COMPETITION IN THE BOTTLED WATER INDUSTRY

Overview This case is about the bottled water industry of United States and discusses the global sales of the industry in 2001 and the average annual growth rate for 1996 to 2001. U.S was the fastest growing and lading market for the bottled water with average growth rate of 9.2% for the years 1996-2001. The main reasons for the growing recognition of bottled water industry in U.S were: Growing concerns of people over the safety of municipal tap water for drinking purpose. Increased focus on health and fitness. Busy and on-the-go life style of people.

Bottled water industry was providing solutions to people through naturally sourced, convenient, pure and portable bottled water. Consumers preferences were shifting from traditional municipal water system to bottled water thus there was a vicious competition and rivalry among the competitors. The industry was dominated by few international food and beverages producers like Pepsi, Nestle, Coca Cola and Groupe Danone. The leading brand was Aquafina by Pepsi with 10% market share and 44.9% annual growth in 2001 while the leading producer of bottled water was Nestle waters with 32.5% market share and 23.5% annual growth in 2001.

Q1: What are the economic characteristics of the bottled water industry: market size, growth, industry structure, barriers of entry and economies of scale etc?

ECONOMIC CHARACTERISTICS 1) Market Size & Growth Rate: Global Sales: Exceeded 32 billion gallons in 2001. Revenues exceeded 6,477 million dollars in 2001. Growth Rate Average annual growth rate was 9%. Rapid growth rate (per capita beverage consumption). Bottled water per person consumption in 1996 was 13 gallons which increased to 19.9 gallons in 2001.

Leading Country Markets for Bottled Water, 1996 and 2001 (Million Gallons) 2001 Rank 1 2 3 4 5 Country United States Mexico Italy Germany France 1996 3,495.1 2,674.2 1,923.9 2,097.6 1,498.9 2001 5,425.3 3,496.5 2,502.6 2,336.5 2,604.6 CAGR (1996-2001) 9.2% 5.5% 5.4% 2.2% 6.6%

Per Capita Consumption of Bottled Water by Country Market, 1996 and 2001 2001 Rank Country Per Capita Consumption (in gallons) 1996 2001 33.5 43.4 25.7 34.7 28.1 34.3 28.8 32.6 25.7 31.3 CAGR (%) 5.3 6.2 4.1 2.5 4.0

1 2 3 4 5

Italy France Mexico Belgium UAE

U.S Per Capita Consumption of Bottled Water, 1991-2001 Year 1996 1997 1998 1999 2000 2001 Capita Consumption (in gallons) 13.1 14.1 15.3 16.8 17.8 19.5 Annual Change 7.4 7.6 8.5 9.8 6.0 9.6

2) Industry Structure: Buyers needs have been changing due more health concerns, less satisfaction level over the quality of tap water and hectic life style of consumers. A significant increase in the number of buyers at national and international level including houses, offices, restaurants, sports events, hotels etc. There were few large competitors in the industry (Pepsi, Nestle, Coca Cola and Groupe Danone) with some small regional sellers who are required to develop either low cost production (distribution capabilities) or unique product attributes (product differentiation). These leading competitors compete globally, internationally, nationally, regionally and locally.

The products offered by the competitors are primarily identical. There are some submarkets in bottled water industry such as mineral, sparkling, purified and enhanced waters. The industry went through a product innovation phase; bottled water was used to delivered to homes and offices in refundable five-gallon containers and dispensed through coolers. Bottled water was also sold in one-litre or smaller single-serving polyethylene terephthalate (PET) and later on it was also available in the high-density polyethylene (HDPE). Introduction of enhanced waters containing specific amounts of vitamins, carbohydrates, calcium, chromium, electrolytes and other supplements. Shape of the bottle such that its not heavy and easy to carry. Large companies of the bottled water industry were vertically integrated by having their own water sources, purification plants, distribution systems, and retailing systems. Economies of scale exist in purchasing, manufacturing, advertising and shipping.

3) Barriers to Entry: 1) Political and Legal Barriers: Environmental Protection Agency (EPA) Food and Drug Administration (FDA) Inspections by state agencies 2) Capital Requirements: Access to advance technology Internet availability for better distribution system and online interaction with wholesalers and customers Tracking Devices on trucks, delivery vans and cargo ships to keep track of product delivery from location to location. 3) Economies of Scale: New entrants can produce more goods as there was a growing trend in the demand for bottled water 4) Competition: High and tough rivalry among the companies at global, national and international level. 5) Product Differentiation: New entrants have the chance to introduce new products with healthy supplements in the water. 6) Access to Distribution Channels: New entrants will have restricted access to the distribution channels.

