ASSIGNMENTS
Written Case Assignment #1 – Case: ____________ (100 points total)
For the first case you are to do an external analysis of the industry in which the
company competes. Your paper must be no longer than 5 double-spaced pages
(12pt font). Please write in complete sentences, using proper grammar and spelling,
but remember, this is a report – not an essay. Use Chapter 3 concepts to guide your
work. The format/subheadings must be as follows:
Rubric
5
points
1. Major economic features of the industry, including, but not limited to market size,
market growth rate, number of rivals, scope of rivalry, number of buyers etc. (Text
Table 3.1). Describe only those features that are relevant to the case.
15
points
2. The industry’s competitive (five) forces. You must discuss all five forces.
Make sure to properly identify rivals, supplies/suppliers, buyers, and substitutes.
Don’t forget to asses the strength of each force. Make sure you identify two or
more factors that support your strength assessment (each with an example from
the case) (Text Figures 3.3 – 3.8). You should use the format below to guide your
writing.
a. Rivalry in the industry is____________ (strong, weak, or moderate)
because___________.
b. Suppliers to the industry provide_(what?)_____. They are (strong, weak,
or moderate) __________, because___________.
c. Buyers of the product are__(who?)______. They are__________ (strong,
weak, or moderate), because____________.
d. Substitutes are ____(what?)_____. They are _________(strong, weak,
or moderate), because____________.
e. Threat of entry of new competitors is __________(strong, weak, or
moderate), because_________. The barriers to entry are _(what?)_____.
10
points
3. Factors that are causing major long-term industry change (driving forces).
Please identify the appropriate categories and provide an example from the case
for each category (Text Table 3.2). This section should discuss at least 3 driving
forces.
10
points
4. Key success factors. Please identify the relevant types of key success factors
and provide an example from the case for each type (Text Table 3.3). This
section should contain at least 3, but no more than 6 key success factors.
10
points
Proper spelling, grammar and formatting, paper length, appropriate style and word
choice, section headings, fonts and margins.
Five Forces Analysis – MGMT 425 Rubric
Case: Competition in the Bottled Water Industry in 2006
Power of Buyers
Failing
Incorrect identification
of relevant buyers and
impact on industry.(0)
Power of Suppliers
Incorrect identification
of relevant suppliers
and impact on industry.
(0)
Strength of Rivalry
Incorrect assessment of
rivalry and factors that
drive industry rivalry.
(0)
Incorrect identification
of substitutes and
impact on industry. (0)
Strength of
Substitutes
Threat of Entry
Incorrect identification
of entry threats and
impact on industry. No
discussion of entry
barriers. (0)
Poor
Correctly identifies one or
two relevant buyers, but
unclear or weak discussion
of factors that shape
impact of buyers on
industry. (1)
Correctly identifies one or
two relevant suppliers, but
unclear or weak.
discussion of factors that
shape impact of suppliers
on industry. (1)
Correctly assesses rivalry,
but unclear or weak
discussion of factors that
shape industry rivalry. (1)
Correctly identifies
relevant substitutes, but
unclear or weak discussion
of factors that shape the
impact of substitutes on
industry. (1)
Acceptable
Correctly identifies
relevant buyers and
supports choices with a
discussion of one factor
that shapes impact of
buyers on industry. (2)
Correctly identifies
relevant suppliers and
supports choices with a
discussion of one factor
that shapes impact of
suppliers on industry. (2)
Correctly assesses rivalry
and provides a discussion
of one factor that shapes
industry rivalry. (2)
Correctly identifies
relevant substitutes and
supports choices with a
discussion of one factor
that shapes the impact of
substitutes on industry. (2)
Correctly identifies entry
threats, but unclear or
weak discussion of factors
that impact the threat of
entry. Mentions entry
barriers, but limited
discussion of impact. (1)
Correctly identifies entry
threats and supports
choices with a discussion
of one factor that impacts
the threat of entry.
Mentions entry barriers
and discusses impact. (2)
Exceptional
Correctly identifies
relevant buyers and
supports choice with a
discussion of two or more
factors that shape impact of
buyers on industry. (3)
Correctly identifies
relevant suppliers and
supports choice with a
discussion of two or more
factors that shape impact of
suppliers on industry. (3)
Correctly assesses rivalry
and provides a discussion
of two or more factors that
shape industry rivalry. (3)
Correctly identifies
relevant substitutes and
supports choices with a
discussion of two or more
factors that shape the
impact of substitutes on
industry. (3)
Correctly identifies entry
threats and supports
choices with a discussion
of two or more factors that
impact the threat of entry.
Mentions entry barriers and
discusses impact. (3)
Points
Competition in the Bottled
Water Industry in 2006
John E. Gan1ble
University of South Alabama
ith global revenues exceeding $62 bil
lion in 2005, bottled water was among
the world's most attractive beverage cat
egories. Industry revenues were forecast to grow by
an additional 30 percent between 2005 and 2010, to
reach approximately $82 billion. Bottled water had
long been a widely consumed product in Western
Europe and Mexico, where annual per capita con
sumption approached or exceeded 40 gallons in 2005,
but until the mid-1990s bottled water had been some
what of a novelty or prestige product in the United
States. In 1990, approximately 2.2 billion gallons of
bottled water were consumed in the United States and
per capita consumption approximated 9 gallons. U.S.
per capita consumption had grown to more than 25
gallons by 2005. The rising popularity of bottled wa
ter in the United States during the late 1990s and ear
ly 2000s had allowed the United States to become the
world's largest market for bottled water, with annual
volume sales of nearly 7.5 billion gallons in 2005. In
2006, emerging-country markets in Asia and South
America seemed to be replicating the impressive
growth of bottled water in the United States, with
annual growth rates exceeding 20 percent. Exhibit 1
presents bottled water statistics for the 10 largest
country markets for bottled water in 2004.
The growing popularity of bottled water in the
United States was attributable to concerns over the
safety of municipal drinking water, an increased
focus on fitness and health, and the hectic on-the
go lifestyles of American consumers. Bottled wa
ter's convenience, purity, and portability made it
the natural solution to consumers' dissatisfaction
Copyright © 2007 by John E. Gamble. All rights reserved.
C-48
with tap water and carbonated beverages. The U.S.
bottled water market, like most markets outside the
United States, was characterized by fierce competi
tive rivalry as the world's bottled water sellers jock
eyed for market share and volume gains. Both the
global and U.S. bottled water markets had become
dominated by a few international food and bever
age producers- such as Coca-Cola, PepsiCo, and
Nestle-but they also included many small regional
sellers who were required to either develop low-cost
production and distribution capabilities or use dif
ferentiation strategies keyed to SOlne unique product
attributes. In 2006, competitive rivalry continued to
ratchet upward as sellers launched innovative prod
uct variations, lowered prices in developed markets,
used strategic agreements to strengthen positions in
established markets, and acquired smaller sellers to
gain footholds in rapidly growing emerging markets.
Industry analysts and observers believed the recent
moves undertaken by the world's largest sellers of
bottled water would alter the cOlnpetitive dynam
ics of the bottled water industry and would mandate
that certain players modify their current strategic ap
proaches to competition in the industry.
