Nestl-Danone and the bottled water sector

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Table of contents
INTRODUCTION...................................................................................3 I. PRESENTATION OF THE STRUCTURAL FEATURES OF THE BOTTLED WATER INDUSTRY...........................................................................................4 I.1. I.2. I.3. I.4. STRATEGIC SEGMENTATION (MARKET SEGMENTATION) ............................................4 MACRO ENVIRONMENT ...........................................................................5 ANALYSIS OF THE COMPETITIVE INDUSTRY........................................................7 ASSESSMENT OF THE ATTRACTIVENESS OF THIS INDUSTRY USING COMPETITIVE FORCES ANALYSIS 9

II. ASSESSMENT OF DANONE AND NESTL'S CURRENT SITUATION........11 II.1. GROWTH OPTIONS AND METHODS OF THE TWO COMPANIES ...................................11 GROWTH OPTION AND METHODS FOR NESTLE....................................................11 GROWTH OPTION AND METHODS FOR DANONE...................................................12 COMPETITIVE STRATEGY.................................................................................................. 13 II.2. ANALYSIS OF THEIR STRENGTHS AND WEAKNESSES.............................................15 II.3. EVALUATION OF THE SITUATION OF THE TWO FIRMS TAKING INTO ACCOUNT THAT OF THE NEW ENTRANTS ........................................................................................................19 III. RECOMMENDATIONS ....................................................................20

Introduction
Water is something that anyone around the world could get from the tap for free, but now it is a huge part of the beverage industry. Bottled water has become the industry's fastest growing segment, both in volume and value. DANONE and NESTLE represent the main leaders of this market. The attractiveness of this market and the exponential growth in consumption of bottled water (138 billion litres consumed in 2003) now pushes competitors such as Pepsi and Coca-Cola to put a foothold in this market. The bottled water industry is divided into three segments (purified water constitutes a separate segment): - Spring Water - Natural Mineral water - Table water Because of this diversification, but also because of the legislation effective on water, (which is very specific in some countries), the leaders had to struggle hard to gain maximum market share in this area. The consumption of bottled water has grown in recent years and the explosion of emerging markets allows new players to enter this market. To ensure sustainability, DANONE and Nestle are now constantly trying to do better in all strategic areas (communication, distribution...).

I. Presentation of the structural features of the bottled water industry

Bottled water industry is becoming the worlds most attractive beverage categories. A heightened emphasis on healthy lifestyles and improved consumer awareness of the need for proper hydration led many consumers to shift traditional beverage preferences for bottled water.

I.1. Strategic segmentation (market segmentation)

The market is divided between 2 segments: the HOD segment & the purified water segment. 1) The HOD segment. HOD, Home and Office Delivery, concerns large bottles market and it is one of the fastest-growing segment in the water industry (28% of the bottled water market). Furthermore the growth rate is about 15% per year. Danone and Nestl, the two leaders made a lot of acquisitions, but also some joint ventures (Danone) and some local agreements. Danone, the global leader in volume, leads with 80% of the demand in volume. HOD sales of bottled water represent 80% in South America, 35% in USA and 2% in Europe. Those sizes of bottled are mainly developed in South America and absolutely not in Europe where there are not allowed. However the market is difficult and costs a lot. Then it is critical to develop some logical skills. That is why it needs strict logistic cost control.

2) The purified water segment. The potential of growth is kind of important. Indeed, water is much easier to produce. The different companies have higher margins with this kind of water than with mineral or spring water. The four challengers are present on this segment; nevertheless, Coca-Cola and Pepsi Co have better retail positions and geographical coverage.

I.2. Macro Environment

PESTEL
Political: The European law focused on: The quality of microbiology Water chemical quality Taste of the water General aspect.

