PLEASE answer it as a Report style-Not Essay, and please answer as many details as possible. ( each question, I need close to a full page TT)

4. Key success factors. Please identify the relevant types of key success factors and provide an example from the case for each type(Text Table 3.3). This section should contain at least3, but no more than6 key success factors.

Q John E. Gamble University of South Alabama W7 ith global revenues exceeding $62 bil- ' lion in 2005, bottled water was among ' the world's most attmctive beverage cat- egories. Industry revenues were forecast to grow by an additional 30 percent between 2005 and 2010, to reach approximately $82 billion. Bottled water had long been a widely consumed product in Western Europe and Mexico, where annual per capita con- sumption approached or exceeded40 gallons in 2005, but until the mid-1990s bottled water had been some- what ofa novelty or prestige product in the United States. In I990, approximately 2.2 billion gallons of battled water were consumed in the L'nited States and per capita consumption approximated 9 gallons. U.S. per capita consumption had grown to more than 25 gallons by 2005. The rising popularity ofbottled wa- ter in the United States during the late 19905 and ear- ly 20005 had allowed the United States to become the world's largest market for bottled water, with annual volume sales of nearly \"LS billion gallons in 2005.1n 2006, emerging-country markets in Asia and South America seemed to be replicating the impressive growth of bottled water in the United States, with annual growth rates exceeding 20 percent. Exhibit 1 presents bottled water statistics for the 10 largest country markets for bottled water in 2004. The growing popularity of bottled water in the United States was attributable to concerns over the safety of municipal drinking water. an increased focus on tness and health, and the hectic on-the- go lifestyles of American consumers. Bottled wa- ter's convenience, purity, and portability made it the natural solution to consumers' dissatisfaction Copyright 8- 2007 by John E. Gamble. All rights reserved. C48 Competition in the Bottled Water Industry in 2006 with tap water and carbonated beverages. The US bottled water market. like most markets outside the United States. was characterized by erce competi- tive rivalry as the world's bottled water sellers jock- eyed for tnarket share and volume gains. Both the global and L25. bottled water markets had become dominated by a few international food and bever- age producerssuch as Coca-Cola. PepsiCo, and Nestlebut they also included many small regional sellers who were required to either develop low-cost production and distribution capabilities or use dif- ferentiation strategies keyed to some unique product attributes. ln 2006, competitive rivalry continued to ratchet upward as sellers launched innovative prod- uct variations, lowered prices in developed markets, used strategic agreemean to strengthen positions in established markets, and acquired smaller sellers to gain t'ootholds in rapidly growing emerging markets. Industry analysts and observers believed the recent moves undertaken by the world's largest sellers of bottled water would alter the competitive dynam- ics of the bottled water industry and would mandate that certain players modify their current strategic ap- proaches to competition in the industry. INDUSTRY CONDITIONS IN 2006 Even though it was the world's largest market for bottled water, the United States remained among the faster-growing markets for bottled water since per capita consumption rates of bottled water fell sub- stantially below those in Westent Europe, the Middle Case 4 Competitor in IN? Bottled Water lnd;sliy in 2066 Leading Country Markets for Bottled Water, 1999, 2004 (in millions of gallons) Bottled Water Sales 1999 2004 4,5?9.9 3.05613 1 .21 10 1 .4933 2. 356.1 2,194.6 1 334.1 caes- (19992004}- a,aoa.7 3.2% 4,668.3 8.8 3,140.1 20.9 3,062.0 15.4 2,314.4 3.6 2322.6 44 Country United States Mexico China Brazil Italy Germany France mumm'humd Indonesia Spain 1 0 India All others Worldwide total LO 1 376.4 5333.5 25.9934 2.2513 4 .2 1 343.5 1 6.5 1 .4535 6.2 1 =353.131 25.0 10.5350 9.0 EEG? (Avg. CARG) 9.4 90?.1 444.0 ' CAGR=Compouno annual growth rate Source: Beverage Marketing Cormoration as reported by the International Bottled Water Association. 2006. Fast. and Mexico. Bottled water consumption in the Lnitcd States also lagged per capita consumption of soft drinks by more than a 2:1 margin. but in 2003 bottled water surpassed coffee, tea, milk, and beer to become tlte second largest beverage category in the United States. in 2005, more than 15.3 million gallons of carbonated soft drinks were consumed in the United States, but concerns about sugar con- sumption and other nutrition and tness issues had encouraged many consumers to transition from solt drinks to bottled water. Whereas the bottled water market in the United States grew by [0.7 percent be tween 2004 and 2005 to reach ?.5 billion gallons. the US. carbonated soft drink market declined by 0.6 percent. Industry analysts expected the carbonated soft drink industry to decline by LS percent annu all; for the foreseeable future as bottled water, en ergy drinks. and sports drinks gained a larger \"share ol'lhc stomach." Exhibits '2, 3. and 4 illustrate the growing popularity ofhortled \"amt among U.S. con sumers during the l990s and through 2004. Almost onehalf of bottled water consumed in the United States in l 990 was de livcrcd to homes and olhces in returnable livegallon containers and dis~ [tensed through coolers. At that ti me. only lSti mil~ Lion gallons of water was sold in oneliter or smaller Single-serving polyethylene terephthalatc (PET) bottles. Beginning in the late 19905. consumers bc gun to appreciate the convenience and portability of Water bottled in singleserving PET containers that could be purchased chilled from a convenience store and drunk immediately. By 2005. bottled water sold in two-liter or smaller PET containers accounted for 60.3 percent of industry volume. The unit sales of bottled water packaged in PET containers grew by 22.5 percent between 2004 and 2005. Water sold in vegallon containers used in the home and ofce delivery (I 10D} market accounted for only 1?.8 per cent of industry volume in 2005 and grew by only .2 percent between 2004 and 2005. Similarly, water sold in l or 2.5gallon highdensity polyethylene (HDPE') containers accounted for just 16.5 percent of industry volume in 2005 and grew by only |.0 percent between 2004 and 2005. Convenience and portability were two of a va- riety of reasons US. consumers were increasingly attracted to bottled water. A heightened emphasis on healthy lifestyles and improved consumer awareness of the need for proper hydration led many consum- ers to shift traditional beverage preferences toward bottled water. Bottled water consumers frequently claimed that drinking more water improved the ap- pearance of their skin and gave them more energy. Bottled water analysts also believed that many health-conscious consumers drank bottled water be cause it: was a symbol to others that they were inter ested in their health. A certain amount of industry growth was at tributable to increased concerns over the quality of tap water provided by municipal water sources. ____m____________ C-50 Part 2 Cases in Crafting and Executing Strategy Exhibit 2 Per Capita Consumption of Bottled Water by Country Market, 1999, 2004 Per Capita Consumption 2004 (in gallons) CAGR* Rank Country 1999 2004 (1999-2004) Italy 40.9 48.5 3.5% Mexico 30.9 44.5 7.6 United Arab Emirates 29 43.2 8.3 Belgium-Luxembourg 32.2 39.1 4.0 France 31 374 3.8 Spain 26.9 36. 