The following is transcript of Beverage Digest's podcast, The Breeze, Episode 12. In today's episode, industry expert John Sicher joins Beverage Digest Editor and Publisher Duane Stanford to explore the evolution of the purified bottled water category. As Coke and Pepsi shift their casepack water strategies away from DSD at Walmart, what lies ahead for the category?

Please excuse any transcription errors.

DS:

Hello and welcome again to the Breeze with Beverage Digest. I'm your host, Duane Stanford. This is where we bring you into the kinds of industry conversations that we have here every day at Beverage Digest. We dissect what's happening, connect the dots and ask the most important question what does this mean? Let's say hello again to our regular podcast contributor, john Sicher. John has spent years following the beverage industry, first as publisher of Beverage Digest and now as an industry consultant. John hello, hey, Duane, how are you Good to be with you again? Fantastic, all right. For those of you who don't know, john is a very good amateur photographer. His specialty is New York City life and I absolutely love his work. First of all, john, is that fair? Is New York City life kind of a focus of your photography?

JS:

Yeah, I love shooting in New York City and thanks to you, I've got time to do it now, Duane.

DS:

That's great. So John sent me a really interesting shot this weekend from his exploits around town and this was of a child's birthday party and the table was filled with boxed water and some smart water. But the fact that the table was covered with water was a real sign of the times, I'd say Now. When I was a kid in the 1970s and 80s, the drinks on the table at my birthday party most certainly would have been soda. Now, john, I know you grew up in the 50s. Is that right, correct? So what would have been on your birthday table growing up? I'm curious.

JS:

Yeah, it would have been pizza and burgers and probably a Coke or Pepsi. That's what folks used, even for kids, to celebrate with back then. But boy, as you point out, times have really changed.

DS:

So that photo that you sent John, with all the boxed water on the table, and I just want to disclose too, boxed water is a sponsor of Beverage Digest and of the Future Smarts conference, but they do not even know I'm talking about boxed water today. But this story that I, that photo that John took and a story that I broke in a recent issue of Beverage Digest, got John and I thinking and talking about the bottled water category. Now, if you'll remember, bottled water wasn't a thing, at least not any kind of scaled way, until the mid 1990s, and that's when brands like Evian moved from glass to lighter plastic bottles. Now, around that time, in 1994, pepsico got into this growing bottled water category by creating the first purified bottled water brand, which they called Aquafina. Now Coke was a little more suspicious to the category. They wanted to make sure this was something that was going to stick before they got in, and they held out for about the next five years and then, in 1999, created Desani, their version of a purified water brand.

DS:

Now, by the 2000s, this category, this bottled water category, fueled in large part by these purified water brands that you know, instead of springs, etc. They would basically take tap water, add some minerals, put it in bottles, make it very convenient and portable for consumers. And this category was on a tear and Nestle decided to create its own national bottled water brand and they called it Pure Life. Now that brand would go on to change the game by driving down costs in a strategy to stack the water high and sell it cheap versus other national brands. Now what happened with that strategy is that it created a race to the bottom when it came to pricing, especially for what's known as case pack water. Now those are the 12 and 24 and even larger packs of shrink-wrapped bottled water that you see in the stores like Walmart and the grocery stores. And this whole evolution came while Americans had this growing desire to cut sugar intake from beverages. So that helped fuel some of this transition to water too, and the case pack water trend. And what this did over time is drive more and more volume at ever cheaper pricing, which you know, as it will commoditize the bottled water market.

DS:

Now that brings us to today, and, as BD reported exclusively last month, Walmart has been working with the Coke and Pepsi systems to move case pack bottled water from direct store delivery to a warehouse delivery model. Now what's most interesting is that these two systems generally bristle at any attempt to scale back DSD. They're always in fear of a slippery slope. Other products would be moved from DSD to warehouse, for instance. Now Coke and Pepsi have been largely working with Walmart on this plan, according to the bottleers that we've spoken to. Why would they do this? Because the segment is simply not profitable enough. Coke and Pepsi want to focus on higher margin products. So, john, you covered this industry in the late 1990s, the early 2000s. What was the impact of this bottled water on the industry as a whole?