Political aspect can change in function of the country. Economical: The kind of distribution network depends on the country. Economical crisis doesnt impact on drink and food industry because of it vital aspect. Social: Social authorities cheer people to drink water. Developed countries (without USA) take care of the label and the quality of the water. Price is one of the main key factors in the purchase in United Stated. The bottled water demand is high in emerging country, because of the poor quality of tape water but also due to expensive and difficult access of health care. Technological: Company invest on Research and development to improve the quality of the water and to realize new products. Flavour water is one of the last innovations in this sector. Food industry launched new product that combine powder and water. Environment: Springs of water are vulnerable to pollution. Selling out of natural sources Legal:

Specific standards in different countries (quality of the ingredients, labelling, sale...) French law requires companies to provide drinking water to its employees Possibility of selling tap water retired / purified from the area of EU In France: names and labels not controlled accreditation body For fountains in France: no possibility of home delivery

I.3. Analysis of the competitive Industry

DANONE Net sales 2002 (bn) Net profit (bn) Net Margin % of sales in water activities 13,5 1,3 9,5% 36% NESTLE 60,5 5,2 8,4% 8,6% PEPSICO 23 3 13,1% NC COCA COLA 18 2,8 15,5% NC

MARKET SHARE North America Latin America Asia Europe HOD segment Purified water Acquisitions 12% 14% 14% 13% Present (leader) Present Arco Iris, McKesson Water, Chteau deau, Patrimoine des eaus du Quebec, Naya Inc, Sparkling Spring Water Suntory Water (in USA), Eden Springs, CocaCola, Polska 30% 4% 6,5% 16% Present Present Powwow Opalia, Aqua, Spring Water, Saint Spring, Sparkling. 10% 10% 1% 1% Not present Present 6% 8% 6% 2% Not present Present

Joint Venture

Woda

Local agreements

Ultra Pura, Aqua pura

We can easily notice that Coca-Cola and Pepsi Co are aggressively entering in the market and are making a large number of acquisitions. Plus, Asia now represents the most attractive market with a growth in excess of 16%.

I.4. Assessment of the attractiveness of this industry using competitive forces analysis
To assess the attractiveness of the bottled water sector using competitive forces we have to use the five forces framework analysis. It is composed of the threat of entry into an industry; the threat of substitutes to the industrys products or services; the power of buyers of the industrys products or services; the power of suppliers into the industry; and the extent of rivalry between competitors in the industry. (Johnson, Scholes and Whittington, 2009, p.30). So we will decompose each of those Porters forces to analyse the bottled water industry. The threat of entry In the bottled water market the level of competition is not so high so the entry is easy. However it is a mature market so there are a few new entrants. Besides, the launch costs are relatively high so there are barriers from the outset and brands image of existing players such as Nestl, Danone or even Coca-cola, are so strong that it is increasingly difficult to launch new products. (Brulhart & White, 2009, p.4). Substitute Product Many substitutes products are present in the beverage market. Water is the cheaper but soft drinks are more often consumed and very appreciated in most countries. However, in the Figure 1, we can see that from 2003 to 2005 the annual growth in volume of non alcoholic drinks have less increase compare to the water growth. Indeed, it reached 7% whereas sodas, fruit juces and energy drinks reached in average 6%. (Brulhart & White, 2009, p.4-5). Power of Buyers For those companies buyers are retailers such as Carrefour or Tesco, which have a strong negotiating power because they can easily switch from one supplier to another. (Johnson, Scholes and Whittington, 2009, p.34). Power of Suppliers The suppliers to the bottled water industry are municipal water systems, spring operators, bottling equipment manufacturers, deionization and filtration equipment manufacturers. Manufacturers of bottles and plastic caps or label printers and secondary packaging suppliers also represent them.

 Competitive rivalry The bottled water market is concentrated in two major players, Nestl and Danone which account for 18% and 46% of market share depending oh the geographical area (Brulhart & White, 2009, p.6). But due to the strong attractiveness of this market other giants in soft drinks such as Coca-Cola and Pepsico implant themselves, and also some local outsiders in different countries. Eventually, buyers are also becoming competitors within the market such as Casino or Intermach. We can talk about an oligopoly competition. It dominates by only several big players like Danone, Nestle, Coca-Cola and PepsiCo.

LOW

LOW

HIGH

HIGH

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II. Assessment of Danone and Nestl's current situation