IN UST
I 2006
co
I
o
Even though it was the world's largest market for
bottled water, the United States remained among the
faster-growing markets for bottled water since per
capita consumption rates of bottled water fell sub
stantially below those in Western Europe, the Middle
Case 4 Competition in the Bottled Water Industry in 2006
-""h O
t
Leading Country Markets for Bottled Water, 1999, 2004
(in millions of gallons)
United States
2
Mexico
3
4
China
5
6
7
8
9
10
All others
Worldwide tota.l
C-49
Brazil
Italy
Germany
France
Indonesia
Spain
India
4,579.9
3,056.9
1,217.0
1,493.8
2,356.1
2,194.6
1,834.1
907.1
1,076.4
444.0
6,833.5
25,993.4
6,806.7
4,668.3
3,140.1
3,062.0
2,814.4
2,722.6
2,257.3
1,943.5
1,453.5
1,353.3
10,535.0
40,756.7
8.2%
8.8
20.9
15.4
3.6
4.4
4.2
16.5
6.2
25.0
(Avg. CARG)
9.0
9.4
* CAGR=Compound annual growth rate
Source: Beverage Marketing Corporation as reported by the International Bottled Water Association, 2006.
East, and Mexico. Bottled water consumption in the
United States also lagged per capita consumption of
soft drinks by more than a 2: 1 margin, but in 2003
bottled water surpassed coffee, tea, milk, and beer
to become the second largest beverage category in
the United States. In 2005, more than 15.3 million
gallons of carbonated soft drinks were consumed
in the United States, but concerns about sugar con
sumption and other nutrition and6tness issues had
encouraged many consumers to transition from soft
drinks to bottled water. Whereas the bottled water
market in the United States grew by 10.7 percent be
tween 2004 and 2005 to reach 7.5 billion gallons, the
U.S. carbonated soft drink market declined by 0.6
percent. Industry analysts expected the carbonated
soft drink industry to decline by 1.5 percent annu
ally for the foreseeable future as bottled water, en
ergy drinks, and sports drinks gained a larger "share
of the stomach." Exhibits 2, 3, and 4 illustrate the
growing popularity of bottled water among u.s. con
sumers during the 1990s and through 2004.
Almost one-half of bottled water consumed in
the United States in 1990 was delivered to homes and
offices in returnable five-gallon containers and dis
pensed through coolers. At that time, only 186 mil
lion gallons of water was sold in one-liter or smaller
single-serving polyethylene terephthalate (PET)
bottles. Beginning in the late 1990s, consumers be
gan to appreciate the convenience and portability of
water bottled in single-serving PET containers that
could be purchased chilled from a convenience store
and drunk immediately. By 2005, bottled water sold
in two-liter or smaller PET containers accounted for
60.8 percent of industry volume. The unit sales of
bottled water packaged in PET containers grew by
22.5 percent between 2004 and 2005. Water sold in
five-gallon containers used in the home and office
delivery (HOD) market accounted for only 17.8 per
cent of industry volume in 2005 and grew by only
0.2 percent between 2004 and 2005. Similarly, water
sold in 1- or 2.5-gallon high-density polyethylene
(HDPE) containers accoL1nted for just 16.5 percent
of industry volume in 2005 and grew by only 1.0
percent between 2004 and 2005.
Convenience and portability were two of a va
riety of reasons U.S. consumers were increasingly
attracted to bottled water. A heightened emphasis on
healthy lifestyles and improved consumer awareness
of the need for proper hydration led many consum
ers to shift traditional beverage preferences toward
bottled water. Bottled water consumers frequently
claimed that drinking more water improved the ap
pearance of their skin and gave them more energy.
Bottled water analysts also believed that many
health-conscious consumers drank bottled water be
cause it was a symbol to others that they were inter
ested in their health.
A certain amount of industry growth was at
tributable to increased concerns over the quality
of tap water provided by municipal water sources.
Part 2 Cases in Crafting and Executing Strategy
C-50
._--/Jlbi 2
Per Capita Consumption of Bottled Water by Country Market,
1999, 2004
Italy
Mexico
United Arab Emirates
Belgium-Luxembourg
France
Spain
Germany
Lebanon
Switzerland
Cyprus
United States
Saudi Arabia
Czech Republic
Austria
Portugal
Global Average
2
3
4
5
6
7
8
9
10
11
12
13
14
15
* CAGR
= compound
40.9
30.9
29
32.2
31
26.9
26.6
17.9
23.8
17.8
16.8
19.9
16.4
19.7
18.6
4.3
48.5
44.5
43.2
39.1
37.4
36.1
33
26.8
26.3
24.3
23.9
23.2
23
21.7
21.2
6.4
3.5%
7.6
8.3
4.0
3.8
6.1
4.4
8.4
2.0
6.4
7.3
3.1
7.0
2.0
2.7
8.3
annual growth rate
Source: Beverage Marketing Corporation as reported by the International Bottled Water Association, 2006.
l'~ -hi 'f
3
Global Bottled Water Market Wholesale Value and Volume, 2001-2005,
Forecasts for 2006-2010
2001
92.8
2002
2003
2004
99.5
107.9
2005(e)
2006(f)
2007(f)
2008(f)
2009(f)
2010(f)
113.3
119.7
125.9
132.9
139.5
146.4
153.4
7.2%
$47.3
51.3
56.1
59.1
62.9
8.5%
9.4
5.3
8.4
5.0
5.6
5.2
5.6
66.4
70.4
6.4
5.6
6.0
5.0
4.9
4.8
74.5
78.5
81.9
5.8
5.4
4.3
(e) = estimated
(f) = forecast
Source: Global Bottled Water Industry Profile, December 2005 , Datamonitor.
Consumers in parts of the world with inadequate
water treatment facilities relied on bottled water to
provide daily hydration needs, but tap water in the
United States was very pure by global standards.
(Municipal water systems were regulated by the U. S.
Environmental Protection Agency and were required
Case 4 Competition in the Bottled Water Industry in 2006
u.s. Per Capita Consumption
of Bottled Water, 1991-2005
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005(p)
(p)
9.3
9.8
10.5
11.5
12.2
13.1
14.1
15.3
16.8
17.8
19.3
21.2
22.6
24
25.7
5.4%
7.1
9.5
6.1
7.4
7.6
8.5
9.8
6.0
8.4
9.8
6.6
6.2
7.1
= preliminary
Source: Beverage Marketing Corporation as reported by
the International Bottled Water Association, 2006.
to comply with the provisions of the Safe Drinking
Water Act Amendments of 2001.) Consumer con
cerns over the quality of drinking water in the
United States emerged in 1993 when 400,000 resi
dents of Milwaukee, Wisconsin, became ill with flu
like symptoms and almost 100 immune-impaired
residents died from waterborne bacterial infections.
Throughout the 1990s and into the early 2000s, the
media sporadically reported cases of municipal wa
ter contamination, such as in 2000 when residents of
Washington, D.C., became ill after the city's water
filtration process caused elevated levels of suspend
ed materials in the water.
