Beverage Companies Catch A Wave With Water's Success

As the mercury climbs, more and more consumers will be turning to a cold bottle of water to quench their thirst.

Bottled water --  now the second largest beverage category behind carbonated soft drinks --is still riding a wave of surging popularly. Last year, sales volume of bottled water rose 10.2% to 6,142.3 million gallons, or $11 billion worth , according to market researcher Beverage Marketing.

Nestle's "Eco-Shape" bottle uses 15% less material than its previous bottle, and is the lightest bottle for water on the market today.

And as consumers continue to shift away from fizzy soda pops in droves to healthier beverages, bottled water could overtake carbonated soft drinks as the best-selling type of soft drink within a decade, said Gary Hemphill, managing director of Beverage Marketing.

“The biggest opportunity for us is to improve our basic bottled water business,”  Kim Jeffrey, president and chief executive of Nestle Waters North America, which is part of Nestle, told CNBC.com in a recent interview.

In 2002, Nestle consolidated its bottled-water brands into the Nestle Waters division. That unit now accounts for about 10% of the Swiss food conglomerate's total worldwide sales, with almost half coming from North America.

Although Nestle has introduced flavored water products, such as Pure Life, to the market, the company plans to continue to focus on its natural spring water products, which include Poland Spring, Arrowhead, Deer Park and Zephyrhills, Jeffrey said. “Once you add sugar or color, you aren’t talking about water anymore,” he said.

Jeffrey expects Nestle Waters will be able to continue to increase its U.S. sales volume by about 15% a year, which is slightly above the industry average.

Although growth has been strong, the water business has been challenging in the past because of fierce competition. Beverage companies have a history of waging brutal price wars during the peak summer selling season. This year, however, the companies are starting off the summer with pricing on more solid ground.

According to Hemphill, data from market researcher Information Resources, showed water prices firmed during the first quarter. The volume of non-jug water sold in grocery stores rose 18.9%, but the dollar value of those sales, which exclude sales in Wal-Mart and club stores, rose 19.3%, he said.

The gains, while modest, are notable. Jeffrey estimates bottled water prices have fallen some 40% over the past five years. At the same time, raw material costs have soared, further dampening profits.

Nestle, the largest seller of bottled water in the U.S., has had the advantage of being the low-cost producer.

“They have the ideal situation,” said Manny Goldman, of Goldman Consulting Services. Goldman said that's because Nestle benefits from a combination of strong regional brands and cost advantages driven by relatively high-speed, modern manufacturing facilities “It is really their ball game.”

Competitors PepsiCo , which sells the largest U.S. water brand Aquafina, and Coca-Cola , which markets Dasani, Dannon and other water brands, declined to comment.

Nestle is also turning to packaging to further reduce its costs. The company has just developed a new “Eco-shape” bottle that is 15% lighter than the current bottle. Jeffrey estimates the bottle will result in the company reducing its resin needs by 65 million pounds in 2008.

Nestle Waters North America, President and Chief Executive Kim Jeffrey.

To date, beverage companies have not spent a lot of money promoting their water brands. Much of the growth has been the result of consumer interest.

Many drink it because of health concerns. The typical bottled water drinker includes people in their 30s and 40s, and those with higher education levels, but younger consumers have grown up with a preference for non-carbonated beverages, which will help support the category's growth in the years to come.

Jeffrey estimates the amount spent on marketing water brands is about 15% of what is spent marketing carbonated soft drinks.

That's likely to help sales on top of reduced costs. There's also a message that resonates with consumers.

“I think people care about that,” Jeffrey said, adding it is a good short-term solution for helping to reduce the amount of materials entering the waste stream. “In the short term, it is responsible for us to go as light as we can.”

© 2008 CNBC.com