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    Concurrents Concurrents Document Transcript

    • The Evolution of the Bottled Water Industry: Ready for the “Water Wars”?01/2012-5621This case was written by Javier Gimeno, Professor of Strategy, Aon Dirk Verbeek Chaired Professor in InternationalRisk and Strategic Management, and Karel Cool, Professor of Strategic Management, BP Chaired Professor ofEuropean Competitiveness, both at INSEAD. The case is based on previous reports by INSEAD MBA alumni ManojSahasrabudhe, MBA 2002, Alistair Phelps and Vicky Davies, MBA 2003. It is intended to be used as a basis for classdiscussion rather than to illustrate either effective or ineffective handling of an administrative situation.Copyright © 2012 INSEADTO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATIONMAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THECOPYRIGHT OWNER.
    • By 2002, the global bottled water industry was at an inflection point. Traditionally, theindustry had been fragmented among many local and regional players, but over the lastdecade four large multinationals (Danone, Nestlé, PepsiCo, and Coca-Cola) had been battlingfor global market share. These four companies controlled over 30% of the global market, andcontinued to expand organically and through acquisitions. Yet, in an industry in which manysources of supply existed, with products that were nearly impossible to tell apart by taste, andfor which a free substitute existed (tap water), it was not clear whether these global playerswould be able to create an attractive industry structure that would deliver sustained profits.In 2002, the U.S. market was one of the main fronts in the battle for market position amongthese multinationals. In contrast with Western Europe, which had large but mature demand forbottled water, the U.S. market had tripled during the 1990s as health-conscious customersincreasingly turned to bottled water. Nestlé, which had acquired the bottled water business ofPerrier in 1992, was the clear market leader with many of the strongest regional spring waterbrands. However, the growing market had attracted new entrants, both small and large.Brands like Fiji and Glaceau sought a premium position. Yet it was the aggressive entry byPepsiCo in 1994, followed by Coca-Cola in 1999 – with new business models based onpurified waters and substantially different economics – that had disrupted the industrystructure. By 2002, the competitive escalation was starting to produce adverse effects. Since2001, bottled water prices had dropped by 3%, and some analysts feared that a possible pricewar could erode industry profitability.Faced with tougher competitive conditions, Nestlé, PepsiCo, Coca-Cola and Danone had tore-assess their strategic postures and commitments to the US bottled water market. Questionsarose about the long-term profitability of the market. Would it ever approach that of thecarbonated soft drink industry, which was among the most profitable industries in the world?Or would the competitive escalation and price competition erode industry profits? Questionsalso arose about the diverse strategies used by the ‘big four’. Whose strategy was mostappropriate for the future of the market? And how should each adapt their respective strategyto the emerging competitive environment?The Evolution of the Bottle Water IndustryThe medicinal properties of mineral water have been valued since antiquity. Visits to naturalsprings and spas became fashionable among the wealthy elite during the 19th and early 20thcenturies. The American bottled water industry got started in 1844 when a Maine inn-keeper,lying on his deathbed, discovered the remarkable therapeutic properties of water from hislocal spring. As the popularity of the water grew with visitors, the inn turned into a spa resortand the family began to sell the water under the brand of Poland Spring. In France, watersfrom mineral springs like Evian, Vittel and Perrier were popular in the early 20th century, andpatients returning from a “cure” brought back supplies of water to continue their cure athome. A modest demand for bottled mineral waters developed in pharmacies.1The bottled water industry remained small until the 1960s, when the development of large-scale retail surfaces (supermarkets, hypermarkets) boosted demand for new categories ofgroceries. This allowed mineral water to switch from the pharmacy to the grocery category.1 Early history of industry from John Sutton’s “Sunk Costs and Market Structure” MIT Press (1991).Copyright © 2012 INSEAD 1 01/2012-5621
    • The introduction of plastic bottles in 1968 enabled a move towards the larger 1.5-litre bottles,which are popular today in many countries.Another major boost came from the use of mass advertising in the 1970s, when Perrier led theway in developing a new image for mineral water. With its characteristic small green bottle,Perrier had been positioned since the turn of the century mainly as a bar mixer. The “Whis-per” (a mix of whisky and Perrier) was fashionable in sophisticated circles outside France.But in the 1960s and 1970s, the company sought to move beyond the older whisky-drinkinggeneration and targeted younger customers. The first major slogan, “Perrier, c’est fou!”(“Perrier, it’s crazy!”) captured the imagination of a new generation with commercialsshowing dancing youngsters, creating an image of Perrier as “très ‘in”, “très ‘à la mode”. Thead was so effective that future campaigns could play with meaningless variations on the samewords (“Ferrier, c’est pou!”) and be instantly recognizable.The success of Perrier sparked imitation. In France, Evian and Vittel reacted by alsoescalating branding and advertising expenses. Each player emphasized a different image.Perrier focused on a fun and young image. Evian had targeted sales for infants (the babybottle segment) since the 1960s, and its advertising emphasized its purity, although during the1970s, as the brand moved to large retail surfaces, it tended to emphasize the idea of everydayuse. By the mid-1980s, the top four companies in France accounted for some 80%-85% ofsales. The growth of the market, however, had encouraged the opening or reopening of manysprings, and some of these producers tended to sell on price with no advertising support, at thebottom end of the price spectrum. By 2001, the top three companies, Nestlé (which owned thePerrier, Vittel, and Contrex brands, among others), Danone (with Evian, Badoit, and Volvic)and Neptune (with low-price brands like Cristaline and Saint-Yorre) controlled 63% of thevolume sold in France.The pattern of consolidation seen in France was not consistently followed around the world,or even in Western Europe. For example, by 2001, the top four companies in each countrycontrolled about 60% of volumes in Italy, 48% of volumes in Spain, 42% in the USA, 35% inthe U.K., and only 24% in Germany. These countries exhibited differences in customerpreferences, distribution channels, and competitive dynamics that shaped their marketstructures.A major change in the industry came with the introduction of purified waters by PepsiCo(Aquafina) in 1994 and Coca-Cola (Dasani) in 1999. In contrast to spring water companies,which typically extracted water from underground aquifers and springs, these companies usedmunicipal tap water filtered through reverse osmosis systems that removed impurities fromthe water. This move allowed Coke and Pepsi bottlers to use their existing purificationequipment (used in the production of soft drinks) and existing distribution channels. Sincewater did not have to be transported from a single original source, this development allowedthe development of strong national (or even global) brands that were produced locally.Aquafina and Dasani were launched with strong advertising campaigns and mid-tier pricing,and quickly gained market share. By 2001, Aquafina and Dasani had gained 4.5% and 4.2%shares of volume in the US market respectively, inching into position behind the volumeleader brand Poland Spring (owned by Nestlé). By 2001, Aquafina had become the leadingUS brand in terms of dollar value.Copyright © 2012 INSEAD 2 01/2012-5621
