Distribution Channels and Competitive Dynamics in the Bottled Water Industry

Consumers could purchase bottled water in nearly any location in the United States where food was also sold. Supermarkets, supercenters, and wholesale clubs all stocked large inventories of bottled water, and most convenience stores dedicated at least one stand-up cooler to bottled water. Bottled water could also be purchased in most delis and many restaurants; from vending machines; and at sporting events and other special events like concerts, outdoor festivals, and carnivals. Bottled water could also be delivered directly to consumers’ homes or offices.

The distribution of bottled water varied depending on the producer and the distribution channel. Typically, bottled water was distributed to large grocers and wholesale clubs directly by the bottled water producer, while most producers used third parties like beer and wine distributors or food distributors to make sales and deliveries to convenience-store buyers. Similarly, food-service distributors usually handled landing accounts with restaurants and delis and making necessary deliveries to keep the account properly stocked. Most distributors made deliveries of bottled water to convenience stores and restaurants along with their regular scheduled deliveries of other foods and beverages. Therefore, these third-party food and beverage distributors almost never made deliveries to one-time or infrequent events like art festivals or sporting events, since they were better equipped to represent a variety of food and beverage companies that wanted their products available for sale in locations where consumers made frequent food and beverage purchases. Similarly, vending machine servicing did not match the resources and competitive capabilities of most food and beverage distributors.

Because of the difficulty for food-service distributors 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 and PepsiCo’s vast beverage distribution systems made it easy for the two companies to make Dasani and Aquafina available anywhere Coke or Pepsi could be purchased. In addition, the two cola giants almost always negotiated 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 some period of time. Under such circumstances, it was nearly impossible for other brands of bottled water to gain access to the account.

Coca-Cola and PepsiCo’s soft-drink businesses also aided the two companies in making Aquafina and Dasani available in supermarkets, supercenters, wholesale clubs, and convenience stores. Soft-drink sales were important to all types of food stores since soft drinks made up a sizable percentage of sales and since food retailers frequently relied on soft-drink promotions to generate store traffic. Coca-Cola and PepsiCo were able to encourage their customers to purchase items across their product line to ensure prompt and complete shipment 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 new brands such as FruitWorks, SoBe, Lipton’s iced tea, and Starbucks Frappuccino.

Distribution Channels in the Bottled Water Industry

Since most supermarkets, supercenters, and food stores usually carried only three to five branded bottled 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. Market surveys indicated that wholesale prices for branded bottled water ranged between $3.50 and $7.00 per case—depending on the appeal of the product and the competitive strength of the seller. Some supermarkets and other grocery chains required bottled water suppliers to pay slotting fees in addition to offering low prices to gain shelf space. Grocers expected to pay less for private-label products and typically required private label suppliers to prepare bids offering both purified and spring water in packaging of various sizes. Contracts were awarded to the low bidder and typically re-bid on an annual or biannual basis.

Convenience-store buyers also aggressively pressed bottled water producers and food distributors for low prices and slotting fees. Most convenience stores carried only two to four brands of bottled water beyond 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. Even though bottled water producers were responsible for paying slotting fees to gain shelf space, food-service distributors handled sales transactions with convenience stores and made all deliveries. Food and beverage distributors usually paid the bottlers of lesser-known brands $3.75 to $4.25 per case, while popular national brands commanded wholesale prices in the $5.00–$6.00 range. Typically, a distributor would represent only one or two bottled water producers and required producers to make deliveries to their warehouses. Some bottlers offered to provide retailers with rebates of approximately 25 cents per case to help secure distributors for their brand. Food distributors also asked bottled water suppliers to sponsor annual trade shows at which participating vendors (including bottled water producers) would offer discounts of approximately 25 cents per case to convenience-store customers willing to commit to large quarterly purchases. 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 volume was relatively low—making per unit distribution costs exceedingly high unless other beverages were delivered along with bottled water. 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.

