The US bottled water market continues to grow impressively but the key driver behind the growth has been the entry of Coca-Cola and PepsiCo into the market, which has presented a significant challenge to the previously undisputed heavyweights in the bottled water business, Nestle and Danone. In spite of the growing presence of Coke's Dasani brand and PepsiCo's Aquafina, Nestle is still the market leader in the US bottled water market with around 30% but both Danone and Nestle are under considerable pressure from the two soft drinks giants.

Danone in particular has suffered. It clearly sees the lack of a nationally consolidated and dedicated distribution network as a problem, particularly for its Evian brand. Evian's sales were reported to have dropped by 5% last year - a conservative estimate according to some analysts - in spite of the strong growth in the market as a whole.

As a whole, Danone Waters of North America (DWNA), which has Sparkletts and Evian as its key brands, recorded sales of almost $880m in 2001. However, the Aquafina/Dasani effect can be clearly seen in its market share, which had grown steadily for five years but which fell from 14.7% in 2000 to 13.6% in 2001.

Danone appears to be considering some fairly radical steps to compensate for the new market conditions. There is strong speculation that it will sell its McKesson subsidiary, a home and office water delivery business, which sells the Sparkletts brand, to Coca-Cola.

Danone is also looking to set up a full licensing deal for its Evian brand. Both Cadbury Schweppes and Coca-Cola had been suggested as possible partners but Coke has recently emerged as the favourite to take over the full management of Evian in the US. Danone was concerned that Evian was not being given sufficient emphasis by the Coke and independent bottlers it relies on for distribution. Danone believes a full licensing agreement will give the brand the consolidated nationwide distribution network it has lacked and the marketing focus and muscle it requires to compete with the leading brands.

"It's been quite well reported that Evian has lost a lot of its distribution power after the launch of Dasani and Danone are looking at their options to maximise the value of their water brand in the US," Martin Dolan of Credit Suisse First Boston told

Significantly, Coke and PepsiCo chose to attack the market with purified waters rather than natural spring water products. The key Danone and PGA brands are mineral waters, which tend to have higher distribution costs. Worryingly for the two European-based companies, US consumers do not appear to make any great distinction between the two types of bottled water. Indeed Martin Dolan goes as far as to say that "there is no distinction being made by US consumers between purified water and mineral water." Even where Aquafina and Dasani are priced at virtual parity with natural spring waters, the PepsiCo and Coke brands are doing very well.

Nevertheless, the Nestle bottled water operation, Perrier Group of America, is holding its own against the aggressive newcomers, growing its sales broadly in line with the market. PGA's share of the market has grown from around 25% in 1996 to nearly 33% in 2001, with wholesale sales rising by 23.5% in 2001 to top the $2 billion mark.

However, PGA's largest brand, Poland Spring, was knocked off its number one spot by Aquafina and was also overtaken by Dasani in 2001 and is now the number three brand. Other PGA brands in the top 10 are Arrowhead, Deer Park, Zephyrhills and Ozarka.

The other soft drinks group which could yet come into the equation in the US is UK-based sweets and soft drinks conglomerate Cadbury Schweppes. The group was recently reported to be considering the acquisition of a bottled water brand with the aim of capitalising on the growth in the US.

In the US, Cadbury-Schweppes finds itself in a very similar position to Coca-Cola and PepsiCo. Like them, it is reliant on the becalmed CSD sector, with its Dr Pepper and Seven Up brands, while the growth areas in the soft drinks market are non-carbonated soft drinks and bottled water. "We have been studying water for some time and have nothing to announce at this stage. We are continuing to explore it," said director of corporate communications at Cadbury Schweppes-owned Dr Pepper Seven Up Inc., Michael Martin. This view was echoed by Cadbury Schweppes in London, which declined to comment on its strategy for the US bottled water market.

However, Cadbury-Schweppes is thought to be looking at a different solution from PepsiCo or Coca-Cola. Rather than attempting to launch or develop a purified water brand, Cadbury reportedly wants to acquire a small, premium mineral water. This would seem to imply that it is going after PGA's and Danone's territory instead of taking on Coca-Cola and PepsiCo at their own game.

Indeed, Cadbury Schweppes already has a participation in the purified water market through its share in the 7Up Dr Pepper Bottling Group, which produces the Deja Blue brand. Although the company is remaining tight-lipped, the speculation appears to suggest that it views a natural mineral water as a viable development option in the US water market, in spite of the inroads Coca-Cola and PepsiCo have made into Nestle and Danone territory with purified brands.

"The issue for Cadbury Schweppes is how they tackle the marketplace. They have Deja Blue which suits the bottler system in the US but I'm not too sure if it suits Cadbury Schweppes overall," said Martin Dolan.

Although it now appears to be an outside bet, it is of course still possible that Cadbury Schweppes, rather than Coca-Cola, will end up signing a licensing deal with Danone for Evian in the US.

One way or another, Cadbury Schweppes seems certain to make a move into the bottled water market in the short to medium term, adding further competition to a market which Nestle and Danone used to call their own.