Pepsi's H2OH! has come to define flavored bottled water in Brazil and has become the top-selling water brand in Brazil by retail value, according to Euromonitor International.        Font Size ..... Small Normal Big Very Big

BY JON DOLD
Euromonitor International

As developed regions such as North America and Western Europe saw their economies tumble and environmental concerns rise in 2008, global sales growth of bottled water suffered a sharp slowdown globally. Accordingly, major players in the bottled water industry are looking elsewhere for untapped market potential. With its massive economy, evolving embrace of healthy consumption, the success of flavored bottled water, and relatively low per capita consumption of bottled water, Brazil has become a magnet for companies looking for growth.

Although Brazil’s major bottled water brands such as Indaiá (Indaiá Brasil Águas Minerais Ltda) have been available on Brazilian supermarket shelves for decades, consumption of bottled water in Brazil has remained low; in 2008 total per capita volume of bottled water was 27 liters per person per year, versus 98 liters in North America and 118 in Western Europe. But the market has produced attractive growth rates in recent years. The total value of the Brazilian bottled water industry has grown at a compound annual growth rate of 16 percent from 2003 to 2008, according to Euromonitor International.  This is far higher than other soft drinks such as carbonates, and also greater than bottled water growth globally. Changing Brazilian attitudes towards health and body image have opened up opportunities for low-calorie alternatives like bottled water and sports drinks at the same time as a rising middle class has generating fast consumption growth throughout the soft drinks industry.

And while the forecast for the Brazilian economy in 2009 has become increasingly pessimistic, a likely strong rebound and return to rising incomes should mean a return to healthy growth for the long term.  In the long term Brazil looks like a solid bet for bottled water; not only is consumption low with room to grow, but the country has seen strong growth of the middle class, and the joint rise in incomes and health and body image awareness bodes well for the future of bottled water in the country.

FLAVORED WATER

Flavored bottled water has taken Brazil by storm. Looking to rejuvenate the soft drinks industry with a new brand, PepsiCo Inc. launched H2OH! through their Brazilian distributor Cia Brasileira de Bebidas in 2006 with a big marketing push to appeal to adult Brazilian women with an alternative to carbonated beverages and still bottled water. The combination of low-calorie positioning, aggressive marketing, and appealing lime flavor drew a surprisingly wide group of consumers of all ages to the product, which has been so successful that the name H2OH! has come to define flavored bottled water in Brazil.

And it has quickly attracted competitors. Coca-Cola Indústrias Ltda followed close on H20H!’s heels in 2006 with the launch of Aquarius in lime and orange flavors. Local Brazilian players also jumped in looking to take advantage from the phenomenal growth of the market with copycat brands, such as the 2007 launch of H2X (Refrigerantes Xereta Ltda) and Cachoeira (Refriso Refrigerantes Sorocaba Ltda) in May of 2008, among many others.  New entries for the most part have not strayed far from H2OH!’s winning formula or citrus flavors and light carbonation, leaving flavor and ingredient innovation unexplored. However, in May 2008  Cia Brasileira de Bebidas went back to the market with Guarah, marketed similarly to H2OH! (low in calories and lightly carbonated) but intending to simulate the flavor of the company’s popular carbonate brand Guaraná Antarctica.

The surge of flavored water brands has had a big impact on the market. H2OH! already became the top-selling water brand in Brazil by retail value in 2007, according to Euromonitor International, and the flavored bottled water category has gone from being almost negligible in 2005 to 20 percent of the bottled water industry by value in 2008. But even with a rush of newcomers, almost none have gained significant share against the first mover.

FUNCTIONAL WATER

Flourishing in bottled water in Brazil will not necessarily be an easy task. The market is quickly becoming more competitive, and the influx of brands means more pressure to innovate or cut prices. Regulation is also impacting the market, and water companies must be prepared to deal with a number of restrictions on how bottled water products can be presented; H2OH!, for example, must be described as a carbonated beverage rather than a water on its label, and must be displayed in the carbonated beverage aisle rather than the water aisle in supermarkets in some states to prevent confusion with mineral water. H2OH! has relied on its strong marketing to solve this problem, and other companies moving into flavored bottled water must do the same in order to avoid being associated with other carbonated beverages, making flavored bottled water success a potentially expensive proposition. And still bottled water, while growing, may lose its luster as more and more consumers embrace flavored bottled water products.  In addition, the sources of quality mineral water are not unlimited, and the industry reports that water sources need to be within 400 kilometers of their local markets in order to be considered a sound investment. The need for access to new water sources may require large investments in acquisitions of smaller players in order to gain strong coverage at the national level.

But while the bottled water categories that have already been developed may pose challenges, functional bottled water may have potential. Both sports drinks and flavored bottled water have been growing quickly and increasing interest in fitness and gym membership is evident among Brazilians, but no major functional bottled water brand has been unleashed in Brazil to date. Companies that can survive their product being shelved away from the mineral water aisle in supermarkets can avoid the need to invest in mineral water sources. As a result, a company with a large war chest available to aggressively market a functional water product could have a shot at repeating H2OH!’s success.

NEW GLOBAL PLAYERS

Water multinationals have begun their efforts to expand and take advantage of the proven market potential for companies that can meet demand for healthy consumption in Brazil. In late 2008 Danone S.A., which had never entered the Brazilian water market previously despite being Brazil’s biggest dairy company in terms of retail value, announced the acquisition of local player Icoara Indústria e Comércio de Águas S.A. With its newly purchased water source, Danone immediately began to market its Bonafont brand. Danone is using its vast experience to push the healthy aspects of its products in its marketing, focusing on low salt content and water’s role in cleansing the body, as well as differentiating its product with a shaped PET bottle to communicate a healthy image. Although the brand is initially available only in São Paulo, given Danone’s strong distribution and brand recognition throughout the country, it is likely to expand its presence.

Also in late 2008, Nestlé Waters Brasil Bebidas e Alimentos Ltda announced its intention to purchase another local bottled water company, Santa Bárbara, along with its water source and production facility. The company stated that it would also make significant investments through 2013 to increase capacity. Globally, Nestlé is the largest bottled water company in retail value share, according to Euromonitor International, but has yet to make major gains in the bottled water market with any of the various brands it maintains on the market, with a historical share in Brazil always below 3 percent in terms of retail value. The purchase of Santa Bárbara not only provides strong presence in the state of São Paulo, but also gives Nestlé a new brand that has invested in marketing itself as an option for Brazilians looking for health, beauty and fitness. Like Danone, Nestlé is strong in the country outside of bottled water (its condensed milk brand Moça being among the Brazil’s most recognized and ubiquitous brands) and can succeed by investing in water and leveraging both its global experience in water and strong distribution in Brazil.

Neither company has announced intentions to launch a major flavored or functional bottled water to date; but given the importance of the flavored bottled water market and the company’s strong presence in these niches globally, new launches could well occur in the short term. Whatever the case, it’s a safe bet the dispute for dominance in Brazilian bottled water will only become fiercer.

Jon Dold is a research analyst at Euromonitor International. This article was written for Latin Business Chronicle.

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