I recall the story of a well-known racehorse trainer, out on his gallops one spring morning watching his string of horses when a rainbow appeared. One of the stable lads, riding a particularly well thought of horse, shouted across to the trainer telling him that if he looked behind the rainbow he would find a pot of gold. "You idiot" the trainer retorted back. "You don’t need to look behind a rainbow for a pot of gold. You’re sitting on one."

I think that Nestle Waters has looked at its stable of brands and realised it too may already be sitting on its own pot of gold.

The company has watched the plight of the artificially-sweetened segment in the US and appears convinced it may well have something in the locker that will capitalise on the woes of this segment. Recent numbers from beverage research agency Canadean expose the challenges facing the ‘diet’ segment in the country, with the low-calorie segment dropping by 17% in just five years. That compares unflatteringly with the 5% drop in ordinary, regularly-
sweetened carbonates.

In terms of volume, the light segment has shrunk by more than 2.5bn litres in that period. If an average litre sells for $1.90, then that adds up to $4.75bn – that’s quite a lot to play for.

It may well be fair to assume that, if you can put forward an appropriate substitute to the ailing aspartame-sweetened drinks in the category, then you should be well placed to capture a large chunk of that missing volume and revenue. As The Coca-Cola Co and PepsiCo pursue alternative sweetener solutions like Stevia, Nestle is in the process of repositioning its fizzy water brands as the perfect substitute to diet or light drinks.

In some markets, like Sweden, consumers have for some time consumed sparkling waters, both plain and flavoured, instead of low-calorie carbonates. This trend has stunted the share of the light carbonates segment. Despite double digit growth in light CSDs last year, Canadean reports that low-calorie drinks account for just 24% of the Swedish CSD market compared to 30% in neighbouring Denmark and 40% in Norway. In Sweden, there is a vast array of interesting and often bizarre flavours that have built up a sizeable audience; consider Spendrup’s excellent Loka strawberry & lemon pie flavoured water, or maybe the chocolate milk shake option.

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Sparkling water annual per capita is more than 20 litres in Sweden while, in the US, it stands at just 6 litres. Nestle has quite rightly identified a lot of slack in the market.

Nestle Waters sells a lot of water all around the world, but the margin the company achieves has been an issue. The firm is selling more water but for the same amount of money. By focussing on just a few glamourous, international brands in developed markets, as they are planning to do, marketing can be synchronised, costs can be cut and margins can be upped. Building trust and prestige equity in a few brands is a lot mo
re economical than trying to do so in a lot of brands.

Products like Poland Spring Perrier, San Pellegrino and Vittel should be versatile enough to extend into other segments or even categories in the US. These brands can be adapted and shrewdly-positioned to appeal to the American drinker who wants to drink a low-calorie drink but does not want the anxiety that artificial sweeteners are increasingly causing over there.

Water brands score very highly on naturalness in the eyes of consumers and introducing flavours to these drinks should allow them to compete very effectively with the low-calorie, fizzy drink segment. Obesity is getting more widespread in the US and demand for low-calorie drinks has not just melted away; the problem is that confidence is draining away from many of the existing products.

The recent news that Nestle Waters is in negotiations with Société des Sources du Pestrin to sell the supply centre that bottles the Quézac brand in France and the fact that the company has opted to sell other regional brands in the country, is a clear indication of the new strategy being put in place.

Resources are being channelled into a few international brands. The revenue raised from the sale of the smaller local waters is helping Nestle to put together a war chest to fund its new ambitions. The company has announced already that it is set to invest as much as US$200m this year in the US. This will go a long way to helping it realise its objective to take high-profile water brands, add flavour and encourage Americans to drink them as low calorie CSDs.

If Nestle can successfully reinvent its flagship sparkling water brands as ‘diet’ CSDs, then there is no doubt that it will have found that pot of gold.