Preview of the Year - 2013 - Part II: Bottled Water
In the second part of Euromonitor's preview of the drinks industry in 2013, head of beverages and consumer foodservice research, Michael Schaefer, turns his gaze to the bottled water category.
Now a US$175bn global industry, bottled water remains a giant. Yet, in many markets, the eye-popping growth figures of yesteryear have evaporated; seemingly for good. In both Western Europe and North America, manufacturers continue to fight on-going battles of commoditisation, with private-label offerings accounting for an ever-larger portion of demand. What’s more, the category remains under scrutiny in both regions amidst consumer concerns about water quality, environmental impact, and cost relative to tap water.
While the picture elsewhere remains far brighter, competition for emerging market consumers grows more cutthroat by the day, with strong local players leveraging well-developed distribution capabilities. That said, the future clearly lies in markets such as China and India, which together are expected to account for nearly half of global volume expansion over the next five years. For the largest global players, 2013 promises to be another challenging year, as the quest to slash costs, grow distribution, and (above all) find the right value proposition goes on.
Where’s the value?
In mature, developed markets, success remains a matter of finding the right value proposition. This does not necessarily mean the lowest price - while private label continues to gain share in the US, for instance, it has actually declined in France and elsewhere, squeezed by tap water at the low end and more premium/functional products at the high end. Instead, growth is now very much a matter of effective messaging. The most successful products going forward will be those able to tell a story - of added functionality, of unique sources, of environmental responsibility - in a way that resonates with increasingly sophisticated consumers. Manufacturers can expect to double their efforts to explain exactly what benefits their products provide, while also pursuing an ever more-segmented product strategy.
European mineral water brands have proven particularly aggressive in this regard, explicitly promoting specific health benefits, such as daily allowances of calcium, magnesium, and other nutrients per serving. What’s more, they have worked to promote their local sourcing whenever possible, often working with local authorities to ensure a pristine local environment. These twin narratives of functionality and heritage, specific benefits and a more nebulous concept of consumer trust, are expected to remain the driving forces behind nearly every successful strategy in key markets in North America, East Asia, and Western Europe, with private label and tap water both remaining potent adversaries at the low end.
Distribution still key in emerging markets
While no such slowdown is underway in markets like China, India, Brazil or Mexico, competition in these markets grows fiercer by the day. Although rising incomes and questionable municipal water supplies will continue to drive rising demand, a growing portion of this demand is being met by smaller, low-cost producers providing bulk water supplies (in containers of ten litres or more) to a relatively small local area. This is especially true in markets like Mexico and Brazil, where direct delivery remains the primary mode of distribution, particularly among lower-income consumers. The difficulty of constructing a truly national distribution network in this segment, particularly to more rural areas, continues to hamper efforts by the largest global players to grow share, particularly as sales of more value-added products such as flavoured or functional water often remain limited. That said, demand for branded products remains high, particularly those brands able to secure certified natural sources of water. In China, for instance, a number of local brands have moved quickly to secure rights to natural springs, and are expected to continue to take share over the next two to three years.
Nor are the largest players taking the rise of local bulk water players lying down, with massive investments in direct distribution and even direct retail expected to continue. In India, for instance, leading player Bisleri Group has announced plans to expand its pilot programme of 'Bisleri Shoppes' exclusively selling Bisleri-branded products, as a means of both combating direct delivery and securing retail space against rivals offering ever-higher margins to local retailers. This type of hands-on marketing and retail activity is expected to gain steam in 2013, with consumer education still a massively important element in generating the consumer trust that remains the coin of the realm among many emerging market consumers.
Upmarket we shall go
For any global or even regional player, the key risk in 2013 remains commoditisation, with the aforementioned private label and small bulk water players muscling in, and the ever-present threat to margins and branding. In both emerging and developed markets, a compelling narrative will continue to drive expansion, with consumers in every market still highly receptive to ideas of safety, quality, and specific functionality.
Among lower-income emerging market consumers, there is still ample room for education regarding the benefits and safety of bottled water, with retail concepts like the Bisleri Shoppe expected to take this process further into suburban and rural areas.
Meanwhile, the path to a premium brand in more developed markets remains a story of unique, age-old purity, whether it involves artesian wells in Fiji or water taken from 800 metres under the ocean. That said, value still matters - while branded products still retain real pricing power relative to private label and smaller bulk producers, consumers will not tolerate a dramatic pricing gap for long, although a push for added functionality will help to shore up value perceptions for major brands.
Indeed, over the next five years, this could prove the most important trend of all, as bottled water moves ever closer to other soft drinks categories in terms of the occasions it covers and the consumers it serves. Vitamins, minerals, energy, and flavour - all of these have a place in bottled water, particularly when tied to a well-crafted message of purity that few other soft drinks categories can match.
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