Even though some consumers were concerned
about the purity of municipal water, most consum
ers' complaints with tap water centered on the chem
ical taste of tap water that resulted from treatment
processes that included the use of chlorine and other
chemicals such as fluoride. In a tap-water tasting
in Atlanta hosted by Southpoint Magazine, judges
rated municipal water on taste and found some
cities' waters very palatable. Water obtained from
the municipal source in Memphis was said to have "a
C-Sl
refreshing texture." However, othermunicipal systems
did not fare as well with the jUdges-some of whom
suggested Houston's water tasted "like a chemistry
lab," while others said Atlanta's municipal water was
akin to "a gulp of swimming pool water."l However,
there were positive attributes to the chemicals added
to tap water, as chlorine was necessary to kill any
bacteria in the water and fluoride had contributed
greatly to improved dental health in the United States.
In addition, tap water had been shown to be no less
healthy than bottled water in a number of independent
studies, including a study publicized in Europe
that was commissioned by the World Wide Fund
for Nature and conducted by researchers at the
University of Geneva.
Bottled water producers in the United States
were required to meet the standards of both the
Environmental Protection Agency (EPA) and the
U.S. Food and Drug Administration (FDA). Like all
other food and beverage products sold in the United
States, bottled water was subject to such food safety
and labeling requirements as nutritional labeling
provisions and general good manufacturing prac
tices (GMPs). Bottled water GMPs were mandated
under the 1962 Kefauver-Harris Drug Amendments
to the Federal Food, Drug and Cosmetic Act of 1938
and established specifications for plant construc
tion and design, sanitation, equipment design and
construction, production and process controls, and
record keeping. The FDA required bottled water pro
ducers to test at least weekly for the presence ofbac
teria and to test annually for inorganic contaminants,
trace metals, minerals, pesticides, herbicides, and or
ganic compounds. Bottled water was also regulated
by state agencies that conducted inspections of bot
tling facilities and certification of testing facilities to
ensure that bottled water was bottled under federal
GMPs and was safe to drink.
Bottled water producers were also required to
comply with the FDA's Standard of Identity, which
required bottlers to include source water information
on their products' labels. Water labeled as "spring
water" must have been captured from a borehole or
natural orifice of a spring that naturally flows to the
surface. "Artesian water" could be extracted from a
confined aquifer (a water-bearing underground layer
of rock or sand) where the water level stood above
the top of the aquifer. "Sparkling water" was re
quired to have natural carbonation as it emerged from
the source, although carbonation could be added to
C-S2
Part 2 Cases in Crafting and Executing Strategy
return the carbon dioxide level to what was evident
as the water emerged from the source. Even though
sparkling water was very popular throughout most
of Europe, where it accounted for approximately 54
percent of industry sales, it made up only 8 percent
of the bottled water market in the United States.
The FDA's definition of "mineral water" stat
ed that such water must have at least 250 parts per
million of total dissolved solids, and its standards
required water labeled as "purified" to have under
gone distillation, deionization, or reverse osmosis
to remove chemicals such as chlorine and fluoride.
"Drinking water" required no additional processing
beyond what was required for tap water but could
not include flavoring or other additives that account
for more than 1 percent of the product's total weight.
Both "drinking water" and "purified water" had to
cleaily state that the water originated "from a com
munity water system" or "from a municipal source."
Bottled water producers could also voluntarily
become members of the International Bottled Water
Association (IBWA) and agree to comply with its
Model Code, which went beyond the standards of
the EPA, FDA, or state agencies. The Model Code al
lowed fewer parts per million of certain organic and
inorganic chemicals and microbiological contami
nants than FDA, EPA, or state regulations and im
posed a chlorine limitation on bottled water. Neither
the FDA nor the EPA limited chlorine content. IBWA
members were monitored for compliance through
annual, unannounced inspections administered by
an independent third-party organization.
Distribution and Sale
of Bottled Water
Consumers could purchase bottled water in nearly
any location in the United States where food was
also sold. The distribution of bottled water varied
depending on the producer and the distribution chan
nel. Typically, bottled water was distributed to large
grocers and wholesale clubs directly by the bottled
water producer, whereas most producers used third
parties like beer and wine distributors or food dis
tributors to make sales and deliveries to convenience
stores, restaurants , and delis.
Because ofthe difficulty for food service distrib
utors to restock vending machines and provide bottled
water to special events, Coca-Cola and PepsiCo were
able to dominate such channels since they could make
deliveries of bottled water along with their deliveries
of other beverages. Coca-Cola 's and PepsiCo 's vast
beverage distribution systems made it easy for the
two companies to make Dasani and Aquafina avail
able anywhere Coke or Pepsi could be purcha ed. In
addition, the two cola giants almost always negoti
ated contracts with sports stadiums, universities, and
school systems that made one of them the exclusive
supplier of all types of nonalcoholic beverages sold
in the venue for a specified period. Under such cir
cumstances, it was nearly impossible for other brands
of bottled water to gain access to the account.
PepsiCo and Coca-Cola's soft drink businesses
had allowed vending machine sales to account for
8 percent of industry sales volume in 2005 and had
also aided the two companies in making Aquafina
and Dasani available in supermarkets, supercent
ers, wholesale clubs, and convenience stores. Soft
dlink sales were important to all types of food stores
since soft dlinks made up a sizable percentage of
the store's sales and since food retailers frequently
relied on soft drink promotions to generate store
traffic. Coca-Cola and PepsiCo were able to encour
age their customers to purchase items across their
product lines to ensure prompt and complete ship
ment of key soft drink products. As a diversified
food products company, PepsiCo had exploited the
popularity of its soft drinks , Gatorade sports drinks,
Frito-Lay snack foods , and Tropicana orange juice
in persuading grocery accounts to purchase not
only Aquafina but also other non-soft drink brands
such as FruitWorks, SoBe, Lipton 's Iced Tea, and
Starbucks Frappuccino.
Since most supermarkets, supercenters, and food
stores usually carried fewer than seven branded bot
tled waters plus a private-label brand, bottled water
producers other than Coke and Pepsi were required
to compete aggressively on price to gain access to
shelf space. Supermarkets and discount stores ac
counted for 43.5 percent of U.S. industry sales in
2005 and were able to require bottled water suppliers
to pay slotting fees in addition to offering low prices
to gain shelf space. Natural foods stores could also
require aIIDual contracts and slotting fees but were
much more willing than traditional supermarkets to
pay higher wholesale prices for products that could
contribute to the store 's overall level of differentia
tion. In fact, most natural foods stores would not
carry brands found in traditional supermarkets.
Case 4 Competition in the Bottled Water Industry in 2006
Convenience stores were also aggressive in press
ing bottled water producers and food distributors for
low prices and slotting fees. Most convenience stores
carried only two to four brands of bottled water be
yond what was distributed by Coca-Cola and Pepsi
and required bottlers to pay annual slotting fees of
$300 to $400 per store in return for providing 5 to
10 bottle facings on a cooler shelf. Some bottlers
offered to provide retailers with rebates of approxi
mately 25 cents per case to help secure distributors
for their brand of bottled water. Food and beverage
distributors usually allowed bottled water producers
to negotiate slotting fees and rebates directly with
convenience store buyers.