6.1 Germany 26.6 33 4.4 Lebanon 17.9 26.8 8.4 UAWNOOOVOUAWN Switzerland 23.8 26.3 2.0 Cyprus 17.8 24.3 6.4 United States 16.8 23.9 7.3 Saudi Arabia 19.9 23.2 3.1 Czech Republic 16.4 23 7.0 Austria 19.7 21.7 2.0 Portugal 18.6 21.2 2.7 Global Average 4.3 6.4 8.3 . CAGR = compound annual growth rate Source: Beverage Marketing Corporation as reported by the International Bottled Water Association, 2006. Exhibit 3 Global Bottled Water Market Wholesale Value and Volume, 2001-2005, Forecasts for 2006-2010 Volume Sales Annual Industry Revenues Annual Year (in billions of liters) Change (S in billions) Change 2001 92.8 $47.3 2002 99.5 7.2% 51.3 8:5% 2003 107.9 8.4 56.1 9.4 2004 113.3 5.0 59.1 5.3 2005(e) 119.7 5.6 62.9 6.4 2006(f) 125.9 5.2 66.4 5.6 2007(f) 132.9 5.6 70.4 6.0 2008(f) 139.5 5.0 74.5 5.8 2009(f) 146.4 4.9 78.5 5.4 2010(f) 153.4 4.8 81.9 4.3 (e) = estimated (f) = forecast Source: Global Bottled Water Industry Profile, December 2005, Datamonitor. Consumers in parts of the world with inadequate United States was very pure by global standards. water treatment facilities relied on bottled water to (Municipal water systems were regulated by the U.S. provide daily hydration needs, but tap water in the Environmental Protection Agency and were requiredCase 4 Competition in the Bottled Water Industry in 2006 C-51 Exhibit 4 U.S. Per Capita Consumption refreshing texture." However, othermunicipal systems of Bottled Water, 1991-2005 did not fare as well with the judges some of whom suggested Houston's water tasted "like a chemistry Per Capita lab," while others said Atlanta's municipal water was Consumption Annual akin to "a gulp of swimming pool water." However, Year (in gallons) Change there were positive attributes to the chemicals added 1991 9.3 to tap water, as chlorine was necessary to kill any 1992 9.8 5.4% bacteria in the water and fluoride had contributed 1993 10.5 7.1 greatly to improved dental health in the United States. 1994 1.1.5 9.5 In addition, tap water had been shown to be no less 1995 12.2 6.1 healthy than bottled water in a number of independent 1996 13.1 7.4 studies, including a study publicized in Europe 1997 14.1 7.6 that was commissioned by the World Wide Fund 1998 15.3 8.5 for Nature and conducted by researchers at the 1999 16.8 9.8 University of Geneva. 2000 17.8 6.0 Bottled water producers in the United States 2001 19.3 8.4 were required to meet the standards of both the 2002 21.2 9.8 Environmental Protection Agency (EPA) and the 2003 22.6 6.6 U.S. Food and Drug Administration (FDA). Like all 2004 24 6.2 other food and beverage products sold in the United 2005(p) 25.7 7.1 States, bottled water was subject to such food safety and labeling requirements as nutritional labeling (p) = preliminary provisions and general good manufacturing prac- tices (GMPs). Bottled water GMPs were mandated Source: Beverage Marketing Corporation as reported by under the 1962 Kefauver-Harris Drug Amendments the International Bottled Water Association, 2006. to the Federal Food, Drug and Cosmetic Act of 1938 and established specifications for plant construct to comply with the provisions of the Safe Drinking tion and design, sanitation, equipment design and Water Act Amendments of 2001.) Consumer con- construction, production and process controls, and cerns over the quality of drinking water in the record keeping. The FDA required bottled water pro- United States emerged in 1993 when 400,000 resi- ducers to test at least weekly for the presence of bac- dents of Milwaukee, Wisconsin, became ill with flu- teria and to test annually for inorganic contaminants, like symptoms and almost 100 immune-impaired trace metals, minerals, pesticides, herbicides, and or- residents died from waterborne bacterial infections. ganic compounds. Bottled water was also regulated Throughout the 1990s and into the early 2000s, the by state agencies that conducted inspections of bot- media sporadically reported cases of municipal wa- tling facilities and certification of testing facilities to er contamination, such as in 2000 when residents of ensure that bottled water was bottled under federal Washington, D.C., became ill after the city's water GMPs and was safe to drink. iltration process caused elevated levels of suspend- Bottled water producers were also required to ed materials in the water. comply with the FDA's Standard of Identity, which Even though some consumers were concerned required bottlers to include source water information about the purity of municipal water, most consum- on their products' labels. Water labeled as "spring ers' complaints with tap water centered on the chem- water" must have been captured from a borehole or ical taste of tap water that resulted from treatment natural orifice of a spring that naturally flows to the processes that included the use of chlorine and other surface. "Artesian water" could be extracted from a chemicals such as fluoride. In a tap-water tasting confined aquifer (a water-bearing underground layer in Atlanta hosted by Southpoint Magazine, judges of rock or sand) where the water level stood above rated municipal water on taste and found some the top of the aquifer. "Sparkling water" was re- cities' waters very palatable. Water obtained from quired to have natural carbonation as it emerged from the municipal source in Memphis was said to have "a the source, although carbonation could be added toC52 Part 2 Cases in Crafting anc Execit'ng Strategy return the carbon dioxide level to what. was evident as the water emerged From the source. Even though sparkling water was very popular throughout most of Europe. where it accounted for approximately 54 percent of industry sales. it made up only 8 percent of the bottled water market in the United States. The FDA's denition of \"mineral water\" stat ed that such water must have at least 250 parts per million of total dissolved solids. and its standards required water labeled as \"puried" to have under gone distillation. deionization, or reverse osmosis to remove chemicals such as chlorine and uoride. \"Drinking water" required no additional processing beyond what was required for tap water but could not include avoring or other additives that account for more than 1 percent of the product's total weight. Both \"drinking water" and \"puried water\" had to clearly state that the water originated \"from a com munity water system\" or \"from a municipal source." Bottled water producers could also