Competitive Industry: Bottled Water

In recent years, people have been flocking to the stores to pay top dollar for something they get virtually free out of their taps.  The bottle water industry has grown to a substantial market where it is estimated that Americans consumed over 7.5 billion gallons of bottled water during 2005, or 26.1 gallons per person, second in consumption to only soft drinks (Woo 2006).  Companies such as Pepsi and Coke have brought their own brands to the marketplace, while other companies offer water which has been infused by oxygen, colored, or enhanced with nutrients or herbs (Woo 2006).

It is estimated that world sales for bottled water is $22b US, with the annual market growth between 3% in Africa and Western Europe, to 15% in Asia and the Pacific.  Thousands of employees work for several hundred different companies, making this a highly competitive market (Ferrier 2001, p12-13).  Although the competition to get their product in the hands of the consumer are difficult, companies profit margins are not affected, with profits estimated to be between 25-30% (Ferrier 2001, p.13).

The demand for bottle water can be broken up into two segments.  As urbanization occurs, and people have easier access to markets and grocery

stores, the consumption of bottled water increases. These people believe that they are receiving a higher quality product than what is available in their tabs (Ferrier 2001, p.18).  This can constitute the trendy consumer who consumption is based on many factors such as price, disposable income and alternative solutions.  The second group of consumers is based on the necessity of having portable, clean water that is not available through their infrastructure.  In China for example, two-thirds of the population suffer from water shortages, while sixty percent of urban waterways are polluted (Yangzi Delta Region 2003).

What has made bottled water popular has more to do with marketing than with actual quantifiable health reasons.  Many people believe that bottled water contains less chemicals then tap water or is better regulated, however this is not true.  While many companies advertise their water as either spring or mineral water, coming from an underground source, over 25 percent of all bottled water come from a tap and are further filtered.  To add to their appeal, and help foster the belief that the water is healthier, most bottles display images of natural and clean environments (Wells 2000). Read about Doughnut Industry

In a blind taste test, many people cannot identify the difference between tap and bottled water.  Although products such as oxygen infused water such as OxEnergy and Flo2 make claims that an athlete will perform better with the extra oxygen, specialists disagree.  These companies have cited NHL hockey teams who have accredited their ability to win games to the product.  A researcher at McMaster University states that the amount of water they would need to consume for a player to receive enough oxygen to make a difference would be a few hundred liters during a game.  He believe that the nature of athletes is to be gullible, and that stating the product will make them play better will have a placebo effect and they will naturally increase their performance (Wells 2000).

Despite the large amount of manufacturers in the market, the pricing for water remains high, however the pricing difference between products hardly exists.  More importantly, consumers do not seem to be interested saving money on bottle water by purchasing larger bottles; being willing to pay the higher price for small bottles which are more convenient (Jordan 2002, p.1).

Although price point is important, it seems that people are really just paying for convenience.  The argument for consumers to purchase expensive water is for health concerns; however, this statement becomes less likely when purchasing trends is examined.  If health was the true concern for consumers, most would be purchasing larger bottle packages where they cost per liter is cheaper.  Since consumers are still driven to purchase smaller, more expensive bottles the reality is that convenience is the main selling point (Jordan 2002, p.2).  With these consumer buying habits things such as necessity, price, and quality become less important, while other thing such as packaging, marketing, and availability become the determining factor.

Maybe one of the most interest facts about bottled water is the willingness of the consumer to pay the premium where a cheaper substitute product, mainly tap water, is easily accessible.  The inelasticity of bottled water is not expected for the beverage industry which is typically a highly elastic industry.  The cost for tap water is typically 50 cents per 1000 liters, where people in stores will pay around $1 for a half liter bottle (Wells 2000).

Although people are inclined to purchase water in the bottle over their tap, the competition between the various companies is fierce.  Unlike other industries where another company can make a better quality or cheaper product taking away market share, in the water industry no company has any technological advantage over the other.  This means that the most important factor is selling your product is branding (Karolefski 2002).

Robert Lynn, VP of sales and marketing for Global Beverage Systems believes that a price war will happen for water; however this will not occur until growth stops (Karolefski 2002).  Although he may be correct, this did not stop Pepsi to start the war with their product Aquafina in 2005 when they decided to drop their price of 24-pack bottles to as low as $3.99 in what they called “Double-Down.”  One of the largest concerns for suppliers was whether to preserve their high price, or to cut down and grab market share (Maras 2006).

