29 Aug 2013 US: PepsiCo to target premium water category amid CSD woes
Although bottled water consumption has been growing strongly as a result of shifting consumer preferences, it is not as profitable a business for beverage companies due to the lack of differentiating factors. Premium water on the other hand allows these companies to earn better margins by adopting a differentiated targeting strategy that, if successful, will help improve operating margins of PepsiCo’s bottled water business.
The consumption of fizzy drinks has been declining in developed markets over the past few years. The situation in the US is a key example of this trend – per capita consumption of CSDs peaked around 1998 at about 204 litres a year. Today, the figure stands at around 166 litres a year.
A major reason behind this has been growing consumer awareness about negative health impacts of CSDs. A research paper recently published in the American Journal of Public Health concluded: “Soft drink consumption is significantly linked to overweight, obesity, and diabetes prevalence worldwide.”
This certainly is bad news for major cola companies Coca-Cola and PepsiCo, both of whom have been hit hard by this trend. PepsiCo posted a 1% decline in organic net revenue in its Americas beverage operations for the second quarter as lower volumes more than offset higher net pricing.
The soda slump has resulted in a surge in bottled water sales in the US, which is evident from the fact that the amount of water consumed by an individual on average has grew by 40% to about 58 gallons per year since 1998. This has primarily been led by strong growth in the consumption of bottled water, which has almost doubled to 219 litres per year.
Analysts expect the trend to continue in the long run as increasing health consciousness and convenience will continue to drive consumers towards bottled water. However, the issue with bottled water is the lack of substantial differentiating factors, which makes it a commoditised business with high price elasticity of demand. It is therefore not a very profitable business for beverage companies who continue to rely on CSD sales for a bulk of their profits.
However, companies can earn more by adopting a differentiated targeting strategy by building brand equity through marketing investments. Differentiated targeting implies offering several brands/products to meet the unique needs of different consumer segments. Coca-Cola’s Smartwater , Nestle’s Resource , and other popular brands such as Fiji and Evian are betting on the same strategy.
According to Beverage Digest, Smartwater volumes have been up 16% y-o-y during the first half of this year. The overall premium water category has also been doing pretty well, as revenues grew by 11% last year, which reflects strong demand for these products.