Premium Hydration Overtakes Enhanced Water

Amid rising consumer disdain for high-calorie beverages, a convergence in demand for simple refreshment and functionality is starting to give rise to a broad, catch-all category: premium hydration. At its core are products that are generally thought of as enhanced waters, but it has more room at the margins, including alkaline waters, electrolyte enhanced waters and beverages, naturally functional products like coffeefruit-based Bai or any number of coconut waters, mix-to-drink twist-cap bottles, even carbonated products like Sparkling Ice and its current raft of imitators.

In particular, coconut water products and electrolyte-infused waters, led by market leaders Vita Coco and Smartwater, respectively, have found success by promoting hydration as a key function of their beverages, particularly as a way to bridge the gap between health and refreshment.

“Hydration is a very contemporary opportunity that’s out there,” said Neil Kimberley, a longtime beverage consultant. “I think it probably comes back to the idea that it’s not so much about enhanced water as it is about some form of hydration. And then it’s about, ‘is this an updated form of modern hydration that is not for a sports occasion?’ Then I think you get into this kind of space.”

Consumers have been drinking more beverages in general, Kimberley noted, particularly as hydration becomes a more significant part of their daily needs, and a big part of that boost in consumption has come from bottled water. Moreover, as U.S. consumers increasingly shun carbonated soft drinks, research from Nestlé Waters North America and published by Zenith International, a consulting group focused on the food and beverage industries, found that 51 percent of consumers choose non-flavored bottled water in favor of CSDs, while 12 percent opt for sweetened or enhanced water.

At a cost that hovers around $3-6 for a 24-pack of brands like Poland Springs and Dasani, manufacturers have made it extremely easy to buy and consume commodity water. However, higher margins in single serve premium water and hydration beverages have made the products an attractive option for retailers. And in more and more instances, lines have been blurred to include a wider range of beverages.

“[The growth of] bottled water and the whole idea of premium hydration starting with Vitaminwater and then going through products like Smartwater and Sobe Lifewater and then into coconut water, and maybe even Body Armor is an example, is something that’s starting to get grouped together by retailers, and I think that’s becoming the decision set for the consumer,” Kimberley said. “It is taking away share from carbonated soft drinks, specifically diets, and, probably, there’s some trading going on inside the actual premium set itself when you look at the declines of Vitaminwater and the increases in Smartwater.”

The irony of Vitaminwater’s current position is that the brand was once touted as the better-for-you (and higher margin) alternative to highly sweetened carbonated soft drinks and artificially flavored sports drinks. Along with its first-to-market status, Vitaminwater’s fortified formulation and a lighter sweetness profile (than most CSDs, anyway) were significant pieces of the proposition. Moreover, the isotonic flavor, sans the salty aftertaste of Gatorade, gave the brand a solid following among female consumers, who have played a major role in the growth of the enhanced water category.

In recent years, however, the billion-dollar brand has faced a highly publicized torrent of criticism from public health advocates who claim that Vitaminwater’s positioning as a healthy beverage is not only flawed, but dangerous. A 2009 lawsuit filed by consumer advocacy group The Center for Science in the Public Interest (CSPI) alleges The Coca-Cola Co, Inc., which markets the cane sugar-sweetened drinks, has engaged in “deceptive and unsubstantiated claims” in the labeling and marketing of the products.

“Vitaminwater is Coke’s attempt to dress up soda in a physician’s white coat,” said CSPI litigation director Steve Gardner said in a statement about the lawsuit. “Underneath, it’s still sugar water, albeit sugar water that costs about ten bucks a gallon.”

Lawsuits aside, sales of Vitaminwater are in the midst of sustained slide, pointing to a consumer that wants something else. According to Symphony IRI, a Chicago-based market research firm, the brand is down over 16 percent in dollar sales and over 20 percent in unit sales in all multi-outlets combined including C-Stores for the 52 week period ending on Aug. 11 2013. A significant part of that decline is likely rooted in cannibalization from Vitaminwater Zero, the brand’s zero-calorie line. That noted, Zero isn’t faring much better than its stable mate: the brand is down 10 percent and 17.25 percent in dollar and unit sales, respectively.

While Coke is attempting to make up ground through deep discounting of Vitaminwater in grocery channels (10 for $10 deals have become commonplace for the line), it appears that Vitaminwater is continuing to lose market share to a variety of low-calorie/sugar beverages, including Talking Rain’s Sparkling ICE. Despite a formulation that seems out of line with the industry’s current tilt toward natural ingredients (Sparkling ICE is made with artificial sweeteners and colors), the line of zero-calorie carbonated drinks is on pace to reach $400 million in annual sales by the end of 2013, according to the company’s CEO, Kevin Klock.

Klock believes that the rise of Sparkling ICE is rooted in Americans’ desire for simple refreshment, preferably in the form of zero-calorie and easy- to-understand beverages. While part of ICE’s simplicity is that it is as analogous to a diet soda as it is to a flavored water, its growth is nevertheless reflective of a consumer that wants something beyond water that isn’t a traditional soda.

It’s interesting because that’s a place the industry has been before. Five or six years ago, fearing “water fatigue” and aware of the (since realized) possibility that bottled water alone would be a commodity product, Coke, Nestle, and PepsiCo all rolled out flavored, zero- or low-calorie, carbonated versions of their leading water brands. Perhaps the brands were wrong, certainly the timing was off, but, it seems, the instinct was correct.

So if flavor and boredom are part of the impetus behind premium hydration, what else is driving it?

Much of the seismic shift created by the global health and wellness movement has given way to consumers clamoring for function-infused enhanced water products, according to a recent Euromonitor International report. Euromonitor, a London-based market research firm, found that while concerns over high sugar and high calorie content drove declines in total volume and dollar value of flavored water in the U.S. in 2012, consumers’ interest in functional benefits has led to a 5 percent growth in overall dollar sales of functional waters and a 6 percent jump in volume.

But in the meantime, there’s a high end as well, where premium-sourced bottled waters, like FIJI and Evian, are increasingly featuring pricing and positioning that is more similar to premium hydration products. Consumers are looking for any kind of value-added benefit in their water products – including exotic sourcing – and marketers are employing the pretext of premium hydration as a means of attracting new buyers.

According to Kimberley, retailers are the final piece of the puzzle, setting shelves to reflect those trends.

“And as that premium hydration idea is taken on, retailers seem to be resetting their shelves that way, and I think that that’s where the consumer group is and there’s a lot of interest and activity,” Kimberley said.