The market for bottled water may be drying up

The market for bottled water may be drying up. Despite massive discounting, brands like Aquafina and Poland Spring are experiencing a sales drought unlike any the category has ever seen.

After almost a decade of triple and then double-digit growth, sales volume grew less than 1% for the first half of the year, per Beverage Digest, Bedford Hills, N.Y.

The chief culprit: the economy. Shoppers are less interested in paying for a product that they can get for free.

A secondary reason is that green-minded consumers have become active in railing against buying plastic bottles in bulk because many will end up in landfills. The fact that gallons of fuel are used to transport a product that is available through the plumbing is another concern. Finally, there is a widespread belief that PET bottles leech toxins into liquids if frozen or heated up, a claim which is widely disputed.

"The category has felt the impact of the negative publicity it has been receiving lately," said John Rowan, editorial director at Beverage Marketing, New York.

In addition, the industry's sheer size has made such a slowdown inevitable, he said. "Bottled water is No. 2 in volume behind soft drinks. Something that big can't grow forever."

The industry's response so far has been deeper discounting. The average price of bottled water was down 6.6% at supermarkets for the four weeks through Aug. 10, per IRI. Dasani led the way with a 10% decrease.

A recent report by Brand Keys, New York, based on responses from 26,000 consumers in the first quarter, shows "value" was the No. 1 attribute consumers were seeking in a bottled water, beating out "purity." Such findings, coupled with the widespread price cutting, has raised fears that the category has fallen victim to commoditization. "I was walking home last night and saw a sign with 'water 99 cents' crossed out and replaced with '89 cents.' So there it is. How much is water worth?" said Brand Keys president Robert Passikoff.

One beneficiary of the commoditization has been private label. Sales for such brands rose 17.2% for the first half, per Beverage Digest.

There is considerable trading down to private label and tapping into the cheap 24-bottle case segment, said Gerry Khermouch, editor of Beverage Business Insights, West Nyack, N.Y.

Khermouch said Coke and Pepsi have no one to blame but themselves."To a certain extent, Coke and Pepsi decided not to chase that unprofitable business. This, of course, is ironic as even basic bottled spring water was premium priced until Coke and Pepsi entered and turned it into the latest front of the cola wars."

Coke and Pepsi's solution has been to shift its resources behind enhanced water brands. Ad spending in the U.S. for Coke's Glacéau Vitaminwater was $39.5 million in the first half (excluding online), per Nielsen Monitor-Plus. This exceeded the spend behind all of the regular bottled water brands combined.

Of the top regular water brands, Aquafina led the pack, spending $5 million on media for the first half of the year. Its efforts are directly aligned with its sponsorship of Major League Baseball. PepsiCo more than tripled its budget for SoBe Life Water, compared to the first half of last year, spending $22 million. "Consumers are seeking variety. Flavored and enhanced waters are a great answer to that demand," said a Pepsi rep.

The enhanced water category grew 18.4% in the first half.

Kim Jeffrey, CEO of Nestlé Waters, Greenwich, Conn., acknowledged bottled water was "experiencing slow growth compared to historic levels. Nielsen data shows our category is highly susceptible to an economic downturn."

Jeffrey is confident it will rebound: "Seventy percent [of bottled water consumers] came from other beverage consumption. They didn't come to our category from tap water."

John Sicher, editor of Beverage Digest, agrees. "If the economy improves and consumers begin to feel better, we're going to see at least some increase in the growth rate of bottled water again," he said.

Nevertheless, Mark DiMassimo, co-founder of Tappening.com, which promotes drinking tap water, said a cultural shift has occurred: "Instead of being a badge for health and status, bottled water has now become a badge for environmental wastefulness. And, cost sensitivity is coming up fast. It's caught in the same storm as Starbucks is. It felt good to be a little extravagant a few years ago. Now, it doesn't feel good to waste money. [Especially considering that] being charged for water is like being charged for gravity."