    • The Market for Bottled WaterIn 2001, about 115 billion litres of bottled water were sold worldwide, for a total retail value(including channel markups) of about $67 billion. Over the last four years, volume had grown11%, while value had grown by 5.8%. These global statistics masked huge differences inpenetration around the world. Western Europe accounted for about 38% of the total globalvalue, North America about 23%, Latin America about 16% and the rest was divided amongother regions. Bottled water consumption per capita also varied heavily: about 92 litres inWestern Europe versus 60 litres in the US. Within Western Europe, consumption differedmarkedly, from 159 litres in Italy, 142 in France, 134 in Spain, 104 in Germany, but only 23litres in the UK. However, markets with greater per capita consumption also experiencedlower growth. Annual volume growth from 1998 to 2001 in Western Europe was about 5.5%,versus 9.2% in the US. Within Western Europe, growth rates differed, from 2.3% in Germanyto 10.5% in Spain (see Exhibits 7, 8 and 9 for country demand statistics).The main selling attribute of bottled water was its purity. Many brands emphasized the purityof their springs, which originated typically from underground aquifers in remote locations farfrom pollution sources. For example, San Pellegrino boasted that: “As it flows underground,protected from sources of pollution, it [water] acquires its mineral salt composition andbacteriological purity.” In contrast, tap water mostly came from rivers and lakes and had totravel great distances and pass through routes that were perceived as unclean before reachingthe tap. Bottled water gained in popularity as a light, rehydrating alternative to calorie-richsoft drinks or caffeinated drinks that could dehydrate the body (Exhibit 14).The bottled water market was typically segmented along three dimensions: productcharacteristics, water sources, and marketing channels. By product characteristics, the mainwater categories were still, sparkling, and flavoured/functional water. Still bottled water wasthe dominant category, with about 77.6% of global volume and 72.6% of global value.Sparkling water, including natural or added carbonation, was the traditional alternative to stillwater and took about 21.2% of global volume and 24.4% of value. Because of carbonationpressure, sparkling water was sold in glass or rigid plastic bottles, and at a higher price. Forhistorical reasons, countries differed in their preferences for these types of waters: sparklingwater constituted 86% of the retail market in Germany, but only 2% in Spain. Flavoured andfunctional waters (enriched with calcium, minerals or vitamins) were being introduced in theUS. Products like Perrier lemon and lime, and Aquafina FlavorSplash, focused on flavourenhancements, while Quaker Oats’ Propel Fitness, or Glaceau’s VitaminWater focused onvitamin and mineral enhancing. In 2001, flavoured/functional water took about 1.2% of globalvolume, and about 3% of value. Since 1998, the volume of still water andflavoured/functional water had grown at about 12% per year, while sparkling water volumegrew at about 3.5%.The market could also be segmented by water source (natural springs or purified watersources), although it was not clear whether customers either understood or cared about thesedistinctions (Exhibit 15). Waters from natural springs could come from a single spring (oftencalled single-spring or mineral water), or from multiple springs (multi-spring waters). Single-spring water brands were typically bottled at source, and had no treatment except filtration.Premium European waters like Perrier, Vittel, Contrex, and San Pellegrino (Nestlé brands)and Evian and Badoit (Danone brands), were single-spring waters, whose transportation costsCopyright © 2012 INSEAD 3 01/2012-5621
    • increased dramatically when sold far from the spring. Multi-spring water brands used acommon brand name to market water from multiple springs. A limited number of treatmentswere permitted, but these had to be listed on the label. The specific location of the springsource for each bottle also had to be clearly visible on the label. Poland Spring, Arrowheadand Ozarka (Nestlé brands), and Dannon and Sparkletts (Danone brands) in the US, andAquarel (Nestlé brand) or Cristaline (Neptune brand) in Europe, were examples of multi-spring water brands. Purified (or table) water could be a mixture of spring and tap waters, andcould be sourced from above-ground sources like rivers and glaciers. Purified water wentthrough more involved water treatment processes to remove impurities or minerals, or haveminerals added to make a kind of artificial mineral water. Pepsi’s Aquafina and Coca-Cola’sDasani and BonAqua were examples of purified waters.Finally, the bottled water market could also be segmented by marketing channels. Generally,channels could be divided between the retail (or off-trade) channel, and the on-trade channel,which focused on hospitality, restaurants and catering businesses where consumptionoccurred on the premises. Worldwide, the retail channel was 84% of volume, but only 57% oftotal value, since customer prices in the on-trade channel were about four times higher than inthe retail channel. Again, countries differed in the share of the different channels. Forexample, the on-trade channel accounted for 27% of volume sold in the US, but only 4% ofvolume sold in France. Premium brands tended to perform better in the on-trade channel,since the prestige of the water brands enhanced the image of the outlet, and allowed the outletto justify high markups. Restaurants were increasingly abandoning the habit of providing freetap water to customers and putting bottled water on their menus. On-trade channels typicallystocked one or two brands, and could easily switch brands to get a bargain.Water retail tended to use three main types of channels: “take home”, “cold”, and “home andoffice delivery” (HOD) channels (Exhibit 17). The “take home” channel included grocerystores, supermarkets, hypermarkets, independent food stores, drug stores, discount stores, andmass merchandisers, where purchases were typically planned as part of a shopping trip,intended for home consumption. Typical formats in “take home” channels included jugs andlarge bottles (over 1 litre), but the biggest growth was in “packs” of 12 or 24 half-litre bottles.The “cold” channel included convenience stores (e.g., 7-Eleven stores), gas stations, andvending machines, where the product was purchased typically in single serve bottles (lessthan 1 litre) for immediate consumption off-premises. Whereas a 24 pack of half-litre bottlessold in a supermarket for around $5 or $6, the same 24 bottles could sell for about $24 in thecold channel. The HOD channel had emerged for delivery of large 5-gallon (18 litre) bottlesfor use in home dispensers or office water coolers. Typically, customers would enter intosupply contracts with local representatives of water companies or bottlers who would installwater coolers and deliver water containers as needed. The US HOD market was highlyconsolidated, with Nestlé, Suntory, and McKesson (a unit of Danone) jointly controlling 84%of the market (with shares of 35%, 29% and 20% respectively).Supply ChainThe supply chain of bottled water generally involved activities of water sourcing,procurement of packaging, bottling, branding, distribution and retail. Different competitorsorganized these supply chain activities differently. Nestlé had an integrated production andmulti-channel distribution model, while Coca-Cola and PepsiCo relied heavily on exclusiveCopyright © 2012 INSEAD 4 01/2012-5621
