GROCERY: Bottled Water: Go with the flow

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GROCERY: Bottled Water: Go with the flow

By Bob Phillips - 10/15/2007
Rich people drink bottled water. So do poor people. African-Americans drink bottled water, and so do whites, Hispanics, Asians, and Native Americans. So do young and old folks, Democrats and Republicans, Yankee fans and Red Sox fans. You get the picture.

The bottled water consumer is everyone, and that makes it an especially valuable commodity for grocers -- as well as a merchandising vehicle that continues to generate consumer traffic and volume, and yield healthy margins.

"Bottled water's popularity has grown dramatically over the last decade," observes Gary Hemphill, v.p. of information services at New York-based Beverage Marketing Corp. "Consumption is broader than ever across a range of consumer demographics."

What's more, per caps are at an all-time high. "Americans are currently consuming over 27 gallons of bottled water a year," notes Steve Seager, senior retail marketing manager for Nestle Waters North America (NWNA).

Based in Greenwich, Conn., NWNA is the leading marketer of bottled water in the United States. Seager says bottled water consumption by Americans is fast approaching the European per capita consumption of 32 gallons per year.

Two things virtually everyone is in agreement with: Health factors are driving growth in the category, and that growth will continue for the foreseeable future.

"Today's consumers are more concerned with what they're putting in their bodies," explains Bob Richardson, national category manager, beverages for Boulder Colo.-based Wild Oats Markets. "Beverages are no longer perceived as just a quick thirst fix. Rather, consumers consider what added benefit will be provided. Today's consumer is more knowledgeable about ingredients and nutritional benefits, and that consumer is willing to pay a little extra to get something healthy."

Water that's easy to consume will also play a big role in category growth. "The convenience water segment is the growth engine of the bottled water category," declares Hemphill. "We believe that's likely to continue to be the case in the years ahead. It's built on a consumer demand for healthier refreshment." The convenience segment consists of PET bottles -- single-serve and multipacks -- in packages sized 1.5 liters and under.

"The convenience-still segment is still growing, and will continue to do so," says Jerry Nick, v.p. and director of center-store sales for Tyler, Tex.-based Brookshire's Grocery Co. "Multipacks are doing well. Margins are still holding. Gallons are still profitable, too."

Here comes the flood

Bottled water was first introduced into supermarkets as an antidote to failed municipal water systems, an answer to consumers' concerns about what was coming out of their taps at home. At first, the bulk package reigned supreme, seemingly offering peace of mind at a reasonable price.

Today, single-serve and multipacks rule the shelf-sets. The single-serve bottle is the dominant package, notes Paul Weitzel, managing partner at Willard Bishop, the prominent retail consultant firm based in Barrington, Ill. As growth drivers, Weitzel points to on-the-go families, as well as people who believe bottled water is healthier than many other beverage options.

"Prices have come down, and more multipack purchasing is occurring," continues Weitzel.

"Supermarkets never have enough space for the water category," he adds. "The minute they finalize a planogram change, it's already outdated. They just can't keep up."

That demand has resulted in a continuing bourgeoning revenue stream for supermarket retailers. According to Nielsen data, bottled water accounted for $4.3 billion in rings at supermarkets with $2 million or more in annual sales (excluding supercenters) for the 52-week period ending Aug. 11, 2007. That represented a healthy 8.9 percent increase over the previous 52-week period. In fact, since the period ending Aug. 16, 2003, bottled water revenue has increased 57.5 percent in the supermarket channel.

The picture is just as bright when looking at SKU movement. Nielsen supermarket data reveals that for the same 52-week period, unit volume increased by 3 percent to 2.17 billion units. That's particularly healthy when combined with the previous year's 7.1 billion units. Indeed, over the four-year period beginning with the 52-week period ending Aug. 16, 2003, bottled water unit volume has increased 16.1 percent.

Even though the category is transforming into a volume-driven model, not unlike CSDs, margins are exhibiting considerably better staying power than those in the carbonated sector.

"Margins have been holding up well," notes Weitzel. "On a gross dollar profit basis, including trade and promotional monies, bottled water ranks sixth in grocery and 16th across the entire store, including perimeter categories. On a gross percentage margin basis, it generates 27 percent, which is dead even with the average center store category."