JS:

You know, duane watching what happened in the water business has been fascinating. If you go back to the 1990s, as you pointed out, the cola companies were really not much in the water business. Aquafina was introduced in 1994, I think, but didn't become national until a few years later. Coke was taking a watch and wait attitude, but they got spurred along by the following development their bottlers started taking on other water. So Coke and New York, which no longer exists, is now part of Coke, liberty. Coke and New York took on a bottled water brand called Vermont. Pure CCE started taking on a Canadian water brand called Naya. And my guess is, though Coke had some ambivalence about the water business, it realized, watching its bottleers take on other brands and watching the growth in the category, they had to get into it, and they got into it very significantly.

JS:

So, and what's happened to their, what's happened to the water business for the cola companies has not been good. So back in 2000, I was looking at some of your data, duane back in 2002, 2003, Coke and Pepsi had a 23.4 share of the water business. In 2022, that's 2003. In 2022, about 20 years later, their share was combined share was down from 23.4 to 9.8. What happened was bottled water didn't really get branded. It wasn't something that Coke and Pepsi could continue in case pack water to sell at a premium Private label, and Nestle brought the pricing down. I think today over half of private label, half of the pet water business is private label and you know there's not a real place in my view long-term for Dasani and Aquafina in the case pack water business. I don't think they're going to be able to sell as inexpensively as private label and I'm not sure that a lot of consumers are going to pay a premium for a brand which is basically just water.

DS:

So do you think it makes sense then that the Coke and Pepsi systems are looking at a potential move at a customer like Walmart to move that business from DSD, which you know is a more costly endeavor for the companies, for the bottlers, because they're going into the stores every day, they're putting the water on the shelf, they're managing that inventory, they're managing the merchandising and display. But you know they believe obviously with DSD, that they can do a very good job of moving that product through and keeping grabbing people's consumers' attention. So it's worth it. Warehouse delivery less expensive. You know it's the stores putting it on the shelf instead of the bottlers. But of course there's a trade-off. I guess what they're saying with bottled water here, or what they are saying with bottled water, is that trade-off may not be worth it anymore. What do you think?

JS:

Is that a good strategy? I'd call it a necessary and probably an interim strategy. I just don't think. If you look at your recent data, Duane, which I do all the time, private-label water has over a 50 share and private-label plus blue triton, which is the old Nestle brands, have about a combined 80 share In CSDs. Private-label only has, I think, about a 5 or 6 share. So the bottled water business, the pet water business, the case-packed water business, is simply moving in a direction of very low price, very thin packages, not branded for the most part. I think if Coke and Pepsi want to stay on shelves at a store like Walmart, I think they're going to have to bring the price way down for consumers. I'm not sure they can do it enough long-term, but I think, on at least on an interim basis, it's the right thing and a necessary thing for them to do.

DS:

It seems like the play for them, then is that maybe you keep designing Aquafina around on some of those shelves, but it's really kind of a play for consumers who maybe they're having a party and they want a branded product on the shelf instead of private-label product for their guests. That might be the opportunities, but beyond that they don't want to overextend themselves and they could be focusing on other things you know more profitable.

JS:

Yeah, I think. Look, coke and Pepsi are great marketing companies. I don't think they had time before the price pressure started to really build long and lasting brands with the Sonia and Aquafina. People talked about the risk of that many, many years ago and I think long term, I think that probably smart water and life water will play a role in Coke and Pepsi's business water business as a premium entries which are probably more single serve and not sold in Case Pack and I think over time you'll see less and less Case Pack to Sonia and Aquafina on retailer shelves.

DS:

Yeah, I mean, if you think about the average consumer, if they're going in looking for bottled water, they're really shopping price these days. And you've got players like, you know, nestle Waters, which later was acquired and became Blue Triton. I mean, this is all about and you watched this play out for years, didn't you, john? Making those bottles much, much lighter. I mean, in some cases some of these bottles almost feel like plastic bags. They're so thin. And you know getting that price down, you know bringing the packaging down, et cetera, all the things that you do, and you're really trying to drive out costs. And that's not exactly what you want to do with a branded product that you're trying to get premium pricing for. So you know, with that, even Blue Triton, these days, since the acquisition, I mean you see their volumes really kind of struggling lately. You know, some of that must be the fact that they're really trying to bring some more profitability into that business and maybe sacrificing some volume along the way. I mean, what do you think? What do you think's going on with that?

