EIS
Mini
Project
Bottled
Water
Macarena Herrera
Rodrigo Guillen
David Leal
1. Bottled Water Introduction and Value Proposition
Bottled water has been around a long time in various forms. Bottled water in America
predates the country’s independence, with records of water bottled and sold from Jackson’s
Spa in Boston in 1767. The bottled water industry really took off in the beginning of the
nineteenth century when new glass technologies made the cost of a bottle affordable and
practical for mass production and consumption. By 1856, over 7 million bottles were being
produced annually at Saratoga Springs, one of the most popular early bottled water sources,
and selling for up to $1.75 per pint.
Early bottled water’s popularity was motivated largely by health concerns to the extent
that consumers in the mid-1800s believed that bottled spring water had health benefits that
bordered on the medicinal. This early value proposition is still valid today as modern
consumers in the developed world are increasingly health-conscious.
Also like today, the historical popularity of bottled water has been due to an associated
image and status, as bottled water was sold at hundreds or thousands of times the price of
normal drinking water. Today, however, the marketing campaigns promoting water develop an
image of bottled water focusing on sex appeal, with models increasingly used in campaigns.
More recently, water in a bottle has been seen as offering convenience to consumers
for its portability and relatively low cost when compared to carbonated beverages. Tourists
purchase bottled water on the street when they get thirsty, carry their bottle as they drink it,
then dispose of it very easily. Motorists can buy water at convenience stores to quench their
thirst as they fill up their gas tank.
In the developing world today, bottled water is seen as safe in places where water from
municipal sources is not potable. There is also an element of convenience to bottled water in
the developing world as it reduces the amount of work required to drink water by eliminating
the need to boil or treat water in the home.
Bottled water went out of style and need in the early twentieth century, when the
advent of chlorination in municipal drinking water supplies made public water consistently
healthy and safe to drink. But the allure of health and image fueled a bottled water comeback
in 1977, when Perrier launched a $5 million marketing campaign in the United States for its
imported water. Perrier’s marketing and timing were perfect, as it took advantage of concerns
about pollution and poor-quality tap water, and it caught the wave of health-conscious young
professionals just as they were beginning to flex their consumer muscle.
After the success of Perrier, many large beverage companies followed with their own
bottled water products, including Coca Cola with Dasani and PepsiCo with Aquafina. Today,
bottled water is the second best-selling beverage option, second only to the global carbonated
beverage industry. In 2010 bottled water’s overall share of the liquid refreshment beverages
marketplace grew slightly to 30 percent globally. In the U.S. bottled water’s market share grew
to 15% in 2010 compared to 23% for the carbonated beverage market as consumer interest in
1
healthy, calorie-free beverages increased. U.S. per-capita consumption was up 2.6% in 2010,
with every person in America now drinking an average of 28.3 gallons of bottled water.
Bottled water has clearly been a success in the marketplace in the last few decades and
this success was dependent on the different actors in the bottled water ecosystem being
incented in a way that allowed this product to penetrate the beverage market.
2. Bottled Water Ecosystem
Environmental
Groups
Bottle
Supplier
Water
Source
Bottler
Distributor
Retailer
Consumer
FDA
Exhibit 1: Bottled Water Ecosystem
The bottled water ecosystem, as shown in Exhibit 1, consists of a series of actors that
begins with the water source and terminates at the end consumer. The water source is
typically a natural spring that is usually leased by the beverage company in a contract that pays
the owner of the spring a fee per unit volume or an upfront cash payment for unlimited use.
More recently, however, some beverage companies, such as Coca Cola in their Dasani brand
water, have used purified water as the contents of bottled water, in which case, a municipality
provides tap water directly to the bottler. In general spring water has been marketed as being
of premium quality and, thus, is relatively more expensive than purified water, which can be
positioned as a lower-cost option.
2
Next, the bottler takes the water and lives up to its name by bottling the water. Large
beverage companies such as Coca Cola and Pepsi own their water bottlers while smaller
beverage companies outsource the bottling operations. The bottlers are generally less
profitable and more capital-intensive than the beverage companies they serve and frequently
face operational challenges. However, vertically integrating gives companies more control over
their long-term strategy, which is the main impetus for the trend where large beverage
companies consolidate the supply chain.
