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Bottled water appears to have been the biggest victim of the economic downturn, particularly in Western Europe. Richard Corbett takes a look at the prospects for one of the larger water players in the region, Nestlé.

Nestlés bottled water division posted flat nine-month sales earlier this month

Nestlé's bottled water division posted flat nine-month sales earlier this month

There was little to cheer earlier this month at the bottled water division of Nestlé, which reported flat sales for the nine months to the end of September. Globally, people may be drinking more bottled water but they are not paying as much for it.

The challenge for Nestlé is to encourage consumers in developed markets to drink more branded bottled water because they pay significantly more for it. The problem facing the industry as a whole is that water is increasingly becoming a game of high volumes and low margins.

According to beverage researcher Canadean, the world-wide water volume picture looks very upbeat. Including an estimate for 2014, the overall packaged water market is expected to have jumped by nearly a third in the last five years, which represents an acceleration on the previous five years. The issue for Nestlé is that, in West Europe, which makes up more than fifth of the world’s bottled water sales, growth has slowed to a trickle - just 1% in the last five years.

A fifth of the global volume will equate to more like a third of the value, and therein lies the problem.

The economies of West Europe - and the Eurozone in particular - remain very delicate and its post-credit-crunch consumers have emerged more cautious and less extravagant. Marketing branded products that effectively look and taste the same as lower-priced alternatives is always going to be difficult but, during a period of economic fragility, the scale of the task is amplified. That’s why, at the beginning of the financial crisis in 2008, private label waters accounted for 30% of water consumption and now account for 36% of volumes. Water is becoming more of a commodity in the eyes of the consumer.

In West Europe, brand-building is made more difficult by the fact that, when it comes to water, consumers tend to trust their own and remain very patriotic to national water sources. That’s why Nestlé has put together such an extensive portfolio of water brands across the region. Having lots of brands is expensive to service but you have to spend the money to differentiate from the private label and cheaper rivals. 

In the rest of the world, Nestlé has overcome this problem by shrewdly developing the Nestlé Pure Life brand. Being termed as a spring water and not a mineral water, Pure Life has far more flexibility in where it can be bottled. The brand can easily cross borders and that is why it is sold in a plethora of marketplaces and now makes up a sizeable chunk of Nestlé’s global water sales.

In Europe, Nestlé has similar aspirations for the Aquarel spring water brand and, although it is sold in 11 markets and has respectable sales, it has not had the same impact as Pure Life – Europeans want more heritage from their water. West Europe is a mineral water stronghold, where waters are sourced from one site and marketed on the attributes - and often the history - of that source. It may be cheap to get a mineral water out of the ground, but it is costly to move it about. That gives local rivals a considerable margin head start.

Mineral waters do justify higher prices and Nestlé has an assortment of very sophisticated, high-end water brands recognised the world over. Brands like Vittel, Perrier, and San Pellegrino have historically been able to command a sizeable price premium. The problem is that, since 2008, West European consumers have been less willing to pay that premium and this is hitting turnover. In West Europe, while the flagship brands like Vittel, Perrier, and San Pellegrino have rallied relatively strongly, some of Nestlé’s other brands have not really recovered their volume or slipped into decline since 2008.

A further threat to the glamorous mineral water brands in Nestlé’s - and other operator’s - stable is the green lobby, which is notably well-represented politically in parts of Europe. Imported bottled water brands have been in the sights of many of these environmental campaigners for some time and they have questioned the ethics of drinking imported water when existing water is often available in abundance.

In Sweden, some government departments even went as far as banning bottled waters in institutions four or five years ago. Water players responded by detailing that 25 litres of bottled water sold in Sweden equated to 150 grams of steak production. The argument can be parried, but the issue continues to be a thorn in the side of the industry.

West Europe is a complex and difficult trading environment for branded water players at the moment and the downward pricing pressures were cited by Nestlé as an important factor in the recent cutbacks at their production plant at Vittel-Contrexville in France. Nestlé is entering a period of adjustment and the company has had to put in place the efficiencies in the region to make them stronger in the longer term.

The outlook is not too cloudy though; the company still sells an enormous amount of water and is fortunate to own some of the most well-known and iconic water brands in the world. The hope is that this will see Nestlé's water unit prosper in the years ahead.


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