm-Bill-Dann would also give it a foot in the door in Ukraine.

In the more consolidated Western European market, both Coca-Cola and PepsiCo have a weaker presence and are considerably behind the two top players, Nestlé and Danone, which have a combined volume share of 25%. Euromonitor International believes that even though this is a mature market, it still presents opportunities for Coke and PepsiCo. Total volume growth in Western Europe (8.82bn litres between 2005 and 2010) is forecast to be approximately double that in Eastern Europe (5bn litres). 

Growth through acquisition remains an option. Coca-Cola recently purchased Apollinaris and the Italian Traficante group, giving the company a foothold in Germany and Italy respectively, the two largest European markets for bottled water by volume. Euromonitor International expects these acquisitions to boost Coca-Cola's position in Western Europe from 7th to 5th in off trade volume terms.

Recent reports indicate that PepsiCo is also on the look out for acquisition targets in Western Europe, and interestingly, was rumoured to be interested in the Apollinaris brand last year. Turkey, which Euromonitor International forecasts will be the fastest growing market in Europe, is thought to be of particular interest to PepsiCo. The company already has a presence with its Aquafina brand and there are many smaller companies, such as Niksar, Kizilay Maden Sulari and Sirma, which might be potential acquisition targets.

PepsiCo has no presence in either Germany or Spain.  Although Danone and Nestlé are established players in the German market, the market is actually not particularly consolidated so there are numerous potential targets, such as Franken Brunnen, Vilsa-Brunnen O Rodekohr and Adelholzener Alpenquellen.

Spain is forecast to be the second fastest growing market in Europe according to Euromonitor International, and there are a number of small local players only operating in the bottled water sector, such as Fontaga, Aguas de Fuensanta, Manantial de Fuencaliente and Aguas Minerales de Firga, which could give PepsiCo an entry into the market.

It seems likely that PepsiCo will follow Coca-Cola's lead and look to firm up its position in the European bottled water market through acquisitions. Euromonitor International expects the company to look for acquisition targets in markets which are not overly consolidated and are forecast to experience strong growth over the next five years.

Euromonitor International also believes that PepsiCo is more likely to make acquisitions in a country where it can expand its existing business, rather than entering a completely new market. Russia and Turkey, expected to show the highest growth in actual volume terms of any European country, east or west, are likely to be high priorities for Coca-Cola's arch-rival.