voluntarily become members of the International Bottled Water Association (lBWA) and agree to comply with its Model Code, which went beyond the standards of the EPA, FDA. or state agencies. The Model Code al lowed fewer parts per million of certain organic and inorganic chemicals and microbiological contami nants than FDA, EPA, or state regulations and im~ posed a chlorine limitation on bottled water. Neither the FDA nor the EPA limited chlorine content. lB\\-W\\ members were monitored for compliance through annual. unannounced inspections administered by an independent thirdparty organization. Distribution and Sale of Bottled water Consumers could purchase bottled water in nearly any location in the United States where food was also sold. The distribution of bottled water varied depending on the producer and the distribution chan- nel. Typically. bottled water was distributed to large grocers and wholesale cl uhs directly by the bottled water producer. whereas most producers used third parties like beer and wine distributors or food dis tributors to make sales and deliveries to convenience stores, restaurants, and delis. Because of the difculty for food service distrib utors to restock vending machines and prayidehottled water to special events. (Eoca~Cola and PepsiCo were able to dominate such channels since they could make deliveries of bottled water along with their delivl'ies of other beverages. Coca-(Lola's and PepsiCo's vasi beverage distribution systems made it easy for the two companies to make Dasani and Aquana avail- able anywhere Coke or Pepsi could be purchased. in addition, the two oola giants almost always ncgoj- ated contracts with sports stadiums. universities. and school systems that made one of them the exclusive supplier of all types of nonalcoholic beverages sold in the venue for a specied period. Under such cir- cumstances. it was nearly impossible for other brands of bottled water to gain access to the aecounL PcpsiC'o and CocaCola's soft drink businesses had allowed vending machine sales to account for 8 percent of industry sales volume in 3005 and had also aided the two companies in making Aquana and Dasani available in supermarkets, superceni- ers. wholesale clubs. and convenience stores. Soft drink sales were important to all types (if-food stores since so drinks made up a sizable percentage of the store's sales and since food retailers tquenlly relied on soft drink promotions to generate store trafc. CocaCola and PepsiCo were able to encour- age their customers to purchase items across their product lines to ensure prompt and complete Ship ment of key soft drink products. As a diversied food products mmpany, PepsiCo had exploited the popularity of its soft drinks. Gatorade sports drinks, FritoLay snack foods, and Tropicana orange juice in persuading grocery accounts to purchase not only Aquana but also other nonsoft drink brands such as FruitWorlrs. SoBe. Lipton's Iced Tea. and Starbucks Frappuccino. Since most supermarkets. supercenters, and food stores usually carried fewer than seven branded bot- tied waters plus a private-label brand, bottled water producers other than Coke and Pepsi were required to compete aggressively on price to gain access to shelf space. Supermarkets and discount stores ac counted for 43.5. percent of 1.13. industry sales in 2005 and were able to require bottled water suppliers to pay slotting fees in addition to offering low prices to gain shelf space. Natural foods stores could also require annual contracts and slotting fees but were much more willing than traditional supermarkets to pay higher wholesale prices for products that could contribute to the store's overall level of differentia tion. in fact. most natural foods stores would not carry brands found in traditional supermarkets. Case 4 Competition in the Bottled Water Industry in 2006 C-53 Convenience stores were also aggressive in press- of more than $100 million. Bottlers choosing to sell ing bottled water producers and food distributors for spring water could expect to invest about $300,000 low prices and slotting fees. Most convenience stores for source certification, road grading, and installa- carried only two to four brands of bottled water be- tion of pumping equipment, fencing, holding tanks, yond what was distributed by Coca-cola and Pepsi and disinfecting equipment. Bottlers that did not and required bottlers to pay annual slotting fees of own springs were also required to enter into lease $300 to $400 per store in return for providing 5 to agreements with spring owners that typically ranged 10 bottle facings on a cooler shelf. Some bottlers from $20,000 to $30,000 per year. Companies sell- offered to provide retailers with rebates of approxi- ing purified water merely purchased tap water from mately 25 cents per case to help secure distributors municipal water systems at industrial rates prior to for their brand of bottled water. Food and beverage purifying and bottling the water for sale to consum- distributors usually allowed bottled water producers ers. Sellers of purified water were able not only to pay to negotiate slotting fees and rebates directly with less for water they bottled, but also to avoid spring convenience store buyers. water's inbound shipping costs of 5 to 15 cents per There was not as much competition among gallon since water arrived at the bottling facility by bottled water producers to gain shelf space in delis pipe rather than by truck. and restaurants since that channel accounted for only 6.5 percent of U.S. industry sales in 2005. PepsiCo and Coca-cola were among the better-suited bottled Key Competitive Capabilities water producers to economically distribute water to restaurants since they likely provided fountain drinks in the Bottled Water Industry to such establishments. Bottled water did not enjoy the brand loyalty of soft drinks, beer, or many other food and beverage prod- Suppliers to the Industry ucts but was experiencing some increased brand loy- alty, with 10 to 25 percent of consumers looking for The suppliers to the bottled water industry included a specific brand and an additional two-thirds conside municipal water systems; spring operators; bottling ering only a few brands acceptable. Because of the equipment manufacturers; deionization, reverse growing importance of brand recognition, success- osmosis, and filtration equipment manufacturers; ful sellers of bottled water were required to possess manufacturers of PET and HDPE bottles and plas- well-developed brand-building skills. Most of the tic caps; label printers; and secondary packaging industry's major sellers were global food companies suppliers. Most packaging supplies needed for the that had built respected brands in soft drinks, dairy production of bottled water were readily available products, chocolates, and breakfast cereals prior to from a large number of suppliers. Large bottlers able entering the bottled water industry. to commit to annual purchases of more than 5 mil- Bottled water sellers also needed to have efficient lion PET bottles could purchase