Comment - Danone, Nestle see fresh water growth

Nestle and Danone's waters divisions both reported sales increases in the first-half of the year, signalling that bottled water is experiencing a resurgence in demand in some key western markets.

Earlier this week, Nestle Waters reported an 8.6% climb in net sales in the first half of the year, boosted by good performances across its North America, Asia, Africa and Oceana zones, but in particular Europe. The company also gave a nod to strong performances by its S. Pellegrino, Vittel, Acqua Panna, Contrex and Perrier brands.

Rival Danone, despite experiencing a drop in share price, recorded 16.6% sales growth in its waters division, in the first six months of the year. The increase was driven by favourable weather conditions in Western Europe and Latin America, and a surge in demand following the Japan earthquake.

The bottled water industry has struggled to pick itself up out of the doldrums in the last few years. Emerging markets have been unable to offset declines in mature markets on mainland Europe and stagnation in the UK and North America, both of which have been exacerbated by prolonged economic weakness.

With that in mind, Nestle and Danone's figures make refreshing reading.

However, there is clearly more work to be done.

Almost all soft drinks firms have pointed to commodity headwinds in the last 12 months, and as a result have resorted to taking cost and pricing action in a bid to offset the rises. PET resin costs, in particular, have been a major headache for bottled water firms.

Despite higher sales, Nestle Waters reported a decline in operating margins for its half-year. The company blamed the drop on a sharp increase in oil-related costs.

Earlier this year, Morningstar analyst Philip Gorham, told just-drinks that water remains "an unattractive market" in terms of profitability. Even for the big players, it's tough to make money, he argued.

Improving profitability in the face of higher costs is a key challenge for the bottled water sector over the next few years. 

In terms of growth, both Danone and Nestle continue to look towards the developing world.

Danone has said that emerging markets will be its key focus for the remainder of the year, identifying the MICRUBS - Mexico, Indonesia, China, Russia, US and Brazil – as focus points. Nestle, meanwhile, has said it will focus on merger and acquisition opportunities this year, having already announced several major capital expenditure programmes around the world, primarily in the emerging markets.

I think it would be unwise to say that challenging times for the bottled water industry, and indeed Nestle and Danone, are completely over. But, things look a little brighter than they did two years ago.