A splash or a dribble?

April 15, 2003
Tapping into enhanced waters.
A flood of bottled waters gushed on to U.S. supermarket shelves in the 1990s, adding healthy profits to bottom lines. As Americans tried to quench their thirst, revenues from bottled water more than tripled from $2.5 billion to $7.7 billion, according to New York-based Beverage Marketing Corp. However, supermarket price wars began to drown profits and prompted a new aqua strategy , differentiation -- among beverage purveyors. The result has been a steady stream of vitamin-, herb-, fiber- and soy-fortified waters that promote fitness, stamina, rejuvenation and better brain function to health-conscious consumers. Although sales of these enhanced waters quadrupled from $20 million to $85 million between 2000 and 2001, the segment still only accounts for 1 percent to 2 percent of total revenues for the bottled water category. But the possibilities for brand extensions are endless."Enhanced waters are today a 'niche' segment only adopted by a small segment of the population," says Morgan Stanley analyst Bill Pecoriello. "The key issue is delivering the fortification along with the taste. Several of the new offerings fail on taste, but those that have delivered on taste are doing well." Basically, enhanced (fortified, functional, fitness, designer and new age) waters fall into one of three subcategories: fitness, plain fruit, and diet supplement. Usually consumed during exercise and formulated to meet fluid needs and provide hydration, fitness waters include category leader PepsiCo's Gatorade  Propel Fitness. Reebok Fitness water from Clearly Canadian has also successfully dipped its toes into the fitness segment. Products in the fruit segment, such as VeryFine Fruit20 and Talking Rain's Sparkling Diet Ice, tend to contain fruit essences, vitamins and/or electrolytes, but no added sugar. Diet supplement waters, by comparison, are formulated with a variety of vitamins, minerals, antioxidants, herbs and/or soy. Like many products in the diet supplement category, Energy Brands Inc.'s Glaceau Vitaminwater "is relevant to the modern consumer who is looking to lead a healthier, more purposeful lifestyle and connect with the obvious benefits of both vitamins and water," says company president J. Darius Bikoff.  "Glaceau Vitaminwater also offers consumers who drink carbonated soft drinks and other high-calorie beverages a chance to lower their caloric intake, while still getting the benefits of water, great taste, nutrient enhancement and variety."  Other diet supplement waters include Snapple's Elements, Coca-Cola Co.'s Dasani Nutri-Water and PepsiCo's Aquafina Essentials. Another variation is Baxter International's Pulse, which targets existing illnesses. "The overall bottled water business continues to grow at 30-plus percent and these enhanced waters are a very small part of the growth," says Pecoriello. "Glaceau Vitaminwater and Propel by Gatorade have been more of the successful entrants, while Aquafina Essentials and Dasani Nutri-Water, have been less so."
Gatorade Propel, which leads the enhanced water category, contains only 10 calories per serving, and was the first to gush past its competitors and reach the $100 million sales mark. And Gatorade is on a roll, having created three innovative line extensions in the last year , Ice, X-tremo (targeted to Hispanic consumers) and All-Stars (formulated for pint-size consumers). To re-create brand excitement, Gatorade also expanded flavor choices, unveiled new packaging and added the words "Rehydrate, Replenish, Refuel" on its labels.
But Gatorade will be challenged to keep its No. 1 position because brand loyalty is nearly nonexistent in the bottled water category. Brand recognition is high for Evian and Gatorade, but it doesn't translate to brand loyalty. To many consumers, one bottled water brand is no different than another. In fact, according to a Morgan Stanley study, one of two consumers of carbonated beverages use one brand exclusively, while only one in five are loyal to a single water brand. It's too early to tell, but differentiated enhanced waters may garner more loyal consumers. They do provide a better profit line, since prices on average are 40 to 45 percent higher than regular bottled water.According to Information Resources Inc., U.S dollar sales for the 52 weeks ending Feb. 2003, translated to increases of 225.1 percent for Propel; 279.1 percent for Reebok Fitness Water; 157.2 percent for Glaceau Vitamin Water; 108.6 percent for Glaceau Smart Water; 62.5 percent for Veryfine Fruit20; and 1,100.5 percent for Hansen's E20. One might salivate over the prospect of investing in this kind of growth. Hope springs eternal.Beverage Consumption 2002     Gallons Per Person (annually)Carbonated soft drinks                          54.0Beer                                                    22.6Milk                                                     22.6Coffee                                                  21.9Bottled water                                        21.1Source:The Motley Fool

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