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Europe's mineral water titans face cola challenge

Caroline Brothers

Luckily, the chilly waters of Lake Geneva keep them well apart.

The village of Evian-les-Bains, at the foothills of the Alps on the lake's French shore, is home to Evian mineral water, transformed by the French food group Danone into the world's biggest global mineral water brand.

Under its pink-and-white sign, its plant stares across the water at the Swiss town of Vevey, headquarters of food giant Nestle which produces the green-bottled Perrier label.

Bitter rivals, the two mineral water titans have been battling for control of the world's high-margin bottled water market, the food and beverage sector's new Eldorado worth upwards of 40 billion euros ($35.24 billion) in annual sales.

Last year Danone, whose brands also include Volvic, Badoit, Dannon Water, Bonafont and Wahaha in China, became the global leader by volume of bottled water sold.

However Nestle -- whose stable includes the Perrier, Vittel, San Pellegrino, Poland Spring, Aquarel and Pure Life labels -- outpaced it in turnover terms with sales of 4.7 billion euros, against 3.8 billion at Danone.

But it is in the United States, where Nestle is the number one player and Danone number two, that an unprecedented challenge has ambushed them both.

Cola giants Coca-Cola and PepsiCo, having all but saturated the market for carbonated drinks, are muscling in on the consumer health bandwagon with waters of their own.

Last year Pepsi overtook Danone in volumes of water sold in less than two litre bottles in the United States.

Spearheaded by its Aquafina water, now the top-selling brand at US supermarket checkouts since its launch just over three years ago, it garnered 16 per cent market share, still half of Nestle's 30 per cent, but ahead of Danone's 12.

WATER PRESSURE

Meanwhile Coke was snapping at the heels of both of them, its Dasani water cornering a respectable 10 per cent.

"Now Coke and Pepsi have entered the industry, competition is going to intensify," said analyst Martin Dolan at investment bank CSFB. "It is a crucial region because you have low per capita consumption in a market where consumer preferences are changing."

He estimates the US market will grow at a rate of 15-20 per cent over the next five years. "And it will continue in double digits for five years after that," he said.

"Still water is the fastest growing major segment in the consumer category, growing three to four times faster on average than anything else in the food and beverage industry," added Warren Ackerman at Dresdner Kleinwort Wasserstein.

No matter that Coke and Pepsi are marketing distilled tap water against the Europeans' spring and mineral waters. What counts is access to retailers from hypermarkets to Mom and Pop stores.

While Nestle has its own US distribution network for its customer-loyal regional brands, the complication for Danone is that 50 per cent of Evian's US distribution is handled by Coke. Analysts say Evian is losing fridge space to Coke's Dasani.

Last week talk surfaced that Danone, whose US volumes fell five per cent last year according to some estimates, was discussing Evian's distribution arrangements with Coke and the British soft-drink firm Cadbury.

Danone's sporty chairman, former windsurfing champion Franck Riboud, has already said the group is working on the issue, and minimises North America's importance to his group.

"The Danone business equation is not a US equation, it's Asia, Latin America, Europe," he told reporters at a recent briefing in Evian.

NO INFERIORITY COMPLEX

"Water in the United States represents just two per cent of our global sales volumes, not 20-30 per cent like our friends across the water," he added. "We have no reason to have an inferiority complex. Our strategy lies elsewhere."

That may be so, but analysts say the US market accounted for 20 per cent of Danone's growth in the sector between 1998 and 2000, and fear erosion of its stellar growth story.

Riboud, however, is biding his time to see how the US market evolves. Targeting emerging markets instead, he refuses to jeopardise Danone's overall performance ratios in a region he says can only bring lower prices and skinnier margins.

Opting out of a US fight, however, does not mean Danone will not be assailed on its emerging market flank.

Though Danone's emerging market presence is four times that of Nestle, the Swiss giant is also positioning itself in developing countries.

It rolled out its Nestle Pure Life bottled water, geared towards developing countries with unreliable municipal water supplies, in 1999 and hopes it will overtake Evian as the world's leading water brand by volume by 2010.

Brisk water sales in developing countries contributed to a 16 per cent rise in Nestle's overall profits last year, and Nestle's chief executive, Austrian Peter Brabeck, intends to expand the group's water operations.

Danone's Asia-Pacific director Simon Israel said Danone already had 24 per cent of bottled water market share -- 10 times its next competitor -- in the three countries on which it is focused: India, Indonesia and China.

"If you win these three countries you win Asia," he said.

The cola giants, however, are tracking their every move.

Coke is aggressively pushing its Kinley bottled water against Pepsi's Aquafina in India, where both plan new bottling plants, and Coke has started making inroads in Indonesia.

Moves likely to ruffle the waters of Lake Geneva.

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