    • franchised bottlers for production and distribution activities (see Appendix A for a descriptionof the bottler system used in carbonated soft drink production and distribution).One of the characteristics of bottled water is that the main input (water) is almost free,whether sourced from underground springs, rivers or municipal systems.2 Spring water couldbe bought from property owners for between 0.5 and 1.6 cents per litre, depending on volumeand market proximity. Water from underground aquifers underwent little treatment beyondfiltration, but purified water could undergo more intensive processes, such as distillation,deionization, reverse osmosis, or other purification processes. Water purification involvedseveral steps in which sediment, microbes, and chemicals were eliminated. Reverse osmosisequipment forced water under pressure through semipermeable membranes that filtered outpollutants. By 2002, reverse osmosis technology was mature and equipment wascommercially available. Bottlers for Coca-Cola and Pepsi already owned reverse osmosissystems for purifying municipal water used for production of soft drinks, and thereforeincurred few additional costs for purification.The main raw material cost in bottled water was therefore packaging. The industry began toshift from glass to PVC in the 1960s? Nowadays most companies prefer PET to PVC becauseof its improved strength, weight, and design options, and its lower environmental impact.3PET resin was considered a commodity, and the price varied according to supply and demand,and oil prices (see Exhibit 6). Major brands (including the large Nestlé brands) had bottle andclosure moulding equipment on site, and enjoyed some economies of scale in bottleproduction. Smaller firms bought plastic bottles and caps.In contrast with other food and drink industries, bottling/filling was relatively simple, since noprocessing was involved (except when purification or mineral addition was involved).However, the bottling activity involved significant scale economies. Filling costs per litredeclined substantially as bottling plant size increased up to 200 million litres per year, andless dramatically thereafter (see Exhibit 5). Large plants also benefited from having fillinglines dedicated to specific bottle sizes or different labels. A state-of-the-art bottling facilitywith a capacity of 200 million litres could be built for around $10 million. Companies couldadd modules to their existing bottling plants. Coke and Pepsi bottlers could use their existingbottling lines for water bottling but this involved constraints on bottle sizes or shapes, sincecarbonated soft drinks required thicker PET bottles than was necessary for water.Efforts to differentiate the brands and grow the category had led to increased spending on newproduct development, branding and advertising. Advertising was typical among leadingbrands, representing about 15% of the wholesale price (see Exhibit 4). The introduction in theUS of purified waters like Aquafina and Dasani at the national level was accompanied byheavy advertising, with total water advertising expenditures doubling in three years.Advertising expenditures for the major brands in the water sector for 2001 reached $26.4million for Coca-Cola, $13.2 million for Pepsi, $14.2 million for Nestlé, and $9.5 million forEvian (Danone) (Exhibits 20 and 21). Despite these investments, brand was selected by only2 However, water procurement and transportation systems may involve huge fixed costs.3 A remarkable exception to this rule is Germany, where about 97% of water is consumed on returnable glass packaging. Germans drink predominantly sparkling water. Regional water distribution companies handled the distribution and recycling of these bottles. As a consequence, the German market was more regionally fragmented than other similar-size markets.Copyright © 2012 INSEAD 5 01/2012-5621
    • 10% of surveyed water customers as a top attribute for product selection (versus 37% forcarbonated soft drinks customers), and low price was selected by 38% (versus 26% forcarbonated soft drinks). It seemed that water brands had not achieved the level of branddifferentiation and loyalty of soft drinks.Distribution costs varied considerably. They increased with the distance transported from thebottling plant (about one cent per litre for each 100 miles), and decreased with the density ofthe delivery locations and the size of deliveries: a supplier delivering large volumes to a fewnearby warehouses would have much lower costs than one delivering to a large number ofrestaurants spread out over a large territory. For Coca-Cola and Pepsi, distribution activitieswere the responsibility of their respective networks of independent or partially-ownedbottlers. These bottlers used the “direct store delivery” (DSD) distribution model, which theyalso used for distributing carbonated soft drinks. According to the DSD model, employees ofthe bottler managed the brand and stocks directly in the retail store (bypassing the retailer’swarehouse) by securing shelf space in the store, stacking products, and setting point-of-purchase displays. Although this method of distribution was very popular with smaller storesand convenience stores, which were happy to outsource the merchandising activities to thebottlers, large chains like Wal-Mart preferred to use their own warehouses and distributionnetworks. Other water companies, such as Nestlé and Danone relied on independent brokersand wholesalers, which delivered beverages to the supermarkets (either to the warehouse or tothe store) as well as to many points of sale, including stands and convenience stores.The supply chain activities were performed by different actors, depending on the differentbusiness models used by the water companies. Coca-Cola and Pepsi used a “bottler model”,which relied on franchise bottlers for sourcing, bottling and distribution activities, whileproduct development, branding and advertising remained the responsibility of Coke and Pepsithemselves. Pepsi bottlers would pay a license to Pepsi for their use of the Aquafina brand.For Dasani, Coca-Cola adopted exactly the same model as for soft drinks. Coca-Colaprovided a standardized mix of minerals to be added to the purified water, and charged thebottlers for the “concentrate”. Bottlers paid $0.10-$0.14 in royalties per litre. In return, Cokeand Pepsi invested heavily in advertising and bottler trading support. Despite these charges,bottled water was big business for Coke and Pepsi bottlers, who made higher margins fromwater sales than from soft drink sales. In soft drink production, concentrate producers (Coca-Cola and PepsiCo) captured the lion’s share of margins, and bottlers like Coca-ColaEnterprises (CCE) or Pepsi Bottling Group (PBG) had returns below their cost of capital(Exhibit 23).The situation was reversed in water. Analysts estimated that while only 2% of Pepsi’s andCoke’s North American profits came from the water business, Pepsi’s and Coke’s bottlers(PBG and CCE) derived 7% and 8% of their profits from water respectively, which onlyaccounted for 4% of their volume. Coke and Pepsi saw their bottling and distribution systemsas their key strength in the water business. However, the DSD system was not necessarily themost cost-efficient channel to reach some mass-market points of sale.Nestlé, the market leader, used a business model based on large-scale integrated production(including self-production of bottles and closures) with regional brands (Poland Spring in theNorth East US, Arrowhead in the West, etc.). Nestlé had over 20 high-speed bottlingfacilities, and nine PET bottle manufacturing plants strategically located around the country.Focused production and lightweight packaging (more appropriate for water than carbonatedCopyright © 2012 INSEAD 6 01/2012-5621
