Sector Insight: Bottled water - Health drowns out green concerns

seem to be falling on deaf ears. While some public bodies, such as
Liverpool City Council, are no longer using water coolers or bottled
water in their offices, they are the exception. As brands increase the
range of functional and flavoured variants, the market is expected to
continue to grow.

Sales of bottled water traditionally rise in the summer months, as
consumers quench their heightened thirst and cool down. Brands in the
sector will therefore have been bemoaning the recent poor weather more
than most. Perversely, however, the negative impact on sales will have
been offset to some extent by the serious flooding in some regions of
the country, where many people were left without a mains water
supply.

These anomalies aside, the bottled-water sector is an interesting
position. On one hand, the healthy-eating focus and high level of
understanding that hydration is important for wellbeing has been
beneficial. On the other, a rise in the environmental consciousness of
consumers has brought the industry under the spotlight as questions are
asked about whether we should be bottling and transporting a resource
that is pumped to our homes anyway.

Across the pond, the City of New York recently launched an ad campaign
encouraging restaurants to serve, and people to drink, tap water to help
protect the environment. On this side of the Atlantic, a recent report
by the Drinking Water Inspectorate showed that the quality of tap water
is better than ever, leaving even fewer reasons for opting for bottled
water.

But these issues have yet to dent the sector. Between 2002 and 2006 it
was one of the fastest-growing areas of the soft-drinks market. This
year, volumes are expected to reach 2.26bn litres, with a value of
almost £2bn, according to Mintel. And there is significant room
for growth, as penetration in the UK lags most other European
countries.

One area already flourishing is consumption among children. Following
the roll-out of government restrictions on the types of food and drink
available in schools, the number of 11- to 16-year-olds drinking bottled
water has risen from 45% to 65% in the past four years.

Though environmental concerns have yet to drive down sales,
manufacturers are already putting responses in place. Some, such as
Belu, have introduced bottles made from bioplastics; these are derived
from plant sources rather than petroleum and result in lower emissions
during manufacture. Other brands, such as Highland Spring, have added
more glass bottles to their range, as they are widely recyclable.

Still water has continued to outsell sparkling, with flavoured variants
from the big brands thriving. There has been criticism of this category,
however, with accusations that consumers are being led to believe all
flavoured options are healthy, when some rival carbonates' sugar
content. Brands have added sugar-free versions in a bid to counter
this.

The big players afford considerable promotional support to their brands.
Market leader Danone, whose brands include Evian and Volvic, plans to
hike its marketing spend by 15% next year.

The company is set to focus its activity on promoting the detoxifying
and re-hydrating properties of its brands as it seeks to fuel sales of
water throughout the year.

While Evian is aimed primarily at young women, Volvic's sights are set
on a broader audience, which it is currently targeting through the
eccentric puppets featuring in its 'Volcanicity' TV ads. It has also
introduced a one-litre sports-cap bottle targeting the men's impulse-buy
market.

Nestle's UK portfolio includes Vittel, Perrier and Buxton. The latter
gained prominence earlier this summer by being the official mineral
water at this year's Wimbledon tennis championships, while Vittel
leveraged its position as water for consumers with an active lifestyle
through its status as the official water of the Flora London Marathon.
Its focus is shifting toward functional benefits through products such
as its Vittel+Energy sports drink, with added carbohydrates and
vitamins.

Ethical brands in the market include Belu, One and Thirsty Planet, whose
sales generate funds for those in developing countries without easy
access to drinking water.

Of the soft-drink giants, Coca-Cola, which was forced to withdraw its
Dasani brand in 2004 due to its contamination with the carcinogenic
chemical bro-mate, and the fact that it was nothing but purified tap
water, is to try again with Chaudfontaine, a Belgian spring water it is
launching in the UK to sit alongside its Malvern Water brand.

For the overall sector to progress, it will have to win over the grey
market, which has little interest in bottled water. To do so,
manufacturers may need to develop products with added benefits
specifically aimed at this group.

