Bottled water flies off shelves as fizzy drinks go flat

Amid retailers' displays of ever-more exotic soft drinks - ranging from coconut water to lime and cardamom or pomegranate and blueberry - there is one beverage that is increasingly flying off the shelves.

It is water. Sales of plain bottled water are this year set to soar above carbonated drinks for the first time, according to Canadean, the market research group. That would make water the world's best-selling soft drink.

The thirst for water has sparked intense competition for market share among the biggest producers - France's Danone, Switzerland's Nestle, and Coca-Cola and PepsiCo of the US.

Sales of packaged water have grown globally at an annual average of 6 per cent since 2008, easily outstripping carbonated drinks' 1.3 per cent, according to Canadean.

This faster growth will propel water sales to 238bn litres by the end of this year - more than Canadean's forecast of 227bn litres for carbonates, the current leader in soft drinks.

In the food industry, millennial consumers in developed markets are increasingly concerned about additives and heavily-processed foods; and in beverages, they are tending to favour bottled water over sodas.

Globally, demand is being driven by Asia, principally China and India, where governments are struggling to provide consistently reliable tap water to rapidly growing cities. If they can afford it, middle-class families prefer to buy bottled water.

China's consumption of bottled water has almost doubled in five years - from 17bn litres to 33bn litres, according to Euromonitor, the market research group.

Danone sells more water than infant formula in China, driven by its Mizone-flavoured water brand. "Asia remains a key engine of growth," says Cecile Cabanis, Danone's finance director, of the water business, which is also strong in Indonesia.

Bottled water, which suffered during the recession in developed markets, was the fastest-growing of Danone's four businesses last year, and sales have risen by double digits each year since 2011.

Some analysts doubt that this growth rate - driven by fruit-flavoured aquadrinks that now account for 40 per cent of Danone's water business - can be maintained, but the company says that sales are "very resilient."

The French group has increased its share of the water market over the past five years, partly because of greater advertising spend that has helped give it just over 10 per cent of the global market, according to Euromonitor.

Outside Asia, the US is the fastest-growing market, with rates that are similar to those of emerging markets, according to Marco Settembri, chief executive of waters at Nestle, which got into the bottled-water business in 1992 when it bought Perrier-Vittel.

While Danone's water business is skewed more to emerging markets, Nestle sells most of its water to developed markets.

Sales of the Swiss group's Pure Life brand have grown so rapidly in the US - where half its SFr7.4bn ($7.9bn) 2014 water sales were made - that Nestle last year supplanted Dr Pepper Snapple, producer of 7UP, as the country's third-largest soft-drinks company (after Coca-Cola and PepsiCo) according to Beverage Digest, the US industry publication.

Mr Settembri said: "There is a huge growth in the water category in the US, driven by concerns about health and obesity."

Carbonated soft drinks marked a 10th year of decline in the US in 2014, having fallen by 14 per cent in volume over the past decade, according to Beverage Digest.

Coca-Cola, which is trying to reduce its dependence on carbonated drinks, is rolling out its Smartwater "vapour-distilled water with electrolytes" into the UK, another strong market, where it already sells Vitaminwater.

Sales of bottled water rose 10 per cent in the year to the end of March in the UK, according to Nielsen, the market research company.

Smartwater's entry into the UK last year came exactly 10 years after the ill-fated launch of Coke's Dasani brand. The Atlanta-based company pulled Dasani weeks after introducing it to the UK because of a contamination scare, but the brand had already been pilloried by the British media as little more than expensive enhanced tap water.

Some beverage companies, such as the UK's Britvic, have been caught out by water's rising tide. Water is "a category which is not material for us," it said in November, a factor that contributed to a 5 per cent fall in the volume of its still-drinks business that includes J20 and Robinsons.

Nevertheless, it hopes to ride the water wave by expanding Ballygowan, its Irish water brand, into the UK.

The battle between the industry leaders, particularly intense in emerging markets, has even spilled out into public hostility.

In Mexico, Danone, the owner of Evian, Badoit and a flood of local brands, is fighting a price war unleashed last year after the government imposed a tax on sugary carbonated drinks.

Emmanuel Faber, Danone's chief executive, in February accused Coke and Pepsi of "destroying value" by ramping up their water distribution in Mexico to compensate for falling soda sales hit by the tax. Though Danone's own fruit-flavoured water drinks are also affected because they are sweetened, the tax has had a bigger impact on the cola companies.

"Pushing water in a non-strategic manner with no marketing skills means destroying value. That's what they do," Mr Faber complained to analysts in February. "And therefore we are facing price competition in waters that turned into some negative sales for us in total in Mexico in waters last year."

Defending market share is important because pricing power in still water - which accounts for 82 per cent of volumes sold - tends to be weak, as the product is so similar between brands.

Fintan Ryan, analyst at Berenberg, says: "Bottled water is dilutive to group margins. At Nestle, the water business has operating profit margins of about 10 per cent compared to the group average of 15 per cent. There's no intellectual property involved and it's hard to put capital actively into a business that is dilutive - but it is generally fast-growing."

Nestle Waters' Mr Settembri says that the key to profitability lies in its distribution.

"Margins depend on the model. To make money in water, it is critical that production is close to the areas of demand so you reduce the cost of transport," he said.

Demand for bottled water looks here to stay. The outlook "remains bright with medium-to-strong double-digit growth expected at least until 2019," says Canadean.

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