    • beverages) saved on production costs relative to Coke and Pepsi bottlers. Nestlé also had theadvantage of a very flexible distribution strategy based on a very dense distribution networkand a variety of channels to get its water to market. Said CEO Kim Jeffery of Nestlé WatersNorth America, “We made Poland Spring PET bottles in New York available to allwholesalers, distributors, produce, candy-tobacco, grocery, dry goods. Poland Spring, notbottled water, became an available commodity." He added: "We have the ability to dowarehouse, DSD, direct through club, whatever works. There is no perfect distributionsystem. People can argue the merits of DSD versus warehouse all day long, but I think thatDSD has certain advantages in some classes of trade, and warehouse has advantages in otherclasses of trade."In parallel with the four branded bottled water suppliers, some companies pursued a privatelabel strategy. These companies were able to drastically reduce costs by using lower qualitypackaging, reducing salaries and welfare expenses, avoiding advertising and promotionalcosts, and cutting distribution costs by delivering to clients’ warehouses. Despite these lowercosts, private label waters also sold at a low price, and margins for producers were low.Main CompetitorsNestléNestlé was the world’s largest packaged food company, with over 8,500 products andoperations in over 100 countries. The company’s businesses included beverages, milkproducts, ice cream, prepared food dishes and cooking aids, chocolate and sugarconfectionery, and pharmaceutical products. The company had a decentralized structure thatallowed the various companies within the group to remain flexible and efficient. The bottledwater business represented about 4% of the company’s total revenues.Nestlé had entered the bottled water industry with the acquisition of a stake in Vittel in 1969.By 1992 it had acquired a controlling interest in the Perrier Group, which had undergone in1990 a worldwide recall of its flagship water after it discovered traces of benzene in somebottles. With that acquisition, Nestlé became the undisputed leader in the US bottled watermarket, and one of the two global leaders (with Danone). In 1998, it acquired the Italianpremium brand San Pellegrino, and in 2002 it bought Blaue Quellen to become the largestplayer in Germany. By 2001, Nestlé was the market leader in the US, Western Europe,Eastern Europe, and Africa and the Middle East.Its global water brand portfolio included well-known single-spring water brands like Perrier,Vittel, Contrex, San Pellegrino and Buxton. In the US, its main strategy was based on a set ofmulti-spring water brands with non-overlapping regional coverage (Poland Spring,Arrowhead, Zephyrhills, Deer Park, Ozarka). These brands allowed Nestlé to occupy a verystrong position as the low-cost producer in the market. Nestlé also marketed its Europeanpremium waters in the US, at substantial premium prices. It used independent brokers andwholesalers to reach out in multiple retail and on-trade channels. In particular, Nestlé’sdistribution costs in the supermarket and mass channels were lower than those of Coke andPepsi bottlers. Although the “take home” market was substantially larger for Nestlé, it hadalso pushed its regional brands in the home and office delivery (HOD) channel by workingwith affiliated local distributors, and became the leader in the US HOD market. In Europe, inCopyright © 2012 INSEAD 7 01/2012-5621
    • addition to its premium single-spring water brands, it had launched Aquarel, a multi-springstill water, to develop a low-cost position in the European market.DanoneIn 1969, the Group BSN (which emerged from the merger of two glass companies, and whicheventually become Danone) took control of Evian and Badoit, two of the leading brands inFrance. This was part of a strategy of forward integration from glass containers into contents.The group thus became the leading French producer of beer, mineral waters and baby food.Over the years, it strengthened its position in dairy products, biscuits and bottled water,gaining leading worldwide positions in some categories.Danone’s goal was to be the global water leader. Besides its strong position in Europe, whereit was market leader in Spain (FontVella brand) and the UK, Danone engaged in acquisitions,joint ventures and organic growth in North America and Asia. In Asia, Danone acquiredseveral major brands of bottled water, Robust and Wahaha in China, and Aqua in Indonesia,thus making it the leading producer of bottled water in Asia, with a market share of 24%.Danone had been successful in exporting Evian to the US for many years, and the brandenjoyed a strong presence in the premium segment. However, in 1996, Danone attacked thecheaper spring water segment by creating a national multi-spring water brand called“Dannon”. This brand leveraged its nationally recognized brand (Dannon was the leadingyogurt brand in the US). By using multiple sources and relying on an independent distributionnetwork, Dannon was able to create a national brand without exploding its distribution costs.It marketed the product at a discount to established regional players, and the brand grew byover 80% in 1998. Meanwhile, Danone was also distributing its Evian brand through the Cokebottling system. In February 2000, Danone purchased McKesson’s bottled water business andadded the brands Sparkletts, Alhambra and Crystal to its portfolio, becoming the number twoplayer in the US. The acquisition of McKesson also gave Danone a large and profitable HODbusiness (Exhibit 18). However, this was the time when Aquafina and Dasani started hittingtheir stride, and Danone’s US business began to lose market share at alarming rates.PepsiCoDuring the 1990s, both Coca-Cola and PepsiCo executives claimed that they were no longercola companies but “total beverage companies” – with one important difference: Pepsi took itseriously. While Coca-Cola pushed the cola wars in developing countries, Pepsi entered thewater market in 1994 in cooperation with its bottlers. Entry into this new product categoryallowed territory-bound bottlers to grow revenues with limited additional investment. The useof a purified water brand was consistent with Pepsi’s emphasis on working with its bottlers.The strategy implied a substantial risk, since by 1994 the US bottled water market wasdominated by spring water. However, the gamble paid off, and by 2001 Pepsi’s Aquafina held4.5% volume share of the US market and was the second brand in the US in terms of volumeand the first in terms of dollar value. Aquafina had gained 13% market share in conveniencestores and gas stations, which served about 20% of US demand.Although Pepsi’s bottlers used the DSD delivery method, Pepsi had begun to invest inalternative distribution channels. Pepsi’s acquisition of Quaker Oats gave it some synergies inaccessing other channels, such as brokers and wholesalers. Quaker Oats commercializedCopyright © 2012 INSEAD 8 01/2012-5621
    • Propel Fitness water, a functional vitamin-enhanced water. Pepsi was rumoured to bepreparing the launch of Aquafina Essentials – mineral-enhanced water – in the summer of2002.In contrast to the other global players, PepsiCo’s bottled water business was relatively weakoutside the US, except for an 8% share in Latin America. Its most important presence was theElectropura purified water brand, which was developed in an alliance with its Mexican bottlerGemex, and which was fully acquired by the Pepsi Bottling Group in 2002.Coca-ColaAlthough Coca-Cola had been slow in entering the water business, it had pulled off aremarkable catch up. It launched Dasani in 1999 with a big splash, spending over $20 millionin advertising, giving free samples to over 20 million customers, and with a retail price in themid-tier price range similar to Aquafina. In less than three years, Dasani had registered annualsales of almost 90% those of Aquafina, and become the third brand in the US by volume. LikePepsi, Coke planned to leverage its DSD distribution system, bottling network and advertisingscale to increase national market share for Dasani. Despite that fast growth, sales growth ofDasani in supermarkets started to slow down.Before the launch of Dasani, Coca-Cola Enterprises (CCE) the largest anchor bottler, haddistributed other water brands like Evian and Naya. Soon after the launch of Dasani, CCEended its distribution agreement with Naya, favouring Dasani. Left without a distributionnetwork overnight, Naya declared bankruptcy soon after, and was eventually acquired byDanone.In addition to its position in the US, Coca-Cola had tried to expand its bottled water businessinternationally. It launched a multi-spring still water brand, BonAqua, in Russia and Spain,and the Turkuaz brand in Turkey. However, by 2001, its share in Western Europe was only0.5%. Coca-Cola had been able to position itself as leader in Latin-America, leveraging itspowerful bottler network and its market dominance in the region.Recent Events: A Changing Competitive LandscapeThe growth of Aquafina and Dasani during 2001 had a dramatic effect on the market positionof the Danone brands. Despite its very successful launch, the volume share of Dannon wentdown 25% from July 2001 to June 2002. Evian sales also fell 11% in the same period. Salesvolume of Volvic and Sparkletts did not fare any better. While Danone maintained goodprofitability in the HOD market in the US (through its subsidiary McKesson), its Dannonbrand was generating losses.In April 2002, Danone and Coca-Cola announced a strategic alliance whereby Coke wouldbecome the master distributor of Evian in the US. While Danone would continue to managebrand positioning and would even keep representatives in Coke’s Atlanta headquarters, Cokewould become responsible for local promotional spending, merchandising and management ofthe relationships with the bottlers. Coca-Cola and its bottlers already distributed about 60% ofEvian volume in the US, and were expected to bring the remaining 40% in-house when theCopyright © 2012 INSEAD 9 01/2012-5621
