For most multinationals, water is now a key element of their shift to produce healthier drinks

For most multinationals, water is now a key element of their shift to produce healthier drinks

Will the plug be pulled on smaller players competing in an increasingly-crowded bottled water market?

There is no doubt that consumer demand for healthier products has fuelled demand for bottled water worldwide in the last decade. Indeed, in the last few decades, the bottled water industry has gone from a business prospect that few took seriously to a global industry worth billions of pounds.

For most multinationals, water is now a key element of their shift to produce healthier drinks. But, unfortunately for many firms, profitability has remained low in the sector. Some observers believe that this could force out smaller players over the next few years.

Compared to sales declines for bottled water in mature western markets over the last couple of years, last week demonstrated something of a resurgence.

Danone Waters recorded an increase in full-year sales, while rival Nestlé Waters also reported a slight sales increase. Both firms were boosted by a return to growth in developed markets, such as the UK, although both companies' global water sales remained below levels seen in 2007 - the last full-year prior to the global financial crisis.

Water's low profitability was emphasised by Nestlé's results, in particular, which showed its waters division significantly lagging the margin growth of the food and drink giant's other businesses.

When you consider that, according to Morningstar analyst Philip Gorham, Nestlé's water division is more profitable than that of any other player in the market, including The Coca-Cola Co and PepsiCo, it's easier to see why some players may struggle to continue.

Gorham told just-drinks that water remains "an unattractive market". He added: "I think we'll see a reduction in competition soon. There are far too many bottled water brands, and some will fail sooner or later.

Gorham said that smaller players are more likely to "drop out", but he added that the likes of Coca-Cola and PepsiCo don't have it too much easier. 

"The bigger players - even Coke and Pepsi - can't make any money from multi-pack bottled water. They make some margin on the single-serve bottles, but their direct store distribution system is more expensive than using a third-party distributor, and really eats into their margins."

Private label could yet pour more misery onto the branded side of the industry, which, in addition to profitability issues, is also already battling environmental campaigners in key markets.

According to the Ibis World industry report, Global Soft Drink and Bottled Water Manufacturing, demand for private label waters is estimated to have grown at more than 10% during both 2009 and 2010.

While a more buoyant consumer environment in 2011 should encourage some consumers to switch back to brands including Dasani and Aquafina, Ibis World believes many will stay loyal to private label products over the period, potentially denting Coca-Cola and PepsiCo's market share in this segment.

The report also believes that smaller players will be under pressure, even though bottled water still holds significant growth potential - especially in emerging markets.

Improving profitability is the key challenge for the bottled water sector over the next few years. For some, however, the money may dry up.