The FDA regulates the safety of bottled water beverages in the U.S. The FDA monitors
and inspects bottled water products and bottlers under its food safety program. When the FDA
inspects bottlers, the agency verifies that the bottler’s product and water supply are obtained
from an approved source. It also inspects washing and sanitizing procedures and determines
whether the companies analyze their water source and product water for contaminants. The
FDA requires that each brand of bottled water be labeled according to type (standards of
identity). For example, Dasani and Aquafina are required to state that their water source is a
municipal water source, while spring water brands are required to state the location and name
of the spring.
The bottled water industry has come under criticism from environmental groups for
having more lax standards than those of municipal sources. The EPA requires testing for more
substances and requires more stringent standards before the water source is approved.
Recently, the bottled water industry has come under fire from environmental groups for
contributing to waste production through the plastic bottles it uses. These environmental
groups have been successful to the extent that bottled water sales have tapered off recently
after years of consistent growth. In response, beverage companies have made an effort to
become more green and appeal to the powerful environmental groups by offering bottles that
are partially made from plant material and, thus, more environmentally friendly. Because of
environmental groups growing power, we believe they should be considered partners in the
bottled water ecosystem.
Bottle suppliers are a supplier to the bottling companies and hold little power in the
ecosystem as providers of commodity products. These bottles are mostly made out of
petroleum derivatives and are usually sold to bottlers under fixed-price contracts that are
renewed periodically. Changes in prices are mostly tied to input prices such as crude oil.
Distributors are the next actor in the ecosystem. Distributors buy the bottled water
from the bottling facilities and sell, market, and distribute it to retail channels. Most
distributors are independent of the beverage companies and bottling companies although
some large beverage companies own distributing companies in important markets. Distributors
are powerful actors in the ecosystem in that many of them have local monopolies and are the
ones who choose what products get distributed to large retailers.
Retailers buy bottled water from distributors and sell it to end consumers. Large
retailers such as Wal-Mart wield a great deal of power and can negotiate for prices that provide
thin margins for beverage companies and distributors. Smaller retailers such as convenience
3
stores have less purchasing power than supermarket chains but have equal or better margins
due to the premium charged for convenience. Retailers also have significant power since they
ultimately choose the contents of their shelf space that is made available to the end consumer.
End consumers are the last actor in the ecosystem and are the ones who ultimately
make the purchasing decision. As such, beverage companies dedicate a great deal of marketing
resources toward convincing consumers to purchase their products. Because there are many
competitors in the bottled water industry, consumers have many choices and choose based on
preferences ranging from prestige and the perceived quality of the brand to lowest priced
product.
3. Bottled Water Strategy
Any innovation should take into consideration the risks involved in the innovation’s
ecosystem. That is, firms should consider not only risks related to the product itself (initiative
risk) but also those related to its partners and complements (integration risks). The risks of the
initiative refer to aspects such as the feasibility of the product, likely benefits to customers, and
relevant competition. In other words, in order to define a winning strategy it is first important
to understand one’s strengths and weaknesses while considering the aforementioned aspects.
In the case of bottled water, one of the most important benefits it offers the consumer
is that it is convenience. As opposed to tap water, bottled water is an “on the go” product
which is easy to carry, safe, and inexpensive compared to other “on the go” drinks like soft
drinks and juices.
A second significant advantage is that it is a healthy option because it does not have
caffeine or any other substance that can be harmful to the human body, unlike most of its
competitors (e.g. soft drinks). Consumers are growing increasingly health conscious and are
more careful of their drinking habits. Bottled water can be viewed as an ideal substitute for the
unhealthy beverages that the health conscious consumers are attempting to avoid.
Additionally, bottled water is the only natural zero-calorie beverage, which makes it an
attractive option for people who are worried about losing weight while serving as an option in
the very public against obesity, which is a major problem in the U.S and in many countries.
Moreover, awareness about potential positive side effects of mineral water is growing among
consumers, causing the demand for this category of bottled water to increase.
Another important strength of bottled water is that it is cost-attractive for consumers
relative to traditional beverages such as soft drinks and juices. Bottled water has equivalent or
lower retail pricing, which allows it to compete as a substitute at the point of sale.
Although the soft drink (carbonated beverages) industry has fierce competition and
financially powerful brands behind it, the barriers to entry into the bottled water industry are
relatively low. For example, a 100-bottle per hour automatic bottling machine with washer,
filler, capper costs $15,500 compared to carbonated beverage equipment, which requires
multiples of capital expenditures. Additionally, bottled water does not require R&D expenses
other than a purifying system (distillation, reverse osmosis, de-ionization or filtration). Thus, it
4
is an easy-to-enter business for small companies, creating new brands, rising competition and
reducing the product’s price for consumers and allowing the product to make a successful
entrance in the market.
