A recent report from Beverage Digest, a trade publication,
suggests that PepsiCo (
) is planning to launch a new premium water brand,
by next year. We see this as an attempt by the company to revive
its ailing North American beverages business, which has been facing
the heat from declining CSD consumption. Although bottled water
consumption has been growing strongly as a result of shifting
consumer preferences, it is not as profitable a business for
beverage companies due to the lack of differentiating factors.
Premium water on the other hand allows these companies to earn
better margins by adopting a differentiated targeting strategy. We
therefore believe a successful launch will help improve operating
margins of PepsiCo's bottled water business.
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The consumption of fizzy drinks has been declining in developed
markets over the past few years. The situation in the U.S. is a key
example of this trend - per capita consumption of CSDs peaked
around 1998 at about 54 gallons a year. Today, the figure stands at
around 44 gallons a year. A major reason behind this has been
growing consumer awareness about negative health impacts of CSDs. A
research paper recently published in the
American Journal of Public Health
"Soft drink consumption is significantly linked to overweight,
obesity, and diabetes prevalence worldwide."
This certainly is bad news for major cola companies
) and PepsiCo, both of whom have been hit hard by this trend.
PepsiCo posted a 1% decline in organic net revenue in
its Americas beverage operations for the second quarter
as lower volumes more than offset higher net pricing.
The soda slump has resulted in a surge in bottled water sales in
the U.S., which is evident from the fact that the amount of water
consumed by an individual on average has grew by ~40% to about 58
gallons per year since 1998. This has primarily been led by strong
growth in the consumption of bottled water, which has almost
doubled to 21 gallons per year. We expect the trend to continue in
the long run as increasing health consciousness and convenience
will continue to drive consumers towards bottled water.
However, the issue with bottled water is the lack of substantial
differentiating factors, which makes it a commoditized business
with high price elasticity of demand. It is therefore not a very
profitable business for beverage companies who continue to rely on
CSD sales for a bulk of their profits. However, companies can earn
more by adopting a differentiated targeting strategy by building
brand equity through marketing investments. Differentiated
targeting implies offering several brands/products to meet the
unique needs of different consumer segments. Coca-Cola's
, and other popular brands such as
are betting on the same strategy. According to Beverage Digest,
volumes have been up ~16% y-o-y during the first half of this year.
The overall premium water category has also been doing pretty well,
as revenues grew by ~11% last year, which reflects strong demand
for these products.
PepsiCo sells bottled water under its
brand, which holds almost 10% share in the U.S., similar to
. However, the company does not offer anything in the premium water
category as yet. The introduction of
premium water brand will allow the company to more effectively
compete in the fast-growing bottled water category with better
Both PepsiCo and Coca-Cola have also been increasing their focus
on the flavored or fortified water segment as it is offers greater
differentiation than regular bottled water. This segment includes
products such as PepsiCo's
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