Focus - Functional Water - A Valuable Category Poised For Steady Growth
Since 2005, the global volume of functional bottled water has more than doubled, based on Euromonitor International data.
Due to its high average unit price and soaring volumes of late, functional bottled water is a category worthy of attention, reports Richard Haffner.
From a volume perspective, functional bottled water appears to be a niche category. However, due to a relatively high average unit price compared to still bottled water, from a value perspective functional bottled water is a substantial category worthy of attention for major soft drinks companies.
Since 2005, the global volume of functional bottled water has more than doubled, based on Euromonitor International data. One issue affecting future growth potential for the category is the geographic concentration of the business. In 2005, the top three volume markets, the US, Germany and Japan, accounted for 73% of global volume and, in 2010, these same markets accounted for 80% of global volume. Additionally, 2010 was a year where growth in functional bottled water slowed noticeably from the previous five years; from a compound annual growth rate from 2005 to 2009 of over 20% to just 3.5% for 2010 over 2009.
The major cause of the slowdown in global volumes is the world's dependence on the US for growth. From 2005 to 2009, the US accounted for almost 90% of the world's growth. However, in 2010, the US actually contracted in volume. Additionally, of the top five volume markets (US, Japan, Germany, China and Indonesia), for Japan, 2010 reversed several years of volume decline. Growth was positive for Germany, and Indonesia, but it was below previous years and China's growth in 2010 was under 6%.
From a volume perspective, functional bottled water appears to be destined for a niche, accounting for just 2% of total bottled water volume globally with steady, though unspectacular, growth potential. However, this is misleading due to the strong value-added component of the sub-category.
From a value perspective, functional bottled water is much more important to the bottled water category. Due to an average unit price for functional bottled water that is much higher than total bottled water, the functional category accounts for 9% of total bottled water value sales in 2010.
On a price per litre basis, the average price of functional bottled water is almost four times the average price of the total bottled water category. The higher average price is due in part to the segment's skew towards developed markets, where consumers in general have more to spend.
Functional bottled water sells for a similar price premium in both developed and developing markets, regardless of average consumer disposable income. For example, in the US, the average unit price of functional bottled water is about 2.5 times the price per litre of total bottled water; in Japan, functional bottled water is about 1.5 times the price. The relative price of functional to total bottled water is similar in China, where functional water is about 2.5 times the average price per litre of the total category, while the Czech Republic has an average price of 1.9 times more.
On a global basis, functional bottled water brand shares are also affected depending on whether they are viewed from a volume or a value perspective. In 2010, based on Euromonitor International data, from a volume perspective, private label is the fifth leading brand.
However, from a value perspective based on US$, due to its low unit price, private label is not even in the top ten brands. The major branded players' share of the rankings is also affected by a volume vs. value perspective, thought not as dramatically as private label. In 2010, Propel, from PepsiCo, is the clear number two brand based on volume. However, based on value Propel and Dakara from Suntory Holdings are in a virtual dead heat for second position. Glaceau's Vitaminwater is the number one brand from both a volume and value perspective.
Rounding out the top brands are SoBe from PepsiCo, Active O2 from Adelholzener Alpenquellen GmbH and Mizone from Danone. Nestlé is notably missing from this category.
Looking at both value and volume at a country level also helps to provide insight into the potential opportunities for functional bottled water. The countries where bottled water is the most popular with consumers, based on per capita volume, are the US, Czech Republic, Japan and Germany. All of these countries' consumers have per capita off-trade volume at least seven times the global average in 2010. The next closest country, Israel, has per capita consumption at less than half that
In all four of these heavy consuming countries, functional bottled water is a less costly alternative than in other countries. In these four, the off-trade average unit price per litre of functional drinks in 2010 is almost three times the average unit price of still bottled water. However, in the balance of the world, the average unit price of the functional variety is almost five times the price of still bottled water.
Although functional bottled water is less expensive in these heavy consuming countries, it is no longer a niche category from a value perspective, comprising 22% of total bottled water off-trade value in 2010 (compared to 9% of total bottled water off-trade volume). This contrasts with the rest of the world where functional bottled water comprises 1% of off-trade volume sales and only 2% of value sales, despite its heftier price premium to the heavy consuming markets.
Nowhere is the impact of a volume vs value perspective demonstrated better than in Germany. Since 2005, off-trade volume growth has outpaced value growth; volume growth by 177% from 2005 to 2010 and value growing by an equally impressive 136%. The reason volume grew faster than value is that private label volume grew by 284% over this period and branded players in total grew by 71%.
From a volume perspective, private label is the leading brand in Germany in 2010, with Active O2 the leading branded player. In fact, private label is so strong (total private label off-trade volume share is almost 69% in 2010) that an individual chain's private label, Lidl from Lidl & Schwarz Stiftung & Co, has almost as much volume share as Active O2; 25.0% volume share in 2010 for Active O2 vs. 24.5% for Lidl. Private label's impact seems to be on the secondary branded players. Active O2 has held its own in volume share since 2005, gaining almost five percentage points. However, all other branded players did not fare as well, losing over 20 percentage points from 2005 to 2010.
It is interesting to note that private label's volume share gains did not primarily come from the private label share leader, Lidl, but from Aldi and Ja (from Rewe Markt). While Aldi gained over 14 percentage points in volume share from 2005 to 2010 and Ja gained seven percentage points, Lidl only gained about two percentage points over this period.
The volume strength of private label helps to demonstrate the value of a strong brand image. Active O2 seems to be the only branded player thriving in the tough off-trade environment. Although total branded player off-trade volume grew from 2005 to 2010, this was entirely driven by Active O2. All other branded players actually suffered significant volume losses over this period, collectively posting a 44% decline.
The story in Germany is quite different from a value perspective. While private label in total is the share leader based on off-trade volume, based on value, Active O2 is the clear leader with almost half the market in 2010 and total private label has under a 15% value share. To demonstrate the value of a strong brand and marketing investment, consider that, from 2005 to 2010, Active O2 was able to grow off-trade value share at a faster pace than volume share.
The price premium of functional bottled water offers an attractive chance to manufacturers to increase revenue growth in mature, more affluent markets. These markets tend to have an ageing population that could find the product benefits of functional bottled water appealing. While the category will likely remain a niche from a volume perspective, it can become an important contributor to value growth. To realise the full value potential of this category, manufacturers will need to nurture a strong brand image to mitigate the effect of low-priced competition.
However, the heavy consuming functional bottled water markets suggest that there is a limit to how high the price can go. Somewhere around two to three times the average unit price per litre of still bottled water seems to be the sweet spot. As Germany demonstrates, a strong brand image can be very rewarding and able to brave the onslaught of private label.
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