Nonetheless, bottled water as a market also has some weaknesses that need to be
considered while defining a strategy. One of the main weaknesses of bottled water is that it is
much more expensive than tap water. This becomes important as fifty percent of bottled
water sales use purified tap water as its source even though it sells for hundreds of times more
per unit volume than municipal tap water. Additionally, tap water is usually as clean as bottled
purified water, which makes some consumers wonder why they are paying a much higher price
for an equally safe product. Moreover, many people object to the sale of bottled tap water
because they believe that municipal water is publicly owned and should not be privately
exploited for profit. This weakness is usually addressed through marketing by presenting
bottled purified water as a better-tasting alternative to tap water.
Energy used and environmental pollution are another weakness of this industry.
According to National Geographic, 17 million barrels of crude oil per year are used to
manufacture the 29 billion water bottles sold in the U.S. alone. This amount of oil is equivalent
to that used by a million cars for twelve months. Besides this amount of energy used to
manufacture water bottles, water bottle recycling has not become efficient enough to avoid
considerable environmental pollution. With an annual recycling rate remaining around 25%,
the remaining 75% are sent to landfills or end up as litter where hundreds of years have to pass
in order to make those bottles to degrade and break down into smaller pieces, causing water
bottles to pile up as mountains of waste.
However, as mentioned earlier, the success of a product does not depend only on the
efforts of the manufacturer, but also on its adoption by the rest of the players in the ecosystem.
No one in the ecosystem will adopt the innovation if its benefits are not greater than its cost.
Therefore, in order to make sure that the rest of the players in the ecosystem are aligned it is
important to consider what are their benefits and costs of adopting the innovation.
For the water source (tap water or spring water), the benefit of bottled water is the
money that they get from selling the water to the manufacturer. In the case of the owner of
the spring the alternative is to extract and bottle the water himself or sell it to someone else, so
offering the right price is the way to get this player on board. However, in the case of tap water,
the price paid by the manufacturer is not necessarily a benefit since that water would probably
be sold to the end consumer directly as tap water instead. In this case, selling the water to a
bottled water company could actually be a cost to municipalities because bottled water will
compete with tap water and bottlers will try to convince the end consumer that bottled water
is healthier and safer than tap water. In order to be able to sell bottled tap water, bottlers need
to convince the government to give them permission to sell this water. Additionally, bottlers
will probably have to offer a higher price than what the end consumer would pay for that water
if it were distributed as tap water.
5
In the case of the retailers, the benefit of bottled water is the profit earned by selling it,
but the opportunity costs of carrying bottled water are also very high since it is a product that
occupies a lot of shelf-space which is the retailers’ most valuable asset. Another cost for
retailers of offering bottled water is the space that they occupy in the warehouse and because
it is a high-volume but low-price product it may not as profitable as other products that they
can offer. Another cost to retailers of selling bottled water is the cannibalization of other
products like soft drinks that might have greater margins.
For consumers the benefits of bottled water are the convenience and health factors
mentioned earlier: zero calories and a healthy product at a reasonable cost compared to other
beverages such as soft drinks and juices. However, there are also some costs for consumers.
For example, paying a lot more for bottled water than what they pay for tap water and the
negative externalities that all consumer bear, with 75% of water bottles not being recycled.
Taking into consideration the benefits and costs of adoption for each player in the
ecosystem we can assess the integration risks of the initiative. This assessment involves
analyzing the probability that those who need to adopt the concept before the consumer can
end up not adopting it. In order to do this it is very important to understand who the key
players in the ecosystem are as well as what their most critical needs are.
In the bottled water ecosystem it is clear that the retailer and the consumer are the
most critical players and each of these has different critical needs. For consumers, their most
critical needs are health and convenience whereas the retailers’ most precious asset is its shelfspace.
Understanding these risks and every player’s critical needs is crucial in order to be able
to develop a strategy that will align everyone towards the success of the product. Failing to
understand the costs and benefits to each player will cause them to not adopt the product,
which means the product is not sent down the line.
The most important thing to retailers is managing their shelf-space in a way that allows
them to obtain the highest profit possible. Retailers care not only about the profit per volume
of the product but also about its turnover. Therefore, in order to convince retailers to carry
bottled water, bottlers and distributors had to demonstrate how bottled water can be
profitable even though it is a high-volume, low-price product.
