Coca-Cola's Grip on Water

By Scott Leith
The Atlanta Journal-Constitution
June 11, 2003

In a remote valley of the Swiss Alps, a bottling plant has churned out Valser water for the past 40 years.

Anyone in Switzerland should know the name well -- Valser is one of the country's best-selling waters.

But they might not know that this regional brand has become part of one of the world's growing water empires -- Coca-Cola.

Whether by acquiring brands or developing new ones, Coke and its bottlers have quietly assembled a world of water during the past few years.

What's driving Coke's buying spree?

Soft drinks are still the bedrock of Coke's global sales, but they're slow-growing in many parts of the world.

Meanwhile, people drink more and more bottled water. Americans, for example, consumed 60 percent more in 2002 than they did five years before. The rate was even greater in places like China and India, according to Beverage Marketing Corp.

Coke's fledgling water network has come together with little fanfare and still resembles more of a patchwork than a formal strategy. But observers think Coke is aiming at getting a bigger and bigger handle on the world's water market.

"They've been aggressive in buying brands," said John Faucher, an analyst with J.P. Morgan. "From an acquisition standpoint, water has been a big focus for them."

For all of Coke's global activities, water remains a small part of the company's business. Coke still gets 85 percent of its business from soft drinks.

But in 2002, Coca-Cola's global water business grew by 68 percent. Coke spokesman Kelly Brooks said the company's three-year compounded growth rate for water was 59 percent.

The once humble commodity has become more important for major Coke bottlers, too. Australia's Coca-Cola Amatil, which is about 35percent owned by Coke, is buying water companies as part of an ongoing push into more noncarbonated beverages.

This Sydney-based company is busy at the moment with a pair of deals. One is a bid to buy a water company called Neverfail, which specializes largely in home-and-office delivery. In May, Amatil announced an agreement to acquire another Australian water venture, Peats Ridge Springs.

These are just hints at what has been going on in many places.

"Water is an important and growing beverage category in a number of global markets, and the Coke system is not dipping its toe -- it's taking a major plunge," said John Sicher, editor and publisher of Beverage Digest.

In some ways, the Coke system's acquisitions have been scattershot, involving all sorts of brands at a variety of price levels. But Brooks said Coke's approach is generally based on what works locally.

"Because every market for bottled water is different, we choose the right brands, focus our local knowledge and invest only in markets with profitable growth potential," he said.

Just getting a grip on how various markets work is a challenge. Consider the differences in these regions:

  • In Europe, bottled spring water is a fixture on many tables. But in Western Europe, per capita consumption of bottled water is roughly four times greater than that of Eastern Europe, according to Beverage Digest.

  • Western Europe's water market is the world's most sophisticated and includes some famous old brands. Evian water, for one, has been bottled since 1826. Britain's Malvern, now owned by Coca-Cola, was first bottled in 1851.

  • In the United States, bottled water is relatively new, at least as a mass phenomenon. The U.S. water market exploded in the 1990s when Pepsico and Coke got into the business.

  • In Japan, bottled water is still a small-time seller. The typical Japanese person drank just 11.5 liters of bottled water in 2002, according to Beverage Marketing.

  • In Mexico, bottled water is big business. According to Beverage Marketing, Mexicans drank 142.8 liters of bottled water per capita in 2002, compared with 79.6 liters in the United States.

To dip into these diverse markets, Coke and Coke bottlers have grabbed a variety of brands.

In one of the larger deals, Coca-Cola paid $65 million to one of its own bottlers, Panamerican Beverages Inc., to convert a brand called Risco into a Coke-owned product, Ciel. That process, now well under way, gives Coke a big, nationally distributed brand in Mexico.

In some cases, deals have involved more than one company. Valser was picked up via a partnership of Coke and Coca-Cola HBC, a bottler in Greece. Coke owns about 24 percent of Coca-Cola HBC.

Small is profitable

If one thing ties all this activity together, it is Coke's tendency to focus on single-serve bottles instead of larger sizes -- gallon jugs, for example. Brooks said the company favors smaller bottles, especially those sold cold in vending machines and other so-called cold-drink settings. These are more profitable than bigger packages or bottles sold in multipacks.

But big profits are far from assured in water.

In North America, Coke has its hands on three main brands: Dasani, Dannon and Evian. The latter two brands are owned by French giant Groupe Danone and handled in North America by Coke.

The three brands provide Coke with products at different price points. But it also sets up an important conflict: Cheap-priced Dannon competes with higher-priced brands, including Coke's own Dasani.

Market research shows that Coke has been slicing prices on Dannon. At the same time, Dasani has lost market share.

Don Knauss, president of Coke's North American retail division, said Dannon is making money this year, despite low prices. But those profits are split several ways, with money going to Groupe Danone, Coke bottlers and, finally, Coke itself.

"We'll eventually see these prices starting to stabilize," Knauss said.

Many in the industry hope so. Bottlers don't like the erosion of prices, but David Van Houten, president of Coca-Cola Enterprises' North American group, accepts Coke's moves with Dannon.

"There are situations where perhaps Dannon has had to go in and reclaim its turf or re-establish some credibility," Van Houten said.

Many experts wonder if Coke's three-tiered structure will work. Bill Pecoriello, an analyst for Morgan Stanley, said in a recent report that 2003 could be "the summer of the price war" in the U.S. water business.

Van Houten, however, thinks Coke and its bottlers don't have much choice. "I'd rather see Dannon cannibalize Dasani," he said, than lose sales to products from rival companies.

The North American situation also is a reminder that Coke is far from alone in the world's water business.

In many places, Coke is a small player in water -- or even a non-player. Switzerland-based Nestl is an especially tough competitor worldwide, along with having growth ambitions of its own.

In 2002, Nestl made seven water business acquisitions, chiefly involving home-and-office delivery. Today, the company has 77 different water brands. And in the United States, where Pepsico's Aquafina and Coke's Dasani have the biggest-selling individual brands, Nestl still commands more market share overall.

But Coke is likely to have ambitious goals when it comes to water.

"Coke is No. 1 in carbonated soft drinks globally," Sicher said. "Given the Coke system's brand and acquisition activity recently, it seems to want that same spot in the water business."

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