JS:

Yeah, I think it's a problem for them too, but I think maybe less so. Because they have such scale they can probably produce on a less costly basis and on other companies For the most part they don't have DSD. But I think even for Blue Triton with their brands like you know, a Poland Spring it's going to be hard competing long-term against private label. I think there are some categories in the grocery and beverage business where private label has a 60 or 70 share. I think private label is probably heading that way.

JS:

Duane in the case pack water business, I just don't think that. I don't think the COLA companies had enough time to establish brands that could command premium prices and I think that the water business is going in the direction of a private label business and I think even Blue Triton is going to get squeezed on that. You know you always have to look at why do consumers buy products, why do they pay a premium for branded products? I think it's pretty clear with the COLA's, with Sprite, with Mountain Dew, there's no compelling case to pay a brand premium for bottled water, and you know it's. I think Co-compepsy did the right thing trying to get in, but you know economic pressures that they couldn't control or market pressures they couldn't control were too strong, and I think that's where we are today.

DS:

Yeah and you know so. Then you know years later they buy vitamin water, which with that came smart water. You know you've seen over the years then start to focus more on that premium smart water where they can actually bring some of their brand branding expertise to that. They can create a brand at a little more premium price point. You've seen PepsiCo do that as well with life water. That was their answer to smart water. That's been a part of the market that Co-compepsy seemed to have, or not seemed to they have been leaning into in the last decade or so and you know talk about that a little bit, john, kind of watching that unfurl and then you know that kind of led to the alkaline water trend as well that we saw with Ascension. So you've seen this whole move into premiumization and Co-compepsy have kind of responded to that.

JS:

Yeah, I think that I think, basically, you know, the water business has split into two businesses. One is the Case Pack water business, which in many ways is a tap water replacement business, and then you have the branded and functionally enhanced waters, like smart water, like life water, like Ascension, and they've done a pretty good job at figuring out a way to make consumers believe their brands have a certain specialness and can basically sell those brands at a premium. However, the caveat is that those brands are not gonna end up being on the shelves as sold in Case Packs. In other words, what's happened is, if you think of the carbonated soft drinks, those are sold in coolers and sea stores and supermarkets, mass merchandisers, both in a cold format and on the shelves, and basically multi-packs.

JS:

I think that these waters you're talking about, like Ascension, smart water and life water, are gonna have a very small play in the Case Pack business. Maybe not at all, because they're not gonna be able to compete on price. So they're gonna have to basically convince consumers. There's a reason why they should pay a premium for those, and there are lots of reasons consumers might do that. They might think they're healthier, they might think they have a hip brand imagery, whatever it is, and I think they'll do that success through those brands. But they're not gonna be able to do it with Desani and Aquafina.

DS:

Yeah, and that's kind of the point. They don't wanna do that. They want these brands to be in convenient stores. They want you, when you get your gas, to go in and pick up a smart water, some of these value-added waters, in the grocery store. They want you to pick that up at the checkout line in the cold refrigerator right there to check out, or the, the cold vault that's placed there in the, the, the main alley of the store. I mean, that's kind of the play. That's where you get that premium pricing, that's where you're not, you know, fighting on a more commoditized level, and that seems to exactly be what they're going for now.

DS:

I think one thing about bottled water over the years to that was also true and drove this market was that this this was the same time that consumers were looking for alternatives to beverages with sugar. They were, you know. You know they felt like water was kind of the this part of this healthy lifestyle. As people lose weight or just try to be healthy, you know, drink X amount of water a day. They still need a portability. Busy Americans, they need portability.

DS:

So bottled water was away with something that kind of quenched that need and that was driving a lot of the market and then over time you started to shift into into the fact that consumers wanted some functionality in their water too, and that's kind of where we are now. We've moved into this real period of functional waters and you know, essentially an electric alkaline waters really came along and and essentially a show that you could create a lifestyle brand around a functional water use case. And now you see, you know any number of companies getting to that, including coke and Pepsi. Body armor sports drink they have a power water. Now that's moving into the sports space. You've got Gatorade water just introduced to water as well, so they're clear. Clearly these companies coke and Pepsi see money to be made, or at least they need to serve consumers on the water market with these kind of products.

