Coca-Cola and PepsiCo have made impressive progress in their blitzkrieg assault on the US water market but to progress further they will have to take on a powerful market leader in the form of Nestle. And Ben Cooper found that the current top dog has more on its side than sheer scale.

Behind Coca-Cola's recent tie-up with Danone is the conviction that it will best further its aims in the US bottled water market with a portfolio of brands. If imitation really is the sincerest form of flattery, Nestle Waters North America can feel suitably complimented by its ambitious rival.

For Coca-Cola's fledgling portfolio has nothing on the market leader's array of water brands which segment the market by product type, price, consumer and region. The company's recent name change from Perrier Group of America to Nestle Waters North America (NWNA) was primarily a reflection of the fact that mineral water now accounts for 10% of the company's turnover but it also serves to reinforce its strength in breadth.

With more than a third of the market, NWNA enjoys an unrivalled powerbase in the sector and there is little sign that it has any intention of resting on its laurels. Like Coca-Cola and PepsiCo, Nestle is recording strong growth in water volumes as US consumers continue to take to the idea of buying packaged water.

According to NWNA's vice president marketing, Bob Davino, the company's sales in PET packaging - the main growth driver in the market - are growing annually by around 30%. Some brands at an earlier stage of development are turning in growth closer to 60%, Davino says.

"Every year we say we can't sustain the growth and every year we are surprised," Davino told Just-drinks. "We're in a wonderfully vibrant category that keeps growing and growing. Growth rates in the 20%-plus range are realistic for PET over the next three years."

Nestle's strength is founded on six regional natural spring water brands, Poland Spring, Arrowhead, Ozarka, Zephyrhills, Deer Park and Ice Mountain. The company also has the imported mineral water brands, Perrier and San Pellegrino, and also markets the national value brand, Aberfoyle.

Although the six core brands are regional rather than national, they are still major players in their own right and individually bear comparison in volume terms with any water brand sold in the US.

The largest of the six is Poland Spring which is sold primarily in the north-east. In New York, Poland Spring has 57% of the PET market in the grocery channel; in Boston it has 52%. This local strength means that even though Poland Spring is not sold nationally it has an 8.8% share of the total US PET grocery sector.
Similarly, Arrowhead has 34% of the PET grocery sector in LA and a national share of 8.2%.

As Davino points out: "These figures reinforce consumer preference for their own "home-grown," regional spring water brands." As one would expect, Nestle looks to stress authenticity and naturalness in its labeling, advertising and communication for these brands. It has recently introduced new label designs for three of its regional waters: Deer Park, Zephyrhills and Ozarka. Last month, it also launched a new TV ad campaign for its mid-West brand, Ice Mountain, which also plays on these themes.

All six regional brands are available across the full range of distribution channels. Each has its own home and office supply business in addition to dealing with both the off and off premise sectors across the different regions.

The brand which is outside of the regional model is Aberfoyle, also a natural spring water. Aberfoyle is in fact the company's largest brand with a market share of 9.3% in the year to August 11 out of NWNA's total share of 36.5%. But it has a very different distribution and positioning from the six regional brands. Distributed nationwide, Aberfoyle is positioned at a value price, with relatively low media spend.

The company acquired Aberfoyle three years ago and has ambitious plans for the brand. NWNA is expecting annual volume growth of between 30% and 40% for the brand over the next three years which should see it add 1 percentage point to its market share each year.

But strength and depth are not the only advantages Nestle holds as it prepares to meet the challenge of Coca-Cola and PepsiCo. Arguably its prime advantage is that in spite of being by any measure a large enterprise - turnover last year reached $2.1 billion - NWNA is a highly focused company. It packages, markets and sells water and that is all.

"We have a lot of passion and a lot of focus for this business," says Davino. "That means we are focused on finding the right solutions for our trade partners and consumers and they get that in the form of choice of brands, distribution options, availability options and package sizes.  All our energies are focused on water."

The second crucial advantage which Nestle would appear to have over its competitors is the fact that its business is concentrated on natural, spring waters rather than purified water. All the Nestle brands are natural spring waters and while the company does market some purified water sub-brands, source waters account for more than 90% of its business in volume terms.
Davino has no doubt that authenticity is a key motivator for bottled water consumers. "They are real products the way nature intended them to be," he says. "They come from real places. They are authentic. Our brands mean something; they have local relevance. Our trademarks have meaning that resonates."

Davino cites a survey from the consumer research company, FRC, which suggested a 2 to 1 consumer preference in favour of natural, spring water over purified. That statistic is clearly enthusiastically greeted by Nestle but Coke and PepsiCo would say the evidence at the checkouts suggests US consumers are not quite so discerning. After all, by virtue of the strong growth of Aquafina and Dasani, the strongest growth over the last few years has without question been in purifed water.

But it is the future trend which Nestle is looking to most keenly. Like many, Davino believes the importance consumers are increasingly placing on health and well-being has been a key factor behind the growth of the bottled water market. Equally, he expects this to continue to raise the appeal of spring water over purified brands as the packaged water market develops. "As consumers are becoming more health-conscious and particular about choosing bottled water versus other sweet drinks, we believe they are more discerning about choosing natural, protected source, spring water," Davino told Just-drinks. "Natural versus processed also resonates with people across many food categories."

To what degree Nestle will benefit from its focus on spring water will depend on how US consumer appreciation of bottled water develops over the coming years. While they are all agreed that the water market will continue to develop at pace, Coca-Cola, PepsiCo and Nestle all have differing views on exactly how it will develop, and are backing their own judgment. Only time will tell which is most at one with consumers.

Expert Analysis

North America Packaged Water Report

This report gives top-line market data at both a country and regional level, including forecasts out to 2004. Market segmentation is shown, together with packaging and distribution splits, relevant taxes/duties, selected retail prices and, where available, corporate shares.


However, differing marketing approaches aside, it should be borne in mind that  Nestle also holds a significant edge in terms of scale. Coca-Cola may well aspire to holding the same sway in the water market that it enjoys in the CSD sector but there is one inescapable fact the soft drinks giant has to acknowledge. The water market already has its Coca-Cola Co. and it's called Nestle. Holding on to poll position will not be easy but overtaking a powerful and far from complacent market leader will be no stroll in the park either.