WATER WARS

LUCIA MOSES

With about one-third of all bottled water sold in California, bottled water could well be that state's official beverage.

At Unified Western Grocers, Commerce, Calif., a wholesaler cooperative serving independent retailers in the state, the hot deal of the month has become a staple. "Every month, we have to have it," said Trina Guoz, Unified's bottled water buyer for the Southern California region.

If recent promotional activity among retailers there and elsewhere is any indication, this summer looks to be another hot one for bottled water sales.

"Last year was very aggressive," Gary Hemphill, a managing director at Beverage Marketing Corp., New York, said of promotional activity. "It seems as if it's picked up in the second quarter, and we would expect that when the weather warms up, it'll pick up."

The leading bottled water sellers have slashed prices in recent years; since 2003, sales volume has grown faster than dollar sales, according to Beverage Marketing.

It's easy to see why consumers have come to expect rock-bottom prices on water. The share of bottled water sold on promotion has steadily increased over the past few years. In food, drug and mass, one-third of still bottled water sales were on promotion in the year that ended April 22, up from about one-fifth four years earlier, according to ACNielsen.

Today, huge displays and deals offering 24-packs, the size of choice, at a price of 16 cents per convenience-sized bottle aren't uncommon. At retailers like Lakeland, Fla.-based Publix Super Markets that serve hot climates, bottled water is a year-round sell.

Consumers have come to expect regular hot deals on water, and many industry experts said they don't expect that to change anytime soon. While the brand managers would disagree, the observers say convenience bottled water - 72% of the market - has become a commodity, especially to young consumers who grew up drinking it. They doubt that new premium waters with fruit flavors and sweeteners will lead people to attach more value to the category.

"You can insert all the line extensions you want, but no one's been given a good reason to pay more for bottled water," said Darrell Jursa, managing partner at Liquid Intelligence, a beverage consulting firm.

Sales are flattening out, but bottled water volume still is gushing. In a recent report, Mintel International Group predicted U.S. bottled water sales would increase 62% at current prices and 37% at constant prices from 2005-2010. By comparison, from 2000-2005, U.S. sales of bottled water rose 69% at current and 49% at constant prices.

Despite the risk of eroding profit margins, manufacturers seem to remain intent on using deep discounts to grow market share. At six-store Van's Market in Helena, Mont., said Tim Hoffert, a store manager, "Our program now is basically the same as last summer."

Tom Liebert, a manager at CNW Foods in Missouri, operator of two Food4Less stores, sees the same pattern. "Water companies are making money, we're making money," he said. "The saying is, don't beat a dead dog. It's definitely not a dead dog."

Aggressive pricing has helped companies build volume, Hemphill said. "As long as the price promotion remains an effective tool in increasing sales, companies will continue to use it."

Kent Phillips, chairman of Data Bank Limited, Fort Wayne, Ind., a tracker of beverage sales, warned that deep discounts have damaged bottled water's image. "It seems foolish to me to introduce a brand and in a year or two, drop the price to the basement," he said. At the same time, he acknowledged that companies have no good alternative. "The only thing you can do is try to raise your price, cut your promotions, and you're going to take a volume dive because not everybody is going to follow you. It's either that or you stop making it anymore."

Phillips said NestlT Waters North America, the market leader by sales of its combined water brands, is the likely candidate to try raising prices because it has multiple brands, sometimes in the same region, and can afford to lose share on one if its sister brands can offset that loss. "They are basically running the show," he said.

But NestlT Waters tried early this year to ease up on promotions, only to back off when rivals Coca-Cola and PepsiCo stayed the course with their own bottled water brands. NestlT Waters has since reiterated its goals of gaining margin and being the low-cost producer. And retailers said NestlT Waters has been aggressive lately. Liebert said that in a recent promotion, the company occupied half of a 35-foot section in the front of the store on a wall of values. "We sold a ton of it," he said.

Beverage Watch

Top beverage brands maintained their market-leading position over the past year.

Category: Sales* vs. year ago; Sales % change vs. year ago; Dollar share of type/category; Change in share vs. year ago

Whole Milk: Private label: $141.8 million; - 9.1%; 62.5%; -1.3%

Beer: Bud Light: $99.8 million; 6.0%; 15.5%; 0.5%

Table Wine: Yellow Tail: $14.5 million; 15.4%; 4.1%; 0.1%

PET Bottled Water: Aquafina: $35.4 million; 11.2%; 13.8%; -1.1%

Refrigerated O.J.:

Tropicana Pure Premium O.J.: $91.3 million; 3.8%; 44.8%; 1.7%

Source: Information Resources Inc.

* Sales in food, drug and mass, excluding Wal-Mart (for wine and beer, food and drug only), for the four weeks that ended April 16

(April 23 for beer and wine). Soft drink data brand data not available.