bottles for as little distribution systems to supermarket, wholesale club, as 5 cents per bottle, whereas regional bottlers pur- and convenience store channels to be successful in chasing smaller quantities of bottles or making only the industry. It was imperative for bottled water dis- one-time purchases of bottles could expect to pay a tributors (whether direct store delivery by bottlers or much as 15 cents per bottle. Suppliers of secondary delivery by third parties) to maximize the number of packaging like cardboard boxes, shrink-wrap, and deliveries per driver since distribution included high six-pack rings and suppliers of printed film or paper fixed costs for warehouses, trucks, handheld inven- labels were numerous and aggressively competed for tory tracking devices, and labor. It was also critical for the business of large bottled water producers. distributors and bottlers to provide on-time deliveries Bottling equipment used for water purifica- and offer responsive customer service to large cus- tion and filling bottles was manufactured and mar- tomers in the highly price-competitive market. Price keted by about 50 different companies in the United competition also mandated high utilization of large- States. A basic bottle-filling line could be purchased scale plants to achieve low production costs. Volume for about $125,000, whereas a large state-of-the-art and market share were also key factors in keeping bottling facility could require a capital investment marketing expenses at an acceptable per-unit level.Recent Trends in the Bottled of bottled water. Coca-cola had used a joint venture Water Industry with Danone Waters to increase its bottled water product line in the United States beyond Dasani and As the annual growth rate of bottled water sales in acquired established brands in Europe and Australia the United States slowed from double-digit rates. to build strength in markets outside the United signs had begun to appear that price competition in States. PepsiCo expanded into international markets the bottled water industry might mirror that of the for bottled water by allowing foreign bottling fran- carbonated soft drink industry. Fierce price compe- chisees to license the Aquafina brand. The strategic tition could be expected to bring volume gains but maneuvering had created a more globally competi- result in flat or declining revenues for the bottled tive environment in which the top sellers met each water industry. Coca-Cola, Nestle, and PepsiCo had other in almost all of the world's markets and made avoided strong price competition through 2004, but it difficult for regional sellers to survive. California- during the first six months of 2005 all three of the based Palomar Mountain Spring Water was one of industry's largest sellers began to offer considerable many casualties of intensifying competitive rivalry. discounts on 12- and 24-bottle multipacks to boost Like many other independent bottled water compa- unit volume. Exhibit 5 presents average U.S. retail mies launched in the 1990s, Palomar was forced into prices for 24-bottle multipacks marketed by Nestle bankruptcy in 2003 after losing key supermarket Waters, Coca-Cola, and PepsiCo between 2003 and and discount store contracts. After Palomar lost the first six months of 2005. much of its distribution in California supermarkets The world's largest sellers of bottled water ap- and discount stores to Nestle, its 2003 revenues fell peared to be positioning for industry maturity by to $7 million from $30 million just two years ear- purchasing smaller regional brands. Nestle had ac- lier. Exhibit 6 illustrates the extent to which the U.S. quired bottled water producers and entered into joint bottled water market had consolidated by 2003 and ventures in Poland, Hungary, Russia, Greece, France, 2004. Turkey, Algeria, South Korea, Indonesia, and Saudi The introduction of enhanced waters or func- Arabia between 2000 and 2006. Danone Waters also tional waters was the most important product inno- made a number of acquisitions and entered into stra- vation since bottled water gained widespread accep tegic alliances and joint ventures during the carly tance in the United States, with most sellers in 2006 2000s to increase penetration of selected emerging having introduced variations of their products that and developed markets. included flavoring, vitamins, carbohydrates, electro- Danone and Nestle had long competed against lytes, and other supplements. The innovation seemed each other in most country markets, but PepsiCo to be a hit with U.S. consumers, as the market for and Coca-cola were also becoming global sellers enhanced bottled waters expanded from $20 million Exhibit 5 Average Retail Prices of Multipack Bottled Water Marketed by Nestle Waters, Coca-Cola, and PepsiCo, 2003-2005 2003 2004 2005 Average Average Average 24-Pack 24-Pack 24-Pack Brands Price Price Price' Poland Spring $5.89 $5.17 $5.10 (Nestle Waters) Dasani (Coca-cola) $5.36 $5.88 $5.80 Dannon (Coca-cola) $4.7 $4.70 $4.35 Aquafina (PepsiCo) $5.24 $5.40 $5.01 * January 2005-June 2005. Source: Morgan Stanley, as reported by the Atlanta Journal-Constitution, June 21, 2005.Case 4 Competition in the Bottled Water Industry in 2006 C-55 Exhibit 6 Top Four U.S. Bottled Water Marketers, 2003-2004 2004 2003 Market Market Rank Company Leading Brands Share Share Nestle Waters Poland Spring, Deer Park, Arrowhead, 42.1% 39.1% Zephyrhills, Ozarka, Ice Mountain Coca-Cola Dasani, Evian and Dannon 21.9 24.1 A W N PepsiCo Aquafina 13.6 14.5 CG Roxanne Crystal Geyser 7.4 7.0 Others/Private-Label 15.0 15.3 TOTAL 100.0% 100.0% Source: Morgan Stanley, as reported by the Atlanta Journal-Constitution, June 21, 2005. in 2000 to approximately $1 billion in 2006. Most PROFILES OF THE sellers of bottled water had yet to make functiona waters widely available outside the United States. LEADING BOTTLED Energy Brands helped create the enhanced water segment in the United States with its 2000 launch of WATER PRODUCERS Glaceau Vitamin Water, which contained a variety of vitamins promoting mental stimulation, physical rejuvenation, and overall improved health. Glaceau Nestle Waters was the best-selling brand of enhanced water in 2000 Nestle was the world's leading seller of bottled and 2001, but it fell to the number two position in water, with a worldwide market share of 18.3 percent the segment upon PepsiCo's launch of Propel Fitness in 2006. It was also the world's largest food com- Water. Propel Fitness Water remained the market pany, with 2005 sales of 91 billion Swiss francs (ap- leader in the C.S. enhanced water segment in 2006. proximately $71 billion). The company was broadly Energy Brands had achieved a compounded annual diversified into 10 food and beverage categories that growth rate of more than 200 percent between 2000 were sold in almost every country in the world under and 2005, to record estimated sales of $350 million such recognizable brand names as Nescafe, Taster's and maintain its number two position in the U.S. Choice, Perrier, Vittel, Carnation, PowerBar, Friskies, functional