Nestle SA (NESN)’s bottled-water business is struggling to regain momentum as twin concerns about the economy and the environment weigh on growth.
The world’s biggest food company has been losing ground since 2006 as consumers switch to tap and filtered water and as concerns over the environmental impact of plastic packaging and energy used in transportation deter some shoppers, said Hope Lee, an analyst at Euromonitor International in London.
Nestle owns more than 60 water brands including Perrier, Vittel and Pure Life, the world’s best-selling label, and relies heavily on western Europe and North America. Its market share by retail sales value fell to about 10 percent last year from more than 12 percent in 2006, according to Euromonitor. Danone’s share dropped 0.6 percentage point to 10.4 percent over the same period as greater exposure to developing countries such as China and Indonesia offset weakness in more mature markets.
“Nestle is really facing a challenge in developed markets because of the economy,” Lee said. “Even when the economy improves, some customers may not come back if they get used to tap water.”
Nestle will report first-quarter sales tomorrow that may show water underperforming the rest of the business. So-called organic revenue probably grew by an average 6.7 percent, according to 15 analysts surveyed by Bloomberg. Water may have gained 4 percent, estimated Pablo Zuanic, an analyst at Liberum Capital in New York.
Water has shrunk as a percentage of Nestle’s revenue every year for four years and made up about 8 percent, or 6.5 billion Swiss francs ($7 billion), of the Vevey, Switzerland-based company’s total revenue of 83.6 billion Swiss francs last year. Water is about a third the size of its beverage business, comprised of coffee labels Nescafe and Nespresso and products including Nesquik powdered drink.
Sales of bottled water at Nestle increased 5.2 percent on a like-for-like basis in 2011, lagging 16 percent growth at Danone. (BN) The Paris-based company gets about 60 percent of its revenue from emerging markets, where it’s not always feasible for consumers to switch to tap water, compared to less than 30 percent at Nestle, according to Deborah Aitken, an analyst at Bloomberg Industries in London.
“Nestle is focusing more on value bottled water in developed markets, but the alternative for cash-strapped consumers across parts of western and southern Europe is tap water and there’s no getting away from this,” she said.
Nestle has also been trailing Danone on the stock market this year, gaining 4.9 percent compared with 10.9 percent at the French company and 8.4 percent in the Stoxx 600 Food and Beverage Index.
While the bottled-water market in Asia Pacific is expected to grow to about $34 billion in 2016 from $24 billion in 2011, the market in western Europe may remain flat and North America may grow 17 percent over the same period, according to Euromonitor.
Nestle may also be losing share in some developing markets such as China, where new entrants including Tingyi (Cayman Islands) Holding Corp. are making inroads, Lee said. Tingyi’s share of the bottled water market tripled to 0.9 percent in 2011 from 0.3 percent in 2006.
Price increases contributed 3.8 percent to Nestle’s sales growth during the quarter, while exchange rate movements reduced growth by 3.3 percentage points, according to the analysts surveyed by Bloomberg. Nestle doesn’t disclose profit on a quarterly basis.
Danone, the world’s biggest yogurt maker, said April 17 that like-for-like sales increased 6.9 percent during the first quarter. Revenue from its water business climbed 16 percent, helped by emerging markets, especially Indonesia and China, as well as increased consumption of flavored water, or so-called aqua drinks.
The growing popularity of alternative drinks including flavored water and energy drinks also threatens sales of standard bottled water, Liberum’s Zuanic said. Companies such as PepsiCo Inc. (PEP) have expanded into such beverages, which offer greater profitability, after entering the bottled water market just over a decade ago, he said.
“This may for now be more applicable to the U.S., but we are starting to see it also in Europe,” Zuanic said.
By contrast, Nestle is less visible in the aqua drinks market. Revenue growth at its bottled water business may slow to 3 percent next year from 5.2 percent in 2011 and an expected 3.2 percent increase in 2013, according to Zuanic. Still, Nestle’s higher growth in 2010 and 2011 was partly due to a low comparison base and growth of between 3 percent and 4 percent may be a “more normal” range for the company, he said.
There are signs Nestle’s increased focus on lower-priced bottled water may be yielding results. The Swiss company said in February that its Pure Life brand is helping to drive growth in its bottled-water business, even amid “periodic deep discounting in different areas.”
Nestle said it grew at a “double-digit” pace in emerging markets last year, while its European business increased market share and revenue in North America also rose. Still, greater exposure to emerging markets may be needed, Aitken said.
“Nestle has been criticized over the last two or three years for water being an underperformer and they are fixing that by offering more value-priced brands, but they also need to focus more on expansion in developing markets, either by joint ventures or acquisitions,” she said.
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