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    Bottled water continues to shower retailers with profits, but new entrants into the segment are quickly flooding coolers.

    By Matthew Enis

    After running 584 miles in temperatures ranging from 126 degrees to below freezing, Marshall Ulrich gave his beverage of choice a ringing endorsement. "My blisters and tendinitis were a significant worry during the race and O2GO hydration was a key factor in keeping them in check and possibly helping the healing process," he said.

    Not a sound bite typically popping up in sleek prime-time ads, but it does grab attention. According to this athlete, O2GO went above and beyond the average water's call of duty, working to heal blisters and tendons as he ran from the pit of Death Valley to the summit of Mt. Whitney four times in 10 days.

    The majority of Americans run only when chased, but it's clear that they also believe there is something special about packaged water. Posting a 19.7-percent sales gain last year over 2000, bottled water was responsible for more than $840 million in convenience store channel sales during 2001, according to Schaumberg, Ill.-based ACNielsen. The torrential trend shows no signs of running dry.

    Products like O2GO, made by Neptune, N.J.-based TriWater USA Inc.,as well as lightly flavored and vitamin enhanced waters have recently exhibited surprising tenacity — muscling onto the traditional stomping grounds of companies such as the Perrier Group, Danone and Suntory, even as beverage giants Coca-Cola Co. and PepsiCo Inc. have entered the fray.

    The FDA has focused increased scrutiny on health claims made by beverage companies recently, but "drink more water," has been a physician's mantra for years. Medical studies have yet to confirm the benefits of spring water minerals or additives like oxygen, but the products are harmless, and customers are too busy grabbing up bottles to notice.

    Watermark

    Steele is such a strong believer in the segment that he has allowed it to expand outside the cooler door, stocking back endcaps with take-home gallons and six-packs at all of the chain's 82 locations. He sides with the "water is water" majority, arguing that image matters much less than margin in this section of the cooler.

    As a result, Steele has set the margins on Store 24's private-label water brand as a benchmark that suppliers must help him meet in order to earn space on his shelves.

    "One of the reasons that we don't carry certain brands is that they don't offer good margins," he said. "For example, you can charge a high retail for a recognizable brand like Evian, but the penny profit that we require just isn't there. That's a barrier for them — at least in our stores."

    The private-label brand also offers Store 24's customers a lower priced alternative to nationally branded products without sacrificing margin.

    Setting standards on the margins drawn by each brand allows Steele to focus on selling customers up by giving preferred shelf space to package sizes such as 1-liter bottles, which return slightly higher margins across the board.

    With the value brand already competing for customer attention against the premiums and mediums, Steele says there's little reason to price-promote.

    "I really don't think promoting — in terms of price-offs especially — sells more water," he said. "It may transition sales from one brand to another, but with water you're really just giving away margin."

    And you don't have to operate a huge chain to make private labeling profitable. Rocco Arbitell, president of Southbury, Conn.-based Arbitell Convenience Stores, a three-store chain, recently launched his own Racer's Edge brand of spring water. Launching the brand took about a year of work, "but it's selling better than any other water brand in the store."

    At least part the brand's success seems due to its local roots. The water itself is drawn from a Connecticut spring, while the name and logo on the bottle are inspired by Arbitell's sponsorship of local race car drivers.

    Water, Water Everywhere

    Still, the segment's success has been a bit mysterious. If "water is water," why are customers willing to pay prices ranging from 60 cents to more than a $1 for a product they could get from a faucet or fountain? Why can some brands demand a higher retail than others?

    Armchair analysts sometimes cite concern with municipal water supplies as an impetus for the segment's growth, but most suppliers and category managers say that this isn't the case in the c-store channel.

    "The perceived quality of local municipal water supplies can impact gallon and 5-gallon water sales, but I don't think those concerns are driving c-store bottled water business," said Steven Lovinger, president and CEO of Atlanta-based Meridian Beverage Co. Inc. Single-serve packages are simply too small to take home to the wife and kids, he explained.

    Instead, health consciousness, packaging portability and increased product availability have driven the segment's expansion, according to Gary Hemphill, senior vice president of New York-based Beverage Marketing Corp.

    "There are brand-loyal exceptions, particularly at the high end of the market with products like Evian and Fiji, but for the most part, we are just now entering the era of brand building for water," he said. "You're going to begin seeing more marketing put behind bottled water brands as companies work to develop an identity for these products."

    In one recent spot for Purchase, N.Y.-based PepsiCo Inc.'s Aquafina brand, actress Lisa Kudrow of hit-series "Friends" fame says the product is "so pure, we promise nothing."

    Several smaller companies are trying to stake their claim by promising much more. Lovinger's company recently launched its AquaCal line of calcium and vitamin C enhanced flavored waters. Similarly, Littleton, Mass.-based Veryfine Products Inc. has produced its Fruit2O line of lightly flavored waters for over a year. Other companies, such as Whitestone, N.Y.-based Energy Brands Inc. have introduced so many enhancements into their water that they're beginning to straddle the New Age segment.

    Even Gatorade has joined the ranks, offering Propel Fitness Water, with light flavorings, B vitamins and antioxidants in an attempt, the company says, "to create a new beverage category for fitness enthusiasts who typically drink plain water during their workouts."

    Several studies have shown that customers are likely to drink more water if it is lightly flavored, and the beverage industry seems intent on bottling an answer to that tendency.

    Case in point? "Waiters and waitresses have become so accustomed to the requests for lemon in water at restaurants that it's a given now," said Bob Lynn, vice president of marketing and sales Latrobe, Pa.-based Global Beverage Systems Inc., which manufactures the Le Nature's line of lightly flavored waters.

    Yet it remains to be seen if these products will have lasting potential. A handful of attempts by small companies using similar strategies to break into the segment have failed in the past, although the segment as a whole is currently experiencing enough growth to support several more new entrants.

    Many category managers have responded by grouping enhanced products in separate areas of the cooler. "It's a totally different product when you add flavors and enhancements," said Steele. "I almost don't look at it as the same category — it's certainly a different niche with different cost structures."

    On the other hand, spring waters, led by brands such as Evian and Poland Spring, were able to establish strong brand identities and even inspire some loyalty with certain consumers during the past decade.

    "[Spring water] brands are built around the 'romance' or perception of the source," said Rex Griswold, director of national accounts for Greenwich, Conn.-based Perrier Group of America. The group's brands, which include Zephyrhills, Ozarka, Poland Spring, Deer Park, Ice Mountain and Arrowhead, combine to make the company the largest producer of bottled water in the United States.

    The Perrier Group works exclusively with spring water because, Griswold argued, the natural purity of the products gives them a lasting appeal not subject to fads. "The water starts pure and ends pure," he said. "Other waters are starting with municipal supplies and then filtering impurities out."

    This fact hasn't slowed the growth of Aquafina and Dasani, both filtered from municipal sources. Despite direct-store-delivery costs that make Aquafina and Dasani cost about $2 more per case, the brands have quickly become two of the best sellers in the c-store channel.

    Although retailers can often squeeze better margin out of wholesaler-delivered spring waters, one supplier lamented that Coca-Cola and PepsiCo had been able to quickly gain market share with these water brands by preventing out-of-stocks and offering bundled deals.

    "People are going to buy what's there," said Hemphill. "So the most important thing for convenience store operators to do at this point is to have water available on their cooler shelves and not have out-of-stocks."

    By Matthew Enis
    • About Matthew Enis

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