Bottled water was the fastest growing sector of the global soft drinks market in 2007 but as the economic downturn squeezes middle-class wallets in Western Europe and North America, there is evidence that tap water is making a comeback. Euromonitor International analyst Rob Walker believes the leading bottled water companies must maintain investment in these markets during the tough times in order to maximise returns in the long term.

The past year has been something of a rollercoaster ride for the bottled water sector. First, the good news growth story of 2007 was soured by negative media attention given to the environmental impact of throw-away plastic bottles, while the projected 'dethroning' of carbonates as the world's biggest soft drinks sector for 2008 has been undermined by a body blow to middle-class consumer confidence in key markets of North America and Western Europe. 

PepsiCo's Aquafina, leader in the US market, is one of those brands having a rough ride. After posting 8.9% regional volume growth in 2007, according to data from Euromonitor International, the brand's growth curve could conceivably reverse in 2008. At best, it is unlikely to generate volume growth this year in excess of 1%. At worst, it is possible that Aquafina will not only see negative growth, but will also lose critical market share to Coca-Cola's Dasani and Glaceau.

In Western Europe, Danone's Volvic and Evian, which ranked second and third respectively in the region in 2007, are both forecast to show negative volume trajectories in 2008, ending three consecutive years of positive growth. The bottled water division as a whole fuels around one third of Danone's revenue while Europe drives some 60% of activity. The credit crunch fallout, therefore, will badly dent the company's coffers and could trigger a major revamp in strategic investment over the short to medium term. 

For Nestlé, the short to medium-term downside will be easier to contain because its bottled water division accounts for a smaller slice of company revenue, estimated at around 10%. Declining demand for its flagship water brands will, however, be a bitter pill to swallow in the aftermath of robust performances last year, especially in the high-yield US market. Poland Spring, for example, grew by 9.5% by volume, but is forecast to generate growth below 2% this year. The prognosis in Western Europe is worse, with Vittel projected to see volume sales contract. 

Coca-Cola's bottled water division is also feeling the pinch in the key value markets of North America and Western Europe. Even Glaceau, which arrived with all guns blazing into the US last year, is likely to fall well short of medium-term growth targets. There is also set to be a slowdown in the US volume growth trajectory of Dasani, another of the star performers last year. In the bigger strategic picture, however, Coca-Cola is forecast to weather the economic storm better than its main multinational competitors. This is because it has the financial muscle, as well as the industry confidence, to act aggressively in the positioning of brands without weakening promotional support behind them.

The next 12 months could, therefore, prove critical to the evolution of the global bottled water industry. Specifically, companies that are risk-averse will be tempted to lower investment in the traditional safe havens of North America and Western Europe and channel proportionately higher sums into the key emerging markets of Asia, Latin America, Eastern Europe and Africa. These are the regions that are forecast to see the most dynamic growth over the next five years and, in that sense, they do appear to throw a lifeline to many of the bottled water companies. According to Euromonitor International, the Asia Pacific region will top the world's regional volume rankings by 2012, dethroning Western Europe. 

The important strategic point, however, is that while bottled water companies should certainly look to raise investment in emerging markets, it would also be wise to pursue a bold commitment to the developed markets of North America and Western Europe, in spite of the low growth projections in these regions.

While it is true that some consumers in the developed markets are abandoning bottled water for environmental reasons, it is important to point out that most of those now turning to tap water are doing so because they have less disposable income. In short, the root driver of the trend is economic not environmental. 

The key to limiting damage will, therefore, be in narrowing brand margins. But this should not be achieved at the expense of making big cuts in advertising, promotional and distribution expenditure. Equally, it will be important for the major companies to develop and shore up value-protection (second-tier) brands. All of which amounts to a potentially loss-making strategic cocktail for the short to medium term. But, crucially, loss of value in North America and Western Europe can realistically be offset by upside results in the emerging markets.

Furthermore, maintaining a strong investment drive in the world's developed markets during this period of unfavourable economic indicators will, arguably, be the most effective route to maximising volume and value returns into the longer term. 

The Coca-Cola Company is an expert in transforming periods of market weakness into windows of long-term opportunity. Investing in a country when others are running scared has enabled it to steal a competitive march in a multitude of markets around the world, and in an array of different categories. Its competitors in the bottled water market need, therefore, to weigh up which is the bigger risk of the current financial crisis. Is it the contagion on consumption in Western Europe and North America, or is it the door left open for Coca-Cola to seize a long-term market initiative? How the bottled water divisions of Danone, Nestlé and PepsiCo measure up to the crisis over the coming 12 months is likely to dictate the market share make-up of the bottled water sector to 2012 and beyond.