It may not be the biggest launch in Coke's recent history, but with the news that it is to enter the French water market, the company has laid down a massive marker for its future strategic direction. Chris Brook-Carter reviews the repercussions for the current leaders in the bottled water industry.

If anyone was in any doubt as to the Coca-Cola Company's commitment to diversify its efforts away from carbonated soft drinks and into water, then the announcement that the giant is to launch Dasani, its bottled water brand, in France should put them right.

Bottled water still accounts for only 7.4% of the group's turnover, and Coke will make bigger launches in bigger markets, possibly even this year. But water contributed 44% of overall volume growth in 2002 and the significance of this move goes far beyond the physical arrival of Dasani on French soil.

"With low growth, low pricing, strong established competitors and the world's most sophisticated consumers, France would seem like the last place on the planet for Coca-Cola to launch a water," said John Parker, beverage analyst with Deutschbank. "We believe the decision to go with Dasani in this market is the clearest possible statement that Coca-Cola could have made: they are set to build a major water business in every country in the world and that carries with it a seriously negative message for the existing players in our view."

Coke itself has kept fairly quiet about the scale of the launch. However, as Parker pointed out, Coke is "not a company built on niche brands." And indeed, Coke hinted at its ambitious intentions when Hubert Patricot, CEO of Coca-Cola Entreprise compared Dasani's French rollout to the launch of Coca-Cola light.

"With Dasani, we now have an extra asset in our offer of non-alcoholic beverages," said Patricot. "We attribute to Coca-Cola's much-awaited arrival as a new entrant on France's bottled water scene a level of importance comparable to the launch of Coca-Cola light in 1988."

The spring arrival of Dasani in France will follow a UK launch for the brand in February. Dasani's UK debut has been expected for some time. In contrast, the French decision has taken many industry followers and perhaps one or two competitors by surprise. The UK, after all, is a water market with huge potential, which is demonstrating impressive growth rates with apparent ease. France, by comparison, is one of the most mature and sophisticated water markets in the world.

According to the research group Canadean, in 2002 the UK saw per capita consumption of 20.2 litres. France on the other hand recorded per capita consumption of 144.5 litres. Canadean estimates that France will grow at an annual compound growth rate (CAGR) of over the next five years of 3.8%. In the UK it estimates CAGR of 9.5%, while Ireland will register 8.9%.

Furthermore in making this move, Coca-Cola is taking on Paris-based Danone and Switzerland's Nestle SA, the world's biggest water companies, on their own doorstep.

The drinks research and analysis group Datamonitor has called the move a "declaration of war" - a touch melodramatic perhaps, but the aggressive sentiment is not far wrong because Coke will need all its muscle to make an impact.

"Danone is one of the best-managed companies we follow and, along with Nestlé, should have plans in place to give Coca-Cola a very big 'Welcome to France'," said Parker.

Nestle is the leader in the French market with a 25% share, with brands such as the sparkling Perrier and still waters Contrex and Vittel. Danone claims the number two position with 23%. Neptune Distribution, which sells a budget product, holds 19%, while small companies fight it out for the rest.

Picking a winner out of all of this is nearly impossible and analysts are divided over Coke's chances.

"I'm sceptical about the room for new brands in the European water business," one analyst said in a report at the end of last year, while another said: "In the health-conscious trends these days, water is a better business than carbonated beverages. I can imagine Coca-Cola will go quite far in entering the European market."

Those optimistic about Coke's hopes, point to the fact that the company has now become the world's number three water producer, from nothing in 1986, marketing bottled water in more than 100 countries through about 20 brands. First launched in 1999, Dasani has already become one of the world's top ten selling water brands.

In the US, Coca-Cola's arrival in the water category substantially shook up a market once dominated by Europe's giants, prompting the withdrawal of Danone - whose products are now distributed by Coke - and a significant increase in marketing spend by Nestle.

In France, Coke already has 1000 salespeople on the ground and 61% of the carbonated soft drink market. Deutschebank believes the company is likely to follow its US strategy first, attacking the out-of-home segment where its bottler network gives it superb distribution. However, Parker points to reports that the brand will be launched in 50cl, 1 litre and 1.5 litre bottles and in multi-packs. This indicates a push into all major retail outlets, not just the out-of-home sector.

And, of course, the company is no slouch in the marketing department, with a large-scale advertising campaign planned, aimed at rapidly developing consumers' awareness of the brand.

Importantly, the company also realises France is not the US, and the Dasani being launched there has been altered to reflect the significantly more mature Gallic consumer. Unlike the purified water drink available elsewhere, French Dasani will be launched as a mineral composition with added calcium and magnesium.

That said, there is more than the matter of taste to overcome. Nestle and Danone are well entrenched within the French market and consumers and retailers alike are well used to the bands on offer. Some 80% of bottled water in France is sold through retailers who have long-standing relationships with Danone and Nestle.

Furthermore, the defence of their home and neighbouring markets will be a matter of pride for the big two. Nestle is already involved in a cost-cutting exercise to boost efficiency and both have been buying into the Home and Office Delivery (HOD) segment, an area Coke has no presence in.

It is unlikely that either European company has hit the panic button quite yet, but neither will they make the mistake of underestimating Coke's challenge. What may be more worrying is the possibility of a costly price war, triggered by the arrival of another major player in an already overcrowded market.

In the short term, this may be of more concern to investors of Europe's water giants than the likelihood of outright victory for the US invader.