Although this strategy may be successful in the short run, other companies such as Coke and Nestle will follow suit, which will hurt all profits for the industry. More importantly, by lowering the price they risk stealing their own customers away from more profitable products such as soft drinks (Maras 2006).

Price change may be considered a lose-lose situation for any single company.  Price yourself too high and you lose market share of water; price too low and you lose market share of your other products.  As an industry however, customer reaction to price change is similar to gasoline.  The increase in pricing will not affect the consumers desire to purchase product, but they will find the best pricing among the different suppliers, making price variation minimal.

Although people might think that water is just water, companies rely on a variety of brands to market themselves better than their competitor.  Companies can offer spring or mineral water, carbonated water, glacier water, or distilled water (Wells 2000).

With major corporations owning a majority of the market share, newer and smaller companies need to be more innovative to get their products into the hands of the consumer.  Vitamin Water came into existence when founder J. Darius Bikoff washed down a vitamin C tablet with his water and found quite an enjoyable taste.  With combining enhanced water, to a uniquely designed label, and a grass-root distribution strategy, he was able to turn his small company into $350 million in sales (Bounds 2006, pR1)

Now companies of all types are popping out all over the place trying to capture the enhanced water market. Some are adding herbs or fiber into the product, while others are trying to market their own brand of vitamin water (Bounds 2006, pR1). Other companies try to sell water that will give you more energy, give you balance, or help you lose weight (Woo 2006).  The idea of water is no longer to make it a necessity, but to make it trendy with fancy colors, labels, and bottle design to help rationalize the $5 per bottle cost of the product (Woo 2006).

    Taste and quality do not seem to be the factors in this market, since it is all about what is on the outside of the bottle, not the inside (Woo 2006).  Although in many parts of the world, such as Africa or Asia bottled water in a necessity due to a lack of safe municipal water source, in North America, the impulse to purchase bottled water is driven by trend and convenience, not by quality or health concern.  Despite the huge competition among companies, branding is more important than price.  Although companies are inclined to lower their price to capture market share, they run the risk that they will lose out on their more profitable products as consumers turn to water.  With water available at home for virtually free, it is amazing the stability and growth of this sector.

Bibliography

Bottled Water – Market Brief Yangzi Delta Region, March 2003. Agriculture and Agri-Food Canada. http://ats.agr.ca/asia/3787_e.htm (accessed 13 December 2006)

Bounds, Gwendolyn, 2006, “Move Over Coke: How A Small Beverage Maker Managed to Win Shelf Space in One of the Most Brutally Competitive Industries,” The Wall Street Journal, 30 January 2005 p. R1

Ferrier, Catharine, 2001, “Bottled Water: Understanding A Social Phenomenon.” World Wildlife Federation http://assets.panda.org/downloads/bottled_water.pdf (accessed 13 December 2006)

Jordan, Jeffery L. 2002, “Size Counts: The Economic Value of Bottled Water,” Choice: Magazine for Food, Farm and Resource Issues. Fall 2002 http://www.findarticles.com/p/articles/mi_m0HIC/is_4_17/ai_100755079/pg_1 (Accessed 13 December 2006)

Karolefski, John. 2002, “Bottle Water Floods The Market” Brandchannel.com 15 April 2002. http://www.brandchannel.com/features_effect.asp?pf_id=88#more (Accessed 13 December 2006)

Maras, Elliot, 2005, “Bottle Water Price War Expected,” AMonline.com, 25 June 2005. http://www.amonline.com/article/article.jsp?id=14142&siteSection=1 (Accessed 13 December 2006)

Wells, Jenny 2000, “Is Bottle Water Safer Than Tap Water” CBC News.  Broadcasted 8 February 2000. http://www.cbc.ca/consumers/market/files/food/bottledwater/index.html (accessed 13 December 2006)

Woo, Michelle, 2006, “H2Oh so chic,” Arizona Republic, 11 December 2006 http://www.azcentral.com/arizonarepublic/arizonaliving/articles/1211designerwater1211.html  (accessed 13 December 2006)