Bottled Water Industry Analysis

I. Dimensions of Bottled Water Industry

The bottled water industry enjoyed substantial growth in the last decade, especially in the United States. The popularity of bottled water increased dramatically since 1996, and different customers were able to be targeted. The different customer groups included those concerned about water safety, those primarily concerned about fitness, and those customers that drink bottled water primarily for the convenience of it. Customers either purchased bottled water in bulk, or in single serve bottles. Bulk buyers purchase for the home and office in returnable five gallon containers, whereas single serving bottles are purchased from convenience stores, wholesale clubs, and grocery stores.

Bottled water is sold in a worldwide market and it is showing positive growth in the United States. Nearly every location where food is sold now sells bottled water. Several manufacturers control the bottling process from raw material to end distributor, otherwise, licensing agreements must be purchased. Companies such as Coca-Cola and Pepsi enjoy an advantage because they can use their established channels of distribution to include bottled water. It is very important in the industry to have distribution access to supermarkets, wholesale clubs and convenience stores. It is also important that distributors maximize their deliveries in order to keep costs down. It is also necessary for competitors in the bottled water industry to manufacture in large volumes to obtain higher margins.

II. Industry Structure

The industry enjoyed a nine percent growth rate from 1996 to 2000 in the United States, which made the U.S. the world's largest market and a product that was growing faster than any other beverage in that time period. Now bottled water is reaching the mature stage of the product life cycle and a few large firms dominate the industry. There are some small regional sellers, but the top five sellers have 75 percent of industry sales. The capital requirements range from $125,000 to more than $100 million, depending on the sophistication of the plant. Barriers to entry are relatively low, although there are several FDA, EPA, and state regulations that must be met. Competition is fierce and the industry is showing signs of slowing, so new entrants are not much of a threat. The competitors in the industry already have established channels of distribution and bottlers such as Coke and Pepsi dominate the vending market, which shows how important access to distribution channels are. Economics of scale is also vital to keeping expenses, such as marketing expenses, low and to engage in price competition.

III. Driving Forces

Changes in the long-term growth rate are an important driving force. The overall growth rate for the industry is declining as the market becomes saturated, even though per capita consumption is still growing. The main sellers of bottled water are now engaging in price competition and attempting to differentiate their product, which are both signs that the industry is reaching the stage of maturity. Types of differentiation include enhanced vitamin and supplement water. The industry is also consolidating as the big bottlers battle it out for market share. The entry of Coca-Cola and Pepsi in the U.S. bottled water market substantially increased competition and forced smaller sellers to compete on price.

IV. Key Success Factors

The most important success factor is access to distribution channels, which is the reason Coke and Pepsi have been such contenders in the industry. Danone was hard pressed for distribution channels after Coca-Cola started manufacturing their own bottled water. Name recognition and the image of pure, refreshing, healthy drinking water are vital in generating demand for the product. Large manufacturers are successful when they keep their production costs low so they can spend the money needed on marketing the product.

V. Five Competitive Forces

Rivalry among competitors is the strongest competitive force in the bottled water industry, with the power of buyers and threat of substitute products following in strength. Competition will most likely continue to increase as the industry matures. Price is a main factor, although the large companies also compete on image and distribution channel access. Substitutes to bottled water are everywhere, from soda to juice and power drinks, making it a moderately strong force. The threat of entry and power of suppliers are weak competitive forces in the industry. See Appendix A for a more detailed examination of the five competitive forces.

VI. Attractiveness of Industry

For the smaller scale bottlers, the industry is becoming increasingly less attractive. As mentioned before, the product is entering the maturity stage of the product life cycle, which does not promote a lot of opportunity for new

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