Bottled water - Clear Growth in UK

Consumers are taking heed of the health advice to drink eight glasses of water a day and are willing to pay, making the bottled water market a fast-growing sector worth £1.6bn last year, according to Mintel. Growth of 8% for value and volume sales is expected this year alone. Between 2000 and 2004, sales of still and sparkling bottled water increased a massive 46% to almost 2bn litres. Manufacturers are now trying to attract more consumers, and especially children, into the market by introducing flavoured and functional variants, such as those with added minerals.

Water may be one of the least flavoursome soft drinks - unless, of course, it has had flavours added - but it comes in many variants, be it natural mineral, spring or table water (encompassing blends and filtered water) as well as still or carbonated.

Of all the beverages within the soft drinks sector, bottled water is benefiting most from the nation's renewed obsession with health and diet and has become something of a fashion statement, with celebrities and models making a point of being seen clutching their Evian or similar acceptable brand. Indeed, branding has become a crucial part of this market.

In the UK the preference is firmly for still water, which is expected to account for 85% of volume sales by the end of this year. Developments in this sector have focused on adding flavours to encourage consumption among those who find plain water boring. This encroaches on the carbonates market, as well as cordials and squash products aimed at children. It is not just flavour that is being added, as some varieties are adding minerals and vitamins to further establish their health benefits.

Although bottled water is rising in popularity, consumption in the UK is much lower than in other European countries. While about half of the UK population buys it, in France, Germany and Italy penetration is closer to 90%, suggesting that there is still considerable room for growth here.

As with all soft drinks, a key market driver is the weather - a long, hot summer, such as that in 2003, leads to increased demand in the sector.

Danone is the leading supplier in the UK, owning Evian and Volvic, the two biggest-selling brands. Badoit and flavoured Shape waters are also in its drinks portfolio.

Health positioning

Evian, a mineral water, has a relatively young target age group, aiming at 15- to 34-year-olds, in particular women. Much of the brand's promotional activity follows a health and wellbeing theme, including post-New Year detox campaigns. This year is has also run a 'path to purity' loyalty scheme. In contrast, its Volvic brand is aimed at a wider age range and its ads and promotion focus on the volcanic source of the water.

Danone extended Volvic into flavoured water in 2002 with the launch of Touch of Fruit, and in March this year introduced Volvic Splash, a flavoured water aimed at children. Danone also bought the rights to use Nickelodeon's SpongeBob SquarePants cartoon character on the Volvic Splash packaging.

However, the company has ditched the Danone Activ brand, as consumers appeared to be unwilling to pay a premium for the calcium-enriched product.

The second-biggest supplier in the UK is Highland Spring. Formed in 1979, it is particularly strong in the carbonated sector. The brand achieved organic status in 2001, as the land around the underground source of the water is both pesticide- and pollution-free.

It was the first company to see the potential of the children's market and launched its Looney Tunes Water brand in 2001. Its licensing deal with Warner Brothers means cartoon characters such as Bugs Bunny and Tweety feature on the 330ml sports-cap bottles.

Highland Spring redesigned its logo in 2004 and has been emphasising the Scottish heritage of the water. This included investing £10m in the brand and running ads on TV for the first time.

The investment appears to be paying dividends. 'After steady growth in 2004, we started 2005 with Highland Spring outperforming the market as the fastest-growing bottled water in the grocery sector,' says the company's marketing director, Sally Stanley. 'The top three brands are increasing their dominance of the market, now accounting for almost a quarter of sales, proving the importance people place on well-known, quality brands.'

Other big names operating in the market include Britvic, which owns the Pennine Spring brand since its purchase of Ben Shaw's water division; Matthew Clark, with its Strathmore water; and Nestle, whose portfolio includes Buxton, Vittel, Perrier and San Pellegrino.

Quality control

The biggest story to have rocked the bottled water sector in recent years was Coca-Cola's disastrous attempt to launch Dasani in the UK. A successful brand in the US, its UK launch was damaged by the media reporting that it was simply tap water that had been filtered and had minerals added to it, rather than a natural mineral water. The brand was hastily withdrawn after there was a cancer scare about the chemicals found in the water.

The variable nature of our summer weather aside, the sector looks set to continue to grow, as health remains a key issue for consumers. Indeed, this is one grocery sector that should be bolstered by the government's White Paper on health, published in November 2004.

Mintel forecasts that sales of bottled water will grow by 20% between 2005 and 2010 to just over £2bn. In volume terms, the increase is predicted to be 36% over the period, to 3bn litres.

BOTTLED WATER OFF-TRADE SALES BY VOLUME AND MARKET SHARE Brand 2005 2003 2003-05 ltrs (m) share (%) ltrs (m) share (%) chng (%) 1 Volvic 268 15.6 227 14.9 18.1 2 Evian 232 13.5 190 12.5 22.1 3 Highland Spring 110 6.4 94 6.2 17.0 4 Buxton 69 4.0 52 3.4 32.7 5 Vittel 45 2.6 52 3.4 -13.5 6 Aqua Pura 31 1.8 24 1.6 29.2 Own-label 803 46.7 726 47.7 10.6 Others 162 9.4 157 10.3 3.2 Total 1719 100 1521 100 13.0 Source: Mintel BOTTLED WATER ADSPEND BY MANUFACTURER AND BRAND (£000) Brand 2004 2002 1 Danone 6199 7132 Volvic 3070 2371 Evian 2569 2411 Danone Activ n/a 1679 Volvic Touch of Fruit 560 672 2 Nestle 1534 1829 Buxton 396 876 Vittel 1050 691 Perrier n/a 151 San Pellegrino 84 105 3 Highland Spring 1326 771 Highland Spring 1315 771 Loony Tunes 11 n/a 4 Coca-Cola 645 27 Dasani 639 n/a Malvern 7 27 Hildon 82 323 Ballygowan 71 71 Lakeland Willow 33 n/a Others 184 197 Total 10,074 10,350 Source: Nielsen Media Research/Mintel

ANALYST COMMENT - PAUL TARLING, SENIOR MARKET ANALYST, ZENITH INTERNATIONAL

The bottled water market has matured considerably over the past decade - consumers are more accepting of bottled water, retailers have increased availability and the big soft drinks companies have moved into the category.

Rather than being a sign of impending market saturation, this indicates a solid foundation on which the bottled water industry can build.

Bottled water's share of the soft drinks market, including water for coolers, increased from 8% in 1995 to 15% in 2004. Despite volume sales growth slowing considerably in 2004, it highlighted the strength of the industry that an increase in sales could still be achieved during one of the wettest summers on record.

The strength of the bottled water industry is based on many factors, not least consumers' recognition of the benefits of water to a healthy lifestyle. In many respects it is the model healthy beverage, as it is convenient, refreshing and calorie-free. Add to this the relatively low level of bottled water consumption and the recent entry of the UK's second- and third-biggest soft drinks companies, Britvic Soft Drinks and Princes Soft Drinks, and the market's potential is clear.

Despite the strength of the plain bottled water market, manufacturers are constantly looking to expand their portfolios. Increasingly this means flavoured variants and, to a lesser degree, added functionality. More and more producers are looking to emulate the success of brand variants such as Danone's Volvic Touch of Fruit and Shape water with added calcium and magnesium.

Plain bottled water and flavoured water are expected to be major drivers in the continued growth of the UK soft drinks market in 2005.

Resource: The Brand Republic