II.1. Growth companies options and methods of the two

GROWTH OPTION AND METHODS FOR NESTLE

The growth option for Nestle is huge thanks to its power and its investment in and outside Europe. Nestl is a company which have a lot of cash flow thanks to their investment and it permits the company to make acquisitions, and for the future it seems to be a real advantage to stay leader and compete with Danone in the emerging countries where Danone is still number one. In these countries like Brazil, Mexico, Argentina or Thailand and Pakistan the options for the growth prospect appear to be very high. Nestl is completely aware about that and dont hesitate to invest a lot in these countries and continue to innovate and its acquisition and joint venture policy. The brand also understands that in some countries it is a good thing to use local water brand like in Arabic countries (Saudi Arabia, Jordan and Egypt). Thats why Nestl saw bottled water demand there grow at a 20% annual rate. And top-line growth from its production and distribution emerging markets network helped it lift margins in its water division by 10 basis points in the first half of the year. In term of communication, both companies decided to invest a lot (70m for Nestle and 50m for Danone). Therefore, Nestl invest more than Danone and use different methods to consolidate its brand image (traditional advertising/sponsoring/endorsement contract). In order to reach consumer and get the attention of the new ones, Nestl continue to have a huge portfolio and continue to develop new brand well targeted in other countries. In each country where Nestl wants to be, the brand tries to adapt the price, type of water, format to the local specificities. In terms of production Nestl uses the multi-site concept. That means that the company produce the same brand water at different places in the world. It permits to Nestle to ensure profitability and a global presence all other the world and omnipresence thanks to its distribution circuit. Nestl tend to be always trendy by having different type of bottle for all kind of target. The R&D is huge and represents around 11% of net sales.

One thing is certain, is that Nestle will always run business where the company is sure to be a big competitor and have profitability on the new market.

GROWTH OPTION AND METHODS FOR DANONE

We know that Danone is the world leader in bottled water in terms of volume thanks to its 2 big brands: Evian and Volvic. Danone is very presents in Western Europe. To respond to the demand in North America, Danone signed a contract and a joint venture with Coca cola to distribute products. This partnership helps the two companies in terms of production, sales and distribution. This is the same thing in Japan where Danone signed a partnership with Mitsubishi and Kirin Beverage Corp (one of the Japanese drinks leaders). It permits to Danone to control the distribution network. As we said before, Danone is leader in emerging countries and the develop world with 31% of its sales. Danone knows that in these kind of countries growth options are huge and the demography tends to increase a lot. In each developing country (Latin America, Mexico, Argentina, Uruguay), Danone has its own brand adapted to the country.Same thing in Asia (China and Indonesia). For example, DANONE has lunched a brand of purified water in China and has taken 30% of the market. Thats means that DANONE wants to be a big player in Asia by playing in all the For Danone the growth policy is also having an active marketing approach that aims to identify consumer needs. Like Nestl, Danone innovate every day to respond to the demand in each country (products and consumption habits). Thats why flavoured appear in the last few years like Blackberry, Salvetat strawberry, and new format like 5 litre format. With innovation, Danone uses a lot of advertising and promotional strategies and plan to still increase its advertising budget. Moreover, advertising tries to be adapted in each world sector where Danone is. It permits to the company to be very reactive and flexible everywhere to the market conditions. In reality, Danone use CRM methods to see potential growth with for example, surveys and huge database. In conclusion, Rick Haffner, head of global beverage research at Euromonitor, sees the future like: He believes bottled water sales will continue to grow on a long-term basis, largely driven by emerging markets.

Haffner attributes the trend to rising incomes and a desire for clean

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Low

drinking water. He estimates long-term emerging market growth running at 5% to 7% per year in volume terms compared to a meagre 1% in the developed world.

Competitive strategy
In terms of competitive strategy, both brand use different options in each countries. But we can see that Nestl is often more expensive in Value than Danone which permit the company to be leader in terms of value and of volume for Danone. We can also see that Danone try to lunch different product like sweet waters. We can sum things up through the strategy clock, as following:

High

o d u c t

o r

Low

b e n e f i t s

s e r v i c e

Price

High

Thanks to this study, we can give some objectives for both brands: 13

Objectives for Danone: Increase the number of sales in order to raise up the turn over Diversification by lunching new products or propose less expensive products. Capture new market share

Objectives for Nestl:

Sustain the high brand awareness of the company Be more present in market where the completion is less high and become leader thanks to its power Take off competitors from market Try to lunch new aromatic waters

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II.2. Analysis of their strengths and weaknesses

STRENGHTS: DANONE
A leader
-

WEAKNESSES: DANONE
Position
The immense diversification portfolio of the firm makes it impossible to run every division smoothly In Asia, where is the most attractive market nowadays, Nestle have only 6.5% of market share while Danone has 14% market share. In Latin America Danone has neglected this market (only 4%)