JS:

Yes, they do and they need to serve their customers too. I mean they, if you know, if, if a bottler goes into an account it wants to be able to sell it, doesn't it? It would that the bottler wants to sell a water. Well, today, going in the, it's a pretty easy proposition in a sea store, for because, because of smart water, life water, I think Gatorade water is probably going to be quite successful for PepsiCo. But again, I think that that's the, that's the part of the water business they're going to play, and I mean these great big branded companies like coke and the coke and Pepsi that handle huge amounts of volume are going to end up playing in the water business in a price premium, smaller volume business, and I think that's what we're going to see over the next five years.

DS:

That's one of the reasons why these bottling systems coke and Pepsi are even entertaining a notion like moving case pack water from DSD to warehouse delivery. I mean, the fact is, you've got these kind of trends working against you on case pack water and even though they don't like to see things move from DSD to warehouse, the bottleers you know understand, I think, and you know that this is a category that they need some kind of solution for so they can focus on some of these other products. You know the coke system seems engaged in this question with Walmart over moving case pack to DS, from DSD to warehouse. The Pepsi system at least PepsiCo, which owns most of its bottling seems pretty engaged in the in the in this as a solution.

DS:

Some of the independent bottlers, you know they're constantly concerned about having enough volume on their trucks to kind of drive their profitability and and make their scaled systems. You know scale is what beverage businesses operate on and so they're always concerned about any loss of scale and what that might mean from a slippery slope perspective. You know, what would you say to independent bottlers in terms of that fear, given this situation? I mean, how do you assess that little bit of a schism within this whole thing right.

JS:

I would say that the the the move from DSD to warehouse is probably going to be, at least for the near future, specific to water, because that's a category where co-compepsy really cannot be price competitive. They don't have big brands that have are growing or have growth potential. I do not see that happening with CSD's. It could. The warehouse delivery couldn't, couldn't handle the velocity of CSD's and I think co-compepsy can maintain control of the brands in the other big categories, like sports drinks, like the juice drinks, like the ready to drink teas, certainly the energy drinks, but I don't think they're able to do that with bottled water. So I I don't see a mass exodus of products from the DSD to warehouse or in the next four or five years, because I don't see the same market pressures pushing against other categories that I do against case pack water so here's another interesting wrinkle, john, I've been thinking about.

DS:

You've got this entire trend now, especially with younger generations you know Gen Z, certainly younger millennials, you know even older millennials this whole move to reusable water bottles. I mean it's to the extent to where carrying one, carrying a reusable bottle, is fashionable. You know it's a way to. You know it used to be that when you carried, you know, a branded soft drink or whatever around it, had that badge identity. Well, you, these young consumers, are getting that same thing from these reusable bottles and you know in that's good, that's obviously has created, will create some pressures on bottled water. One of the questions is okay, where does that go? What does that mean long term? Clearly it's an opportunity for people to move to young consumers to use tap water instead of packaged beverages. How big a risk do you think that is?

JS:

I think it's a risk. I think that you know, in our neighborhood in New York City the city just opened a beautiful new six block long park along the East River and there are water stations and not just water fountains but clearly water stations along that parkway. You know, I think that concerns about plastic, the inconvenience of these super thin wall bottles, are going to basically drive more and more consumers to use these containers you're talking about. I think that the convenience of bottled water will ensure the category stays big for a while, but I'm not sure how much bigger it's going to get. You know, I used to tell people that.

JS:

You know, try walking up Third Avenue in New York City on a hot summer day and trying to get someone to refill your water container, you know. But you can probably every other block in New York you can go in some place and buy yourself a bottle of water. So there's still a significant convenience factor. I mean, to your point in your opening comments, one of the main reasons that pet water broke out was because in the 90s or maybe even the late 80s, it started emerging in soft drink like packaging. So it was convenient, it was resealable, you could buy it nearly any place and that convenience really helped drive the growth and it will keep it large, at least for a while. But those containers you're talking about are certainly going to cut into the growth.