water category. Alpo, Nestea, Libby's, Stouffer's, and of course, Coca-Cola, Nestle, and Danone Waters had be- Nestle. The company produced bottled water as ear- gun testing vitamin-enhanced waters in as early as ly as 1843, but its 1992 acquisition of Perrier created 2002, but all three had changed their approaches to the foundation of what has made Nestle Waters the functional waters by 2006. Coke had given up on world's largest seller of bottled water, with 75 brands vitamin-enhanced waters in favor of flavored water, in 130 countries. In 2005, Nestle recorded bottled while Nestle Waters and Danone Waters retained water sales of 8.8 billion Swiss francs (approximately only a fluoride-enhanced water. Like those at Coca- $6.9 billion) and was the global leader in the bottled Cola, managers at Nestle and Danone believed that water industry, with an 18.3 percent worldwide mar- flavored waters offered substantial growth opportun ket share in 2005. Nestle Waters was the number one nities in most country markets. The Tata Group, an seller of bottled water in the United States with a Indian beverage producer, showed greater confidence 42.1 percent market share in 2004 and the number n the vitamin-enhanced bottled water market with one seller in Europe with a 20 percent market share. its purchase of a 30 percent stake in Energy Brands Nestle was also the number one seller in Africa and in 2006 for $677 million. The Tata Group's chairman the Middle East and was aggressive in its attempts to believed that Energy Brands had the potential to be- build market-leading positions in emerging markets come a $3 billion company within 10 years. Asia and Latin America through the introductionC-56 Part 2 Cases in Crafting and Executing Strategy of global Nestle products and the acquisition of es- 2003 and 2004, but offered only fruit-flavored tablished local brands. The company acquired nearly enhanced waters in 2006. Contrex Lemon Meringue 20 bottled water producers between 2001 and 2003. and Strawberry Melba were two innovative calorie- In 2006, Nestle Waters was the number one brand free flavors introduced in 2006. The company had of bottled water in Pakistan, Vietnam, and Cuba; the also used packaging innovations to differentiate its number two brand in Indonesia and Argentina; and bottled water brands, including a spill-proof cap the number three brand in Thailand. for child-sized bottles of Poland Spring, Deer Park, The company's bottled water portfolio in and Arrowhead. Nestle Waters also developed a 2006 included two global brands (Nestle Pure Life bubble-shaped bottle that was designed to appeal and Nestle Aquarel), five international premium to children. Perrier's new PET container was part brands (Perrier, Vittel, Contrex, Acqua Panna, and of a strategy to revitalize the prestigious brand, S. Pellegrino), and 68 local brands. Nestle Pure Life which had experienced annual sales declines since was a purified water product developed in 1998 for the mid-1990s. The new plastic bottle was intended emerging markets and other markets in which spring to better match the on-the-go lifestyles of young water was not an important differentiating feature consumers than Perrier's heavy one-liter glass con- of bottled water. Nestle Aquarel was developed in tainers. Nestle would still package Perrier in glass 2000 for the European market and markets that pre- bottles for consumers who preferred the brand's ferred still spring water over purified water or spar- traditional packaging for dinner parties and other kling spring water. Nestle's other waters marketed formal settings. in Europe were either spring water with a higher Home and office delivery (HOD) was also an im- mineral content or sparkling waters such as Perrier portant component of Nestle's strategy-especially and S. Pellegrino. Almost all brands marketed out- in North America, Europe, and the Middle East. side of Europe were either spring water or mineral HOD made up nearly 30 percent of Nestle Waters' water with no carbonation. Its brands in the United sales volume in the United States and was record- States included Pure Life, Arrowhead, Ice Mountain, ing double-digit growth in most other country mar- Calistoga, Deer Park, Zephyrhills, Ozarka, and kets in 2005. In 2005, Nestle competed in the HOD Poland Spring. market for bottled water in 30 countries. Between During the early 2000s, Nestle Waters manage- 2000 and 2004, the company had made 8 acquisi- ment believed that its broad portfolio of local wa- tions in the European HOD segment to grow from ter brands was among the company's key resource no presence to the leading position, with 32 percent strengths. However, the notable success of Nestle's market share. Nestle had also made acquisitions and two global brands had caused management to reor- entered into joint ventures to develop market lead- ganize the division in 2006. Pure Life and Aquarel ing positions in countries located in the Middle East, had grown from just 2.5 percent of the division's Northern Africa, and the Far East. Nestle's market sales in 2002 to 12.0 percent of the division's 2005 leading positions in Europe and the United States in sales. Consumers in the United States seemed to ac- HOD and PET channels allowed it to earn the status cept the Pure Life brand as well as long-established of low-cost leader in the United States. Exhibit 7 local brands, with sales of Nestle Pure Life in the illustrates Nestle Waters' cost and wholesale price United States increasing by 50 percent between 2004 ing advantages relative to Coca-Cola and PepsiCo and 2005. Flavored varieties of Pure Life had also in U.S. markets. Nestle Waters' management stated achieved notable success in Canada by capturing a in mid-2002 that it expected to double the division's 70 percent share of the flavored water market within revenues by 2010. the first six months on the market. Nestle's 68 local brands had accounted for as much as 75.7 percent of division sales in 2002, but local brands had declined Groupe Danone to 64.8 percent of sales in 2005. The company's five Groupe Danone was established through the 1966 premium international brands accounted for an ad- merger of two of France's leading glass makers, ditional 23.2 percent of 2005 sales who foresaw the oncoming acceptability of plastic Nestle had test-marketed functional waters as a substitute to glass containers. The management fortified with vitamins and plant extracts between of the newly merged company believed that, ratherCase 4 Competition in the Bottled Water Industry in 2006 C-57 Exhibit 7 Value Chain Comparison for the Bottled Water Operations of Nestle, PepsiCo, and Coca-Cola Nestle Waters PepsiCo Coca-Cola Retailer price per case $8.44 58.52 $8.65 Retailer margin 35.0% 17.5% 17.6% Wholesale price per case $5.49 $7.03 $7.13 Wholesale sales $5.49 $7.03 $7.13 Support revenue 0.00 0.41 0.52 Total bottler revenue $5.49 $7.44 $7.65 Expenses Water $0.01 $1.67 $1.70 PET bottles 1.03 1.16 1.16 Secondary packaging 0.61 0.68 0.68 Closures 0.21 0.23 0.23 Labor/manufacturing 0.70 0.70 0.77 