The worlds largest food company: net sales in excess of 60 bn Number of Employee is around 280,000 people Very large brand portfolio with approximately 6000 brands 18 % of market shares in the global market for water bottled. The global leader in bottled water Diversification in a lot of brands: 70 30 % of the market in North America 16% of the market in Europe Net sales in 2002: 60,5 bn Net profit in 2002: 5,2 bn Broad portfolio of brands

Promotion
-

Promotion
-

Top 50 list of Fortunes Americas Most Admired Food Companies, and ranked on top on Consumer Food Products Strong internal growth and strong cultural environment Powerful marketer. The quality of the Nestle products embeds an element of trust in the mind of the consumer that makes Nestle one of the powerful brands to be followed The decentralized culture in the organization encourages employees Customer base loyalty for Nestle is very vast and powerful Powerful brand positioning in the consumers mind

Retailers do not get to set high margins to indulge more in sales Logistics costs are quite high The immense diversification portfolio of the firm makes it impossible to run every business unit smoothly Transportation as well as storage problems. Supply Chain having a complex stature It is also perceived that Nestle puts profit first

Product
-

Regulators like FDA and AMA (American Medical Association) are pressing on the firm for removing tags (low cholesterol or heart healthy) Many products are not understandable in different countries

Position -

Strongest positions in Europe and North America Nestle: is developing rapidly with nestle Pure Life in Latin America Market leader in Vietnam Present in several different fields: nutrition, dairy products, ice cream, drinks, cooking products, chocolate and confectionary, pet foods, catering strategy Bought more than 12 large players in Europe, Asia, the Middle East and the Americas

Product
-

The name Nestle also visualizes the high standard and quality of the product Nestl provides quality brands and products and line extensions that are well-known

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STRENGHTS: NESTLE
Leadership
Large brand portfolio 1973: BSN merged with Gervais Danone became the leading French food manufacturer. Danone focused it activity on 3 core business: Fresh dairy product (47%), drinks (27%) and Market cereals (23,3)%. biscuits, The sales of bottled water are expanded and Owns 2 of the Five leading brands of bottled water: are likely to continue this year. Evian and Volvic. 2003: sales reached 138 billion litter Top-Selling brand of bottled (Aqua in Indonesia) ( compare to 2001 83 Billion) Significant market share in Western Market in signing an agreement with Suntory Danone expansion who should double between 2003 HOD. Limited to sell and 2010. Asia is the marketon the growing faster with with Well positioned who is premium segment 16% Evian Partnership with Coca-Cola in US Demand Group is market leader in value in Japan: Signed a partnership agreement with one of the France is a very sensitive country about Japanese drinks leader. quality. The level of consumption is High. Number one in terms of value in Mexico, in Emerging country start to consume water Argentina and Uruguay. bottle. Key player in of tape water can change the The treatment Asia (40% of the bottled market) in Middle East market and in North taste and the smell of the water Africa. Strong marketing strategy to identify depend Consumer behaviour are different andconsumer needs. of the zone in the world Second biggest company in Water bottles industry: Water drawn from an underground source in 13,5 is bn Asia reluctant to buy Danone has a large market share in the water Large distribution circuits : Home, Office, market: the largest Vending machine, Gym Restaurant, Bar, Pub,in Latin America (14%), Asia (14%), and retails, gas station. club, mass Europe (13%) Danone is the world leader in Home and Office Delivery segment: this market accounts for 80% of demand Legal in term of value. Tape water have to respect the strong norms imposed by Promotion European Union. Government built a bad image of the soft is sold Agreements with competitors: Evian drink permit the development of the bottles throughout the Coca-Cola distribution network of water Danone is today more considered as a brand than a company, which gives her more legitimacy to impose its products. Trends Advertising and promotional strategies are a key Tap water in perceived as polluted element is the success of the group. The decentralization of marketing business HOD: fastest growing and dynamic segment is unit permits the company to react rapidly to the the water industry today evolution of each market. HOD: represent 28% of the total volume of Customer are segmented by profile and Danone the sales can personalize their relationship with the users HOD Annual magazine, Europe letters and discount (thanks to Growth in news is 40% since 1993 coupons. HOD is still in it early phase of development in France and in Europe : About 2.3 Litre per persona while in US it represent about 20 Position litres Strong position in mass retail and in restaurants: Growth of 20% of the fountain in France the reputation of the group allows him to be 98% of the fountain in France are out of home present in the bigger retailers while in US its 50% The globalization of its products allows the group Large format of bottle will probably replace to meet universal needs: a strong position in traditional countries (60% of the sales are made emerging packaging Marge for HOD: 40% there) 31% Of its sales in emerging countries. Market share and notoriety well established in order to be essential and to have a large margin of negotiation Signed a high number of joint ventures: Joint venture with Polska Woda in order to penetrate the polish market. The group does the same with US market and the Asian Market.