7) Brand Loyalty: New entrants will not be able to enjoy brand loyalty. Q2: Analyse the profile and strategies of main competitors. Conduct a five-force analysis. Which of the five competitive forces is strongest? How intense is the rivalry between the competitors? Is there a high risk of new entrants and what is the bargaining power of retailers in negotiating prices with suppliers? PROFILES & STRATEGIES OF MAIN COMPETITORS According to the case there are 9 leading U.S. bottled water producers but the top 5 of these are: Nestle Waters, Groupe Danone, Pepsi Co., Coca Cola and Suntory Water Groups. 1. NESTLE WATERS Nestle is the Swedish largest industrial company and the worlds largest food company. The company was broadly diversified into 19 food and beverage categories that were sold in almost every country of the world under different renowned brand names like Nescafe, Tasters Choice, Alpo, Nestea, PowerBar etc. Nestle was producing bottled water since 1843 but it became worlds largest seller of bottled water after acquiring Perrier in 1992 with 72 brands in 160 countries. In 2001 Nestle held 16% share of global bottled water market with sales of 7.5 billion Swiss francs. In attempt to built market leading position in the market Nestle introduced its global products and acquired local brands in most geographic regions of the world. The company acquired 11 bottled water producers in 2001 and was expected to purchase several others in 2002. Its water portfolio of 2002 consisted of 2 global brands (Nestle Pure Life & Nestle Aquarel), 4 international premium brands (Perrier, Vittel, Contrex & San Pellegrino) and 66 local brands. Nestle Waters did not market enhanced water product. Nestle market leading positions in U.S. regional markets and its competitive capabilities in Europe allowed it to earn the status of low-cost leader in U.S. 2. Groupe Danone It was established in 1966 and acquired a leading brand of bottled water Evian in 1969. Later on in 1997 the company diversified its products into dairy products and baked goods.

In 2002 Groupe Danone became leading global food company with annual sales of 44.5 billion Euros. It was the largest seller of bottled water by volume. Groupe Danones strongest brands in 2002 were Sparkletts and Dannon. The company made a number of acquisitions of regional bottled water producers. In 2002 Danone acquired controlling interest of Polands leading brand and Canadas Sparkling Spring brand of bottled water. The company entered into a joint venture with Kirin Beverages to strengthen its distribution system in Japan. It also made a partnership with an Egyptian firm, Rachid Group to target market opportunities in North Africa and Middle East. Groupe Danone relied on Pepsi bottlers and independent bottlers to distribute its water product to markets which were not handled by Coca Cola. But when Coca Cola gave attention to these markets, the company lost its shelf space in many convenient stores and supermarkets. Groupe Danone and Coca Cola then entered into a strategic alliance in 2002 as a result of which Coca Cola became the exclusive distributor of Evian (Groupe Danone bottled water brand) in U.S. and Canada. The two companies also began a joint venture in June 2002 that made Coca Cola responsible for the production, marketing and distribution of Group Danones two brands: Dannon and Sparkeltts. 3. Coca Cola Company: Coca Cola was the worlds leading manufacturer, marketer and distributor of non alcoholic beverages with 300 brands worldwide. Company produces soft drinks, juices, juice drinks, sports drinks, water and coffee but it was best known for coca cola- the worlds most valuable brand. Coca cola has a vast global distribution system of independent bottlers. The company held market leading position in soft drinks segment in most countries and this strength of the company helped it to gain market shares in soft drinks (lemon lime and diet) segments. Coca Cola created purified water with combination of magnesium sulphate, potassium chloride and salt (brand name Dasani). In 2001, Coca Colas marketing expertise and vast U.S. distribution system allowed Dasani to become the second largest and fastest growing brand of water sold in U.S. In 2002, Coca Colas joint venture with Groupe Danone made Coca Cola to jump to the position of second largest bottled water producer in United States.

4. PepsiCo. Inc. : In 2002 Pepsi Co. Was the worlds 5th largest food and beverage company operating in more than 200 countries with sales of about $27 billion. Pepsi Co. produced and marketed Aquafina in 2002 and was best selling brand in U.S. This brand was marketed nationally. Pepsi created product differentiation by purifying tap water and using it in making soft drinks. Water produced by this purification system was so pure that ozone gas was added to it to stop bacterial growth. In late 2002 Pepsi Co. moved into international markets of Spain and Mexico. It acquired Mexicos largest bottler which was number one producer of purified water. Pepsi Co. introduced enhanced bottle water products in 2002 under the brand name of Aquafina Essentials. (Multi-V, Daily-C, B-Power and Calcium+). 5. Suntory Water Group: Suntory Limited was a diversified Japanese consumer products company wit 2001 sales of 833 billion yen. It is the Japans largest producer and distributor of alcoholic and non alcoholic beverages. Suntory Water Group was the 5th largest producer and distributor of bottled water in U.S. with annual sales of $507 million in 2001. The company made 30 acquisitions between 1999 and 2001 to increase its overall market share in United States. The companys home and office delivery business maintained delivery fleets in most parts of U.S. and was supported by online purchase system for customers. In 2002 the company introduced a calcium enhanced bottled water and also developed the first PET water package capable of being dispensed through 12-ounce can vending machines. Suntory Water Groups was awarded by The Institute of Packaging Professionals 2001 Innovation Award.

FIVE FORCE ANALYSES 1. Bargaining Power of Suppliers: The bargaining power of suppliers is LOW as a large number of suppliers is available in the market; about 50 different companies in U.S.

2. Bargaining Power of Customers: Customers have a medium bargaining power as water is a necessity and customers are not willing to compromise on health and safety related to drinking water. However they have the choice to choose among the different bottle water supplying companies. 3. Threats of New Entrants: There is low threat of new entrants to the existing companies as the existing leading companies are enjoying the major share of the global market. New entrants can make their place in the market only by offering low price products and superior distributive system which would be difficult. 4. Threats of Substitute Products The bottled water industry is threatened by the substitute products like soft drinks, tea, coffee and soda as these products are very popular. The industry needs to bring up innovative products like flavoured water and vitamin water. 5. Competitive Rivalry: There is concentrated competition among the bottled water companies due to price and product differentiation.