Depreciation 0.07 0.08 0.08 Total cost of goods sold 2.63 4.52 4.62 Gross profit $2.86 $2.92 $3.03 Selling, general, & 2.29 2.25 2.53 administrative EBITA $0.57 $0.67 $0.50 EBITA margin 10.4% 9.0% 6.5% Includes licensing fees and royalties paid by Coca-Cola and PepsiCo bottlers to Coca-Cola and PepsiCo. Source: Goldman Sachs Global Equity Research as reported by Beverage World, April 2002. than shifting its focus to the manufacture of plastic volume in 2005 but was displaced by Nestle in both containers, the company should enter markets for terms of volume and dollar sales during 2006. products typically sold in glass containers. Groupe Danone recorded worldwide bottled water sales Danone's diversification outside of glass containers of E3.4 billion in 2005. Among Groupe Danone's began in 1969 when the company acquired Evian most important beverage brands were Evian, the France's leading brand of bottled water. Throughout world's leading brand of spring water, and Wahaha, the 1970s and 1980s, Groupe Danone acquired ad- the leading brand of bottled water in China. ditional food and beverage companies that produced Each brand accounted for more than E1 billion in beer. pasta, baby food, cereals, sauces, confection- sales during 2005. During that year, 40 percent of ery, dairy products, and baked goods. In 1997, the Danone's bottled water sales originated in Europe, company slimmed its portfolio of businesses to dairy 47 percent were in China, and 13 percent were in products, bottled water, and a baked goods division emerging markets outside of Asia. Danone's local producing cereal, cookies, and snacks. In 2005, and regional brands held number one shares in many Groupe Danone was a leading global food company, country markets such as Denmark, Germany, Spain, with annual sales of E13 billion and was the world's the United Kingdom, Poland, Indonesia, Mexico, largest producer of dairy products, the number two and Morocco. producer of cercal, cookies, and baked snacks, and Like Nestle, Danone had made a number of ac- the second largest seller of bottled water. The com- quisitions of regional bottled water producers dur- pany had been the largest seller of bottled water by ing the late 1990s and early 2000s. During 2002,C-58 Part 2 Cases in Crafting and Executing Strategy Danone acquired a controlling interest in Poland's the joint venture the largest HOD distributor in the leading brand of bottled water for an undisclosed United States, with sales of approximately $800 amount and purchased Canada's Sparkling Spring million. Brands marketed by DS Waters included brand of waters for an estimated $300-$400 million. Alhambra, Crystal Springs, Sierra Springs, Hinckley The company also entered into a joint venture with Springs, Kentwood Springs, Belmont Springs, and Kirin Beverage Company to strengthen its distribu- Sparkletts. Groupe Danone and Suntory sold 100 tion network in Japan and embarked on a partner- percent of DS Waters to a private investment fund ship with the Rachid Group, an Egyptian firm, to ac- in 2005 for an undisclosed sum. The sale result- celerate its development of market opportunities in ed in a E315 million loss for Groupe Danone and North Africa and the Near and Middle East. During completed Groupe Danone's exit from the North 2003 and 2004, Groupe Danone acquired three HOD American bottled water market. Danone's HOD bottled water sellers in Mexico. Danone acquired the business remained the worldwide leader in the cat- leading brand of bottled water in Serbia and an HOD egory with number one rankings in Asia, Argentina, seller in Spain in 2004. In 2006, the company ac- and Canada. Groupe Danone was the second larg- quired a 49 percent stake in Denmark's leading seller est HOD provider in Europe in 2005 through a joint of bottled water. venture with Swiss-based Eden Springs. Danone Waters' revenues had declined by nearly Groupe Danone had made functional and fla- 20 percent between 2000 and 2005 as its U.S. dis- vored waters a strategic priority for its beverage tribution agreement with Coca-cola began to suffer. business. The company introduced flavored and Prior to Coca-Cola's launch of Dasani, its bottlers vitamin-rich versions of Volvic in Europe during distributed Evian and other non-Coke bottled water 2003 and 2004, and by 2005 it was selling flavored brands. Before the introduction of Dasani, about 60 and functional waters in most of its markets. The percent of Evian's U.S. distribution was handled by company held a number one ranking in functional Coca-Cola bottlers. With Coca-Cola bottler's atten- beverage categories in New Zealand and Argentina. tion directed toward the sale of Dasani, Evian lost Functional and flavored waters accounted for 25 per- shelf space in many convenience stores, supermar- cent of the group's beverage sales in 2005. kets, delis, restaurants, and wholesale clubs. Danone Waters and Coca-cola entered into a joint venture in 2002 that allowed Evian and Dannon The Coca-Cola Company water brands to be distributed along with Dasani to With 300 brands worldwide, the Coca-Cola Company convenience stores, supermarkets, and other retail was the world's leading manufacturer, marketer, and locations serviced by Coca-Cola's bottling opera- distributor of nonalcoholic beverage concentrates. tions. In addition, the agreement made Coke respons The company produced soft drinks, juice and juice sible for the production, marketing and distribution drinks, sports drinks, water, and coffee and was of Dannon in the United States. Coca-cola provided best known for Coca-Cola, which has been called Danone an up-front cash payment in return for 51 the world's most valuable brand. In 2005, the com- percent ownership of the joint venture. Danone con- pany sold more than 20.6 billion cases of beverages tributed its five plants and other bottled water as- worldwide to record revenues of $23.1 billion. Coca- sets located in the United States to the joint venture. Cola's net income for 2005 was nearly $4.9 billion. However, Evian and Dannon continued to suffer un- Seventy-three percent of Coke's gallon sales were der the new distribution arrangement as Coca-cola generated outside of North America, with four inter- continued to put most of its marketing muscle be- national markets (Mexico, Brazil, China, and Japan) hind Dasani. Danone sold its 49 percent interest in accounting for 27 percent of Coca-Cola's sales by the North American bottled water joint venture to volume. Sales in the United States also accounted Coca-Cola in 2005. for 27 percent of the company's total volume. Danone's home and office delivery businesses Along with the universal appeal of the Coca-Cola were not included in the agreement with Coca-Cola brand, Coca-cola's vast global distribution system and were combined with Suntory Water Group's as- that included independent bottlers, bottlers partially sets to form DS Waters in 2003. The combination owned by Coca-cola, and company-owned bottlers of Danone Waters' and Suntory Waters assets made made Coke an almost unstoppable internationalCase 4 Competition