Some things that beverage companies and distributors had to emphasize in order to
convince retailers to carry their products were the following. First, beverage companies and
distributors had to convince retailers that water would be a high-demand product with a high
turnover rate. Beverage companies and distributors had to show retailers that consumers’
health awareness was growing and that their consumption of soft drinks would start slowly
decreasing, which meant that if retailers did not carry a substitute to these products, lost sales
would ensue. In order to convince retailers, beverage companies and distributors showed
retailers the benefits that bottled water offered consumers (convenience, health and a
reasonable price) and all the reasons why consumers would gradually start buying less soft
drinks and more water.
6
Second, bottlers needed to sell their product at a price that would allow retailers to get
a higher margin for the product than they made with other competing products such as soft
drinks. Since soft drinks also occupy a lot of shelf-space, bottlers needed to show retailers why
they believed that bottled water would be a growing category and would end up increasing the
retailers’ margins compared to soft drinks. Selling their own private label brand, for example,
was an attractive option for large retailers since they could get the water at even lower prices,
thus obtaining higher margins.
Finally, beverage companies and distributors had to help retailers come up with ideas of
how to make the most of the store’s capacity. For example, displaying bottled water on the
floor at the entrance either inside or outside the store or against the walls at the back of the
store were ways of not taking up shelf-space but still offering the product.
Another important way to improve sales is to have consumers understand the benefits
and advantages that water brings to their diets. As a measure to boost sales, Britain’s biggest
water bottlers (Nestlé, DANONE, Highland Spring, Evian and Buxton) created in 2007 the
National Hydration Council (NHC), an industry organization dedicated to researching the
science and communicating the facts about natural bottled water. Another important measure
taken by this council was to promote campaigns (e.g. DANONE’s “six to eight daily glasses of
water”) to increase consumer awareness about the importance and health benefits of drinking
water.
A well informed consumer can make better choices when comparing benefits and
tradeoffs especially between drinking water and drinking other types of soft drinks, so research
turned into advertisements and campaigns showing why drinking water is healthier than any
other soft drink helped bottled water improve its communication with consumers to improve
sales. Also, campaigns focusing on the bottled water convenience, reliability and water origin
(especially for high-end brands) can help consumers understand the difference and price
premium that bottled water has compared with tap water.
Although environmental issues and consumer trends might determine future sales of
the bottled water industry, a well-positioned product in the retail floor together with strong
marketing and awareness campaigns targeted at consumers can continue to help bottled water
sales improve. To address the environmental issues, it is very important for the bottled water
industry to actively participate with the community and government institutions with
campaigns towards recycling and proper waste reduction. We also believe that the industry
will have major consolidation and acquisitions of regional brands from large competitors in
order to reduce competition and acquire more sources of spring water, especially with large
competitors such as Coke and Pepsi try to grow their footprint in this market. Finally, the rise
of new bottled “enhanced water” in the market poses a new growth opportunity for the
bottled water industry that all current participants should analyze as a new innovation strategy.
7
REFERENCES:









The Daily Green. “Almost Half of All Bottled Water Comes from the Tap, but Costs You
Much More”. http://www.thedailygreen.com/environmental-news/latest/bottledwater-47091001#ixzz1aObKYqgw
National Hydration Council. http://www.naturalhydrationcouncil.org.uk/
Brand Channel. “Bottled Water Floods the Market”.
http://www.brandchannel.com/features_effect.asp?pf_id=88
Intuit. “5 Marketing Lessons from the Bottled Water Industry”.
http://blog.intuit.com/marketing/5-marketing-lessons-from-the-bottled-waterindustry/
National Geographic. “Drinking Water: Bottled or From the Tap?”.
http://kids.nationalgeographic.com/kids/stories/spacescience/water-bottle-pollution/
Food and Water Watch. 2010. Bottling Our Cities’ Tap Water. Available:
http://www.foodandwaterwatch.org/water/bottled/bottling-our-cities-tap-water/
BMC (Beverage Marketing Corporation). 2010. Bottled Water in the U.S.: 2010 Edition.
Available: http://www.beveragemarketing.com
Earth911. “Plastic Recycling Facts”. http://earth911.com/recycling/plastic/plastic-bottlerecycling-facts/
International Bottled Water Association. “2009 Market Report Findings”.
http://www.bottledwater.org/content/statistics
8