Competition among Bottled Water Producers

Bulk water sold in returnable five-gallon containers was delivered to home and office users directly by bottled water producers. These producers usually specialized in home and office delivery, but might also sell a PET product through convenience and supermarket channels. Retail pricing to bulk water purchasers ranged between $5 and $7 per five gallon container. Consumers of bulk water were also required to rent a cooler at $10 to $15 per month. Most bulk water sellers used a delivery route system with scheduled visits for deliveries of water and empty container pickup.

The suppliers to the bottled water industry included municipal water systems; spring operators; bottling equipment manufacturers; deionization, reverse osmosis, and filtration equipment manufacturers; cooler manufacturers; sellers of racking systems; manufacturers of PET and HDPE bottles and plastic caps; label printers; and secondary packaging suppliers. Most packaging supplies needed for the production of bottled water were readily available for a large number of suppliers. Large bottlers able to commit to annual purchases of more than 5 million PET bottles could purchase bottles for as little as 5 cents per bottle, while regional bottlers purchasing smaller quantities of bottles or only making one-time purchases of bottles could expect to pay as much as 15 cents per bottle. Most PET and HDPE bottle producers preferred to reward customers choosing to develop ongoing relationships with their lowest prices. Suppliers of secondary packaging (e.g., 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.

Equipment used for water purification and filling bottles was manufactured and marketed by about 50 different companies in the United States. About 10 manufacturers offered a complete line of filling equipment, filtration equipment, distillation equipment, deionization equipment, bottle washers, labeling equipment, packaging equipment, and reverse osmosis equipment, with others specializing in a few equipment categories. A basic bottle-filling line could be purchased for about $125,000, while a large state-of-the-art bottling facility could require a capital investment of more than $100 million. Bottlers choosing to sell spring water could expect to invest about $300,000 for source certification, road grading, and installation 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 a year. Companies selling purified water merely purchased tap water from municipal water systems at industrial rates prior to purifying and bottling the water for sale to consumers. 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.

Suppliers to the Bottled Water Industry

Bottled water did not enjoy the brand loyalty of soft drinks, beer, or many other food and beverage products, but it was experiencing some increased brand loyalty, with 10–25 percent of consumers looking for a specific brand and an additional two-thirds considering only a few brands acceptable. Because of the growing importance of brand recognition, successful sellers of bottled water were required to possess well-developed brand-building skills. Most of the industry’s major sellers were global food companies—having built respected brands in soft drinks, dairy products, chocolates, and breakfast cereals prior to entering the bottled water industry. PepsiCo, Coca-Cola, and Nestlé were the most successful sellers at building consumer loyalty in the United States, according to a 2002 brand loyalty study conducted by NFO WorldGroup. The survey found that Aquafina consumers were rather loyal to PepsiCo’s brand, as it accounted for 77 percent of regular Aquafina consumers’ total bottled water purchases. Nestlé Waters’ brands also commanded a 77 percent brand loyalty rating, while the Dasani brand accounted for 62 percent of bottled water consumed by frequent Dasani purchasers. Brands offered by other bottled water sellers achieved far lower levels of brand loyalty.

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 distributors (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 inventory tracking devices, and labor. It was also critical for distributors and bottlers to provide on-time deliveries and offer responsive customer service to large customers 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.

As the U.S. per capita consumption of bottled water grew to nearly 20 gallons in 2001, industry analysts believed the annual growth rate of bottled water sales in the U.S. would begin to slow. There was some concern among analysts that a slowing industry growth rate might set off stronger price competition in the industry.  As of mid-2002, there had been some modest declines in pricing at both the retail and wholesale levels. Some of the price decline was attributable to Coca-Cola and PepsiCo’s use of multipacks in take home PET channels, which had slightly decreased average revenue per gallon. A July 2002 pricing survey found the average retail price of bottled water sold in supermarkets had declined by 3.4 percent since July 2001, with the price of some brands down by as much as 9 percent from the previous year.

The world’s largest sellers of bottled water appeared to be positioning for industry maturity by purchasing smaller regional brands, with Groupe Danone acquiring Naya for $34 million and McKesson for $1.1 billion in 2000, Suntory acquiring Great Pines Water for $19 million in 1999, and Nestlé acquiring Aberfoyle Springs in 2000 and Black Mountain and Aqua Cool in 2001. Most of the leading sellers of bottled water were making similar acquisitions worldwide. Nestlé had acquired bottled water producers in Poland, Hungary, Russia, Greece, France, and Saudi Arabia between 2000 and 2002. Groupe Danone had made a number of acquisitions in attractive global markets and had also entered into strategic alliances and joint ventures to increase penetration of selected emerging and developed markets.