in the Bottled Water Industry in 2006 C-59 powerhouse. Coca-cola held market-leading positions million in 2002 to $1.3 billion in 2003, the three-tier in most countries in the cola segment of the soft strategy seemed to be failing in some regards since drink industry, and the strength of the Coca-Cola Coke's three water brands had collectively lost 2.2 brand aided the company in gaining market share in market share points between 2003 and 2004. Coca- most other soft drink segments such as the lemon- Cola's loss of market share seemed to be attributable, lime and diet segments. The company had also been to some to degree, to Nestle's growth during 2004 able to leverage Coke's appeal with consumers to and the increasing popularity of private-label brands, gain access to retail distribution channels for new which had grown by more than 60 percent during beverages included in its portfolio such as Minute 2004. However, some lost market share for the three Maid orange juice products, Powerade isotonic bev- brands combined might have been a result of weak erages, and Dasani purified water. support for Evian and Dannon brands. Coca-cola The Coca-cola Company did not market and had committed to increasing advertising and pro- distribute its own brand of bottled water until 1999, motion for Evian by 20 percent between 2005 and when it introduced Dasani. The company created a 2010, but beverage industry analysts believed it was purified water that included a combination of mag- unlikely that Evian would ever return to its previous nesium sulfate, potassium chloride, and salt to recre- top-five ranking in the United States. ate what Coke researchers believed were the best Coca-cola tested a vitamin- and flavor-enhanced attributes of leading spring waters from around the Dasani Nutri Water sub-brand during 2002 and 2003, world. The Dasani formula was a closely guarded but it abandoned the concept after poor test-market secret and was sold to bottlers, just as the company performance. In 2005, the company did go forward sold its Coke concentrate to bottlers. The Dasani with Splenda-sweetened lemon- and raspberry- name was developed by linguists who suggested the flavored varieties of Dasani. The company later add- dual "a"'s gave a soothing sound to the name, the "s" ed strawberry and grape flavors to the Dasani line. conveyed crispness and freshness, and the "i" ending Fruit-flavored Dasani had proved to be successful in added a foreign ring. Dasani was supported with an the market by 2006, with most retailers stocking at estimated $15 million advertising budget during its least two flavors of Dasani in addition to unflavored first year on the market and was distributed through Dasani water. Coca-cola extended the Dasani line in all retail channels where Coke was available. Coca- 2006 with the introduction of Dasani Sensations-a Cola's U.S. advertising budget for Dasani was $20 flavored water with light carbonation. Like other va- million in 2005. Coca-Cola's marketing expertise rieties of Dasani, Dasani Sensations contained no and vast U.S. distribution system allowed Dasani to calories. Powerade Option was another functional become the second largest brand of water sold in the water developed by Coca-cola that was introduced United States by 2001-a position it continued to in 2005. Powerade Option was a competing product hold in 2006. to Gatorade Propel Fitness Water and was available Coca-Cola's 2002 joint venture with Danone in grape and strawberry flavors in 2006. As of 2006, Waters allowed Coca-cola to jump to the rank of Powerade Option had been largely unsuccessful in second largest bottled water producer in the United capturing share from Propel Fitness Water and was States and third largest bottled water producer in the unavailable in many retail locations. world. The joint venture provided Coke with bottled Coca-Cola had long produced and marketed, water products at all price points, with Dasani po- bottled water in foreign countries under local brand sitioned as an upper-midpriced product, Evian as names, such as its Bon Aqua brand in the German a premium-priced bottled water, and Dannon as a market and NaturAqua in Hungary, but began ef- discount-priced water. Coke management believed forts to make Dasani an international brand in 2004 the addition of Dannon would allow the company to with expansion into in Africa, Brazil, and the United protect Dasani's near-premium pricing, while gain- Kingdom. Coca-Cola management chose the United ing spring water brands that could be marketed na- Kingdom as its entry point to Western Europe tionally to challenge Nestle's regional brands in the with launches planned for 20 additional European spring water segment. countries by mid-2004. Coca-cola supported the Even though the joint venture allowed Coca- March 2004 launch of Dasani in the United King- Cola's sales of bottled water to increase from $765 dom with a $3.2 million advertising budget and aC-60 Part 2 Cases in Crafting and Executing Strategy 4-million-bottle sampling campaign but voluntarily it would be easier to produce a national brand of recalled all Dasani bottles from retailers' shelves just bottled water that could utilize the same water pu- two weeks after the launch. rification facilities in Pepsi bottling plants that were The recall was predicated on test results per- used to produce the company's brands of soft drinks. formed by the company that indicated the bottles Pepsi management also believed that the company were tainted with bromate-a cancer-causing agent. could distinguish its brand of purified bottled water Bromate became introduced to the product when cal- from competing brands by stripping all chlorine and cium, a mandatory ingredient for bottled waters sold other particles out of tap water that might impart an in the United Kingdom, was added to Coca-cola's unpleasant taste or smell. PepsiCo began testing a proprietary formula of minerals used to distinguish filtration process for Aquafina in 1994 when it in- Dasani from other bottled waters. The bromate lev- stalled $3 million worth of reverse osmosis filtration els present in Dasani exceeded regulatory limits in equipment in its Wichita, Kansas, bottling plant to the United Kingdom but met standards for purity on further purify municipal water used to make soft the European continent. Nevertheless, Coke man- drinks. The system pushed water through a fiberglass agement believed it best to recall the product and membrane at very high pressure to remove chemi- discontinue immediate plans to distribute Dasani cals and minerals before further purifying the water not only in the United Kingdom but also in all other using carbon filters. The water produced by Pepsi's European markets. The Dasani launch was viewed process was so free of chemicals that the company by many in the business press as one of the all-time was required to add ozone gas to the water to prevent great marketing disasters and resulted in Coke's bacteria growth. abandoning the Dasani brand in Europe. Coca- Since the company's introduction of Aquafina, Cola