Comment - Soft Drinks & Water - Stagnant Water in Western Europe
At last week's Consumer Analyst Group of Europe conference, Danone faced up to the challenges its bottled water division faces in Western Europe. Richard Corbett concurs and sympathises. But, Richard warns, beware of the emerging markets: The rewards they promise come only from booming volumes.
Although no doubt upbeat about the prospects for packaged water demand in the emerging world, the head of Danone has expressed his concern over the outlook for the Western European packaged water market. Having taken a look at Canadean’s figures, I think he is probably right to be a little anxious; Canadean reckons that the water market in West Europe did manage to edge forward last year, but packaged water demand in the region hasn't delivered marked growth since as long ago as 2006.
The issue for Danone, Nestle or any other player in the packaged water market is that, although spectacular growth in emerging markets is exciting, in Western Europe the average price of a litre of bottled water (on- and off-premise) is around US$1.50: In Asia, it’s more like $0.60. You have to sell a lot more water in Asia than West Europe.
As Emmanuel Faber alluded to, part of the problem can be traced to Southern Europe and, specifically, Italy, Spain and Portugal. These markets are at the forefront of the Euro crisis and the fact that they account for nearly four in every ten litres of water sold in Western Europe has implications for the region as a whole. Both Spain and Portugal’s water markets look to have shrunk last year while Italy’s was marginally up but dropped by between 3% and 4% in 2010.
It is not just Southern Europe that has felt the pinch; since 2008, everybody in Western Europe has felt a bit poorer and many have concluded that water is a luxury and that municipal water is a more economical way to get hydrated. I'm sure somebody has some figures, but it would be interesting to know how many PET bottles are consumed then refilled using tap water. It is the shift back to municipal water that has sapped the vibrancy from what had been a vogue segment prior to 2007.
The problem confronting bottled water operators in Western Europe is that, although there are variations and exceptions, municipal waters are relatively safe to drink in the region and consumers have something to fall back on when they downgrade from bottled water.
Without wishing to over-generalise, in Western Europe before 2008, consumers were drinking still water in a different way to consumers in emerging markets. That’s partly why they pay so much more for it. I cannot think of any other product that highlights the power of marketing more than bottled water; I can go into my local supermarket and pay between GBP0.17 and GBP0.84 for a two-litre bottle of water that looks and tastes virtually the same and delivers the same sense of refreshment. A glamorous, imported water brand or a high-brow local mineral water was not just a beverage but often a statement of status or a fashion accessory - Kylie Minogue drank Evian, so my wife did too. Prior to the crash, we wanted a little bit more from our water in Western Europe than to just quench our thirst.
Back in 2004, the Coca-Cola Co discovered this to their peril when it launched the Dasani brand in the UK, in what was to be a wider European launch. Sales were brisk until somebody pointed out that the brand was actually tap water that had been purified. The news triggered a media maelstrom with Coca-Cola portrayed as Monty Burns from the Simpsons, accused of duping people into buying tap water. The fact that the water went through four stages of production before it was bottled, including the use of techniques developed by NASA, seemed to be ignored. Consumers wanted their bottled water brands to have a story behind them and Dasani’s European aspirations were quashed.
The post-crisis European environment is different now and, of all the soft drinks categories, water is the most vulnerable to the new financially-cautious consumer. It is a situation compounded by an environmental debate that is smouldering in some countries. The finger has been pointed at many of the iconic imported mineral water brands suggesting that it is not environmentally friendly to ship drinking waters in from afar. Maybe, today, Dasani could have played the green card.
Globally though, the packaged water category remains a good bet. Having endured the side effects of drinking the municipal water in India (watch out for the ice cubes!), I can appreciate the potential for clean, safely-packaged water in many emerging markets where tap water security is a serious issue. Consumers in such markets don’t care which mountain it came from, or whether it was sourced from a spring that has been used since Roman times, as long as it is safe.
As consumers become more affluent, one of the first priorities that they choose to spend their new-found disposable incomes on is safe clean water. So, until the governments in these markets address the issue of water security, packaged water sales will continue to grow. Thus, packaged water producers may have to sell a lot more water in emerging markets due to the price variance - it is more than likely that they will.
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