There was not as much competition among
bottled water producers to gain shelf space in delis
and restaurants since that channel accounted for only
6.5 percerit of U.S. industry sales in 2005. PepsiCo
and Coca-Cola were among the better-suited bottled
water producers to economically distribute water to
restaurants since they likely provided fountain drinks
to such establishments.
Suppliers to the Indu try
The suppliers to the bottled water industry included
municipal water systems; spring operators; bottling
equipment manufacturers; deionization, reverse
osmosis, and filtration equipment manufacturers;
manufacturers of PET and HDPE bottles and plas
tic caps; label printers; and secondary packaging
suppliers. Most packaging supplies needed for the
production of bottled water were readily available
from a large number of suppliers. Large bottlers able
to commit to annual purchases of more than 5 mil
lion PET bottles could purchase bottles for as little
as 5 cents per bottle, whereas regional bottlers pur
chasing smaller quantities of bottles or making only
one-time purchases of bottles could expect to pay a
much as 15 cents per bottle. Suppliers of secondary
packaging like cardboard boxes, shrink-wrap, and
six-pack rings and suppliers of printed film or paper
labels were numerous and aggressively competed for
the business of large bottled water producers.
Bottling equipment used for water purifica
tion and filling bottles was manufactured and mar
keted by about 50 different companies in the United
States. A basic bottle-filling line could be purchased
for about $125,000, whereas a large state-of-the-art
bottling facility could require a capital investment
C-53
of more than $100 million. Bottlers choosing to sell
spring water could expect to invest about $300,000
for source certification, road grading, and installa
tion of pumping equipment, fencing, holding tanks,
and disinfecting equipment. Bottlers that did not
own springs were also required to enter into lease
agreements with spring owners that typically ranged
from $20,000 to $30,000 per year. Companies sell
ing purified water merely purchased tap water from
municipal water systems at industrial rates prior to
purifying and bottling the water for sale to consum
ers. Sellers of purified water were able not only to pay
less for water they bottled, but also to avoid spring
water's inbound shipping costs of 5 to 15 cents per
gallon since water arrived at the bottling facility by
pipe rather than by truck.
Key Comp titive Capabilities
in the Bottled Water Industry
Bottled water did not enjoy the brand loyalty of soft
drinks, beer, or many other food and beverage prod
ucts but was experiencing some increased brand loy
alty, with 10 to 25 percent of consumers looking for
a specific brand and an additional two-thirds consid
ering only a few brands acceptable. Because of the
growing importance of brand recognition, success
ful sellers of bottled water were required to possess
well-developed brand-building skills. Most of the
industry's major sellers were global food companies
that had built respected brands in soft drinks, dairy
products, chocolates, and breakfast cereals prior to
entering the bottled water industry.
Bottled water sellers also needed to have efficient
distribution systems to supermarket, wholesale club,
and convenience store channels to be successful in
the industry. It was imperative for bottled water dis
tributors (whether direct store delivery by bottlers or
delivery by third parties) to maximize the number of
deliveries per driver since distribution included high
fixed costs for warehouses, trucks, handheld inven
tory tracking devices, and labor. It was also critical for
distributors and bottlers to provide on-time deliveries
and offer responsive customer service to large cus
tomers in the highly price-competitive market. Price
competition also mandated high utilization of large
scale plants to achieve low production costs. Volume
and market share were also key factors in keeping
marketing expenses at an acceptable per-unit level.
Part 2 Cases in Crafting and Executing Strategy
C-54
of bottled water. Coca-Cola had used a joint venture
with Danone Waters to increase its bottled water
product line in the United States beyond Dasani and
acquired established brands in Europe and Australia
to build strength in markets outside the United
States. PepsiCo expanded into international markets
for bottled water by allowing foreign bottling fran
chisees to license the Aquafina brand. The strategic
maneuvering had created a more globally competi
tive environment in which the top sellers met each
other in almost all of the world's markets and made
it difficult for regional sellers to survive. California
based Palomar Mountain Spring Water was one of
many casualties of intensifying competibve rivalry.
Like many other independent bottled water compa
nies launched in the 1990s, Palomar was forced into
bankruptcy in 2003 after losing key supermarket
and discount store contracts. After Palomar lost
much of its distribution in California supermarkets
and discount stores to Nestle, its 2003 revenues fell
to $7 million from $30 million just two years ear
lier. Exhibit 6 illustrates the extent to which the U.S.
bottled water market had consolidated by 2003 and
2004.
. The introduction of enhanced waters or func
tional waters was the most important product inno
vation since,bottled water gained widespread accep
tance in the United States, with most sellers in 2006
having introduced variations of their products that
included flavoring , vitamins, carbohydrates, electro
lytes, and other supplements. The innovation seemed
to be a hit with U.S. consumers, as the market for
enhanced bottled waters expanded from $20 million
Recent Trends in the Bottled
Water Industry
As the annual growth rate of bottled water sales in
the United States slowed from double-digit rates,
signs had begun to appear that price competition in
the bottled water industry might mirror that of the
carbonated soft drink industry. Fierce price compe
tition could be expected to bring volume gains but
result in flat or declining revenues for the bottled
water industry. Coca-Cola, Nestle, and PepsiCo had
avoided strong price competition through 2004, but
during the first six months of 2005 all three of the
industry's largest sellers began to offer considerable
discounts on 12- and 24-bottle multipacks to boost
unit volume. Exhibit 5 presents average U.S. retail
prices for 24-bottle multipacks marketed by Nestle
Waters, Coca-Cola, and PepsiCo between 2003 and
the first six months of 2005.
The world's largest sellers of bottled water ap
peared to be positioning for industry maturity by
purchasing smaller regional brands. Nestle had ac
quired bottled water producers and entered into joint
ventures in Poland, Hungary, Russia, Greece, France,
Turkey, Algeria, South Korea, Indonesia, and Saudi
Arabia between 2000 and 2006. Danone Waters also
made a number of acquisitions and entered into stra
tegic alliances and j oint ventures during the early
2000s to increase penetration of selected emerging
and developed markets.
Danone and Nestle had long competed against
each other in most country markets, but PepsiCo
and Coca-Cola were also becoming global sellers
ExhilJ 'r- S Average Retail Prices of Multipack Bottled Water Marketed by Nestle
Waters, Coca-Cola, and PepsiCo, 2003-2005
-
-
-
-
- ..
'4
:Brands
...
',. -
-
T2003 '
:
'
..
,
Average
24-Pack
'Price
£ '
Poland Spring
(Nestle Waters)
... -
':2004
Average
.24-Pack
Price
.......
$5.89
'''2~
AV_~
·24!P.a
Price
'
•
$5.17
..
$5.10
Dasani (Coca-Cola)
$5.36
$5,88
$5.80
Dannon (Coca-Cola)
$4.70
$4.70
$4.35
Aquafina (PepsiCo)
$5.24
$5.40
$5.01
* January 2005-June 2005.