management announced during a June 2006 PepsiCo had expanded its water brands in the Deutsche Bank conference for consumer goods that United States to include Gatorade Propel Fitness it would expand its line of noncarbonated beverages Water, SoBe Life Water, and functional versions of in Europe through acquisitions. Within two weeks Aquafina. The product lines for its water business of the announcement, Coca-cola had acquired the were developed around customer type and lifestyle. Italian mineral water company Fonti del Vulture and Propel was a flavor- and vitamin-enriched water the Apollinaris mineral water brand sold in Germany marketed to physically active consumers, while by Orangina. Coca-cola also acquired two HOD Life Water was a vitamin-enhanced water similar to bottled water producers in Australia during 2006. Glaceau Vitamin Water in formulation and packag ing that was marketed to image-driven consumers. PepsiCo Inc. The company targeted mainstream water consumers with unflavored Aquafina, Aquafina FlavorSplash In 2006, PepsiCo was the world's fourth largest food (offered in four flavors), and Aquafina Sparkling and beverage company, with sales of approximately (a zero-calorie, lightly. carbonated citrus or berry- $32 billion. The company's brands were sold in more flavored water). Aquafina Alive, planned for a 2007 than 200 countries and included such well-known launch, included vitamins and natural fruit juices. names as Lay's, Tostitos, Mountain Dew, Pepsi, The company's strategy involved offering a contin- Doritos, Lipton Iced Tea, Gatorade, Quaker, and uum of healthy beverages from unflavored Aquafina Cracker Jack. Six of PepsiCo's products were among to nutrient-rich Gatorade. In 2006, Gatorade, Propel, the top-15 largest selling products sold in U.S. su- and Aquafina were all number one in their catego- permarkets. PepsiCo also produced and marketed ries, with market shares of 80 percent, 34 percent, Aquafina-the best-selling brand of bottled water in and approximately 14 percent, respectively. the United States between 2002 and 2006. PepsiCo was slowly moving into international PepsiCo had made attempts to enter the bottled bottled water markets, with its most notable effort water market in as early as 1987, when it purchased occurring in Mexico. In 2002, PepsiCo's bottling a spring water company, but its attempts were un- operations acquired Mexico's largest Pepsi bottler, successful until its 1997 introduction of Aquafina. Pepsi-Gemex SA de CV, for $1.26 billion. Gemex After experimenting with spring water and sparkling not only bottled and distributed Pepsi soft drinks in water for several years, Pepsi management believed Mexico but also was Mexico's number one producerCase 4 Competition in the Bottled Water Industry in 2006 C-61 of purified water. After its acquisition of Gemex, when a court invalidated the 2004 sale of the com- PepsiCo shifted its international expansion efforts to pany to Amcon Distributing. Amcon, which had lost bringing Aquafina to selected emerging markets in $2 million in fiscal 2005 and another $1.8 million Eastern Europe, the Middle East, and Asia. In 2006, during the first six months of fiscal 2006, shut down Aquafina was the number one brand of bottled water its Trinity Springs water division after the ruling and in Russia and Vietnam and the number two brand in was negotiating a settlement with Trinity Springs Kuwait. shareholders in late 2006. Penta's differentiation was based on a propri- Other Sellers etary purification system that the company claimed removed 100 percent of impurities from tap wa- In addition to the industry's leading sellers of bot- ter. The company had also built brand recognition tled water, there were hundreds of regional and spe- through product placements in motion pictures, mu- cialty brands of bottled water in the United States. sic videos, and more than 25 television series. Penta Most of these companies were privately held bottlers also sponsored a large number of triathlons across with distribution limited to small geographic regions the United States and was endorsed by a wide variety that competed aggressively on price to make it onto of entertainers and professional athletes. In 2006, convenience store and supermarket shelves as third- Penta was distributed in more than 5,000 health food tier brands. Many of these bottlers also sought out stores in the United States. Penta was also avail- private-label contracts with discounters and large able in Australia, Japan, the United Kingdom, and supermarket chains to better ensure full capacity uti- Canada. Fiji was also among the best-selling brands lization and to achieve sufficient volume to purchase of superpremium water sold in natural foods stores bottles and other packaging at lower prices. CG in 2006 but was also sold in many supermarkets, Roxanne was the most successful privately owned convenience stores, and drugstores across the United bottled water company in the United States. The States. Like Penta, Fiji received considerable expo- company's Crystal Geyer brand made it the fourth sure from its placement in network television series largest seller of bottled water in the United States and motion pictures. in 2004, with a 7.4 percent market share. Crystal Voss achieved differentiation not only from the Geyser competed at the lower price points in U.S. purity of its source in Norway but also through its supermarkets and convenience stores and was bot- distinctive glass bottle and limited channels of dis- tled from springs in California, Tennessee, South tribution. The brand was available only in the most Carolina, and New Hampshire. The company did not exclusive hotels, spas, and resorts. Another super- disclose its financial performance. premium brand, Eon, achieved its differentiation Another group of small bottlers such as Fiji, through its anti-aging claims. The company's anti- Voss, Penta and Trinity Springs used differentiating aging properties were said to result from the basic features to avoid the fierce price competition at the atomic structure of Eon water, which was altered low end of the market and sold in the superpremium through a proprietary reverse osmosis technology. segment, where bottled water retailed from $1.50 to The structure of Eon was similar to that naturally oc- $2.25 per 16-ounce PET container. Superpremium curring in snowflakes and glacier ice and was sug- brands were most often sold in natural foods stores, gested to improve cellular hydration and cell detoxi- with Trinity Springs being among the leaders in the fication properties better than unstructured water. channel in 2005. Trinity's differentiation was based Many other superpremium brands of bottled water on its water source, which was a 2.2-mile-deep arte- were sold in the United States during 2006, with sian well located in the Trinity Mountains of Idaho. each attempting to support its premium pricing with Trinity Springs' distribution halted in March 2006 some unique characteristic. Endnote As quoted in "The Taste of Water," Bottled Water Web, telwet tax