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Coca-Cola immerses itself in water

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Coca-Cola was already spearheading the growth in the US bottled water segment with its Dasani brand but following two deals with Danone, the group now has a portfolio of complementary water brands. Ben Cooper looks at the recent developments in this dynamic market and suggests Coca-Cola has stolen a march on rival PepsiCo.

If any confirmation were required of Coca-Cola's commitment to the bottled water market in the US it was provided last week. Following hard on the heels of the soft drinks giant's licensing deal for Danone's Evian brand, Coke paid the French food and drinks group $128m in cash for a 51% stake in a partnership to market and distribute Danone's bottled spring and source waters in the US.

Under the deal, Danone will contribute five manufacturing plants, a licence for the use of the Dannon and Sparkletts brands and a number of other value brands to the joint venture.

While the deal is undoubtedly good news for Danone whose brands had been squeezed in the growing US bottled water market by the rapid and aggressive expansion of PepsiCo and Coca-Cola, with their Aquafina and Dasani brands, and by market leader, Nestle, it is extremely significant for Coca-Cola.

Until now, Coca-Cola and PepsiCo had followed very similar paths in the US bottled water segment, spearheading the recent growth surge with single brands. With the core CSD market becalmed, both were attracted by the growth potential in bottled water in the US, a market now worth around $3.5 billion and, according to market analysts, Canadean, growing at 15% per annum. In fact, PepsiCo made the first move, launching Aquafina three years before Coca-Cola's arrival with Dasani in 1999. Backed by distribution muscle and advertising dollars, both brands have done well and in recent years have been driving the category.


"It only serves to confirm just how far this market has come in such a short space of time"
But Coca-Cola's move has arguably taken the group into a new phase of development, giving it a portfolio of brands and the potential to segment the market. It also speaks volumes of the development of the US water market itself that Coca-Cola should consider the sector ready for such a change. It only serves to confirm just how far this market has come in such a short space of time.

The deal moves Coca-Cola ahead of PepsiCo in terms of market share and arguably also sees the Atlanta-based company take the initiative in a market where PepsiCo had hitherto been ahead of its rival.

According to Beverage Digest, PepsiCo was in second place, behind Nestle, with a 16.7% share. Notwithstanding the growth of Dasani, Coca-Cola was back in third place with 10.9%. The brands within the joint venture are estimated to have annual sales of around $250m.

But it is not just in its ongoing battle with PepsiCo that the deal is significant. Unlike in the CSD sector, Coca-Cola and PepsiCo are not the heavyweights of this market. It is Nestle which commands by far the strongest position in the US water market with a brand portfolio including Perrier, Poland Spring, Deer Park and Zephyrhills and a market share last year of 37.4%.

Critically, this deal will allow Coca-Cola and Danone to build the Dannon brand into a major national spring water brand which could challenge the strong regional spring water brands in the Nestle portfolio such as Poland Spring and Zephyrhills. Dannon is sold nationally but it is not currently among the top 10 bottled water brands in the US so there is clearly potential for development. It has also been suggested the access the deal gives Coca-Cola to lower-priced brands will allow it to retain a higher price positioning for Dasani. Dannon in fact generally sells at 20% below Dasani in supermarkets according to data from Morgan Stanley.

For Danone too, the deal should be extremely positive. Chairman, Franck Riboud, has said he expects the US venture, which will account for a third of the group's US water activities, to have a neutral impact on its pre-exceptional result this year and a positive one from 2003. He said he expects the joint venture to bring "strong and lasting growth in our brands and our profits."

But the group is clearly keen to retain its interest in the US bottled water market rather than eventually sell out to Coca-Cola. This may also be no bad thing as, even though it was finding the US water market tougher going than Coke, Pepsi and Nestle, Danone does not lack for experience in the water business. "Coca-Cola doesn't hold an option to acquire the rest of the capital in the joint venture," Riboud said. "The deal with Coca-Cola will allow us to get back to a strong growth rhythm. The simple fact that we will have the capacity to negotiate with the giant of soft drinks shows the potential of our brands."

How the power balance plays out between Danone and Coca-Cola remains to be seen but it is beyond doubt that both companies have significantly strengthened their positions in the US bottled water market through this alliance. But while it may have given Danone a chance to regroup and go forward, it has arguably given Coca-Cola a platform to challenge for leadership.


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