Added appeal

While representing a relatively small share of the market, enhanced waters represent a major dollar growth segment for retailers.

"Enhanced drinks are on fire as far as percentage increase is concerned, but not in total volume," says Jerry Nick, v.p. and director of center store sales for Tyler, Tex.-based Brookshire's Grocery Co. "It's still growing. Health is the driving issue."

People today see beverages as more than just a means of hydration, according to Bob Richardson, national category manager, beverages for Boulder Colo.-based Wild Oats Markets. Rather, they're looking for added benefits. And they're asking serious questions on a daily basis.

"Today's consumer is more knowledgeable about ingredients and nutritional benefits, and that consumer is willing to pay a little extra to get something healthy," says Richardson.

When Atlanta-based Coca-Cola North America acquired Glaceau, it became a major player overnight in the category.

"Enhanced waters are driving strong volume growth and even larger dollar growth in the single-serve water category," says Brandon Leck, director, Coca-Cola North America Water Brands, explaining the soft drink giant's acquisition of the small New Age enhanced water brand. "Glaceau has gained five dollar-share points in the water category year to date after posting 136 percent growth vs. a year ago, according to Nielsen supermarket channel data. The enhanced segment definitely has legs."

According to Leck, the flavored water subsegment is larger than the total premium water segment, and is equal in size to the total sparkling water segment.

"Consumers seeking variety in their water consumption like flavored water," he continues. "On an equivalized case basis, flavored water generates more than two times the profitability than [nonflavored still] water. Capturing flavored water growth is important for overall margin enhancement, gaining new consumers and securing valuable dollar share."

In an effort to attract new consumers to the water category, Coca-Cola's Dasani brand launched a New Age flavored extension, Dasani Plus, in the summer. Dasani Plus combines nutrient-enhanced attributes (vitamins E, B3, B6 and B12; zinc; and fiber) with a zero-calorie profile as well as New Age flavors -- Refresh + Revive (Kiwi Strawberry), Cleanse + Restore (Pomegranate Blackberry) and Defend + Protect (Orange Tangerine) -- packaged in 20-ounce single-serve PET bottles with clear shrinkwrap labels.

Not to be left on the sidelines, Purchase, N.Y.-based Pepsi's noncarbonated portfolio recently underwent some radical tweaking. Gatorade introduced two new products: G2, Gatorade's first reach beyond the active platform into off-the-field consumption, and a Propel extension, Propel Invigorating Water, designed not just to hydrate and nourish, but also to provide a boost of energy, thanks to a mild dose of caffeine. G2 is a low-calorie electrolyte beverage that offers just 25 calories per eight-ounce serving.

While enhanced waters are getting most of the category buzz, only two brands -- Vitaminwater at No. 4 and Propel at No. 7 -- were able to crack IRI's "Top 15" list of leading brands. But, according to Scott Lowe, president and c.e.o. of San Francisco-based Soma Beverage Co., LLC, maker of the Metromint brand, the very fact that two enhanced brands show up on the list in a category as amorphous as bottled water is proof that the segment has potential.

"The fact that Vitaminwater comes in at No. 4 and Propel comes in at No. 7 within the vast generic bottled water category is evidence that enhanced water has legs," asserts Lowe. Look for Vitaminwater to gain even more share in the next 12 months as it completes its national rollout through Coke's massive DSD bottling system and finds its way onto new supermarket shelves all around the country.

In an effort to develop a mainstream following, Metromint, an all-natural mint-flavored water, made recent news by sponsoring soccer star Lindsay Tarpley, a forward on the U.S. Women's National Soccer Team, who recently participated in the 2007 FIFA Women's World Cup in China. But the promotion won't stop with the World Cup. According to Lowe, "As a tie-in to our sponsorship of amateur athletics, we're developing soccer-related retail promotions slated to roll out next spring."

Metromint comes in five varieties: Peppermint, Spearmint, Lemonmint, Orangemint, and soon-to-arrive Chocolatemint -- and is packaged in 500-millimeter PET bottles for a suggested retail price of $1.39 to $1.69. The brand is available in grocery stores where healthy food is sold nationwide, including Whole Foods Market, Wild Oats, and Safeway Naturals.