Bottled Water Confronts Challenges as Growth and Sales Decline
By Rose Anthony
The bottled water category is at a crossroads.
Until the mid-2000s, the U.S. bottled water market seemed unstoppable. It was second only in size to the carbonated soft drink category, and growth continued. In 2008, however, the bottled water market suffered a setback, and a larger decline in volume occurred the following year.
The economic recession was the primary reason for the end of bottled water’s growth streak, which was impressive. The category posted double-digit percentage growth rates in two years and advanced at rates close to that level in several others, as reported in Bottled Water in the U.S, an annually published analysis of the market by Beverage Marketing Corporation. New York City-based company is the leading research, consulting and financial services firm dedicated to the global beverage industry.
But bottled water volume declined by 1.0% in 2008 and by 2.5% in 2009. Furthermore, producers’ revenues declined in both 2008 and 2009 as well. Bottled water wholesale dollar sales first exceeded $6 billion in 2000. By 2007, they topped $11.5 billion. Category sales declined to $11.2 billion the following year and to less than $10.6 billion in 2009.
The good news for bottled water is that the category is dominated by giant beverage companies whose collective marketing expertise will be valuable to going forward.
In 2009, the top three bottled water companies in the United States — Nestlé Waters North America (NWNA), PepsiCo and Coca-Cola — accounted for 57.5% of total wholesale dollar sales. NWNA remained the largest bottled water company in the country, with $3.8 billion in sales. NWNA, the purveyor of major regional brands such as Poland Spring, Arrowhead, Deer Park and Zephyrhills, claimed 35.4% of total bottled water sales in 2009. The company’s Pure Life label was one of the few to buck the downward tendency afflicting the market. The brand's wholesale dollars grew by 18% in 2009. With just one brand — Aquafina — Pepsi-Cola accounted for 11.1% of the market in 2009. Coca-Cola’s Dasani brand rang up $1.2 billion in sales in 2009. Coke also manages or owns several current and former Danone brands in the United States.
Despite the nettlesome challenges confronting these companies and the category, some developments indicate a solid market for bottled water. Consumers increased their annual consumption by more than 11 gallons from 16.2 gallons per person in 1999 to 27.6 gallons in 2009. As usual, domestic non-sparkling water accounted for almost all per capita bottled water consumption. Sparkling water and imports each represented less than one gallon per person. In the key PET portion, average intake moved from less than 5 gallons in 1999 to almost 17 gallons 10 years later.
Retail bulk volume growth has slowed as more and more consumers selected convenient PET multipacks in large format retail channels instead of larger (1 to 2.5 gallon) sizes. Its share eroded from nearly one-quarter of the category volume at the beginning of the century to less than 12% by 2009, largely as a result of competition from PET. Direct delivery also confronted intramural competition from handy, portable PET bottles. The segment, which comprised the largest of them all as recently as the mid-1990s, accounted for 14% of total volume by the end of the 2000s. U.S. home- and office-delivery (HOD) volume slipped from 1.3 billion gallons in 2008 to less than 1.2 billion gallons in 2009.
The relatively small, essentially regional vending segment involving refillable jug containers achieved growth late in the decade after several years of contraction. Its low cost during economic hard times undoubtedly explains vending’s rebound.
The two segments outside the domestic non-sparkling category both saw declines in 2009. The imported water segment, the smallest of them all, is prone to fluctuations. In the 2000s, it registered double-digit percentage growth in some years, and equally sizeable contractions in others. After one of those up years in 2007, imported water’s volume fell sharply in 2008 and then plummeted precipitously in 2009. Sparkling dipped far more modestly.
The bottom line is that challenges remain, but the category is hardly drying up.
Market Watch
Diamond Foods, Henkel Awarded for Innovation and Creativity
By Rose Anthony
Diamond Food and Henkel are the recipients of the 2010 CPG Awards for Innovation and Creativity sponsored by the Grocery Manufacturers Association (GMA), in conjunction with its Associate Member Council (AMC).
Now in its eighth year, the award is given to companies that have demonstrated uncommon creativity, innovation, and have made a significant contribution to the industry knowledge base.
“The CPG Award not only recognizes innovation and creativity, but it also highlights emerging industry trends,” said GMA President and CEO Pamela Bailey. “Diamond Foods and Henkel are exciting examples of companies that have focused on value and innovation to connect with consumers and positively impact the company’s bottom line.”
Diamond Foods took the Division A award for its Project Underdog strategy. The strategy challenged the Diamond team to find new ways to engage the consumer, respond to customer needs and work smarter. The goal of this new business approach was to define Emerald’s role in keeping the category vibrant and relevant. The strategy worked to show the industry that brand variety supported overall category health.
By thinking big, but acting small, the strategy embraced bold ideas while focusing resources and yielded tangible results for trading partners. Retailers who increased their Emerald assortment grew their category almost twice as fast as retailers that did not. At the same time, Emerald itself achieved clear secondary leadership in the category, increasing total distribution by 34%, posting 46% sales growth and increasing category share by 200 basis points.
“Our experience with the strategy has energized and strengthened our commitment to support category health with innovation, invest every dollar where it counts and continually over-deliver for our consumers and our customers,” said Michael Mendes, chairman, president and CEO, Diamond Foods. “We believe our culture and approach to innovation will continue to yield strong financial performance.”
Henkel received the honor in Division B for revolutionizing the laundry industry with the launch of Purex Complete 3-in-1 Laundry Sheets. The project, which spent more than five years in development, brought game changing innovation to a traditionally sedate category.
Unlike many past innovations, Purex Complete 3-in-1 Laundry Sheets won nearly 80% of its sales volume from other brands, and its premium price per load translated into tens of millions of new sales dollars, thus expanding the category. This success drove Henkel to lead laundry detergent category growth during the launch year.
