Bottled Water Business is Going to Witness Fresh Acquisitions and Initiatives

Rajat K. Baisya

 

Bottled-Water-BusinessTHERE is significant growth in bottled water business. The size and growth of this segment is drawing attention of MNCs and local companies alike. The competition in the business has brought into the market many variants. Earlier we had mineral water and natural spring water. The natural spring water business is much smaller. There were only a few players in natural spring water segment. Notably among these were DS group’s Catch brand and Dadi Balasara’s Himalaya Natural spring water Mount Everest brand. There are of course, smaller players as well; mostly located in north. You get these days in most of the airlines serving natural spring water produced from Himachal Pradesh under the brand name Natural. This brand has almost succeeded to replace Catch in many domestic airlines. Sometime ago Tata acquired Dadi Balsara’s Himalyan Natural spring water Mount Everest business as part of their strategy to enter into the natural food business. Catch has first introduced flavoured water into the market. They were able to create a niche segment with flavoured water in PET bottle.

Now many others are likely to enter this segment. Big players like Nestle is also planning to enter the market with what they call functional water or fortified water instead of plain bottled water. A news item posted on Paris-based Nestle waters web site states that, in Asia, the Nestle group is pursuing development by expanding the presence of its Pure Life brand while keeping a close eye on the potential acquisitions. Nestle is the global leader in bottled water business with 72 water brands growing over 9 per cent globally and sales clocking USD 6.1 billion. Former Nestle India Chairman Carlo Donati currently heads the Nestles water business globally. Nestle controls over 19 per cent of the global water business. When Carlo Donati was in India Nestle introduced Pure Life in the market but in spite of being the leader in this segment globally, Nestle exited from this business in India four years ago. The reason could be low margin in the business, besides being highly competitive and fragmented with many lead brands were under dispute on quality issues. Possibly Nestle did not want get into yet another controversy as their water business in India was not that big. Nestle also had introduced it’s sparkling water brands Perrier and San Pellegrino but both were withdrawn in the year 2001 from the Indian market. Both these brands were priced much higher in the range of Rs 65 per bottle and were promoted through the star hotels. The volume was low for these two premium brands and they did not meet the mandatory norms of the Bureau of Indian Standards (BIS) and therefore withdrawn. Two years later their mass-market brand Pure Life was also withdrawn. Carlo Donati has recently said, “we will contribute to the group policy of making Nestle a major global player in nutrition, health and wellness. It has been reported in The Economic Times sometime ago that the Swiss Food Giant Nestle will bring its global brand ‘Poland Spring’ in India or acquire an existing Indian brand of bottled water positioned on the health and wellness platform. Poland Spring is one of the largest selling packaged water brands in the world.

The most ideal brand for Nestle to acquire in India would be Catch of DS Foods. Although the business is not big yet DS group has set up a good imported plant with online bottle making and filling near Shimla. Nestle also tried to acquire Mount Everest of Himalayan earlier but that finally has gone to Tatas. Readers will recollect that couple of years ago Ramesh Chauhan was trying to bring a strategic partner in his Bisleri water business and he was in talk with both Nestle and Dannone. The deal did not materialize. Recently, Ramesh Chauhan was again in the news to sell his stake in the Bisleri bottled water business. Ramesh Chauhan has one daughter who is not interested in business and that might be the reason for Rameshbhai to look around for potential buyer for his business. Bisleri is the leader in the category and therefore only large player like Nestle or Dannone can consider buying this business.

One of the reasons why big players like Nestle has withdrawn their water brand from the Indian market is the distribution problems and heavy discounting in the trade. In this trade it is the retailer who keeps the maximum margins and therefore making money in bottled water business is very difficult. Only high volume and very effective low cost distribution system can help manufacturers to make money. Recently, I read a report from Center of Science and Environment (CSE), the Delhi based NGO who were responsible to raise the big pesticide controversy in bottled water as well as in cola beverages including big global brands like Coke and Pepsi. The report in the form of editorial tried to build a picture that cost of water is very low and the manufacturers are selling one litre bottle at exorbitantly high price. The editorial tried to trace the cost of water as 2 to 3 paise and packing cost as Rs. 3 to 4 and therefore how can the price of one litre bottled water be Rs. 12 to consumer. The author did not realize the other elements of costs including the distribution costs to cover the channel partners margins and freight and other fixed costs. I have written a rejoinder to the editor giving the details of cost elements to show that very thin margin is left for the manufacturer to cover their fixed cost of investment, overheads and marketing including advertisement costs and therefore the contention of the author that manufacturers of bottled water are taking the consumers for a ride was not correct. This is low technology business, anybody can start producing but it is not a business, which everybody can sustain. Unless one gets the critical mass it is not sustainable. However, the business will grow for the simple reasons that there are growing health consciousness among consumers and for the fear of water borne diseases as municipal water is not reliable or at least consumers do not have faith in it.

In FMCG product category the thumb rule is that MRP will be at least three times the prime cost of the product. The author of the CSE article did not consider the cost of trade channel partners, other overheads, freight, insurance, marketing etc. and raised an issue that bottled water is very highly and unreasonable priced. In fact manufacturers of bottled water find it very difficult to make money as retailers retain high margin which is one of the reasons why Nestle had withdrawn from the water business. Otherwise, being the largest in water business in the world they would have much liked to continue. Abroad we can see that water price is almost same as milk or beer. In some market water is even costlier than beer. But in India at that price water cannot be sold. The market behaviour might change in future but at this stage no one will be willing to pay for water more than the price of milk or beer. Even flavoured water and natural spring water introduced by DS group did not sell at Rs 25 a bottle of one litre and they were forced to reduce the price to around Rs 15 per bottle and at that price volume was not big.

The category, however, holds big promise and will continue to grow which is the prime reason why big players like Nestle are trying to reenter the market

 

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