    • distribution contracts with other channels expired or were bought out. Danone and Coke hadagreed on some volume and sales targets to reverse the slide of Evian sales.In June 2002, Danone set up an even more far-reaching agreement with Coke. This time,Danone entered into a joint venture with Coca-Cola (49% Danone; 51% Coca-Cola). Cokewas to provide its marketing, distribution, and management expertise plus $128 million incash in return for the assets of Danones retail bottled waters in the US, ownership of severalvalue brands and production facilities, and the use of the Dannon and Sparkletts brand names.However, Danone remained the owner of the Dannon brand worldwide. The brands going intothe venture had estimated 2002 sales of $240 million. The scope of the alliance did notinclude Coke’s Dasani business, which remained fully owned by Coke, and the Evian brandand Danone’s HOD operations, which remained fully owned by Danone. For Coke, thealliance offered a multi-tiered approach to the market, with Evian as the premium brand,Dasani in the mid-tier, and Dannon and Sparkletts in the low tier.These deals marked the end of Danone’s direct involvement in the US retail bottled watermarket. However, since Danone had negotiated volume and profit guarantees, the deals wereprofit-enhancing. It was expected that Evian would continue to be distributed through theCoke DSD bottler system. Coca-Cola negotiated with its bottlers the right to distribute theDannon brand to supermarkets and points of sales through wholesalers and food brokers,similar to Nestlé’s waters.Coke’s entry into spring water sent a clear message to Nestlé that it wanted a bigger chunk ofthe bottled water market. Morgan Stanley estimated that 8% of Nestlé’s profits came fromUS water (5% from retail; 3% from HOD). A Nestlé response was therefore very likely andcame swiftly: in August 2002, it announced the launch of a new, national brand, Nestlé Pure.Similar to Dannon, Nestlé Pure was sourced from several springs in the US and would bedistributed nationally. It was expected to evolve from Nestlé’s budget brand Aberfoyle.Looking forward, US consumers planned to increase their consumption of bottled water morethan any other beverage category (Exhibit 22). This increase was expected to take placepartially through category growth and partially at the expense of carbonated soft drinks. Yet itwas unclear how competitive dynamics and pricing would play out. While Danone no longerplayed an active role in the US, it had never really put much pressure on industry prices.When Coke entered the water market, Danone’s CEO Riboud stated: “Under nocircumstances will we let our margins deteriorate by chasing market share.” The JV withDanone had given Coke a position in the single-spring, multi-spring, and purified watercategories. On the other hand, PepsiCo was present only in the purified water segment.Nestlé had a very high national market share but this was the result of very strong regionalbrands (e.g. Poland Spring had more than 50% share in the New York metropolitan area)rather than one national brand.Now that Nestlé had clearly signalled its commitment to bottled water in the US, all eyes wereon Pepsi, Coke and the many other players in the market. In 2001, Pepsi had aggressivelypriced Aquafina with price cuts of about 10%. The price cuts were partly the result of tradepromotions, partly due to an aggressive volume push with ½-litre 12- and 24-unit packs. Aslarge packs tended to have a lower unit price than smaller packs, the Aquafina price level hadfallen substantially. This contrasted with Danone, which had continued to raise prices ofDannon and Evian by about 3%. Nestlé had been selective in its price changes; the prices ofCopyright © 2012 INSEAD 10 01/2012-5621
    • Poland Spring and Aberfoyle had eroded by 8% (also by selling multi-packs) but the price ofArrowhead had increased by 2%. Coke had sought to maintain its Dasani price and had notpursued the larger multi-packs to the same degree as Pepsi. Media spending had also gone upsubstantially. During the first half of 2002, Pepsi made a drastic increase in advertisinginvestment for Aquafina, investing $16.2 million during that period (versus $13.3 million forthe whole of 2001). Exhibit 19 provides information of retail list prices of major brands.While Nestlé and Coke were at loggerheads in the bottled water market, they were still 50:50joint venture partners in the tea business, where they marketed brands such as Nestea,Nescafe, Mad River and Planet Java. In the US, this venture generated about $110 million inrevenues and approximately $20 million in profits. The venture had expanded intointernational markets as well.While the US water market had seen a spectacular development in just a few years, manyobservers feared that price reductions would dampen its profitability. Given the reduced profitoutlook in the market, should the dominant players reconsider their aggressive commitment tothis business? Was a price war scenario inevitable? Was it in the interests of the dominantplayers to avoid such a scenario? Moreover, a distinctive feature of the US bottled watermarket was that the four leading firms were deploying different strategies. But, were thesestrategies still viable in the emerging competitive landscape? Or was it time for incumbents tochange strategic direction for their business?Copyright © 2012 INSEAD 11 01/2012-5621
    • Appendix I The Bottler System in Carbonated Soft DrinksThe structure of the carbonated soft drinks industry involved two major players: concentrate producers(CPs) and bottlers. Concentrate producers, like Coca-Cola, PepsiCo, Cadbury Schweppes, and Cott,developed products, produced a concentrate (a blend of ingredients), and took primary responsibilityfor brand management. The capital requirements for the production of concentrate were relatively low.CPs developed networks of franchised bottlers. Bottlers added carbonated water and sweeteners, andtook primary responsibility for bottling, distribution, sales and merchandising.4 Bottling was a capitalintensive business: bottlers invested in bottling lines, warehouses, trucks and distribution networks.Marketing and promotions were jointly implemented and paid for by CPs and bottlers. CPs alsosupported bottlers in negotiations with major suppliers, such as sweetener and can producers. In theUnited States, there were four major concentrate producers, and Coke and Pepsi claimed a combinedshare of 76% of the market. As capital requirements for bottling increased, the number of US bottlersdecreased from over 2,000 in 1970 to less than 300 in 2000. During the 1980s and 1990s, Coke andPepsi had begun to acquire bottlers, which would then be sold to their “anchor bottlers” Coca-ColaEnterprises (CCE), 49% owned by Coca-Cola, and Pepsi Bottling Group (PBG), 35% owned byPepsiCo. By 2000, CCE and PBG handled respectively about 70% and 55% of the North Americanvolumes of Coke and Pepsi.The relationship between concentrate producers and bottlers were governed by master franchisecontracts. These contracts typically gave exclusive territorial rights to bottlers in perpetuity. CPsnegotiated the price of concentrate with bottlers, while bottlers decided on the wholesale price of softdrinks in their territories. During the 1980s and 1990s, the inflation-adjusted price of concentrate wentup, even though the price of soft drinks went down. Bottlers had the choice whether or not to adoptnew products introduced by the concentrate producers. However, bottlers were not allowed to carrycompeting brands.Bottlers used the “direct store door” delivery system to retailers, which involved bottler employeesphysically managing and maintaining the shelf space, managing inventories in the shelves, and settingpoint-of-sale displays in the stores. Bottlers and retailers cooperated in setting promotional activities inthe store. In contrast, private label soft drinks, like President’s Choice, were delivered to the retailer’swarehouse for merchandising by the retailer. Cost per 192 oz. case for Typical US Concentrate Producer and Bottler, 2000 Concentrate Producer Bottler Dollars per Percent of Dollars per Percent of Case Sales Case Sales Net Sales 0.71 100% 5.80 100% Cost of sales 0.12 17 3.77 65 Gross profit 0.59 83 2.03 35 Selling and delivery 0.01 2 1.22 21 Advertising and marketing 0.28 39 0.12 2 General and administration 0.06 8 0.23 4 Pretax profit 0.25 35 0.52 9Source: Harvard Business School case “Cola Wars Continue: Coke and Pepsi in the Twenty-First Century”4 Coca-Cola maintained control of sales forCopyright © 2012 INSEAD 12 01/2012-5621