Source: Morgan Stanley, as reported by the Atlanta Journal-Constitution , June 21,2005 .
I(
Case 4 Competition in the Bottled Water Industry in 2006
C-55
Exhibit 6 Top Four U.S. Bottled Water Marketers, 2003-2004
'f"'"
~-"-"-'·"-··o"'··':'
~ ~
t
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~
,...
.... "
.
:I-!:..,
Rank
_ --), .. ...... ~:""'"
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-
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r
o
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, . . ,
~-
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o'
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,
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Leading • Brands
_
.
. .
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•. ' ....~.."."'f~ 2
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04 "
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M.arket
Share'.,
1...
6.,La __ ~
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't. • -t. _t - •'\. .'"
• . Mar~et ~
.
•
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' Share
~.w
•.
•
__
Nestle Waters
Poland Spring, Deer Park, Arrowhead,
Zephyrhills, Ozarka, Ice Mountain
42.1%
39.1%
2
Coca-Cola
Dasani, Evian and Dannon
21.9
24.1
3
4
PepsiCo
CG Roxanne
Others/Private-Label
Aquafina
Crystal Geyser
13.6
7.4
15.0
100.0%
14.5
7.0
15.3
TOTAL
100.0%
Source: Morgan Stanley, as reported by the Atlanta Journal-Constitution, June 21,2005.
in 2000 to approximately $1 billion in 2006. Most
sellers of bottled water had yet to make functional
waters widely available outside the United States.
Energy Brands helped create the enhanced water
segment in the United States with its 2000 launch of
Glaceau Vitamin Water, which contained a variety
of vitamins promoting mental stimulation, physical
rejuvenation, and overall improved health. Glaceau
was the best-selling brand of enhanced water in 2000
and 2001, but it fell to the number two position in
the segment upon PepsiCo's launch of Propel Fitness
Water. Propel Fitness Water remained the market
leader in the U.S. enhanced water segment in 2006.
Energy Brands had achieved a compounded annual
growth rate of more than 200 percent between 2000
and 2005, to record estimated sales of $350 million
and maintain its number two position in the U.S.
functional water category.
Coca-Cola, Nestle, and Danone Waters had be
gun testing vitamin-enhanced waters in as early as
2002, but all three had changed their approaches to
functional waters by 2006. Coke had given up on
vitamin-enhanced waters in favor of flavored water,
while Nestle Waters and Danone Waters retained
only a fluoride-enhanced water. Like those at Coca
Cola, managers at Nestle and Danone believed that
flavored waters offered substantial growth opportu
nities in most country markets. The Tata Group, an
Indian beverage producer, showed greater confidence
in the vitamin-enhanced bottled water market with
its purchase of a 30 percent stake in Energy Brands
in 2006 for $677 million. The Tata Group's chairman
believed that Energy Brands had the potential to be
come a $3 billion company within 10 years.
P 0
L-.-..a..
WATE
o
5
N estle Waters
Nestle was the world's leading seller of bottled
water, with a worldwide market share of 18.3 percent
in 2006. It was also the world's largest food com
pany, with 2005 sales of 91 billion Swiss francs (ap
proximately $71 billion). The company was broadly
diversified into 10 food and beverage categories that
were sold in almost every country in the world under
such recognizable brand names as Nescafe, Taster's
Choice, Perrier, Vittel, Carnation, PowerBar, Friskies,
Alpo, Nestea, Libby's, Stouffer's, and of course,
Nestle. The company produced bottled water as ear
ly as 1843, but its 1992 acquisition of Perrier created
the foundation of what has made Nestle Waters the
world's largest seller of bottled water, with 75 brands
in 130 countries. In 2005, Nestle recorded bottled
water sales of 8.8 billion Swiss francs (approximately
$6.9 billion) and was the global leader in the bottled
water industry, with an 18.3 percent worldwide mar
ket share in 2005. Nestle Waters was the number one
seller of bottled water in the United States with a
42.1 percent market share in 2004 and the number
one seller in Europe with a 20 percent market share.
Nestle was also the number one seller in Africa and
the Middle East and was aggressive in its attempts to
build market-leading positions in emerging markets
Asia and Latin America through the introduction
C-56
Part 2 Cases in Crafting and Executing Strategy
of global Nestle products and the acquisition of es
tablished local brands. The company acquired nearly
20 bottled water producers between 2001 and 2003 .
In 2006, Nestle Waters was the number one brand
of bottled water in Pakistan, Vietnam, and Cuba; the
number two brand in Indonesia and Argentina; and
the number three brand in Thailand.
The company's bottled water portfolio in
2006 included two global brands (Nestle Pure Life
and Nestle Aqnarel), five international premium
brands (Perrier, Vittel, Contrex, Acqua Panna, and
S. Pellegrino), and 68 local brands . Nestle Pure Life
was a purified water product developed in 1998 for
emerging markets and other markets in which spring
water was not an important differentiating feature
ofbottled water. Nestle Aquarel was developed in
2000 for the European market and markets that pre
ferred still spring water over purified water or spar
kling spring water. Nestle's other waters marketed
in Europe were either spring water with a higher
mineral content or sparkling waters such as Perrier
and S. Pellegrino. Almost all brands marketed out
side of Europe were either spring water or mineral
water with no carbonation. Its brands in the United
States included Pure Life, Arrowhead, Ice Mountain,
Calistoga, Deer Park, Zephyrhills, Ozarka, and
Poland Spring.
During the early 2000s, Nestle Waters manage
ment believed that its broad portfolio of local wa
ter brands was among the company 's key resource
strengths. However, the notable success of Nestle's
two global brands had caused management to reor
ganize the division in 2006. Pure Life and Aquarel
had grown from just 2.5 percent of the division's
sales in 2002 to 12.0 percent of the division's 2005
sales. Consumers in the United States seemed to ac
cept the Pure Life brand as well as long-established
local brands, with sales of Nestle Pure Life in the
United States increasing by 50 percent between 2004
and 2005. Flavored varieties of Pure Life had also
achieved notable success in Canada by capturing a
70 percent share of the flavored water market within
the first six months on the market. Nestle's 68 local
brands had accounted for as much as 75.7 percent of
division sales in 2002, but local brands had declined
to 64.8 percent of sales in 2005. The company 's five
premium international brands accounted for an ad
ditional 23.2 percent of 2005 sales.
Nestle had test-marketed functional waters
fortified with vitamins and plant extracts between
2003 and 2004, but offered only fruit-flavored
enhanced waters in 2006. Contrex Lemon Meringue
and Strawberry Melba were two innovative calorie
free flavors introduced in 2006. The company had
also used packaging innovations to differentiate its
bottled water brands, including a spill-proof cap
for child-sized bottles of Poland Spring, Deer Park
and Arrowhead. Nestle Waters also developed ~
bubble-shaped bottle that was designed to appeal
to children. Perrier's new PET container was part
of a strategy to revitalize the prestigious brand,
which had experienced annual sales declines since
the mid-1990s. The new plastic bottle was intended
to better match the on-the-go lifestyles of young
consumers than Perrier's heavy one-liter glass con
tainers. Nestle would still package Perrier in glass
bottles for consumers who preferred the brand's
traditional packaging for dinner parties and other
formal settings.