The prognosis is favourable: the water market is forecast to reach a
value of £2.6bn by 2012, according to Mintel, an increase of 30%
on 2007, or 19% when inflation is taken into consideration.

WATER BRANDS BY OFF-TRADE VOLUME SHARE



2006 2005 2004 04-06

ltrs % ltrs % ltrs % % chng

(m) (m) (m)



1 Volvic 199 16 184 16 167 15 19.2

2 Evian 174 14 159 14 142 13 22.5

3 Highland Spring 82 7 70 6 69 6 18.8

4 Buxton 52 4 47 4 40 4 30.0

5 Vittel 37 3 31 3 33 3 12.1

6 Aqua Pura 23 2 21 2 19 2 21.2

7 Britvic 18 1 n/a n/a n/a n/a n/a

Own-label 450 35 434 37 407 37 10.6

Others* 236 19 229 19 217 20 8.8

Total 1271 100 1181 100 1094 100 16.2



Source: Mintel

Figures include sparkling, still and flavoured variants

*Includes Britvic sales for 2004 and 2005





SOFT-DRINK CATEGORIES BY SALES AND VALUE SHARE



2006* 2004 2002 02-06

pounds m % pounds m % pounds m % % ch



1 Carbonates 5856 48.4 5515 50.7 4919 52.3 19.0

2 Fruit juice/drinks 3095 25.6 2580 23.7 2228 23.7 38.9

3 Bottled water** 1873 15.5 1614 14.8 1359 14.4 37.8

4 Health/sports/

energy 1271 10.5 1161 10.7 901 9.6 41.1

Total 12,095 100.0 10,870 100.0 9407 100.0 28.6



Source: Mintel

*estimated

**Includes water coolers





WATER-PACKAGING TYPES BY VOLUME SALES AND SHARE



2006 2005 2003 03-06

ltrs % ltrs % ltrs % % chng

(m) (m) (m)



1 Plastic* 1417 83 1281 81 1161 79 22.0

2 Glass 287 17 297 19 294 20 -2.3

3 Cans 13 ** 14 ** 15 1 -13.3

Total 1717 100 1592 100 1470 100 16.8



Source: Mintel

*Includes water coolers

** less than 1%





WATER TYPES BY VOLUME AND VALUE



2006 2005 2003

ltrs pounds ltrs pounds ltrs pounds

(m) m (m) m (m) m



1 Still 1494 1434 1353 1319 1220 1157

2 Sparkling 223 177 239 180 250 188

Total 1717 1611 1592 1499 1470 1345

Source: Mintel

ANALYST COMMENT - NATALIE CORDING MARKET ANALYST, ZENITH
INTERNATIONAL

Everyday hydration has become a prevailing theme in the UK, with the
daily requirement for eight glasses of water being broadly understood,
if not acted upon, by consumers. This was reflected in a 6% increase in
bottled-water sales in 2006 to a retail value of almost £1.7bn.

For consumers seeking naturalness, health and wellbeing, bottled water
is a real alternative to traditional soft drinks. Media attention on the
obesity problem in the UK and the links between it and the rise in
consumption of soft drinks by children has fuelled the growth of bottled
water.

There has also been greater appreciation of bottled water across a range
of consumption occasions, as packaging innovations, such as the sports
cap, have enabled hydration on the go.

Still water accounts for the lion's share of volume sold, with plastic
packaging favoured for its ease of portability. Natural mineral water
accounts for about two-thirds of the market, though this is likely to
change after Highland Spring's reclassification from mineral to spring
water and as Coca-Cola-owned Malvern drops its mineral water suffix to
become Original English Water.

One area in decline is the water-cooler industry, as competition from
mains-water cooler machines grows. Consumption of sparkling bottled
water is also falling off, albeit slightly, as it remains the preserve
of the home and on-trade dining table.

With the UK in the middle of the wettest summer on record, sales will be
hit, especially compared with those during last year's summer heatwave.
Yet solid single-digit growth is projected over the next five years, as
bottled water fights for shelf space through NPD and targeting.