    • Exhibit 1 Major Soft Drinks Manufacturers 2002Manufacturer Country of Regional Main area of Activity Origin PresenceCoca-Cola Co, The US Global C, F/V, BW, FD, Con, RTD T, RTD C, APepsiCo Inc US Global C, F/V, BW, FD, Con, RTD T, RTD C, ADanone, Groupe France Global F/V, BW, FDNestlé SA Switzerland Global C, F/V, BW, FD, Con, RTD T, RTD C, ACadbury Schweppes Plc UK Global C, F/V, BW, FD, Con, RTD T, RTD CSuntory Ltd Japan NA, AP, AU C, F/V, BW, FD, Con, RTD T, RTD C, AAcqua Minerale San Benedetto SpA Italy WE, EE C, F/V, BW, RTD TKirin Brewery Co Ltd Japan AP C, F/V, BW, FD, RTD T, RTD C, ACastel, Groupe France WE, AME C, BWOtsuka Pharmaceutical Co Ltd Japan AP, NA BW, C, Con, FDUnilever Group UK/NL Global F/V, FD, Con, RTD TAmBev Brazil LA, NA, WE C, BW, FDAsahi Breweries Ltd Japan AP C, F/V, BW, FD, RTD T, RTD C, AUni-President Enterprises Corp Taiwan AP, EE C, F/V, BW, FD, RTD T, RTD C, ASunkist Growers Inc US All except AME C, F/V, BW, RTD con, RTD TSource: Euromonitor from company reportsKey: NA=North America, LA=Latin America, WE=Western Europe, EE=Eastern Europe, AP=Asia-Pacific,AME=Africa and the Middle East, AU=Australasia C – carbonates; F/V – Fruit / vegetable juice, BW – bottledwater, FD – functional drinks; Con – concentrates; RTD T – ready-to-drink tea; RTD C – ready-to-drink coffee;A – Asian speciality drinksCopyright © 2012 INSEAD 13 01/2012-5621
    • Exhibit 2 Water Market Fundamentals – US versus Europe US Market Europe marketCarbonated Soft In the US, the non-alcoholic drink Penetration of CSD in WesternDrink (CSD) category is dominated by CSD. With Europe is a lot lower than in the USPenetration consumers more and more interested in and that of bottled water already a lot healthier lifestyles, there is thus higher. substantial room for migration and therefore growth.Growth Strong Limited potential, given that the market is already well developed and quite saturated.Route to In the US, DSD (direct store delivery) is In Europe, the DSD system is notMarket the prevailing distribution system - key. acceptable due to high volumes and the key role of convenience stores.Bottler In the US, bottlers are controlled by the In Europe, there is a much looserRelationships large CSD companies. relationship with the bottlers.Competitive In the US, the market development is at The main competitors (primarilyLandscape a very early stage (limited size of Nestlé) are already very big, while competitors with limited national the rest of the market is quite presence). fragmented. Over the last few years, Coca-Cola has acquired a number of local brands, notably Valser (Switzerland) and Chaudfontaine (Belgium)Perception In the US, table water as a business In Europe, table water is unlikely toof table model is accepted by consumers. be accepted by the consumer. This iswater all the more true as brands are key and neither Coca-Cola nor Pepsi have viable strong brands in western Europe.Pricing High prices. In western Europe, prices are already a lot lower than in the North American market.Source: UBSCopyright © 2012 INSEAD 14 01/2012-5621
    • Exhibit 3 Major Soft Drinks Manufacturers: Merger and Acquisition Activity 2000-2002Year Acquirer Company acquired Strategic benefit2000 Cadbury Schweppes Snapple Beverage Group (from With brands Royal Crown Cola, Snapple, Mistic and Triarc Companies Inc) Stewart’s, acquisition forms part of strategy to build share through non-sparkling soft drinks2000 Cadbury Schweppes Pepsi-Cola Bottlers Australia Fortifies distribution network2000 Danone Robust Expanding presence in Chinese market2000 Danone Aquarius Gains presence in Chinese home and office delivery market2000 Danone McKesson Water Gains control of leading player in US home and office delivery market2000 Danone Naya Gains control of Canadian water company2000 Nestlé Valvita and Schoonspruit (South Gains entry into mineral water markets in South Africa Africa) and Kekkuti (Hungary) and Hungary2000 PepsiCo South Beach Beverage Co Gains presence in energy drinks through SoBe brand2001 AmBev Cympay Majority stake gives AmBev an 8% share in Uruguayan mineral water market2001 Cott Corp Royal Crown Cola’s international Cadbury Schweppes retained businesses in US, Canada division (from Cadbury Schweppes) and Mexico2001 Cadbury Schweppes La Casera Secures presence in Iberian peninsula through Spain’s third largest soft drinks maker2001 Cadbury Schweppes Pernod-Ricard’s soft drinks business Purchase includes brands Orangina and Yoo Hoo in continental Europe, North America and Australasia2001 Danone Aqua Raised stake in Indonesian water company as part of strategy to expand in Asia-Pacific2001 Danone Frucor Beverages Group Ltd Purchase of Australian energy drinks producer, including brands V, H2go and Mizone (bottled water) and gforce (new age beverages, offers chance to expand beyond bottled water sector2001 Nestlé Glaciar (Argentina), Sansu (Turkey), Continuing strategic expansion into mineral water sector Al Manhal (Saudi Arabia), Ava and in developing markets Fontalia (Pakistan)2001 Nestlé Aqua Cool (US/Europe), Black Expands presence in home and office delivery market Mountain (US), First Choice (UK) and Rossi (France)2001 PepsiCo Quaker Oats Control of global leader in sports drinks, Gatorade2002 AmBev Quilmes Stake in Argentine brewer that owns the two largest Pepsi bottlers in Argentina2002 Cadbury Schweppes Nantucket Allserve Inc (from Ocean Expansion in non-carbonated soft drinks Spray Cranberries Inc)2002 Cadbury Schweppes Squirt (non-cola carbonate brand Commitment to fast-growing Mexican carbonates sector from Refremex)2002 Danone Patrimoine des Eaux du Quebec Expanding Danones presence in Canada, Argentina and Asia2002 Danone Sparkling Spring Water Holdings Consolidating its position in the HOD market in the UK, the US and Canada2002 Danone Chateaudeau International Control of all water jugs (HOD) businesses of the Suez Group in France. The deal has been made with Ondeo, a subsidiary of the Suez Group2002 Pepsi Bottling Group Pepsi-Gemex Owns the world’s No 1 bottled water brand Electropura2002 Nestlé Saphir A 33% stake in Saphir, a major HOD player in France Source: Euromonitor. Copyright © 2012 INSEAD 15 01/2012-5621
    • Exhibit 4 Estimated Cost Differences between a Premium Brand and a Private Label Brand (per litre) circa 2000 Premium Private Label Raw materials $0.01 $0.01 Packaging $0.14 $0.10 Salaries $0.10 $0.05 Depreciation $0.03 $0.04 Distribution $0.10 $0.06 Plant operating costs $0.04 $0.06 Advertising & promotion $0.09 $0.00 Profit $0.09 $0.01 Wholesale price $0.60 $0.32 Source: Company data and BT Alex.Brown InternationalCopyright © 2012 INSEAD 16 01/2012-5621
    • Exhibit 5 Economies of Scale in Bottling Exhibit 6 PET Price VolatilityCopyright © 2012 INSEAD 17 01/2012-5621
