Nestle's Water Unit Springs a Leak as Activists Block New Wells

July 26 (Bloomberg) -- Nestle SA signed an agreement in October 2003 to bottle water from the slopes of Mount Shasta, a 14,162-foot peak in northern California. Almost three years later, the company hasn't drawn a single drop.

The world's biggest water bottler has been stymied by a handful of residents in nearby McCloud, a town of 1,343 people. A group called Concerned McCloud Citizens has blocked the deal until a state-mandated study of the project's effect on underground water basins is completed. Nestle says there were no plans to extract water until an environmental report was filed.

Nestle's bottled-water unit faces similar opposition in Michigan, Florida and Maine as it expands to meet demand for healthier alternatives to sugary sodas. The battles challenge Vevey, Switzerland-based Nestle's dominance over PepsiCo Inc. and Coca-Cola Co. in the $20 billion U.S. water market, according to beverage consultant Zenith International.

``The moment you inject a commercial aspect into something people consider to be nature's gift, then there are going to be challenges,'' says Jason Holway, an analyst at Bath, England- based Zenith. ``If you look at water resources as a whole, they are under pressure.''

The boom in spring water consumption over the past decade has forced Nestle, the world's largest food producer, to search out new sources across the U.S. In response, environmentalists are demanding that Nestle Waters, the Swiss company's bottled- water unit, pay more for access to water supplies and guarantee that the public resources will be protected from overuse.

Bottled water sales are growing 10 percent annually, according to Zenith.

`Recipe for Disaster'

``Think of an aquifer as a giant milkshake glass and think of each well as a straw in the glass,'' says Robert Glennon, a professor of law and public policy at the University of Arizona who studies water resources. ``What most states permit is an unlimited number of straws, and that's a recipe for disaster.''

Nestle Waters' sales rose by 9.3 percent to 8.79 billion Swiss francs ($7.1 billion) last year, accounting for almost 10 percent of the parent company's global revenue. North America is the unit's biggest market, accounting for 48 percent of sales.

``Water has a strong emotional element to it, and companies have to understand that,'' says Philippe Rohner, who helps manage a $2.9 billion water fund, including Nestle shares, at Pictet Asset Management in Geneva. ``They have to understand the local regulatory environment and the local politics. Those that cannot manage the complexity will not be successful.''

Bottled-Water Boom

Driven in part by the bottled-water boom, Nestle shares have risen 18 percent in the past 12 months, compared with a 16 percent gain for PepsiCo and a 0.8 percent gain for Coca-Cola.

Nestle says it manages water resources wisely, creates jobs in rural communities and helps the environment by donating to nature groups.

In McCloud, Nestle plans to build a $60 million bottling plant on the site of a shuttered lumber mill, employing as many as 240 people. The company agreed to pay as much as $450,000 a year to the McCloud Community Services District for the right to draw 521 million gallons of water annually for 50 years, says Michael Stacher, general manager for the district.

Coca-Cola and PepsiCo, which together control 35.3 percent of U.S. single-serving bottled water sales, have faced less criticism than Nestle because their top brands, Dasani and Aquafina, use municipal water that is purified and filtered before bottling.

Spring Water Deal

Purchase, New York-based PepsiCo doesn't sell spring water, says spokeswoman Nicole Bradley. Coca-Cola last year bought out Groupe Danone's 49 percent stake in their Dannon spring water venture in the U.S. Ray Crockett, a spokesman for Atlanta-based Coca-Cola, said he isn't aware of any legal challenges to the company's spring water business.

Nestle, whose seven U.S. spring water brands include Arrowhead and Ice Mountain, controls 42.7 percent of the single- serve market, according to Beverage Digest of Bedford Hills, New York. North American sales rose 17 percent last year, excluding acquisitions and currency fluctuations.

Sustaining that expansion may be more difficult if a group of Maine residents succeeds in restricting access to spring water in the state, the source of Poland Spring water, Nestle's No. 1 U.S. brand. Sales of Poland Spring totaled at least 500 million Swiss francs in 2004.

