Bottled water’s bubble may have burst the past couple of years, but retailers with private label water have done just swimmingly, and retailers are optimistic that the next 12 months will be equally strong.
The packaged beverages subcategory enjoyed decades of growth, as consumers increasingly chose refreshment that fit their healthier lifestyles. From 1984 to 1994, when Pepsi introduced its bottled water, sales zoomed from $1 billion in the U.S. to $3 billion. Coca Cola introduced its bottled water in the 1990s, followed by Nestlé’s entry in 2000. By then, sales had climbed to more than $5 billion.
Bottled water wholesale dollar sales first exceeded $6 billion in 2000. By 2007, they soared past $11.5 billion. Category sales declined to $11.2 billion the following year and to less than $10.6 billion in 2009. According to NACS’ 2010 State of the Industry data, bottled water dropped from 2008 in percent of packaged beverage sales, average store sales, gross profit margin dollars and gross margin percentage.
The bottled water phenomenon came under increasing attack from environmentalists’ campaigns against the disposal of the bottle plastic, and manufacturers’ claims of their water’s superiority to tap water drew closer scrutiny. Some municipalities bristled at their local water sources being used by big business, while others voted to ban bottled water at official functions.
Still, the bad press was hardly denting bottled water consumption. From 2001 to 2005, U.S. bottled water sales rose from $7 billion to $10 billion. After growing by 10.8% in 2005, bottled water volume jumped 9.5% in 2006.
The recession that began in 2008 has done more to slow consumption and sales than any public relations smear campaign. People simply decided that it is easy to stop paying for what they can get from their taps.
“The recession takes its toll,” said Tom Lauria, vice president of communications for the International Bottled Water Association (IBWA). “It’s a free-market economy; our members understand it’s a part of doing business. No one is panicked.”
Private Label Strength
Retailers with growing private label brands seem to be the least concerned about a drop off in water sales, and with good reason. In the year between the summer of 2008 and the summer of 2009, private-label bottled water sales were $120.9 million, a boost of 7.4% from the previous year, according to SymphonyIRI in Chicago.
Gary Tabor, director of marketing for Pak-A-Sak, a 35-store chain based in Portland, Ind., said his private-label sales had two milestones this past year.
First, Pak-A-Sak’s 20-ounce bottles not only outsold those of Dasani and Aquafina, they did so with the national brands on promotions that brought them down to the same price as the chain’s water. Tabor said the gross margin on the national brands is 33.7%. By comparison, he pays 33 cents for a bottle of Pak-A-Sak water, which retails at 99 cents with a 68.6% margin.
The second milestone was the 41% sales boost in the first nine months of 2010, mostly attributed to a simple merchandising maneuver—displaying Pak-A-Sak water on ice in barrels that greeted consumers as they entered stores from May to October.
Tabor used the barrels for Bug Juice in two of those months, but reported a 100% increase in private-label water sales for June and July over 2009. He spent $500 for graphics for the barrels’ trial. “The barrel display is now a regular feature,” Tabor said.
Overall bottled water sales were up almost 14%, said Tabor, while gross margin rose 26%. Driven by aggressive tea promotions—tea dollar sales rose 66%—total cooler sales jumped almost 7%, with gross margin up 9.4%.
“We’re just now digesting the success,” Tabor said of the recent water splash. “The beauty of it is we didn’t have to discount to get the volume.”
Additionally, the chain has been active with grassroots promotions. For example, when it donates water for community causes—Boy Scouts, parades, etc.—it gives Pak-A-Sak water. “Everybody’s walking around with our logo in their hand,” Tabor said.
Tim Grossi, category manager for 45-store Dash-In Food Stores of La Plata, Md., said the exposure provided by his chain’s logo on water bottles was the point of turning to private label six years ago.
The chain wanted to boost its brand visibility. The bonus is that Dash-In water accounts for 40% of the chain’s bottled water sales, making it the category sales leader by 10% over Deer Park and by 25% over Aquafina and Dasani.
Half-liter Dash-In water is anywhere from 10-50 cents lower than the major brands. While bulk sales are not cost efficient for retailers with private-label water, Grossi has been selling six-packs of Dash-In water from the cold vault for $2.49 at the rate of one per day. “Which is good,” he said. “It’s an impulse convenience item.”
Grossi said bottled water accounts for 20% of the chain’s vault sales—carbonated soft drinks are 50%—and continues to grow. Private label water sales have benefited from the national brands’ retail increases after they aggressively promoted to gain market share.
“They’re not giving it away anymore,” Grossi said.
Dash-In reported higher store brand sales and higher category sales, and lower national brand sales. Grossi said national brands will always be important, despite the significant retail gap.
“There’s always going to be a customer base that wants a name brand,” Grossi said, “and youth is heavily influenced by media ads.”
One marketing approach Grossi doesn’t care for is iced-barrel displays because they need constant upkeep to stave off unpleasant appearances. “They are nasty,” he said—but he will bundle a bottle of water with a foodservice item.
Lauria, of IBWA, is optimistic for bottled water’s rebound, as is Michael Bellas, chairman and CEO of the Beverage Marketing Corp. in New York City. Beverage Marketing and IBWA released their annual report on bottled water last May and it showed that while consumption dropped 2.5% in 2009, bottled water held steady at 29% of the liquid refreshment marketplace.
“Although 2009 was the second year in a row of unusual weakness in liquid refreshment beverages’ performance, the worst may be over,” Ballas said. “Beverages are likely to be one of the first categories to benefit with a job-led economic recovery because they represent an inexpensive form of pleasure.”
Lauria agreed. “There’s a light at the end of the tunnel,” he said.