    • Exhibit 7 Global Sales of Bottled Water by Region (1998-2001) 1998 1999 2000 2001 CAGR (98-01)World (total) Bottled water - Retail value rsp (US$ mn) 31,961 33,929 35,356 38,297 6.2% Bottled water - On-trade value (US$ mn) 25,039 27,271 27,744 29,303 5.4% World - Total value (US$ mn) 57,000 61,200 63,100 67,600 5.8% Bottled water - Retail volume (mn litres) 72,319 79,311 86,679 96,650 10.1% Bottled water - On-trade volume (mn litres) 12,381 14,589 16,521 18,750 14.8% World - Total volume (mn litres) 84,700 93,900 103,200 115,400 10.9%Western Europe (total region) Bottled water - Retail value rsp (US$ mn) 10,876 10,954 10,201 10,719 -0.5% Bottled water - On-trade value (US$ mn) 17,759 17,974 16,552 16,729 -2.0% Western Europe - Total value (US$ mn) 28,635 28,928 26,753 27,448 -1.4% Bottled water - Retail volume (mn litres) 28,724 30,098 31,497 33,847 5.6% Bottled water - On-trade volume (mn litres) 6,998 7,368 7,776 8,112 5.0% Western Europe - Total volume (mn litres) 35,722 37,466 39,273 41,959 5.5%France Bottled water - Retail value rsp (US$ mn) 2,307 2,455 2,227 2,262 -0.7% Bottled water - On-trade value (US$ mn) 1,247 1,354 1,213 1,212 -0.9% France - Total value (US$ mn) 3,554 3,809 3,440 3,474 -0.8% Bottled water - Retail volume (mn litres) 6,772 7,311 7,664 8,084 6.1% Bottled water - On-trade volume (mn litres) 291 323 329 334 4.7% France - Total volume (mn litres) 7,063 7,634 7,993 8,418 6.0%Germany Bottled water - Retail value rsp (US$ mn) 3,057 2,837 2,489 2,618 -5.0% Bottled water - On-trade value (US$ mn) 7,658 7,376 6,573 6,352 -6.0% Germany - Total value (US$ mn) 10,715 10,213 9,062 8,970 -5.8% Bottled water - Retail volume (mn litres) 6,231 6,235 6,152 6,775 2.8% Bottled water - On-trade volume (mn litres) 1,752 1,783 1,820 1,771 0.4% Germany - Total volume (mn litres) 7,983 8,018 7,972 8,546 2.3%Italy Bottled water - Retail value rsp (US$ mn) 1,638 1,542 1,451 1,494 -3.0% Bottled water - On-trade value (US$ mn) 2,382 2,356 2,211 2,252 -1.9% Italy - Total value (US$ mn) 4,020 3,898 3,662 3,746 -2.3% Bottled water - Retail volume (mn litres) 6,741 6,736 7,089 7,306 2.7% Bottled water - On-trade volume (mn litres) 1,695 1,743 1,865 1,913 4.1% Italy - Total volume (mn litres) 8,436 8,479 8,954 9,219 3.0%Spain Bottled water - Retail value rsp (US$ mn) 588 643 623 679 4.9% Bottled water - On-trade value (US$ mn) 1,297 1,378 1,335 1,457 4.0% Spain - Total value (US$ mn) 1,885 2,021 1,958 2,136 4.3% Bottled water - Retail volume (mn litres) 2,870 3,255 3,590 3,946 11.2% Bottled water - On-trade volume (mn litres) 1,053 1,143 1,237 1,344 8.5% Spain - Total volume (mn litres) 3,923 4,398 4,827 5,290 10.5%United Kingdom Bottled water - Retail value rsp (US$ mn) 914 1,003 1,011 1,064 5.2% Bottled water - On-trade value (US$ mn) 542 565 595 604 3.7% UK - Total value (US$ mn) 1,456 1,568 1,606 1,668 4.6% Bottled water - Retail volume (mn litres) 926 1,020 1,126 1,252 10.6% Bottled water - On-trade volume (mn litres) 109 114 126 132 6.6% UK - Total volume (mn litres) 1,035 1,134 1,252 1,384 10.2%USA Bottled water - Retail value rsp (US$ mn) 6,627 7,151 7,896 8,880 10.2% Bottled water - On-trade value (US$ mn) 7,799 8,524 9,543 10,597 10.8% USA - Total value (US$ mn) 14,426 15,675 17,439 19,477 10.5% Bottled water - Retail volume (mn litres) 9,373 10,421 11,182 12,206 9.2% Bottled water - On-trade volume (mn litres) 3,420 3,739 4,081 4,455 9.2% USA - Total volume (mn litres) 12,793 14,160 15,263 16,661 9.2%Exchange rate (US$ per Euro) 1.121 1.066 0.924 0.896 -7.2%Exchange rate (US$ per GBP) 1.656 1.618 1.513 1.439 -4.6%Source: Euromonitor.Copyright © 2012 INSEAD 18 01/2012-5621
    • Exhibit 8 Per-capita Consumption of Bottled Water by Region (1998-2001) 1998 1999 2000 2001 CAGR (98-01)World (total) World - Total value per capita (US$) 9.7 10.3 10.4 11.0 4.3% World - Total volume per capita (liters) 14.4 15.7 17.1 18.9 9.5%Western Europe (total region) Western Europe - Total value per capita (EUR) 56.7 60.0 63.7 67.3 5.9% Western Europe - Total volume per capita (liters) 79.3 82.8 86.5 92.1 5.1%France France - Total value per capita (EUR) 54.0 60.6 63.0 65.5 6.7% France - Total volume per capita (liters) 120.3 129.4 135.3 142.2 5.7%Germany Germany - Total value per capita (EUR) 116.5 116.8 119.7 122.2 1.6% Germany - Total volume per capita (liters) 97.3 97.7 97.3 104.3 2.3%Italy Italy - Total value per capita (EUR) 62.3 63.5 68.7 72.3 5.1% Italy - Total volume per capita (liters) 146.6 147.2 155.2 159.6 2.9%Spain Spain - Total value per capita (EUR) 42.7 48.1 53.7 60.4 12.2% Spain - Total volume per capita (liters) 99.7 111.7 122.4 134.0 10.4%United Kingdom UK - Total value per capita (GBP) 14.9 16.3 17.8 19.5 9.4% UK - Total volume per capita (liters) 17.5 19.1 21.1 23.3 10.0%USA USA - Total value per capita (US$) 53.6 57.7 63.6 70.4 9.5% USA - Total volume per capita (liters) 47.6 52.2 55.7 60.2 8.1%Exchange rate (US$ per Euro) 1.121 1.066 0.924 0.896 -7.2%Exchange rate (US$ per GBP) 1.656 1.618 1.513 1.439 -4.6%Source: Euromonitor.Copyright © 2012 INSEAD 19 01/2012-5621
    • Exhibit 9 Per Litre Price of Bottled Water by Region (1998-2001) 1998 1999 2000 2001 CAGR (98-01)World (total) Bottled water - Retail price/litre (US$) 0.44 0.43 0.41 0.39 -3.4% Bottled water - On-trade price/litre (US$) 2.02 1.87 1.68 1.56 -8.2% World - Average price/liter (US$) 0.67 0.65 0.61 0.58 -4.7%Western Europe (total region) Bottled water - Retail price/litre (Euro) 0.34 0.34 0.35 0.35 1.0% Bottled water - On-trade price/litre (Euro) 2.26 2.29 2.30 2.30 0.6% Western Europe - Average price/liter (Euro) 0.72 0.72 0.74 0.73 0.5%France Bottled water - Retail price/litre (Euro) 0.30 0.32 0.31 0.31 1.1% Bottled water - On-trade price/litre (Euro) 3.82 3.93 3.99 4.05 2.0% France - Average price/liter (Euro) 0.45 0.47 0.47 0.46 0.7%Germany Bottled water - Retail price/litre (Euro) 0.44 0.43 0.44 0.43 -0.8% Bottled water - On-trade price/litre (Euro) 3.90 3.88 3.91 4.00 0.8% Germany - Average price/liter (Euro) 1.20 1.20 1.23 1.17 -0.8%Italy Bottled water - Retail price/litre (Euro) 0.22 0.21 0.22 0.23 1.5% Bottled water - On-trade price/litre (Euro) 1.25 1.27 1.28 1.31 1.6% Italy - Average price/liter (Euro) 0.43 0.43 0.44 0.45 1.5%Spain Bottled water - Retail price/litre (Euro) 0.18 0.19 0.19 0.19 1.8% Bottled water - On-trade price/litre (Euro) 1.10 1.13 1.17 1.21 3.2% Spain - Average price/liter (Euro) 0.43 0.43 0.44 0.45 1.5%United Kingdom Bottled water - Retail price/litre (GBP) 0.59 0.61 0.59 0.59 -0.2% Bottled water - On-trade price/litre (GBP) 3.01 3.06 3.12 3.18 1.9% UK - Average price/liter (GBP) 0.85 0.86 0.85 0.84 -0.5%USA Bottled water - Retail price/litre (US$) 0.71 0.68 0.70 0.73 0.9% Bottled water - On-trade price/litre (US$) 2.28 2.28 2.34 2.37 1.4% USA - Average price/liter (US$) 1.13 1.11 1.15 1.16 1.0%Exchange rate (US$ per Euro) 1.121 1.066 0.924 0.896 -7.2%Exchange rate (US$ per GBP) 1.656 1.618 1.513 1.439 -4.6%Source: Euromonitor.Copyright © 2012 INSEAD 20 01/2012-5621
    • Exhibit 10 Shares of the Leading Players in the US Bottled Water Market (volume) 1998 1999 2000 2001Danone 4.3 11.3 10.1 9.9Nestlé 23.1 23.1 25.4 26.0Coca-Cola 0.0 0.7 2.3 4.2PepsiCo 1.9 2.8 3.5 4.5Suntory 9.3 9.8 10.0 9.3Crystal Gey. 2.6 3.1 3.4 3.6Culligan 2.7 2.6 2.7 2.6Others 56.0 46.4 42.7 40.0Total 100 100 100 100Million litres 13,590 15,270 16,350 18,280Source: Zenith Bottled Water Report Exhibit 11 Shares of the Leading Players in the US Bottled Water Market (wholesale value) 1998 1999 2000 2001Danone 7.6 16.1 14.4 13.7Nestlé 25.6 25.6 27.9 27.8Coca-Cola 0.0 1.4 4.6 8.2PepsiCo 4.0 5.9 7.0 8.9Suntory 6.8 7.4 7.5 6.7Crystal Gey. 3.2 4.1 4.1 4.2Culligan 1.5 1.5 1.4 1.4Others 51.3 38.1 32.9 29.1Total 100 100 100 100Million $ 4,394 6,006 6,366 7,110Source: Zenith Bottled Water ReportCopyright © 2012 INSEAD 21 01/2012-5621
    • Exhibit 12 Global Market Share of the Leading Bottled Water Players (2001; volumes) Danone Nestlé Coca-Cola PepsiCo Total (million ltr)N. America 11% 26% 4% 4% 19,200W. Europe 12% 16% 1% 1% 38,210E. Europe 3% 6% 5% 5% 6,767C&L America 8% 2% 11% 8% 25,327Asia & Australia 24% 3% 6% 1% 22,277Africa & M.E. 2% 8% 0% 0% 9,204Total 12% 11% 5% 3% 120,984Source: Zenith Bottled Water Report Exhibit 13 Estimated Revenue and Costs for Water Bottlers in 2000 (24-pack case of half-litre bottles) Nestlé Pepsi CokeRetail price (paid by customer) $8.44 $8.52 $8.65Retail margin 35% 18% 18%Wholesale price (paid by channel) $5.49 $7.03 $7.13BottlersSupport from concentrate producer $0.00 $0.41 $0.52Total bottler revenue $5.49 $7.44 $7.65COGSConcentrate / Water $0.01 $1.67 $1.70PET bottles $1.03 $1.16 $1.16Closures $0.21 $0.23 $0.23Secondary packaging $0.61 $0.68 $0.68Labor/manufacturing $0.7 $0.7 $0.77Depreciation $0.07 $0.08 $0.08Total COGS $2.63 $4.53 $4.63Gross Profit $2.85 $2.91 $3.02SG&A $2.29 $2.25 $2.53EBITA $0.56 $0.66 $0.49Source: Goldman Sachs Global Equity researchCopyright © 2012 INSEAD 22 01/2012-5621
