Is the Incredible Growth of Bottled and Sparkling Water Sustainable?

The popularity of this beverage category has exploded as soda consumption stumbles.

Motley Fool Staff
Motley Fool Staff
Jun 4, 2017 at 1:25PM
Consumer Goods

For Market Foolery, Mac Greer trots out the theme of "Yes, No, Maybe So" for Motley Fool analysts David Kretzmann and Matt Argersinger. Each Fool tells us about a trend they feel bullish on, one they feel bearish on, and one that has them on the fence.

In this segment, we hear why Kretzmann is worried that the industry-leading gains in bottled and sparkling water may not represent a permanent shift in consumer preferences. Is paying a premium for plain old H2O a fad?

A full transcript follows the video.

This video was recorded on May 24, 2017.

Mac Greer: David, what are you maybe-so on?

David Kretzmann: I'm going with bottled and sparkling water. This is kind of a safe one, I'm leaning more yes than no on this one. It's probably no surprise, but looking at global bottled water consumption, it went from 212 billion liters in 2007 to 391 billion liters this year, that's estimated for this year. In the meantime, carbonated beverage sales in the U.S. have stagnated since 2010. You've seen Pepsi and [Coca-Cola] continue to struggle with that. They've been transitioning more and more to waters and juices and teas to ramp up their own growth. Even SodaStream (NASDAQ:SODA) has made a resurgence here in the U.S. and around the world since its repositioned itself from a pure soda alternative, where it would have these funky syrup flavors, and instead going the sparkling water route, saying, "These systems aren't to make soda, they're to make sparkling water." And lo and behold, they've done pretty well. One company in particular that I've continued to watch in this space, it's a really funky little company, they don't have conference calls, the CEO is probably the quirkiest guy you'll ever see running a public company, it's National Beverage (NASDAQ:FIZZ). The company has a couple segments now. They have a carbonated soft drink segment, with brands like Shasta and Faygo, kind of these offbeat --

Greer: Shasta, wow, there's a name I haven't heard in a while.

Kretzmann: They also have the Powerplus brands segment, and the main driver with that is LaCroix, however you want to say that.

Greer: Either is acceptable on Market Foolery.

Kretzmann: We might do both, we'll see. But, right now, LaCroix is at about 9% market share, but it's the fastest growing sparkling water brand out there. They have the top two spots. A little boots on the ground research here, our local Whole Foods near us at HQ, any time you walk in, there's often a huge LaCroix display, either at the front of the store or at a pretty prominent location in the store. Another local store here in town, Balducci's, I walk by it just about every morning, there's a massive LaCroix display right in the front door. So, the stuff is selling like hotcakes, at least in Old Town Alexandria. And just looking over the past four quarters for that Powerplus brands segment, their case volume sales were up 31%, 46%, 40%, and 49%. So, they're putting up some staggering growth. The main question I have here is, is this a sustainable lasting trend, or is it still more of a fad? And I'm leaning more toward it being a trend, because I think as people become more health-conscious, they probably aren't going to go back to soda any time soon. But, I'm wondering, with the individual brands within that category, like LaCroix, are they actually here to stay, or can one of these bigger players just recreate it?

Greer: I'm a skeptic here, because I love water. I love sparkling water without the sparkling part. The word for that is water.

Kretzmann: You and me both.

Greer: So, when you're competing with water, isn't that tough? That feels like really ... maybe they're not competing with water. Maybe sparkling water drinkers would be drinking soda otherwise?

Kretzmann: I think a lot of people who are trying to transition out of soda will go to LaCroix or sparking water.

Greer: It's like that nicotine patch.

Kretzmann: Something like that. Personally, I've tried it, and they don't really taste sweet, so it hasn't been very appealing to me. But I'm not a soda drinker, either. But I look at that sales growth, and over the past year, their sales growth has accelerated to 15%, and their earnings are up over 70%, so their margins are continuing to tick up. So, it's that LaCroix brand, for National Beverage, anyway, is driving those sales. But then, thinking a little bit bigger picture, you have the energy drink market, with Monster and Red Bull, and that category has almost doubled in the U.S. since 2010. So, I look at that and I kind of scratch my head. It's not just a clear trend toward healthy drinking. That's why, for me, it's still a little bit up in the air, especially when you're looking at individual brands like LaCroix -- how much staying power do they actually have?

Greer: OK, we will leave it there.