Mary Jane Credeur, January 23, 2008, Shanghai Daily - Tap water is fine for restaurateur Alice Waters, who stopped selling bottled stuff last year at her environmentally conscious Chez Panisse restaurant in Berkeley, California. That could be bad news for Nestle SA.
Per-capita sales of the product in the United States will rise 6.3 percent this year and 3.6 percent in 2010, slowing from 8.9 percent last year, according to Euromonitor International Ltd. Operating profit growth at Nestle's water unit, whose 2006 sales of 9.6 billion Swiss francs (US$8.7 billion) were 10 percent of the Swiss company's total, will shrink by half to five percent in 2008, UBS AG has forecast.
Beverage companies, including Nestle, Coca-Cola Co and PepsiCo Inc, are also facing inroads from private labels in the US$15 billion industry. The competition comes as religious groups and environmentalists say that bottling wastes energy and overtaxes landfills.
"All this energy to bottle water, carbonate it, put it in the glass, ship it and truck it to our restaurant - it was such a waste," said Mike Kossa-Rienzi, general manager of Chez Panisse. The restaurant used to sell about 25,000 bottles a year. Now Chez Panisse filters and serves tap, flat or carbonated, in a glass carafe for free.
Shares of Nestle, which bottles Poland Spring, fell 6.75 Swiss francs, or 1.5 percent, to 455.25 francs at 10:30am in Zurich yesterday and have lost 12 percent this year. They're forecast to gain 27 percent in the next 12 months, according to analyst forecasts compiled by Bloomberg News. UBS's forecast also assumes a drop in the dollar against the franc will erode the water unit's profit.
Coca-Cola shares, down one percent since January 1, will advance 11 percent in that period and Pepsi, which has dropped 5.9 percent in 2008, is forecast to gain 14 percent.
US sales of soda, which still accounts for 67 percent of non-alcoholic drinks, have shrunk for three years, according to the industry journal Beverage Digest. Water accounted for 17 percent of non-alcoholic drinks sold in 2006, the most recently available figure, up from 8.3 percent in 2001.
Headline jibes
"This growth can't continue at this pace," said Patrik Schwendimann, an analyst at Zuercher Kantonalbank with an "outperform" rating on Nestle. Criticism from environmentalists "could have some impact if it's always in the headlines."
A New York Times editorial last August contributed to objections. San Francisco in July banned spending of public funds on the product, and New York City is encouraging people to refill containers. Chicago this month imposed a five-cent-a-bottle tax. Many restaurants in the US still serve tap water to guests, which is unusual in Europe.
Critics say tap water is plentiful and costs pennies. A single, chilled 20-ounce bottle of Coca-Cola's Dasani or PepsiCo's Aquafina sells for US$1.29. Some restaurants charge US$5 or more for a bottle of San Pellegrino.
"Bottling water and shipping it is a big waste of fuel, so stop already," Garrison Keillor, host of the radio show "A Prairie Home Companion" wrote last year in the International Herald Tribune. "Water is water. If you want lemon flavoring, add a slice of lemon. You want bubbles, stick a straw in it and blow."
Nestle, PepsiCo and Coca-Cola control 60 percent of the US bottled water market, and use municipal supplies for three of the four biggest brands, Aquafina, Dasani and the Swiss company's Pure Life. The product provides about 9.6 percent of Coca-Cola's US sales volume and 7.9 percent of PepsiCo's, according to Beverage Digest.
Pure Life sales have risen as much as 40 percent annually since it was introduced in 1998. Nestle introduced it to North America in 2002 and wants to make it the best seller in the market this year.
"We had such a fantastic growth rate over the past couple of years that you cannot grow like that eternally," said Nestle Chief Executive Officer Peter Brabeck in a recent interview in Nestle's headquarters on Lake Geneva in Vevey, Switzerland. Sales have been affected by other beverages, including tea and vitamin-spiked waters, he said.
Nestle, Coca-Cola and PepsiCo have cut prices to compete with cheaper brands sold by retailers, including Wal-Mart Stores Inc. At an Atlanta Wal-Mart, a 12-pack of the store brand Sam's Choice cost US$2, while Aquafina was US$4.28. The average price for a dozen bottles through November was 22 percent lower than in 2003, Information Resources Inc said.
Negative press
"It's being commoditized," said Walter Gerasimowitz, who manages US$1 billion, including Coca-Cola and Nestle shares, at Meditron Asset Management in New York. "There are many more competitors now."
PepsiCo's biggest bottler, Pepsi Bottling Group Inc in Somers, New York, said in October that "negative press" limited Aquafina's growth to six percent in the third quarter. Nestle said cooler weather caused water sales growth to decelerate to 6.9 percent in the first nine months of 2007 from 10 percent in the first half.
Dasani rose by a "mid-single digit," down from gains of 10 percent or more in past quarters, said Coca-Cola spokesman Ray Crockett. It "returned to solid growth" in the last half of 2007, he said.
PepsiCo CEO Indra Nooyi dismisses criticism. "State to state, city to city, water tastes different," Nooyi said. "If you want a consistent taste, you go for bottled water. If you don't want the convenience, then you shouldn't buy bottled water."
Some consumers are switching to refillable plastic Nalgene bottles made by Thermo Fisher Scientific Inc, or US$24.95 stainless steel containers from Guyot Designs LLC. Sales at the closely held company, based in Deer Isle, Maine, surged 40 percent last year, said co-founder Sloan Russell.
"More than 80 percent of our customers are looking for an environmentally responsible product," Russell said.