Private Label Buyer

Water Works

January 23, 2008

Once again, private label bottled water posted double-digit dollar sales gains. But value-added or “enhanced” varieties promise higher margins and strong potential for future growth.

More and more consumers looking for a way to quench their thirst are reaching around carbonated soft drinks to find a bottle of water. Already the second-most popular commercial beverage, having surpassed beer in 2003, bottled water is expected to overtake soda for the number-one spot sometime during the next five years or so, reports New York-based Beverage Marketing Corp. But the bottled water category of the future likely will look a lot different than it does today.

When bottled water first hit supermarket shelves in a big way more than a decade ago, source was a major selling point, and most products came from underground springs or artesian sources. Today, however, half of all category sales go to purified waters drawn from municipal sources, including the two top-selling national brands, Aquafina and Dasani, which are owned by PepsiCo and Coca-Cola Co., respectively. However, according to figures supplied by Chicago-based Information Resources Inc.(IRI), the convenience/PET segment’s biggest player is Nestlé Waters North America, which owns seven of the top 15 bottled water brands, including Poland Spring, Arrowhead, Deer Park, Pure Life and Crystal Geyser, several of which also are categorized as purified rather than spring water.

“Consumers today aren’t as concerned about the source as they are about the price,” says Jim Sas, managing partner at Pittsburgh-based Creekside Springs LLC. And they don’t particularly care about brand names either. “The case pack business especially has become extremely commoditized,” sparking price wars that have left the category with very, very slim margins.

Although private label is holding its own - dollar sales in the convenience/PET subcategory shot up almost 23 percent over the past 52 weeks vs. a gain of only 14.7 percent for the category as a whole - no one’s making much in the way of profits. “To get the kind of margins they need to succeed,” says Ken Visser, vice president of business development for Vancouver-based StonePoint, “retailers need to be in the value-added segment. Value-added waters are really the only ones in the industry with any margin left.”

Value-Added Drives Gains

Also known as “water beverages,” value-added waters can include any number of “enhancements,” from natural or artificial flavors and electrolytes to vitamins, caffeine, calcium, dietary supplements - even fiber. According to Beverage Marketing Corp., enhanced waters represented only about 7 percent of single-serve (1.5 liters and smaller) bottled water volume in 2006. But sales continue to grow rapidly. In fact, the company credited with starting it all, Whitestone, N.Y.-based Glaceau, saw both its Smartwater and Vitaminwater brands put up triple-digit dollar sales gain over the past 52 weeks, vaulting the latter into the number-four spot on the list of top sellers.

Although sales of conventional bottled water continue to expand as well, “The real growth is coming from enhanced water,” Sas says. “That’s why Coke and Pepsi are going after that market now.” (After launching Dasani Plus flavored vitamin water earlier this spring, Coca-Cola bought Glaceau; PepsiCo introduced Aquafina Alive in January and is expanding its Propel lineup.)

On the private label side, however, very few chains have moved beyond flavored waters. “It’s surprising that more retailers aren’t taking a leadership role in the enhanced-water category,” Visser says. “There’s so much more they could be doing with their store brands.”

Retailers have been quicker to market with fluoridated waters. Although it’s been somewhat controversial in the past, “There seems to be a little more movement around fluoridated water,” reports Water Source One president Dave Evans, who credits a recent declaration by the American Dental Association in support of fluoridated water for children who’ve passed their first birthday. As a result, the Austin, Texas-based co-op recently began offering purified water with fluoride in 1-gallon bottles under the Kid Pure brand, a product it hopes will find a home in retailers’ store brand programs as well. “National brands dominate that segment,” Evans says. “But with a little more momentum, it’s likely to get more interest from retailers.”

Upscale Packaging Sends the Right Message

One of the most important components of any bottled water program is packaging that delivers a quality message. While it’s especially critical for value-added products, even plain old spring water can get a boost if it’s in a unique, upscale bottle. For example, Target’s Archer Farms brand spring water comes in a sleeker bottle that helps it stand out from all the other products on the shelf. Yes, it costs the Minneapolis-based retailer a little more, Evans says, “but it’s really worth it to have that point of differentiation.”

“There’s really a strong fashion element to bottled water,” Visser adds. “If it’s in a better bottle, it says something about the consumer who’s drinking it - that they’ve made a decision to buy something better, that they’re better.”

But given the hue and cry recently over the negative impact of bottled water on the environment, retailers looking to upgrade their private label packaging should proceed with caution.

Although it’s not necessarily fair to focus on bottled water when hundreds of other products - including plenty of beverages that aren’t nearly as good for you - also are offered in plastic bottles, the industry has taken a beating lately from environmental groups touting tap water as a “greener” alternative that also happens to be free.

According to Stephen Kay, vice president of communications for the International Bottled Water Association, Alexandria, Va., “It’s not a bottled vs. tap water world. The majority of bottled water drinkers also drink tap water.” It all depends on the circumstances, he continues. Sometimes tap water is the best way to go; sometimes bottled water is a better choice.

