Coca-Cola announced last week that it was taking over full control of its US water joint venture, CCDA Waters, buying out its partner, Danone. However, speculation over the poor performance of the CCDA brands and Coca-Cola's pricing strategy persist. Ben Cooper reports.

In spite of taking decisive action in the US by buying out Danone from its water joint venture, Coca-Cola's water strategy is still being questioned by analysts. Packaged water is a key development area for soft drinks companies and one that Coca-Cola has been keen to tap. But the embarrassing debacle of its botched launch of Dasani in the UK last year and continuing doubts over its US water strategy has led some observers to question Coke's approach to this exciting growth area.

Last week, Coca-Cola announced that it had acquired Danone's minority stake in the US water joint venture the two companies had been operating for the past three years. The deal saw Coca-Cola acquire Danone's 49% stake and assume full control of CCDA Waters which produces and markets Dannon, Sparkletts and other water brands in the US. Coca-Cola will take over full ownership of five spring-water bottling plants in the US.

It was also announced that Coca-Cola will increase marketing expenditure on Evian, Danone's premium water brand, which it imports and markets in the US under a separate agreement, by 20% over the next five years. This comes in response to an 8% decline in Evian sales last year.

The joint venture clearly failed to live up to expectations. Coca-Cola acquired its 51% stake in the company in 2002 for US$130m and is thought to have paid Danone less than US$100m for the remaining 49%, though financial details of the deal were not disclosed. However, the lack-lustre performance of the joint venture and Evian's decline has led some to question the three-tiered pricing strategy Coca-Cola employs in the US water market. The soft drinks giant markets the Danone spring waters as its discount brands, its own purified water, Dasani, as a mid-priced offering, while Evian is the company's premium water brand.

However, intense competition has driven prices down and affected profitability at the joint venture. One analyst estimated that the retail price of the Dannon brand has fallen by as much as 60% over the past two years, while some have suggested that the joint venture has never actually turned a profit during the three years of operation. Coca-Cola said that full control of CCDA Waters would allow it more flexibility and speed in changing packaging, distribution or promotion.

Coca-Cola appears committed to its three-tiered pricing strategy and to its spring water brands but the wisdom of this has been questioned given that these brands effectively compete with its prime water brand, Dasani. "The three-tiered water strategy has not proven to be working," said Bill Pecoriello, beverage analyst at Morgan Stanley. "We question why they ever got into that spring-water business and why they remain in it."

A particular problem appears to be the Dannon brand which is not distributed through the Coke bottler network and is effectively competing directly with Dasani. "Much of the rapid growth of Dannon has come at the expense of Dasani," Pecoriello said. It has even been speculated that Danone may in due course take back control of the Dannon brand in the US.

Meanwhile, even more galling for Coca-Cola has been the success enjoyed in the water sector by its longstanding rival PepsiCo. By focusing on its purified water brand, Aquafina, PepsiCo appears to have stolen a march on Coca-Cola. Aquafina is the biggest selling single water brand in the US with a 13.6% share of the market in 2004, according to Beverage Digest. Dasani is the number two brand with 12.1%. Coke's combined share, including the Danone brands and Dasani, declined by 2.2 percentage points in 2004 to 21.9%. The market leader in water is Nestle, which has a host of strong regional brands including Poland Spring, Zephyrhills and Arrowhead, with a share of 42.1% in 2004.

According to the 2005 Global Packaged Water Report, published by just-drinks.com in March, North America is the fourth largest water market in the world, with an estimated 13.5% share of the global market for packaged water by volume. Water sales are rising fast especially in the HOD sector and in large size non-refillable PET bottles.