WEAKNESSES: NESTLE
Position THREATS: Competition
-

OPPORTUNITIES: DANONE

DANONE

- Competitive sectors. High In 2000 due to sell off Danone sold it beer Exist business and withdrew form in hypermarkets in more than 50 brands sell glass packaging - Standardization of products does not take into France. account the draw big groups as Coca Cola, Attractive sector socio-cultural differences PepsiCo and Castel Neptune. One of the priority of Coca Cola and Pepsi Co is to penetrate the European market thanks to their Promotion impressive resource. term of distribution: strong - Disadvantage in Pepsiposition in mass retail but notstrong distribution Co and Coca-Cola have a in other circuits networks. Mains Leader in the industry signed partnership agreement with strong local brand in order to penetrate new market. Product Strong direct competition from hard discounts - Due to the presence all over the world Danone have to adapt to the law and the regulations of each countries. - They Market have to adjust to production norms, the High quality of the ingredients, labelling constraints Cost sector Lack and issues related to the target market. of awareness among sale. Habits of consumption are very different in function of the country Evolution of the trends Versatile demand face to the number of offers

Legal
-

Norms and law are different in each country French legislation prohibits Direct Home Delivery

SWOT analysis
Due to the vital aspect of water the bottled of water market is attractive, dynamic and very competitive. The general growth of the last ten years permits the apparition of a lot of brands (More than 70 in France). Bottled of water market depends on different aspects, so the company have to be aware about them. The first one are consumptions habits that are changing in function of the country. French customers dont have the same needs than Mexican. Second Aspect very important is the government policy. This one can fixed their owns norms and laws for it country. However the general pollution of tap water push people to buy bottled of water. Another opportunity for water brand is the decline of soda (due to the obesity). Water brands are more and more innovative it can be an innovation about water flavour or about packaging. 10 years ago appeared a new bottled format: Fountain. This segment is a source of revenue for the Brand. This segment grows fast and is a new way to consume water. In this market we have two mains players. Nestl (leader in value) and Danone (leader in volume). These two groups try to penetrate new markets thanks to join venture or trade agreements. Even if this two brands play a big role in the water market there are other serious competitors as Coca-Cola and Pepsi-Co. Thanks to the brand of this group the water market is more and more attractive. Consumers habits change fast so the brand strategy has to follow these trends.

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II.3. Evaluation of the situation of the two firms taking into account that of the new entrants
ANSOFFS MATRIX

Current Product

New Product

Market Penetration

Product Development

Current Market

Evian, Arvi, Volvic, Talians, Aquarel, Valvert, Cristaline, Wattwiller.

Montcalm, Saint Amand, Mont Roucous.

Medium Risk Market development

High Risk Diversification

New Market

Salvetat, Badoit (green), Quezac, Contrex, Perrier, San Pellegrino, Hepar, Courmayeur, Saint Yorre, Vichy Celestins.

Saint Amand sparkling, Wattwiller sparkling, Badoit (red), Eau de Perrier, Salcetat (lemon) Taillefine and volvic with flavour. Medium Risk

Low Risk

III. Recommendations
To maintain their market shares and develop a competitive advantage, Nestl and Danone should: Danone Diversification strategy Spread French products on the world market Try to increase the profitability by cutting costs With a good distribution circuit in Europe, they should target the HOD and Purified Water in order to increase their revenues on this market

Nestl

Cut prices on product in which the investment is already payed back in order to take off the competitors on the market Target new market with only one product

Develop and communicate on their bottle Nestle Pure Life in order to create a new global brand for the company

They should both stop the expansion of possible new big entrants like Coca cola and PepsiCo. They should also make more acquisitions in all over the developing countries because it is an important growing market. By improving the distribution networks in Asia and USA they could delete the competitive advantage of PepsiCo and Coca. They could develop the company outside the mass retail network and restaurant like at home with the HOD segment.

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