Home and office delivery (HOD) was also an im
portant component of Nestle's strategy-especially
in North America, Europe, and the Middle East.
HOD made up nearly 30 percent of Nestle Waters '
sales volume in the United States and was record
ing double-digit growth in most other country mar
kets in 2005. In 2005, Nestle competed in the HOD
market for bottled water in 30 countries. Between
2000 and 2004, the company had made 8 acquisi
tions in the European HOD segment to grow from
no presence to the leading position, with 32 percent
market share. Nestle had also made acquisitions and
entered into joint ventures to develop market lead
ing positions in countries located in the Middle East,
Northern Africa, and the Far East. Nestle's market
leading positions in Europe and the United States in
HOD and PET channels allowed it to earn the status
of low-cost leader in the United States. Exhibit 7
illustrates Nestle Waters' cost and wholesale pric
ing advantages relative to Coca-Cola and PepsiCo
in U.S. markets. Nestle Waters ' management stated
in mid-2002 that it expected to double the division's
revenues by 2010.
Groupe Danone
Groupe Danone was established through the 1966
merger of two of France's leading glass makers,
who foresaw the oncoming acceptability of plastic
as a substitute to glass containers. The management
of the newly merged company believed that, rather
r
I
Case 4 Competition in the Bottled Water Industry in 2006
c
r.
t
'I .
J, 11
C-S7
Value Chain Comparison for the Bottled Water Operations of Nestle,
PepsiCo, and Coca-Cola
Retailer price per case
$8.44
$8.52
Retailer margin
35.0%
17.5%
17.6%
Wholesale price per case
$5.49
$7.03
$7.13
Wholesale sales
$5.49
$7.03
$7.13
Support revenue
0.00
0.41
0.52
$5.49
$7.44
$7.65
$1.70
Total bottler revenue
$8.65
Expenses
Water *
$0.01
$1.67
PET bottles
1.03
1.16
1.16
Secondary packaging
0.61
0.68
0.68
Closures
0.21
0.23
0.23
Labor/manufacturing
0.70
0.70
0.77
Depre~iation
0.07
0.08
0.08
2.63
4.52
4.62
$2.86
$2.92
$3.03
2.29
2.25
2.53
EBITA
$0.57
$0.67
$0 .50
EBITA margin
10.4%
Total cost of goods sold
Gross profit
Selling, general, &
administrative
9.0%
6.5%
* Includes licensing fees and royalties paid by Coca-Cola and PepsiCo bottlers to Coca-Cola and PepsiCo.
Source: Goldman Sachs Global Equity Research as reported by Beverage World, April 2002.
than shi fting its focus to the manufacture of plastic
containers, the company should enter markets for ·
products typically sold in glass containers. Groupe
Danone's diversification outside of glass containers
began in 1969 when the company acquired Evian
France 's leading brand of bottled water. Throughout
the 1970s and 1980s, Groupe Danone acquired ad
ditional food and beverage companies that produced
beer, pasta, baby food, cereals, sauces, confection
ery, dairy products, and baked goods. In 1997, the
company slimmed its portfolio of businesses to dairy
products, bottled water, and a baked goods division
producing cereal, cookies, and snacks. In 2005 ,
Groupe Delllone was a leading global food company,
with annual sales of€13 billion and was the world's
largest producer of dairy products, the number two
producer of cereal, cookies, and baked snacks, and
the second largest seller of bottled water. The com
pany had been the largest seller of bottled water by
volume in 2005 but was displaced by Nestle in both
terms of volume and dollar sales during 2006.
Danone recorded worldwide bottled water sales
of €3.4 billion in 2005 . Among Groupe Danone's
most important beverage brands were Evian, the
world's leading brand of spring water, and Wahaha,
the leading brand of bottled water in China.
Each brand accounted for more than £1 billion in
sales during 2005. During that year, 40 percent of
Danone 's bottled water sales originated in Europe,
47 percent were in China, and 13 percent were in
emerging markets outside of Asia. Danone 's local
and regional brands held number one shares in many
country markets such as Denmark, Germany, Spain,
the United Kingdom, Poland, Indonesia, Mexico,
and Morocco.
Like Nestle, Danone had made a number of ac
quisitions of regional bottled water producers dur
ing the late 1990s and early 2000s. During 2002,
C-58
Part 2 Cases in Crafting and Executing Strategy
Danone acquired a 'controlling interest in Poland's
leading brand of bottled water for an undisclosed
amount and purchased Canada's Sparkling Spring
brand of waters for an estimated $300-$400 million.
The company also entered into a joint venture with
Kirin Beverage Company to strengthen its distribu
tion network in Japan and embarked on a partner
ship with the Rachid Group, an Egyptian firm, to ac
celerate its development of market opportunities in
North Africa and the Near and Middle East. During
2003 and 2004, Groupe Danone acquired three HOD
bottled water sellers in Mexico. Danone acquired the
leading brand ofbottled water in Serbia and an HOD
seller in Spain in 2004. In 2006, the company ac
quired a 49 percent stake in Denmark's leading seller
of bottled water.
Danone Waters ' revenues had declined by nearly
20 percent between 2000 and 2005 as its U. S. dis
tribution agreement with Coca-Cola began to suffer.
Prior to Coca-Cola's launch of Dasani, its bottlers
distributed Evian and other non-Coke bottled water
brands. Before the introduction of Dasani, about 60
percent of Evian's U.S. distribution was handled by
Coca-Cola bottlers. With Coca-Cola bottler's atten
tion directed toward the sale of Dasani, Evian lost
shelf space in many convenience stores, supermar
kets' delis, restaurants, and wholesale clubs.
Danone Waters and Coca-Cola entered into a
joint venture in 2002 that allowed Evian and Dannon
water brands to be distributed along with Dasani to
convenience stores, supermarkets, and other retail
locations serviced by Coca-Cola's bottling opera
tions. In addition, the agreement made Coke respon
sible for the production, marketing and distribution
of Dannon in the United States. Coca-Cola provided
Danone an up-front cash payment in return for 51
percent ownership of the joint venture. Danone con
tributed its five plants and other bottled water as
sets located in the United States to the joint venture.
However, Evian and Dannon continued to suffer un
der the new distribution arrangement as Coca-Cola
continued to put most of its marketing muscle be
hind Dasani. Danone sold its 49 percent interest in
the North American bottled water joint venture to
Coca-Cola in 2005.
Danone's home and office delivery businesses
were not included in the agreement with Coca-Cola
and were combined with Suntory Water Group's as
sets to form DS Waters in 2003. The combination
of Danone Waters' and Suntory Waters assets made
the joint venture the largest HOD distributor in the
United States, with sales of approximately $800
million. Brands marketed by DS Waters included
Alhambra, Crystal Springs, Sierra Springs, Hinckley
Springs, Kentwood Springs, Belmont Springs, and
Sparkletts. Groupe Danone and Suntory sold 100
percent of DS Waters to a private investment fund
in 2005 for an undisclosed sum. The sale result
ed in a €315 million loss for Groupe Danone and
completed Groupe Danone's exit from the North
American bottled water market. Danone 's HOD
business remained the worldwide leader in the cat
egory with number one rankings in Asia, Argentina,
and Canada. Groupe Danone was the second larg
est HOD provider in Europe in 2005 through a joint
venture with Swiss-based Eden Springs.
