Nestlé's Patience Runs Dry on Bottling Plant

After six years of surprisingly contentious and frustrating attempts to bottle the glacier-fed spring water flowing in the small Northern California town of McCloud, Nestlé is giving up.

In 2003, Nestlé (NESN) signed a contract to build a facility in McCloud. Some locals claimed the deal with the local government was done in secret, without proper environmental evaluation, and they managed to stall construction year after year. During that time, the economy bubbled and burst; people drank more bottled water and paid less for it; concerns about the environmental impact of the industry took hold; and Nestlé itself changed some of the ways it does business. Last year the company scaled back the project. Then, earlier this month, it withdrew its proposal altogether. McCloud had become an inconvenience.

In a Sept. 10 letter addressed to McCloud's leaders and citizens, Kim E. Jeffery, the head of Nestle Waters North America, wrote: "We have sincerely appreciated the time, input, and patience both supporters and opponents have shown as all stakeholders considered our evolving project proposal in McCloud. We know that this dialogue has not been an easy process, and we are grateful for your willingness to stay engaged and provide us with feedback every step of the way."

greener option Jeffery went on to write that Nestlé no longer needed to build a plant in McCloud because it had secured a site in Sacramento that was closer to its Northern California customers, which would help lower costs and reduce the company's environmental footprint. The site is in an industrial area. There is an existing facility, with all the permitting and zoning already in place. Nestlé will bottle spring water there as well as purify tap water for bottling.

In McCloud, a former mill town struggling to reinvent its economy, some were disappointed to lose the revenue and potential jobs. Debra Anderson, president of the McCloud Watershed Council, which led the fight against Nestlé, was elated. "I was thankful and grateful for this decision," she says. "A lot of things worked in our favor. My sense is that Nestlé felt pulling out of McCloud was a good business decision for all kinds of reasons: the economy, fuel costs, bad press. For them it would be a lot better to go somewhere else."

When BusinessWeek first chronicled the fight between Nestlé and its opponents in McCloud last year, it seemed likely that Nestlé (whose brands include Perrier, Poland Spring, and Arrowhead) would prevail, even if doing so took longer than usual. "I want all the t's crossed, all the i's dotted," Jeffery said of the project. "I don't want anyone to say we didn't do it right."

declining prices Even then, though, the economics of the bottled water industry were changing. It turns out that bottled water consumption peaked in 2007, at 29 gallons per person (having grown from 13.5 gallons a decade earlier). Prices, meanwhile, have been declining as competition from private-label brands increased. Bottled water itself became a commodity.

At Nestlé, now the largest bottled-water company in America, that complicated matters more. Nestlé is one of the few suppliers that mine pristine springs (in places such as McCloud) for much of its bottled water. Yet the brand most responsible for its growing market share during the Great Recession is Pure Life, which is purified tap water. Naturally, that process is cheaper to begin with: Nestlé doesn't have to buy any land and usually doesn't have to ship the bottled water very far.

Jeffery says thatNestlé's recent actions should not leave the impression that a bigger shift from spring water to tap water is under way at the company. Nestlé does, of course, want to build smaller plants closer to its customers, for all kinds of reasons. But that doesn't necessarily mean they will all be in cities and use municipal water (a business that also has plenty of critics). Even the Sacramento facility will bottle some spring water that Nestlé already owns.

community involvement Nestlé plans to open three new plants in the coming years, says Jeffery, and has some locations picked out already. One of them is Cascade Locks, a town 40 miles east of Portland, Ore. This time, Nestlé says it is trying to work with the whole community right from the beginning. Dave Palais, one of the company's 10 geologists who look for new sources of water and Nestlé's main representative in McCloud, says he's in Cascade Locks for a couple of days every month to answer questions about a potential spring water bottling plant. When Nestlé holds meetings there, it brings in an outside facilitator to run them. Yet Anderson, of the McCloud Watershed Council, says she has already received calls from people in Cascade Locks asking for advice about how to deal with Nestlé.

Back in McCloud, Nestlé still owns the 250 acres it intended to build on. Jeffery says the company will have the land appraised and then look for a buyer. Nestlé has also promised to finish a two-year scientific study of the local watershed. "When it's done, they will see they have abundant water," says Jeffery. "It's a crime that the townspeople weren't able to use it."

Before it's here, it's on the Bloomberg Terminal.