    • Exhibit 14 Top Attributes When Selecting Water and Carbonated Soft Drink (CSD) Brands CSD Water Great taste 68% 47% It’s cold 48% 39% It’s my favorite brand 37% 10% Refreshing 35% 44% Available everywhere 35% 25% Low price 26% 38% It rehydrates me 16% 52% Source: Morgan Stanley Soft Drink Survey. “Water is Water” report, June 7, 2002. Exhibit 15 Customer Preferences for Spring versus Purified Waters (% customers) Do you have a preference between purified and spring water? Frequency of use Several timesI only drink… Everyday Occasionally Total a weekSpring Water 11% 8% 4% 7%Purified Water 4% 3% 2% 3%Prefer one, drink both 25% 24% 13% 19%No preference 46% 53% 59% 53%I don’t know 15% 12% 22% 17%Total 100% 100% 100% 100%Source: Morgan Stanley Soft Drink Survey. “Water is Water” report, June 7, 2002. Exhibit 16 Penetration of Brands for Different Retail Channels (YTD 2002 through October 6) Brand Volume Share by Channel Share of Volume Aquafina Dasani Dannon Crystal Private Nestle Volume Growth (Pepsi) (Coke) (Coke) Geyser LabelMass Merchandisers 27% 45% 38% 9% 6% 3% 0% 39%Supermarkets 53% 34% 36% 17% 11% 5% 6% 12%Drugstores 4% 26% 18% 15% 12% 5% 8% 14%Convenience Stores 16% 14% 25% 26% 20% 0% 1% 6%4 Major Channels 100% 35% 34% 16% 11% 3% 4% 18%Source: USB Soft Drinks report, November 29, 2002.Copyright © 2012 INSEAD 23 01/2012-5621
    • Exhibit 17 The Channel Mix of Bottled Water Sales ($ million - value) 1996 Wholesale 2001 Wholesale 2001 Operating Revenues Revenues Profits Single Serve Still $1,480 $4,654 $534 Take Home $251 $1,875 $166 Cold-drink $1,229 $2,779 $368 Single Serve Sparkling $499 $516 $55 Jugs $558 $693 $36 RETAIL $2,538 $5,863 $624 HOD $1,182 $1,605 $263 BOTTLED WATER $3,720 $7,468 $887 (million litres - volume) 1996 1996 2001 2001 Wholesale Percent Wholesale Percent Volumes Volumes Single Serve Still 1,599 16% 6,010 37% Take Home 440 5% 3,385 21% Cold-drink 1,159 11% 2,625 16% Single Serve Sparkling 703 7% 692 4% Jugs 3,357 33% 3,884 24% RETAIL 5,659 56% 10,586 65% HOD 4,542 44% 5,806 35% BOTTLED WATER 10,201 100% 16,392 100% Source: Morgan Stanley, Beverages, August 19 2002. Exhibit 18 Danone US Water Business 2001 Sales ($m) 2001 EBITA ($m) RETAIL 424 18 Evian 184 22 Dannon 240 -4 HOD (McKesson) 420 60 TOTAL US WATER 844 78 Note: the $ -4m Ebita of Dannon was estimated to be composed of $-10m of Dannon and $6m of Sparkletts Source: Morgan Stanley, Beverages, June 20 2002Copyright © 2012 INSEAD 24 01/2012-5621
    • Exhibit 19 Retail Price per Litre of Bottled Water, June 2002 Brand Type $/Litre Sparkling Water Perrier (Nestlé) Mineral 2.00 Poland Spring Sparkling (Nestlé) 0.93 La Croix – Sparkling 0.93 Still Water Evian (Danone/Coke) Mineral 1.57 Dasani (Coke) Purified 1.00 Aquafina (Pepsi) Purified 0.85 Dannon (Danone) Multi-spring 0.76 Poland Spring (Nestlé) Multi-spring 0.75 Ice Mountain (Nestlé) Multi-spring 0.68 Crystal Spring Multi-spring 0.67 Zephyrhills (Nestlé) Multi-spring 0.67 Ozarka (Nestlé) Multi-spring 0.67 Deer Park (Nestlé) Multi-spring 0.66 Sparkletts (Danone) Multi-spring 0.62 Alhambra (Danone) Multi-spring 0.61 Private Label 0.61 Crystal Geyser (Suntory) Multi-spring 0.60 Arrowhead (Nestlé) Multi-spring 0.58 Deja Blue (Cadbury Schweppes) Purified 0.56 Aberfoyle (Nestlé) Multi-spring 0.53 Source: Morgan Stanley, Beverages, June 2002. Exhibit 20 Share of Media Spending (voice), 2001 Share Share of Share of Voice Volume Poland Springs 11% 3% Other Nestlé 26% 12% Total Nestlé 37% 16% PepsiCo- Aquafina 14% 16% Coca-Cola- Dasani 12% 31% Evian 3% 11% Other Danone 8% 11% Total Danone 11% 23% Suntori 1% 1% Cott 3% 0% Rest 21% 14% Bottled Water 100% 100% Source: CMR, Beverage Digest and Morgan Stanley ResearchCopyright © 2012 INSEAD 25 01/2012-5621
    • Exhibit 21 Water Advertising Expenditures by Top Players ($000) 1998 1999 2000 2001 1H 2002Coca-Cola 0 3,341 23,316 26,406 8,565PepsiCo 617 304 10,427 13,229 16,279Nestlé 14,598 5,941 9,700 14,194 9,328Danone 20,228 13,631 14,382 19,271 6,284Sum 35,443 23,217 57,825 73,100 40,456Source: Morgan Stanley Beverage Media Spend Analysis, 9 September 2002, and Beverages analysis report ofJune 16, 2003. Exhibit 22 Current and Future Consumption of Beverages (% consumers) Planned future intake % consumed More Same Less Carb. Soft Drinks 84 7 68 25 Bottled water 66 49 48 3 Tap water 60 38 54 8 Fruit juices 53 31 64 5 Hot coffee 53 6 77 18 Iced tea 45 31 62 7 Milk / soy 42 19 78 3 Wine / spirits 29 11 75 14 Beer 26 15 69 15 Hot tea 23 13 67 20 Fruit drinks 17 17 73 10 Sport drinks 17 30 63 6 Mixes 9 24 66 10 Iced coffees 5 29 56 16 Energy drinks 3 26 56 18 Source: Morgan Stanley Beverage Survey, 7 June 2002Copyright © 2012 INSEAD 26 01/2012-5621
    • Exhibit 23 Corporate Financials of Major Actors in Bottled Water Business (1997-2001) 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Nestle (units: Swiss Francs millions) Danone (units: EUR millions)Total Revenue 69,998.0 71,747.0 74,660.0 81,422.0 84,698.0 13,488.0 12,935.0 13,293.0 14,287.0 14,470.0Earnings Before Interest 7,417.0 7,305.0 8,316.0 9,498.0 9,309.0 1,224.0 1,293.0 1,391.0 1,550.0 1,609.0and Taxes (EBIT)Net Income 4,182.0 4,205.0 4,724.0 5,763.0 6,681.0 559.0 598.0 682.0 721.0 132.0 Margin % 6.0% 5.9% 6.3% 7.1% 7.9% 4.1% 4.6% 5.1% 5.0% 0.9%Total Assets 51,581.0 56,703.0 58,939.0 65,524.0 93,786.0 15,029.6 15,042.0 15,015.0 17,233.0 16,900.0Ratios Gross Margin % 48.8% 49.9% 51.9% 53.2% 55.4% 43.7% 46.4% 49.9% 51.2% 50.3% EBIT Margin % 10.6% 10.2% 11.1% 11.7% 11.0% 9.1% 10.0% 10.5% 10.8% 11.1% Return on Assets % 9.0% 8.4% 9.0% 9.5% 7.3% 5.1% 5.4% 5.8% 6.0% 5.9% Return on Equity % 19.7% 19.4% 20.0% 21.2% 21.0% 8.9% 9.2% 10.8% 10.8% 2.0% Total Debt/Equity % 62.6% 64.0% 52.6% 44.0% 105.3% 50.4% 57.8% 66.2% 72.1% 99.8% Nestle Waters Division Waters DivisionRevenues - - 7,418.0 3,373.0 3,565.0 4,584.0 3,796.0Operating Profit Before Tax - - 622.0 368.0 440.0 513.0 432.0Assets - - 4,928.0 3,178.0 3,901.0 5,423.0 5,494.0 Coca-Cola Company (units: USD millions) Coca-Cola Enterprises (units: USD millions)Total Revenue 18,868.0 18,813.0 19,284.0 17,354.0 17,545.0 11,278.0 13,414.0 14,406.0 14,659.0 14,999.0Earnings Before Interest 5,001.0 5,040.0 3,982.0 5,134.0 5,352.0 720.0 869.0 839.0 1,118.0 679.0and Taxes (EBIT)Net Income 4,129.0 3,533.0 2,431.0 2,177.0 3,969.0 171.0 142.0 59.0 236.0 (321.0) Margin % 21.9% 18.8% 12.6% 12.5% 22.6% 1.5% 1.1% 0.4% 1.6% (2.1%)Total Assets 16,881.0 19,145.0 21,623.0 20,834.0 22,417.0 17,487.0 21,132.0 22,730.0 22,162.0 23,719.0Ratios Gross Margin % 68.1% 70.4% 68.8% 64.3% 65.6% 37.1% 37.4% 37.4% 38.0% 39.9% EBIT Margin % 26.5% 26.8% 20.6% 29.6% 30.5% 6.4% 6.5% 5.8% 7.6% 4.5% Return on Assets % 18.9% 17.5% 12.2% 15.1% 15.5% 3.1% 2.8% 2.4% 3.1% 1.8% Return on Equity % 61.5% 45.1% 27.1% 23.1% 38.5% 10.3% 6.7% 2.2% 8.2% (0.7%) Total Debt/Equity % 53.3% 61.3% 65.5% 60.7% 45.0% 493.4% 440.7% 389.1% 392.4% 431.5% Pepsico, Inc (units: USD millions) Pepsi Bottling Group (units: USD millions)Total Revenue 20,917.0 22,348.0 25,093.0 22,337.0 23,512.0 6,592.0 7,041.0 7,505.0 7,982.0 8,443.0Earnings Before Interest 2,952.0 2,872.0 3,556.0 4,002.0 4,023.0 335.0 277.0 351.0 590.0 676.0and Taxes (EBIT)Net Income 2,142.0 1,993.0 2,505.0 2,543.0 2,400.0 59.0 (146.0) 118.0 229.0 305.0 Margin % 10.2% 8.9% 10.0% 11.4% 10.2% 0.9% (2.1%) 1.6% 2.9% 3.6%Total Assets 20,101.0 22,660.0 17,551.0 20,757.0 21,695.0 - 7,322.0 7,624.0 7,736.0 7,857.0Ratios Gross Margin % 59.2% 58.3% 58.8% 54.2% 54.3% 41.9% 40.6% 42.8% 44.8% 45.8% EBIT Margin % 14.1% 12.9% 14.2% 17.9% 17.1% 5.1% 3.9% 4.7% 7.4% 8.0% Return on Assets % 8.7% 8.4% 11.1% 13.1% 11.8% NA NA 2.9% 4.8% 5.4% Return on Equity % 22.0% 29.9% 37.7% 35.1% 29.4% NA NA 17.8% 14.3% 18.8% Total Debt/Equity % 71.3% 124.2% 44.3% 42.1% 34.6% NA NM 210.6% 200.3% 210.0%Source: Capital IQCopyright © 2012 INSEAD 27 01/2012-5621
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