For Coke, water is the real thing

Ben Laurance, May 27, 2007, The Sunday Times - Coca-Cola is desperate to diversify in Europe. It already owns Malvern Water and is now looking to buy Highland Spring, writes Ben Laurance

FOR Coca-Cola, it was a bruising and humiliating experience, a fiasco that turned into nightmare. Three years ago, when the company launched its Dasani bottled water for the delectation of the great British public, few predicted that things could go so spectacularly wrong.

But bottled water is not a market that Coke can ignore. In America, the company last week signed up for a $4.2billion (Pounds 2.1billion) takeover of Glaceau, a bottled-water giant. And if it gets its way, it will soon clinch control of one of the most successful brands in Britain.

These deals will help it forget the humiliation of the Dasani debacle. Dasani was launched with millions of pounds of marketing behind it. The water was packaged in a cool blue bottle. But within days of its launch, the press was gleefully pointing out that Dasani was not exactly what many consumers expected in a bottled water.

It came not from a spring on a remote Scottish hillside or some idyllic location in the Alps. It was, in fact, tap water from Sidcup in Kent, which was then filtered before being given a flavour with the addition of a few mineral traces.

A half litre of mains water costing 0.03p was being served up in a bottle and sold for 95p.

Coca-Cola protested that Dasani was going through a "highly sophisticated purification process", which somehow justified the mark-up of more than 300,000%.

Consumers were less than impressed. And within a month, Dasani suffered its second blow: tests showed that some samples contained more than twice the legal limit of bromate, a chemical that can cause cancer.

Stocks were withdrawn. A planned launch of the bottled water in continental Europe was shelved. Coca-Cola offered an explanation in language that would have tickled George Orwell: "The timing is no longer considered optimal."

Dasani was a disaster, but the very fact that Coca-Cola was so eager to move into the British bottled-water market gave a crucial signal.

It marked an acknowledgment of Coke's need to diversify away from the sweet brown drink that has been its mainstay since it was first concocted by pharmacist John Pemberton in Atlanta, Georgia, 121 years ago.

Last week, proof of Coke's determination to cut its dependence on cola came with the deal to buy Glaceau, which produces a range of water tweaked with electrolytes and flavourings.

For Coca-Cola, the deal represents little more than a catching-up exercise. In American fizzy drinks, Coke is dominant, with 43% of the market. But in non-carbonated drinks - which include bottled water, sports drinks and juices - its arch-rival PepsiCo is well ahead with 50% of the market, more than twice Coke's share.

In Britain, Coca-Cola has owned Malvern Water since 1999. And this year the company is likely to make a new push to strengthen its position in water.

Industry insiders confidently predict that this summer will see the British launch of bottled water from Chaudfontaine, Coca-Cola's operation in Belgium, which the company bought in 2003.

And as The Sunday Times discloses today, the American giant is hoping to clinch a takeover of Highland Spring, based in Perthshire.

For Coke, water is now the real thing. It is a market that no serious soft drinks company can afford to ignore.

Highland Spring is a brand that is ostentatiously Scottish: the labels on its bottles sport a tartan sash. It feels as if it has been around for ever.

In fact, the company was set up only in 1979. And it is owned by the Al-Tajir family from Dubai - through a company domiciled in the very unScottish Liechtenstein.

In the early 1990s the family tried to sell Highland Spring to Perrier. At that stage it had never made a profit. But under Joe Beeston, its chief executive, the company has invested and expanded. Six years ago Highland Spring bought the neighbouring Gleneagles brand.

In 2005, the last year for which accounts have been filed, Highland Spring's sales were Pounds 51m. Profits were Pounds 3.2m.

Buying Highland Spring promises to put Coca-Cola into the

big league in the British bottled- water market.

Estimates of market shares vary. But the food and drinks consultancy Zenith reckons that Highland Spring accounts for about 10% of sales by volume, putting it on a par with Volvic and behind only Evian, which is the market leader in Britain.

Both Volvic and Evian are controlled by Danone of France.

And for Coke, it is essential that the company reduces its dependence on cola. Put bluntly, cola is looking increasingly like a mature market.

Cola in all its forms is still Britain's biggest-selling soft drink and Coke is by far the strongest player. But over the five years from 2001 to 2006, the volume of take-home cola - of all

brands - sold in Britain rose by a meagre 7%. Over the same period, the volume of water sold increased by 74%.

Before the end of the decade, take-home volumes of water

are likely to outstrip colas as the nation becomes more health conscious.

Richard Laming of the British Soft Drinks Association, which represents UK producers, said: "There is definitely a sustained shift towards drinks that don't have added sugar - fruit juices, bottled water and fruit-flavoured water. Also, people seem to be shifting away from things with bubbles."

But figures last week from Britvic suggested that it, at least, has managed to halt the decline in sales of carbonates. As well as controlling brands such as Robinsons, 7Up, Tango and RWhites lemonade, the company distributes Pepsi in Britain.

Britvic's sales of fizzy drinks in the half year to April grew by 9.6% - a better result than it had for still drinks, which showed an 8.5% increase.

The carbonates category "appears to show a rebound", said Paul Moody, Britvic's chief executive. Nevertheless, Britvic, too, has joined the move into bottled waters. It bought Pennine Spring in 2004. Fruit Shoot H2O is Britvic's water brand aimed at children.

A year ago, AG Barr - best known for IrnBru and now in talks to buy Vimto maker Nichols - paid Pounds 15m for Strathmore mineral water.

By coincidence, gaining control of Highland Spring would also mean that Coca Cola would own two water brands whose official status has been downgraded within the past few months.

To be called a "natural mineral water", the fluid that goes into the bottle must be exactly as it comes out of the ground. Until recently, that was true of both Highland Spring and Malvern Water. But earlier this year, both were downgraded to the less exclusive "spring water".

In the case of Malvern Water, Coca-Cola had to start treating the water before it was bottled - this was because of erratic rainfall, which meant that some impurities were getting into the water.

Highland Spring lost its

"natural mineral" classification because it started taking water from a broader catchment area in the Ochil Hills: it no longer used a single spring.

Last summer's record-breaking temperatures brought a huge increase in sales of bottle water. The Soft Drinks Association estimates that for every one degree Celsius that temperatures rise above 14C, sales of water increase by 5.2%.

Global warming or not, water sales are heading up. Coke is determined to be in on the act. .