DS:

Yeah, it's all good points and you know, part of what's happening obviously is some of the younger consumers being more interested in the sustainability element of all this and that's obviously a huge that's for a whole nother show. But you know sustainability issues, you know plastic waste all of that you know is very much in the mix here, obviously, and these young consumers are seeing reusable bottles as an alternative to that. But I think it's still really interesting as well the fact that they are it's moving into this kind of lifestyle usage as well. They may even drink bottled water, they may pour bottled water into their reusable bottles, but a lot of it is about that lifestyle. And you know you raised a good point about you know being able to. You know water fountains now with that are made to put a bottle up to a reusable bottle to fill your bottle. You know I was on the board of our Homeowners Association and you know it was the liaison for the pool and I kind of kept the pool running and one of the things that some of the younger people who moved into the neighborhood started to ask for was a water fountain with one of those, the type of water fountain where you can refill a bottle. So you know that's definitely a pressure here.

DS:

Now here's what's interesting to me too is that one of the other things we've seen now are powders and part of you know these single-serve powdered beverages. Part of the reason I think you're seeing that growth is because they're very easy to use with your reusable water bottle and tap water. And you know people still like flavor, they still like variation. You know they like functionality and powders are a great way to do that. So you've seen Coke and Pepsi and many players get into these powdered waters. They also are really great for putting into bottled water. So I kind of wonder Is there a chance that if powders continue to grow, could that sort of help prop up the bottled water category a little bit over time or maybe slow some of the trends that are happening? Just you know, how would you see that playing out?

JS:

I mean only based on instinct. I think that the tablets and powders are going to basically grow. I think that you know, older consumers like me are not gonna use them as much. So I think that younger consumers, who are predisposed to use these refillable containers, are also the ones who are going to basically using the powders and the tablets, because they're less in the habit of relying on beverages that they only buy in stores. So I think as more and more young people come into the prime beverage buying age group, I think there'll be more and more people using those containers you're talking about and more and more people using the tablets and the powders. So yes, I think, but I think you're gonna see more people using the tablets and the powders to pour into those containers you're talking about than they will buying a half liter bottle of water in a case pack, breaking it open and putting the powder or the tablet on that. I see that has less potential.

DS:

Now, and one interesting caveat to all this is I look at young people. You know I've got a 22 year old, a 27 year old, my 22 year old. I never see her without her reusable water bottle, never. I mean she just carries it religiously everywhere but she also drinks packaged beverages. She also drinks barista served beverages or fountain beverages and a quick trip convenience store et cetera.

DS:

I guess my point is this and this is anecdotal, but I see enough of it to where you know there's something here and that is the fact that, just like with many things, young consumers they don't drink, they typically aren't all or nothing on sugar, they just pick their shots on sugar, they indulge when they wanna indulge. I think that's what I'm seeing so far with younger consumers. You know, especially my daughter's age group, that they basically will carry their water bottle and buy packaged beverages and buy fountain beverages. They're moving in between these categories and a lot of it has to do with just trends or what they like to drink, things like that. So I guess the point there is, one of the things you're gonna see is this kind of pressure on consumer packaged beverage companies.

DS:

They're gonna be competing with these other occasions. So this, you know, automatic number of servings that they're used to getting from each consumer is gonna be pressured. That's where they're gonna have to find alternatives. And so you know, to circle back to some of our other conversations. That's why they're playing with powders, that's why they're experimenting on alcohol, that's why they're looking more into coffee, because they're trying to fill what is clearly an emerging gap. Any parting thoughts on that? John, and particularly you know the question what do you think is next for bottled water?

JS:

I think next for bottled water is what you were talking about, and that is I think that private label will continue to grow. I think the case pack water business will become a private label business over the next five years or so. I think the big beverage companies like Coke and Pepsi will do a good job with brands that are either have a functional ingredients or play off other brands of theirs, or that they have had the ability, the time and the ability to brand.

DS:

Yes, John, after 30 minutes of talking about this issue, I'm pretty parched. I'm gonna go grab a bottle of water and quench that thirst there. Hey, thanks a lot for joining us today. It's great to talk to you, as always, my friend.

JS:

Happy to be with you, John. Talk to you soon. The Breeze is produced by Beverage Digest.

DS:

Visit our website to learn more about our products and subscribe to our newsletter. That's www.beverage-digest.com.