Water, water everywhere -- all of it to drink. The fiercest battle in the beverage industry right now is over bottled water. And for good reason. Bottled water consumption has tripled since 1991, its revenues growing from $2.5 billion to $7.6 billion in 2002, according to Gary Hemphill, senior vice president at Beverage Marketing Corporation.
With 46% of Americans paying up for the clear, cool stuff these days, bottled water is poised to slide past beer, milk, and coffee to become the second best-selling beverage behind soft drinks in the U.S. within the next couple of years. Here's how it currently stacks up against its competitors, in terms of consumption per person in 2002:
Beverage Gallons Per PersonCarbonated soft drinks 54.0Beer 22.6Milk 22.6Coffee 21.9Bottled water 21.1
I have to admit, I'm feeling a little sick looking at those stats, knowing full well I probably drink more Coke than water -- because I'm willing to pay more for calories, caffeine, and tooth decay. Does that make any sense?
As a whole, the water biz is growing at about 10% per year, but the smaller, single-serve bottles are growing at a clip of 27% annually, giving carbonated beverages a run for their money at every 7-Eleven and supermarket from Boise to Baton Rouge.
Why the amazing growth? Consumers (myself apparently not included) are "more aware of fitness, nutrition, and the importance of hydration in the diet," says Stephen Kay, vice president of communications for International Bottled Water Association (IBWA), which helps set standards for the industry. More and more Americans are willing to pay up for high quality, safe, and good-tasting water -- something western Europeans have done for many years.
The future looks even brighter, according to Kay. Whereas the older generations have been reluctant to pay for water (beyond its cost at your tap), newer generation Americans have come to see it as the norm, and that bodes well for the industry.
The players
One might salivate over the prospect of investing in this kind of growth. But doing so in any significant way in your portfolio is difficult. Mega-multinationals have taken over the industry so their bottom lines are only affected minimally by water sales.
The largest player by far is better known in the U.S. for chocolate than water. Nestle S.A.'s (OTCBB: NSRGY) water division sells 70 bottled water brands in 160 countries. Its North American subsidiary sells nine domestic brands, including Arrowhead, Poland Spring, and Deer Park, and five imported brands, including San Pellegrino and Perrier. Nestle Waters North America, Inc. had revenues of $2.1 billion in 2001 (2002's numbers aren't available yet). Its market share is 32.5% and growing.
PepsiCo (NYSE:PEP) comes in second place with its Aquafina product, which currently only has a 10% market share but is the top-selling single-serve bottled water in the U.S. In 2001, Aquafina sales grew nearly 45% and comprised 4% of all of Pepsi's beverage sales.
Coca-Cola (NYSE:KO) falls into third place, its Dasani product grabbing an 8.5% market share in 2001. Sales grew a hefty 40% in 2002, however. Coca-Cola also recently entered into a production, marketing, and distribution partnership with France's Groupe Danone, owner of a number of niche water brands, including Evian. Over the last three years, Coke's global bottled water business has grown at a compound annual rate of 59%.
Last month, Fortune magazine reported that Goldman Sachs estimates bottled water will only account for 20% of Coca-Cola's North American profit growth through 2005 and only 10% of PepsiCo's. So, what's an investor to do? One could take a look at Pepsi Bottling Group (NYSE:PBG), the leading U.S. distributor of Pepsi's beverages. Its profits are far more tied to the water business than Pepsi itself, whose Frito-Lay snack food division chomps its way to the bottom line far faster than water sales. Pepsi Bottling Group has posted 12 consecutive quarters of double-digit earnings growth, unlike its rival Coca-Cola Enterprises, which has not fared as well recently.
Can't I go into business with a garden hose?
Of course, you might spurn the corporations altogether and decide to go into business for yourself. All you need is a kitchen sink and some plastic bottles, right? The margins must be fantastic, no? Think again.
Bottled water is regulated by the U.S. Food and Drug Administration as a packaged food product. There are stringent standards for purification and labeling. For example, if it's spring water, it has to say where it's bottled -- and that's part of the marketing and mystique, too. Which really puts a damper on my plans for Bobala's Bottles, a fine water processed from the garden hose in my backyard.
When it comes to mystique, there probably was no finer brand than Perrier sparkling water, which comes from a spring Hannibal drank from before attacking Rome during the Punic Wars. Dr. Louis Perrier began operating the spring in the late 19th century, and by 1976 the sparkling bubbly, which was later named after him, accounted for 80% of all imported water in the U.S.
That's where the fad began -- with a doctor promoting a spring's medicinal and cathartic purposes. And while those special springs are still used -- and their waters sold for a premium -- good old-fashioned tap water, purified and bottled with shiny packaging for the on-the-go consumer, is what's driving the largest amount of growth in the U.S. today. Aquafina and Dasani are simply taken from municipal water supplies.
Who will win?
I want to say it's always safest to bet on the frontrunner, Nestle. But one can never underestimate the tenacity of Pepsi and Coca-Cola, which is desperate for a profit lift. And who can say what will happen as specialty vita-waters, flavored waters, caffeinated waters, and fitness waters try to make inroads in the market. I am only one man -- one who was slow to accept audio CDs over vinyl, who lived without cable TV for years, and who has only grudgingly purchased bottled water.
But like a method actor, I'm a method writer, so while writing this story I huffed over to the CVS down the street and bought 20-ounce bottles of Dasani and Aquafina for $1.19 apiece, and a six-pack of Poland Spring for $2.99. Here are my completely unscientific observations:
When ice cold, Dasani won on taste for me. It must be the reverse osmosis treatment the water gets. I got that right off the bottle. When I called Coca-Cola's consumer information line -- very helpful -- they told me that was a molecular process used to remove most minerals and impurities. Which is odd because after they're done with that, they actually enhance the water with magnesium sulfate and potassium chloride (I got that off the bottle, too). Once the Dasani warmed up, I tasted a trace of salt, which I didn't care for. But I love that spiritual-looking blue label. It will make me want to buy it every time now that I'm a convert.
Aquafina tasted consistently good -- hey, far better than my tap water at home, like all of these waters. But I disliked its deceptive packaging, which has a graphic of mountains, as if you're getting this from mountain springs. That's misleading to me, as this is purified municipal water. Think about changing that, Pepsi!
Poland Spring, the one spring water I sampled, comes from Clear Spring in Hollis, Maine. It, too, tasted good, though I could not appreciate its "distinctive, clean, crisp taste" any differently than Dasani or Aquafina. At least, the pictures of evergreens on its label ring true, though I question if there are really any mountains that high in Maine and its green colors don't scream refreshment like the blue on the other two.
In the end, you'd like to see the best product win Americans' money. But let's face it, water is a commodity. It's a healthier choice than soft drinks for sure, but look who's winning that battle -- the big companies with big marketing dollars. That's why they likely will win this war, despite many smaller, niche players in the field. I wouldn't put my investing money on any but the big three -- Nestle, Pepsi, and Coca-Cola. I may, however, buy more of their water products if I can wean myself off the caramel-colored, sugary goodness they've already addicted me to. After all, one can only take in so many fluids.
Bob Bobala, the managing editor of The Motley Fool, reminds you to drink eight glasses of water a day. The Motley Fool is investors writing for investors.
