This month, Ray Rowlands of Drinksinfo Ltd follows up on the reports that PepsiCo is planning to launch a premium brand into the burgeoning US bottled water market next year, in an attempt to accelerate its diversification away from its struggling carbonates business.

What’s this we hear: Is PepsiCo set to branch out into the US premium bottled water market? Although the soft drinks and snacks giant has declined to comment on the rumours, it wouldn’t be a bad move, considering the lacklustre performance of fizzy drinks, which represent the core of the company’s soft drinks business. Following what has become an established trend in the US, CSDs endured a further contraction last year, with PepsiCo suffering along with the rest of the market. Hefty investment in new product development has failed to reinvigorate consumption or recapture lapsed consumers. The release of offerings like Pepsi Next, launched in 2012, and Citrus Blast, introduced a year earlier, have merely cannibalised on existing brands. Meanwhile the general public continues to expand its drinks repertoire into a widening range of alternative beverages.

Conversely, the US bottled water market appears to be firmly on the road to recovery, after the damage caused by the recessionary years. Volume growth was decidedly robust in 2012. Consumers are slowly but surely switching back from tap water as confidence in the future builds with additional demand being fuelled by the healthier image that bottled water conveys over sweet carbonates.

It would seem, then, that the public is finally taking on board the very serious issue of obesity that threatens to engulf the nation.

The problem for suppliers is that bottled water is not as profitable as other types of soft drinks such as, for example, energy drinks or iced coffee. Moreover, bottled water suppliers in general have been loathe to raise prices. Far too many have been willing to participate in cut-throat promotional offers in an attempt to combat 'private label' and rebuild sales after the losses suffered in 2008/9. But, premium waters are a different proposition, as people are willing to pay extra for them. This is naturally attracting the interest of soft drinks producers struggling on wafer-thin margins.

The premium US water market, already covers a bevy of brands such as Evian, Fiji Water, and Perrier. Coca-Cola’s Smartwater is also perceived to sit amongst their ranks and other products are still arriving. Only last month Nestlé Waters North America added to its range with the national roll-out of Resource, intended for the more discriminating drinker. The company is calling Resource its first domestically-sourced premium still water brand. It contains natural electrolytes and comes in bottles made from 50% recycled plastic, which should appease environmentalists.

A number of other premium water brands also offer an established pedigree. Both Evian and Perrier have been in existence for well over a century; way before the start of the bottled water boom. Fiji Water lacks such maturity credentials, being less than 20 years old, but heritage is just one aspect of success. The origin of the brand, supplemented by distinctive packaging - like the green Perrier bottle shaped like an Indian exercise club or Fiji’s square bottle - also work in its favour. Then, there is the matter of a superior taste, real or otherwise. Most premium waters are sourced from underground: Intriguingly, Coca-Cola’s Smartwater is vapour-distilled (i.e purified). Obviously, the qualities that embody a premium brand are not entirely clear cut.

So far PepsiCo has not engaged in the premium US water market, but it is a pretty diversified company and claims to offer the world's largest portfolio of billion-dollar food and beverage brands. It is probably as well known for its snacks as for its soft drinks. Frito-Lay North America is its U$13bn convenient foods business unit covering Cheetos, Doritos, Fritos and Lays to name but a few of its brands. Then, there is its Quaker Oats cereals. The firm is already branching out into new health markets like hummus and yogurt via joint ventures with Israel based Strauss and the German Muller company, so why not premium water? 

It is not as if the company is unfamiliar with the bottled water category. Globally it offers a dozen or more brands, including Aqua Minerale (Russia), Bingchun (China), and E-pura (Mexico). Its biggest brand is Aquafina and that is US focused. Aquafina has a fairly long history: It was first launched in 1994 and is available as both a still and sparkling product. The carbonated variants come with a twist of flavour. Much more importantly, the water is purified. It is more akin to tap than spring or mineral water and, unlike Smartwater, that is where it loses its 'street cred'. That said, this has not stopped it becoming one of the top-selling bottled waters in the US whilst also gaining a presence in Canada, Asia, the Middle East and Europe. 

Despite its success, by no stretch of the imagination can Aquafina be considered as premium. This is where the door of opportunity opens for a new PepsiCo water product.

Whether it actually materialises or not, the rumoured brand name is 'Om'. This appears to be a curious choice, if it is true, with no obvious connection to bottled water. In Hindu and Buddhist religions Om is a mantra sound embodying the essence of the entire universe. Maybe, in this instance, Om is an abbreviation for something, Order of Merit perhaps?

For the time being I guess we will just have to wait and see.

Expert analysis

USA Packaged Water Category Profile

USA Packaged Water Category Profile

A competitively priced comprehensive overview of the Packaged Water market....read more