Groupe Danone had made functional and fla
vored waters a strategic priority for its beverage
business. The company introduced flavored and
vitamin-rich versions of Volvic in Europe during
2003 and 2004, and by 2005 it was selling flavored
and functional waters in most of its markets. The
company held a number one ranking in functional
beverage categories in New Zealand and Argentina.
Functional and flavored waters accounted for 25 per
cent of the group's beverage sales in 2005.
The Coca-Cola Company
With 300 brands worldwide, the Coca-Cola Company
was the world's leading manufacturer, marketer, and
distributor of nonalcoholic beverage concentrates.
The company produced soft drinks, juice and juice
drinks, sports drinks, water, and coffee and was
best known for Coca-Cola, which has been called
the world's most valuable brand. In 2005, the com
pany sold more than 20.6 billion cases of beverages
worldwide to record revenues of $23.1 billion. Coca
Cola's net income for 2005 was nearly $4.9 billion.
Seventy-three percent of Coke's gallon sales were
generated outside of North America, with four inter
national markets (Mexico, Brazil, China, and Japan)
accounting for 27 percent of Coca-Cola's sales by
volume. Sales in the United States also accounted
for 27 percent of the company's total volume.
Along with the universal appeal ofthe Coca-Cola
brand, Coca-Cola's vast global distribution system
that included independent bottlers, bottlers partially
owned by Coca-Cola, and company-owned bottlers
made Coke an almost unstoppable international
Case 4 Competition in the Bottled Water Industry in 2006
powerhouse. Coca-Cola held market-leading positions
in most countries in the cola segment of the soft
drink industry, and the strength of the Coca-Cola
brand aided the company in gaining market share in
most other soft drink segments such as the lemon
lime and diet segments. The company had also been
able to leverage Coke's appeal with consumers to
gain access to retail distribution channels for new
beverages included in its portfolio such as Minute
Nlaid orange juice products, Powerade isotonic bev
erages, and Dasani purified water.
The Coca-Cola Company did not market and
distribute its own brand of bottled water until 1999,
when it introduced Dasani. The company created a
purified water that included a combination of mag
nesium sulfate, potassium chloride, and salt to recre
ate what Coke researchers believed were the best
attributes of leading spring waters from around the
world. The Dasani formula was a closely guarded
secret and was sold to bottlers, just as the company
sold its Coke concentrate to bottlers. The Dasani
name was developed by linguists who suggested the
dual "a"s gave a soothing sound to the name, the "s"
conveyed crispness and freshness, and the "i" ending
added a foreign ring. Dasani was supported with an
estimated 5 million advertising budget during its
first year on the market and was distributed through
ail retail channels where Coke was available. Coca
Cola's U.S. advertising budget for Dasani was $20
million in 2005. Coca-Cola's marketing expertise
and vast US. distribution system allowed Dasani to
become the second largest brand of water sold in the
United States by 2001--a position it continued to
hold in 2006.
Coca-Cola's 2002 joint venture with Danone
Waters allowed Coca-Cola to jump to the rank of
second largest bottled water producer in the United
States and third largest bottled water producer in the
world. The joint venture provided Coke with bottled
water products at all price points, with Dasani po
sitioned as an upper-midpriced product, Evian as
a premium-priced bottled water, and Dannon as a
discount-priced water. Coke management believed
the addition of Dannon would allow the company to
protect Dasani's near-premium pricing, while gainspring water brands that could be marketed na
tionally to challenge Nestle's regional brands in the
spring water segment.
Even though the joint venture allowed Coca
Cola's sales of bottled water to increase from $765
C-59
million in 2002 to $1.3 billion in 2003, the three-tier
strategy seemed to be failing in some regards since
Coke's three water brands had collectively lost 2.2
market share points between 2003 and 2004. Coca
Cola's loss ofmarket share seemed to be attributable,
to some to degree, to ~ est16 's growth during 2004
and the increasing popularity ofprivate-label brands,
which had grown by more than 60 percent during
2004. However, some lost market share for the three
brands combined might have been a result of weak
support for Evian and Dannon brands. Coca-Cola
had committed to increasing advertising and pro
motion for Evian by 20 percent between 2005 and
2010, but beverage industry analysts believed it was
unlikely that Evian would ever return to its previous
top-five ranking in the United States.
Coca-Cola tested a vitamin- and flavor-enhanced
Dasani NutriWater sub-brand during 2002 and 2003,
but it abandoned the concept after poor test-market
performance. In 2005, the company did go forward
with Splenda-sweetened lemon- and raspberry
flavored varieties of Dasani. The company later add
ed strawberry and grape flavors to the Dasani line.
Fruit-flavored Dasani had proved to be successful in
the market by 2006, with most retailers stocking at
least two flavors of Dasani in addition to unflavored
Dasani water. Coca-Cola extended the Dasani line in
2006 with the introduction of Dasani Sensations-a
flavored water with light carbonation. Like other va
rieties of Dasani, Dasani Sensations contained no
calories. Powerade Option was another functional
water developed by Coca-Cola that was introduced
in 2005. Powerade Option was a competing product
to Gatorade Propel Fitness Water and was available
in grape and strawberry flavors in 2006. As of 2006,
Powerade Option had been largely unsuccessful in
capturing share from Propel Fitness Water and was
unavail.able in many retail locations.
Coca-Cola had long produced and marketed,
bottled water in foreign countries under local brand
names, such as its Bon Aqua brand in the German
market and NaturAqua in Hungary, but began ef
forts to make Dasani an international brand in 2004
with expansion into in Africa, Brazil, and the United
Kingdom. Coca-Cola management chose the United
Kingdom as its entry point to Western Europe
with launches planned for 20 additional European
countries by mid-2004. Coca-Cola supported the
March 2004 launch of Dasani in the United King
dom with a $3.2 million advertising budget and a
C-60
Part 2 Cases in Crafting and Executing Strategy
4-million-bottle sampling campaign but voluntarily
rccalled all Dasani bottles from retailers' shelves just
two weeks after the launch.
The recall was predicated on test results per
formed by the company that indicated the bottles
were tainted with bromate--a cancer-causing agent.
Bromate became introduced to the product when cal
cium, a mandatory ingredient for bottled waters sold
in the United Kingdom, was added to Coca-Cola's
proprietary formula of minerals used to distinguish
Dasani from other bottled waters. The bromate lev
els present in Dasani exceeded regulatory limits in
the United Kingdom but met standards for purity on
the European c,ontlnent. Nevertheless, Coke man
agement believed it best to recall the product and
discontinue imn1ediate plans to distribute Dasani
not only in the United Kingdom but also in all other
European markets. The Dasani launch was viewed
by many in the business press as one of the all-time
great marketing disasters and resulted in Coke's
abandoning the Dasani brand in Europe. Coca
Cola management announced during a June 2006
Deutsche Bank conference for consumer goods that
it would expand its line of noncarbonated beverages
in Europe through acquisitions. Within two weeks
of the announcement, Coca-Cola had acquired the
Italian mineral water company Fonti del Vulture and
the Apollinaris mineral water brand sold in Germany
by Orangina. Coca-Cola also acquired two HOD
bottled water producers in Australia during 2006.
