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NEW YORK -- The bottled-water industry is teetering on the brink of a price war that could drive down the hefty margins enjoyed by bottlers like Coca-Cola, Pepsi and Nestle and, according to some analysts, drive smaller competitors out of business.
Earlier this year, Coca-Cola and its bottlers lowered the prices of Dannon water 25 percent at grocery stores and mass retailers like Wal-Mart. The company soon edged ahead of its chief rivals: Nestle, the industry leader with 38 percent of the domestic bottled-water business, and Pepsi, which makes Aquafina, the leading brand of water, according to The New York Times
In response to pricing pressure, CG Roxanne, which makes the Crystal Geyser brand, lowered its prices. Nestle, which markets regional brands including Poland Spring and Deer Park, and Pepsi have not committed to lowering prices, but have said they will defend their positions, setting the stage for what could be a summer of water wars.
Analysts are skeptical that a full-scale price war approaching the scale of the cola wars of the 1990s will erupt in bottled water. But if companies see profit margins erode significantly, they could look for profits someplace else, most likely through higher pricing of carbonated drinks, the report said.
"If you look at the economics of the water business, rational players would stop reducing their prices from here because if they don't, they will not be making money in the supermarket channel," William Pecoriello, a beverage analyst at Morgan Stanley told The Times. "You can point to the cola wars, the fast-food wars, where even though you can look at traditional economics there are market-share battles that take place where the players aren't rational."
The products at the center of the pricing turmoil are waters that tend to sell well at mass retail stores. In these stores, called take-home channels in the industry, gross profit margins on water, which is usually sold in multipacks of 16 or 24 bottles, is about 22.4 percent, according to a Morgan Stanley research report. In convenience stores, where waters are usually sold in single-serve bottles, the margins are at 58 percent, according to the report, but sales of single-serve waters have begun to slow.
Bottled water makes up 2 percent of Coca-Cola's profit in the United States, analysts said. The real threat, analysts said, is what could happen to water margins in two or three years. In the face of a probable decrease in water profits, beverage companies are looking to new product lines. Coca-Cola and Pepsi are both exploring milk-based drinks that could appeal to the health-conscious and to parents looking for drinks for children, the report said.