Nestlé has bolstered its Home & Office Delivery (HOD) bottled water operations as competition with Danone intensifies worldwide. In an exclusive report for just-drinks, Euromonitor International looks at the growing importance of this sector, the players, the hotspots and opportunities in 2003.
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Nestlé Waters’ recent announcement of its acquisition of Powwow Group, one of the leading players in the European bottled water Home & Office Delivery (HOD) market, has been just the latest in a recent flurry of M&A activity by the world’s top water producers for control of the lucrative HOD industry. The company announced on 3rd February that it would acquire Powwow for US$603.3 million, over four times Powwow’s 2002 annual turnover.
The bottled water market is a dynamic one, with retail sales alone standing at just under US$34 billion in current value terms in 2002, posting among the fastest growth within the soft drinks industry of 42% between 1997-2002. In comparison, the HOD bottled water market is estimated at $4 billion, but with companies such as Nestlé expecting as high as 15-20% annual growth globally to 2007, there is huge untapped potential for sales which multinationals are keen to exploit.
Crucially, in Western Europe and North America, HOD is a specialist field – the established players within this industry are not the same as those in the retail industry, hence the scramble by the multinationals to acquire existing players.
Nestlé targeting untapped European market
Nestlé and Danone’s leading positions within the retail bottled water market (with 10.4% and 14.7% of total volume sales respectively in 2001) have been complemented with a number of high-profile acquisitions of leading HOD players.
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By GlobalDataIn 2001, Nestlé made the most significant acquisition in Western European bulk bottled water history with the purchase of Ionics’ HOD division, Aqua Cool. In 2002, it went on to acquire a 33% stake in Saphir, a major HOD player in France, culminating in the latest acquisition of AS Watson’s Powwow with has leading positions in France, Germany, Netherlands, UK, Denmark, Italy and Portugal.
Given that HOD sales are estimated to account for just 3% of the total European bottled water industry, compared to approximately 40% in the US, the acquisition is, in the words of Nestlé’s CEO Frits van Dijk: part of the company’s long-term aim of “forming a truly pan-European presence in HOD”. The company already has a presence in burgeoning markets such as Greece, Poland and Russia.
Danone maintains stronghold in North America
In November 2002, Danone’s acquisition of the Canadian company Sparkling Spring Water Holdings, consolidated its position in Canada, the US and the UK, where Sparkling Spring Water commanded a top three presence. The company had already bagged the top slot in Canada with its acquisition of Patrimoine des Eaux du Quebec, which enjoyed a leading position in its home country, as well as in Argentina and Asia. The acquisition also propelled Danone’s share of the HOD markets in Mexico, the US and Europe.
Large HOD markets such as Indonesia are also proving alluring, with a 2001 acquisition of Aqua Golden Mississippi (leading brand Aqua), which held over half the Indonesian HOD market in 2001.
Danone’s European interest is concentrated on home ground, where the company acquired the leading French HOD player, Chateaud’eau International, a move which has intensified competition between itself and Nestlé over control of European sales.
Carbonates giants diversifying into HOD
Carbonates giants such as PepsiCo, who have managed to off-set flat carbonates sales by entering the dynamic bottled water market, in many cases squeezing established bottled water producers, have also recognised the potential of HOD sales and made strategic inroads into the industry.
The Pepsi Bottling Group acquired the largest Pepsi bottler in Mexico (the world’s largest HOD market), formerly known as Pepsi-Gemex in November 2002. The company’s purified water brand Electropura enjoys a 100-year history and leading position in domestic off-trade (single-serve bottles) and HOD (5-gallon jugs) sales. Sales of its 5-gallon jugs are expected to top 100 million units in 2003 alone.
Mixed performance of HOD in economically developed markets
There are distinct features between HOD markets in economically developed and undeveloped markets, with the HOD industry divided into ‘luxury’ markets and ‘necessity’ markets. Luxury markets feature in economically developed countries, such as North America and Western Europe, where the trend towards healthy living drives sales, whilst necessity markets feature in economically undeveloped markets characterised by poor quality drinking water, hence the comparatively large sales in countries such as Mexico and Indonesia.
In North America, HOD sales of bottled water are substantial, with institutional sales of bulk water outperforming direct sales to individual households, a trend repeated in Western Europe, where sales are growing from a smaller base and therefore faster rate. One of the contributing factors to the disparity between home and office delivery is that the economic backbone of these markets is mainly composed of medium to large businesses, which help water suppliers achieve economy of scale in terms of frequency of ordering. Additionally, employee welfare is more important in developed regions compared with developing regions.
Mexico – the world’s largest HOD market
Increasing industrial advancement in many developing markets over the past few decades has brought with it increased risks of pollution. Large populations, rapid urbanisation and poor drinking water supply has resulted in a surge in the demand for bulk bottled water for home/office consumption in countries such as Mexico, Indonesia and China.
Mexico is the largest HOD market in the world with over 14,000m litres sold in 2001, according to industry sources. Many localities have set price band ceilings in order to ensure that nearly all customers can afford to purchase bulk bottled water. Large 18-20 litre presentations are available for office consumption and daily home use. There are often many suppliers available as each small company distributes its own product. Typically, these suppliers are family businesses or agents and distributors delivering water to residential areas, offices and commercial outlets across Mexico.
Indonesia and China HOD markets booming
In Indonesia over one third of 5-gallon bottled water is distributed through direct selling to offices, factories, on-trade outlets and homes. The 5-gallon size is the most common pack size in corporations and factories. However, due to the country’s slow economic recovery in 2002, mobile water stations where consumers can refill and deliver bulk bottles themselves have grown in popularity as companies have been forced to budget.
In China, home delivery of bulk water has also been booming, albeit limited chiefly to urban areas, where consumers can also purchase bulk bottled water through supermarket and hypermarkets. In contrast to North America and Europe, the major retail bottled water manufacturers in China are also active in the HOD industry. Bulk offerings of branded products such as Danone’s Wahaha and Robust are more popular non-branded competition.
Consolidation to continue pace, as demand grows
The increasing presence of multinational players on the global HOD market suggests that the future remains bright for the HOD industry. In the medium term, a strong rate of growth is still expected in the economically developed regions, and consolidation is expected to continue apace as the industry reaches maturity.
Multinationals, with their strong marketing clout, are expected to play an important role in educating consumers regarding the health benefits of bulk bottled water, as well as serve to build up the infrastructure of the industry, particularly in the case of less developed markets. Mexico, Indonesia and China will continue to see rapid development in the HOD market with the rise in average purchasing power. In contrast developing regions such as Eastern Europe and the Middle East are expected to exhibit the highest potential for growth in the longer term.
Related Euromonitor Research:
The Market for Soft Drinks in Mexico
The Market for Soft Drinks in China
The Market for Soft Drinks in Indonesia
The Global Market for Soft Drinks
Euromonitor Soft Drinks Profile: Groupe Danone
World Drinks Marketing Directory 2002/2003