In 2006, PepsiCo was the world's fourth largest food
and beverage company, with sales of approximately
$32 billion. The company's brands were sold in more
than 200 countries and included such well-known
names as
Tostitos, Mountain Dew, Pepsi,
Doritos, Lipton Iced Tea, Gatorade, Quaker, and
Cracker Jack. Six of PepsiCo's products were among
the top-IS largest selling products sold in U. S. su
permarkets. PepsiCo also produced and marketed
Aquafina-the best-selling brand of bottled water in
the United States between 2002 and 2006.
PepsiCo had made attempts to enter the bottled
water market in as early as 1987, when it purchased
a spring water company, but its attempts were un
successful until its 1997 introduction of Aquafina.
After experimenting with spring water and sparkling
water for several years, Pepsi management believed
it would be easier to produce a national brand of
bottled water that could utilize the same water pu
rification facilities in Pepsi bottling plants that were
used to produce the company's brands of soft
Pepsi management also believed that the company
could distinguish its brand of purified bottled water
from competing brands by stripping all chlorine and
other particles out of tap water that might impart an
unpleasant taste or smelL PepsiCo began testing a
filtration process for Aquafina in 1994 when it in
stalled
million worth of reverse osmosis filtration
equipment in its Wichita, Kansas, bottling plant to
further purify municipal water used to make soft
drinks. The system pushed water through a fiberglass
membrane at very high pressure to remove chemi
cals and minerals before further purifying the water
using carbon filters. The water produced
Pepsi's
process was so free of chemicals that the company
was required to add ozone gas to the water prevent
bacteria growth.
Since the company's introduction of Aquafina,
PepsiCo had expanded its water brands in the
United States to include Gatorade Propel Fitness
Water, SoBe Life Water, and functional versions of
Aquafina. The product lines for its water business
were developed around customer type and lifestyle.
Propel was a flavor- and vitamin-enriched water
marketed to physically active consumers, while
Life Water was a vitamin-enhanced water similar to
Glaceau Vitamin Water in formulation and packag
ing that was marketed to image-driven consumers.
The company targeted mainstream water consumers
with unflavored Aquafina~ Aquafina FlavorSplash
(offered in four flavors) and Aquafina Sparkling
(a zero-calorie, lightly carbonated citrus or berry
flavored water). Aquafi.na Alive, planned for a 2007
launch, included vitamins and natural fruit
The company's strategy involved offering a contin
uum of healthy beverages from unflavored Aquafina
to nutrient-rich Gatorade. In 2006, Gatorade, Propel,
and Aquafina were all number one in their catego
ries, with market shares of 80 percent, 34 percent,
and approximately 14 percent, respectively.
PepsiCo was slowly moving into international
bottled water markets, with its most notable effort
occurring in Mexico. In 2002, PepsiCo's bottling
operations acquired :Mexico's largest Pepsi bottler,
Pepsi -Gemex SA de Cv, for $1.26 billion. Gemex
not only bottled and distributed Pepsi soft drinks in
Mexico but also was Mexico's number one producer
I
Case 4 Competition in the Bottled Water
of purified water. After its acquisition of Gemex,
PepsiCo shifted its international expansion efforts to
bringing Aquafina to selected emerging markets in
Eastern Europe, the Middle
and Asia. In 2006,
Aquafina was the number one brand of bottled water
in Russia and Vietnam and the number two brand in
Kuwait.
In addition to the industry's ""'........ LL';;.,
tIed water, there were hundreds of
and spe
cialty brands of bottled water in the United States.
Most of these companies were privately held bottlers
with distribution limited to small geographic
that competed aggressively on price to make it onto
convenience store and supermarket shelves as third
tier brands. Many of these bottlers also sought out
private-label contracts with discounters and large
supermarket chains to better ensure full capacity uti
lization and to achieve sufficient volume to purchase
bottles and other packaging at lower prices. CG
Roxanne was the most successful privately owned
bottled water company in the United States. The
company's Crystal Geyer brand made it the fourth
largest seller of bottled water in the United States
in
with a 7.4
market share. Crystal
competed at the lower price points in U.S.
supermarkets and convenience stores and was bot
tled from
in California, Tennessee, South
Carolina, and New Hampshire. The company did not
disclose its financial performance.
Another group of small bottlers such as
Penta and Trinity
used differentiating
features to avoid the fierce
competition at the
low end of the market and sold in the superpremium
segment, where bottled water retailed from $1.50 to
$2.25 per 16-ounee PET container. Superpremium
brands were most often sold in natural foods stores,
with Trinity Springs being among the leaders in the
channel in 2005. Trinity's differentiation was based
on its water source, which was a 2.2-mile-deep arte
sian well located in the Trinity rv10untains of Idaho.
Trinity Springs' distribution halted in March 2006
Endnote
As quoted in "The Taste of Water," Bottled Water Web,
in 2006
C-61
when a court invalidated the 2004 sale of the com
pany to Amcon Distributing.
which had lost
$2 million in fiscal 2005 and another $1.8 million
during the first six months of fiscal 2006, shut down
its Trinity Springs water division after the
and
was negotiating a settlement with Trinity
shareholders in late 2006.
Penta's differentiation was based on a propri
etary purification system that the company claimed
removed 100
of impurities from tap wa
ter. The company had also built brand recognition
through product placements in motion pictures, mu
sic
and more than 25 television series. Penta
also sponsored a large number of triathlons across
the United States and was endorsed a wide variety
of entertainers and professional athletes. In 2006,
Penta was distributed in more than 5,000 health food
stores in the enited States. Penta was also avail
able in Australia, Japan, the United Kingdom, and
Canada.
was also among the best-selling brands
of superpremium water sold in natural foods stores
in 2006 but was also sold in many supermarkets,
convenience stores, and drugstores aeross the United
States. Like Penta,
received considerable expo
sure from its placement in network television series
and motion pictures.
Voss achieved differentiation not only from the
purity of its source in Norway but also through its
distinctive glass bottle and limited channels of dis
tribution. The brand was available only in the most
exclusive hotels, spas, and resorts. Another super
premium brand, Eon, achieved its differentiation
through its anti-aging claims. The company's anti
aging properties were said to result from the basic
atomic structure of Eon water, which was altered
through a proprietary reverse osmosis technology.
The structure of Eon was similar to that naturally oc
curring in snowflakes and
ice and was sug
gested to improve cellular hydration and cell detoxi
fication properties better than unstructured water.
Many. other superpremium brands of bottled water
were sold in the United States during 2006, with
each attempting to support its premium pricing with
some unique characteristic.
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