After a proposal to tax spring water production failed due to a lack of signatures, a group known as Water Dividend Trust is proposing a bill that would tighten rules on the commercial use of Maine's ground water. The measure would let local communities hold referendums on new spring water extractions.

The trust is trying to gather the 55,520 signatures necessary to put the measure on the ballot next year.

`A Water Plantation'

``We don't want to be a water plantation,'' says Jim Wilfong, a former Maine State representative who's heading the campaign. ``It may be sustainable for what Nestle is doing but not the community at large.''

The tax threat led Nestle Waters to say plans for another bottling plant in Kingfield, a town of 1,100, could be scrapped.

The company has attracted defenders who say the bottled water unit has reached out to the communities it operates in.

``Nestle has hired local people who have gone into the local community and have really bent over backward to talk to the people of Kingfield,'' says Tom Saviello, an independent state representative for the region. ``I have no complaint.''

The Poland Spring brand drew about 600 million gallons of ground water last year in Maine, equivalent to 0.03 percent of the water that flows into underground basins in Maine each year, says Robert Marvinney, a geologist at the Maine Geological Survey.

Managing Resources

Water bottled by Nestle represents 0.0009 percent of freshwater withdrawn worldwide, Chief Executive Officer Peter Brabeck said in a July 16 interview with German newspaper Die Welt am Sonntag. Bottled water is not the real problem, Brabeck argued, saying water wasted in industrial farming is more of a threat to resources.

Local comparisons matter more than global figures, Wilfong says. ``You have to look at these water resources on an aquifer- by-aquifer basis,'' he says. ``I could agree with them if Maine were all one solid aquifer but they are not all linked.''

Carlo Donati, the head of Paris-based Nestle Waters, says the company relies on independent geological assessments at its U.S. locations to make sure water resources aren't overused.

``We have to manage water in a responsible way, which we do,'' Donati says. ``It would be silly to extract more water than you can recharge because one day it will be finished.''

In Florida, Democratic state legislator Franklin Sands plans to propose a fee on spring water extracted in the state, where Nestle produces its Zephyrhills brand. Sands says the proceeds would be used to protect lakes and springs around Lake Okeechobee in central Florida.

Michigan Agreement

Campaigners have forced Nestle to reduce the volume of spring water it bottles in Michigan following a legal challenge by a group called Michigan Citizens for Water Conservation.

Nestle in January agreed to reduce the amount of water it pumps from its main aquifers by almost 13 percent to 218 gallons a minute. Aspects of the case are still under appeal by both sides.

``What we've been trying to do is to define water as essentially public and impose stewardship limitations on its use and sale,'' says Jim Olson, a Traverse City, Michigan-based lawyer who represents the citizens group.

Still, Nestle is being welcomed by many rural towns with troubled economies, such as McCloud, which lost its biggest employer when the local lumber mill shut down in 2002.

Nestle's payments for spring water would add about one-third to the town's budget, says Stacher. The water pumped by Nestle would be slightly less than that used by McCloud in 2004, he says.

``For the amount of water we have available, the amount they are taking is insignificant,'' Stacher says. ``The amount they are paying us is just the opposite.''

Environmental Study

Nestle's project was suspended last August after Concerned McCloud Citizens noted that the legally required environmental impact report hadn't been completed. A draft of the study was submitted July 14. A final report, which will include an analysis of canceling the plant, will be released later this year.

In the meantime, Donati says Nestle isn't dependent on springs to supply the growing demand for bottled water. The company is increasing sales of its Aquarel and Pure Life purified water brands, which are sold in 35 countries and account for 12 percent of bottled-water revenue.

Nestle may shun communities that impose too many charges on spring water plants, Donati says.

``We give back to the state and to the community,'' he says. ``Frankly, if the tax is penalizing in a given state, we can always go to the next one which doesn't apply certain taxes.''