Moreover, PET water bottles accounted for less than one-third of 1 percent of all waste produced in the United States in 2005. Nonetheless, Kay continues, the industry has taken a leadership role in the drive to reduce plastic waste. Although the cynics claim they’ve done it mostly to lower their own costs, many bottlers have reduced the amount of plastic resin in their bottles.

PICK THE RIGHT PACK

In addition to distinctive packaging that also answers consumers’ environmental concerns, another key to success in the private label bottled water category is offering the right mix of products. The 24-count, half-liter case pack is still the most popular SKU, but it’s also the most competitive, often used by retailers as a loss leader.

“It’s very hard for private label to compete at that opening price point,” Sas says, who adds that national brands on promotion are often priced lower than private label. As a result, “Retailers have been forced to find different ways to differentiate their store brands, including unique sizes or casings.” He adds, “I think offering the right package configuration is actually more influential [than price]. It’s a better differentiating factor in private label than almost anything else.”

Of course, the “right” configuration depends on a chain’s target consumer. For example, a recent circular from Carlisle, Pa.-based Giant Food Stores offered half liters of the chain’s Acadia spring water in a 35-count pack - “11 more bottles than the national brand” - for $5.50 a case (two for $11). In other stores, traditional 24-packs still are the answer - but with 20- rather than 16.9-ounce bottles, Kay says.

Retailers also are having some success with sizes as small as 8-ounces - some with fluoride. For example, Minneapolis-based Premium Waters recently began packaging some of its brands in 10-ounce bottles designed to fit in children’s lunch boxes. But the national brands are jumping on that trend as well, thanks to the success of Nestle’s orb-shaped Aquapod bottle, which is aimed directly at children.



Despite the relative success of non-traditional sizes and case packs, manufacturers warn against offering too many SKUs. “One of the biggest mistakes [retailers make] is offering too many products without the sales to justify it,” adds Jason Roberts, vice president of Forest Grove, Ore.-based Cedar Canyon Bottled Water. “The 16.9-ounce bottle sells better than the 1-liter bottle so I would stick with the most popular sizes until a base is established, and then expand the lineup.”

“There tends to be too much focus on offering too many different sizes and configurations that really are the same,” Evans adds. “You don’t need four or five different mixes of 0.5-liter items.” Find out which items are moving best, he continues, and focus on those.

Of course, some of the best movers in any private label program are 1- and 2.5-gallon jugs. Although jug/bulk still water sales continue to decline, dipping another 1.6 percent over the past 52 weeks, private label owns a whopping 44.1 percent of the subcategory, which still managed to bring in almost $750 million over the past year.

Even more important: Retailers were actually able to squeeze some profits out of the bulk segment, a fact that hasn’t gone unnoticed by the national brands. In an effort to win some of that business for themselves, Nestlé and others are borrowing a page from private labelers’ playbooks. While retailers attempt to capture additional single-serve sales through more upscale packaging for store brands, national brands are doing the same thing on the jug side.

Many private label gallons are still in no-frills HDPE, allowing retailers to sell them for well under a buck apiece. To differentiate themselves - and justify their significantly higher price points - national brands are rolling out gallons in fancy PET bottles with handles, larger cap openings and other value-added features.

While some retailers are likely to follow suit, others are finding unique ways to make traditional HDPE gallons more consumer friendly. For example, Sas reports, Creekside Springs created three-packs of gallon jugs so consumers wouldn’t have to purchase as often (and to lower the risk of out-of-stocks - a big problem in the bottled water aisle). And because consumers who purchase the “3-1” now have more water on hand than in the past, they actually use more, leading to an increase in gallon sales. “So private label gallon sales aren’t just tied to price point,” Sas says. “Package differentiation is also important.”

Even Basic Merchandising Does Wonders

Another important component of any successful private label bottled water program is proper merchandising and promotion. But according to Evans, dead-net pricing that allows retailers to hit those opening price points tends to swallow up any promotional dollars that manufacturers might make available. “Low price, day in and day out, is what’s most important,” Evans says, emphasizing price impact in the case-pack segment.

“Availability is a big issue, especially on the bulk side,” Sas adds. The product takes up a lot of space, has to be restocked often and sells for a lot less than many other items in the store. But because it’s a staple, “You have to have it,” he stresses. Running out of bottled water is like running out of milk or bread - and it doesn’t reflect well on the retailer.

Another inexpensive way retailers can promote store brand spring water is to emphasize its source, especially if it’s local. “Water isn’t just water,” explains Kevin Crawford, a distributor for Oxford, Wis.-based Great Glacier. “It all tastes a little different,” a fact he says retailers are finally beginning to grasp. “So, if your water, like ours, comes from a protected source...that’s something you need to advertise more, especially since the national brands have made public the fact that they come from municipal sources.”

And if it’s from a nearby source, all the better. “Consumers really do want to buy local.” But it goes beyond just wanting to support the local economy.

“In Europe,” Visser says, “it’s getting to the point where you have to display how many miles away the product comes from. The more ‘green’ the product,” he explains, “the more consumers expect the company to do its part to reduce the carbon footprint.”

On the value-added side, retailers may want to consider promotions outside of the store - sporting events, health fairs, etc. Visser notes that, “Brands that stick are being seen outside the store.”