Industry consolidation created a more globally competitive environment in which the top sellers met each other in almost all of the world’s markets. Danone and Nestlé had long competed against each other in most country markets, but PepsiCo and Coca-Cola were quickly becoming global sellers as they pushed Aquafina and Dasani into new international markets. In 2001, the top five sellers of bottled water accounted for 75 percent of industry sales; some industry observers believed the industry could consolidate further to three sellers accounting for 75 percent of industry sales by 2005. Exhibits 6 and 7 indicate the degree of industry consolidation in the U.S. bottled water market in 2001.

The introduction of enhanced waters was the most important product innovation since bottled water gained widespread acceptance in the United States, as most sellers in 2002 were moving quickly to introduce variations of their products that included vitamins, carbohydrates, electrolytes, and other supplements. The innovation seemed to be a hit with consumers—the market for enhanced bottled waters expanded from $20 million in 2000 to $85 million in 2001 and was expected to surpass $100 million in 2002. One of the earliest enhanced waters was Energy Brands’ Glaceau Vitamin Water, which was launched in 2000. In 2002, Glaceau came in 20 flavor and supplement varieties that promised mental stimulation, physical rejuvenation, and overall improved health. Glaceau was also the best-selling brand of enhanced water in late 2002, with annual sales growth of 270 percent.

Glaceau retailed for about $1.49 per bottle. Baxter International was a $4.7 billion global health care company that offered three scientifically developed and tested vitamin and nutrient-enriched waters to promote heart health, women’s health, and men’s health. Brands touting health benefits with wider distribution than Baxter’s Pulse or Glaceau Vitamin Water included Clearly Canadian’s Reebok Fitness Water, Gatorade’s Propel, and PepsiCo’s Aquafina Essentials.

Bottled water producers were optimistic about the prospects of selling vitamin-enhanced waters since marketing research had shown consumers (especially female baby boomers) were interested in increasing their intake of vitamins, since enhanced waters were more easily differentiated than purified or spring water, and since enhanced waters carried retail prices as much as 40 percent higher than purified water. Enhanced waters also offered higher margins than typical bottled waters. Even though enhanced waters offered potential benefits, there were some features of enhanced waters that might cause consumers to limit their consumption of such products, including the need for sweeteners to disguise the taste of added vitamins and supplements and calorie contents that ranged from 20 calories per 16-ounce serving for Propel and Reebok to 100 calories per 16-ounce serving for Glaceau. In addition, some medical researchers had suggested that consumers would need to drink approximately 10 bottles of enhanced water each day to meet minimum dietary requirements for the vitamins promoted on the waters’ labels. 

1.    Describe the bottled water industry as presented in the case.
2.    Describe the bottled water industry in its present state.

For numbers 1 and 2 (above), provide information for the following factors:
a.    Size in sales
b.    Projected growth
c.    Number of competitors
d.    Size of competitors
e.    Other?

3.    Describe the macroenvironment as it affects the bottled water industry. Address the following components according to how they are presented in the case: 

a.    Economic conditions from the 
i.    manufacturing standpoint
ii.    customer standpoint

b.    Technology and its use in the industry

c.    Social values and lifestyles (what was the past view of bottled water during industry growth?

d.    demographics (what is the industry’s focus customer)

e.    governmental rule (tightly restricted, loose enough to give industry room to grow/compete.)

4.    What are current driving forces affecting the bottled water industry? Will these trends help or hurt industry members? How so (provide potential scenarios)?

5.    What are key success factors (KSFs) for the bottled water industry participants? Explain how each KSF affects industry members’ ability to compete.

6.    Describe Porter’s 5 Forces within the bottled water competitive environment.

7.    Discuss (3) opportunities and (3) threats affecting the bottled water industry at this time.