“To sustain market share in a challenging economy, this product launch makes it clear that CPG companies have a compelling alternative to simply offering escalating discounts – innovation provides consumers with better options,” said Greg Tipsord, senior vice president and general manager, Henkel Consumer Goods. “Even value brands can offer greater value to dollar-conscious shoppers. It's an important lesson that Henkel is fortunate to have learned, and one that the industry at-large can benefit from.”
“The award sub-committee was impressed with the overall quality and quantity of the submissions we received, which demonstrates that innovation and creativity are thriving in the CPG industry,” said AMC CPG Award Subcommittee Chairman Phillip Friedman of QAD Inc. “The resourcefulness demonstrated by Diamond and Henkel keeps our industry competitive and allows our industry to grow in a way that is cost-effective for the companies and compelling to the consumer.”
The AMC presented Diamond and Henkel with the awards today at the GMA Executive Conference in Colorado Springs, Colorado.
Promoting Organic Foods
What organic foods need is a stronger stand in the dietary guidelines, according to the Organic Trade Association (OTA). The trade group has called on the U.S. Departments of Agriculture (USDA) and Health & Human Services (HHS) to encourage those seeking to minimize their exposure to toxic chemicals to look for the USDA Organic label wherever they shop by revising the draft Dietary Guidelines for Americans 2010.
At a hearing conducted by the Advisory Committee preparing the latest version of the guidelines, OTA’s Executive Director and CEO Christine Bushway pointed out serious concerns with statements in Resource 3 entitled Conventional and Organically Produced Foods. For one, although the Dietary Guidelines statement on organic foods references only limited research on nutrient density, it draws the broad conclusion that “our current understanding of conventional and organically produced foods indicate that their nutritional value and contributions to human health are similar. These conclusions are neither grounded in current science nor relevant to the mandate of the Dietary Guidelines,” she said.
Energy Drinks Need a Boost
Energy drinks/shots makers are having a tough time attracting new customers, says researcher Mintel, despite a 136% increase in sales from 2005-2009. In fact, three of four (74%) of those surveyed say they don’t consume energy drinks/shots and seven of ten (69%) of those non-users are not interested in trying them.
Mintel found that Americans consume 3.05 liters of energy drinks per capita each year, but energy drink market penetration remained flat at 15% of all adults aged 18+ during 2007-2009. Energy drinks/shots non-users cite high prices (48%), too much caffeine (43%) and a general feeling that energy drinks/shots just aren’t good for you (43%) as reasons why they have not consumed any in the past three months.
AUGUST 2010
What’s the Secret to Innovation? Keep the Boss Out of It!
By Lynne Cooke
Billions of dollars are spent on developing and launching new consumer packaged goods (CPG) products each year. Yet year after year most new products fail. So why do the best CPG companies see more than six times the new product revenue compared to the rest?
One secret appears to be how much senior management gets involved in the creative process, according to a first-of-its-kind study unveiled by The Nielsen Company at its recent Consumer 360 Conference.
Nielsen’s research of the innovation processes at 30 large CPG companies operating in the U.S. reveals that companies with less senior management involvement in the new product development process generate a whopping 80% more new product revenue than those with heavy senior management involvement. Companies that employ this and other best innovation practices derive on average 650% more revenue from new products compared to companies that do not.
“New product innovation is a top priority of every major company CEO, yet success varies so widely that it’s absolutely critical to understand what drives successful innovation and what undermines it,” said Tom Agan, senior vice president and managing director for Nielsen. “Once you understand it, then you need to ask yourselves, are we living it?”
Nothing But Blue Skies?
Nielsen’s research shows that simply being physically near corporate headquarters can stifle new idea generation. In fact, it turns out that having no Blue Sky innovation team at all is better than having a team on-site at corporate headquarters.
What is the best place for your breakthrough innovators? Far, far away. According to Nielsen, companies with an off-site Blue Sky innovation team report 5.7% of revenues coming from new products, compared to 4.8% from companies with no Blue Sky team at all. Companies with Blue Sky teams on site report just 2.7% of revenues coming from new products.
“One of the keys to successful new product innovation is to manage new ideas lightly,” said Agan. “While we don’t dispute senior management’s strengths and good intentions, they are often too quick to get involved in the creative process, especially when things are not going well, and their mere presence can stifle free-thinking and boundary-less ideas – which can doom the new product development process to failure.”
New Product Development Mantra: Consistently and Precisely
Senior management needs to play a different, more important role in new product development. The research shows that another important key to success is for senior management to precisely manage the new product development process, not the ideas themselves. According to Nielsen, CPG companies with rigid stage gates – decision points in the process where a new product idea must pass certain criteria to proceed forward – average 130% more new product revenue than companies with loose processes.
“New product development success comes down to two important principles – managing ideas lightly while managing the process precisely,” said Agan. Nielsen’s evaluation shows that CPG companies with the most successful new product innovation records tend to have the following:
- Two to three stage gates that are strictly followed across the organization. The first stage gate is typically designed to identify ideas that will then be developed into a concept and prototype, while the last stage gate is usually designed to determine whether a product should be committed to production and market.
- A focus on growing brands, not ones acquired or designated by senior management.
- A development focus two to three years out.
- A formal scorecard to provide structure to organizational learning.
- A standardized and required post-mortem on all new product development efforts
- A knowledge management system to retain learnings from previous product launches.
In total, the study identifies about two dozen best practices that drive better-than-average incremental revenue from new products.
“From the outside, it can often feel like innovation simply ‘happens,’ arriving like a bolt of lightning out of the sky,” said Agan. “The truth is that companies with successful innovation track records go to great lengths to create an ideal creative environment and the right behaviors, supporting policies and procedures. When they execute well, the best ideas rise to the surface and into consumers’ homes.”
