It was only a matter of time.
After all, by the time bottled water replaced carbonated soft drinks as U.S. consumers’ favorite drink for the first time in 2016, major beverage corporations like The Coca-Cola Company, PepsiCo, Nestle and others had already prepared themselves for the change, building robust brands and operations that could compete in various ways with value-priced and private label offerings.
However, as flavored and unflavored sparkling water has become one of the fastest growing categories on the market, those same companies are in the unusual position of playing catch-up to less heralded rivals.
One of those rivals is, of course, National Beverage Company, makers of La Croix, the brand largely credited with sparking America’s obsession with fizzy flavored water. The Florida-based company has continued to go from strength to strength; according to a company earnings report, sales increased approximately 12.6 percent in the past quarter to $292.6 million, while sales over a 52-week period ending on August 12 stand at over $422 million, according to market research group IRI. (Due to a correction, this paragraph has been changed from an earlier version; see editor’s note, below)
Based on Nielsen all-channel sales data through August 11, 2018, sales of the company’s flavored sparkling water products are up 37.3 percent from the same period last year, giving it a 22 percent stake in the $2.1 billion category. Other independents, such as Polar Corp. and Talking Rain Beverage Corp., makers of Sparkling Ice, have also seized share of the growing market that saw U.S. retail sales of sparkling water, seltzer and club soda reach $2.7 billion.
For now, the sparkling water market may be still be little more than the proverbial drop in the bucket compared to the $16 billion business of bottled water. But with U.S. consumers expected to purchase around 821 billion gallons of sparkling water just this year, the likes of Coca-Cola, PepsiCo, Nestlé and other major beverage manufacturers have all taken significant steps to expand and strengthen their respective positions in this high growth category.
Coke: Premium Potential With Topo Chico
As the world’s biggest soda company, Coca-Cola stands among those with the most to lose from the recent downturn in carbonated soft drink sales. The company has been actively exploring opportunities outside of soda for over a decade as part of its stated goal of becoming a “total beverage company,” and recent moves have indicated that a diversified sparkling water portfolio – which grew over 20 percent in volume in 2017 – will be a key component of its growth strategy moving forward.
Prior to last October, Coke’s sparkling water portfolio was comprised of carbonated line extensions of its existing bottled water lines such as smartwater and Dasani. The addition of Topo Chico, the imported Mexican sparkling mineral water brand that has been a favorite in Texas for decades, altered that landscape. Coke acquired the U.S. rights to the company last October through its Venturing and Emerging Brands (VEB) division for a reported fee of $220 million, and while its national presence remains limited, the brand is growing at a healthy rate under its new ownership.
Speaking during a presentation of the company’s Q1 2018 financial results, Coke CEO James Quincey said that Topo Chico’s U.S. retail value had grown by 30 percent during that time period, Coke’s first full quarter of ownership. The brand also expanded its convenience store distribution by 25 percent.
According to data from IRI, U.S. multi-outlet plus C-store sales increased 32.9 percent over a 52-week period ending on August 12, 2018. Total sales during that time were approximately $98 million, around 3.58 percent of the dollar share of the category. Topo Chico significantly outpaced Coke’s other sparkling water products over the past year: Dollar sales of Dasani sparkling were up around 20.5 percent to $59.2 million, while smartwater sparkling grew 15.7 percent, posting $19 million in sales. Though it is most commonly found in glass bottles, Topo Chico is also sold in a variety of formats, from 6.5 oz. glass bottles to 1L PET packages. Over the 52-week period, its average price ($2.26) fell between that of sparkling products from Dasani ($2.52) and smartwater ($2.09).
Further insights into Topo Chico’s broader strategy were difficult to come by. When asked about the recent growth in C-stores and the company’s channel strategy, marketing manager David De La Garza said convenience retailers will “play a role in our broader channel portfolio” moving forward. He alluded to the challenge of supply chain headwinds “specifically in logistics like transport and freight” that are facing the industry at large, as well as to opportunities in food service.
While Topo Chico is mainly showcased as unflavored sparkling mineral water, Coke has used Dasani to target the unsweetened flavored seltzer category. The brand added three new flavors to its sparkling line earlier this year, bringing the total number of SKUs to 14. That line, along with similar products from Hansen’s, helped grow Coke’s dollar sales for flavored sparkling waters over 32 percent over a 52-week period ending on August 11, according to Nielsen all channel sales data. Though Coke’s $2.4 billion share of the bottled water category dwarfs its presence in flavored sparkling, that segment has grown at a much slower pace of just 1.4 percent over the last year.
Underscoring the importance of sparkling to Coke’s product set, the company took the unusual step of turning to crowdfunding platform Indiegogo to gauge interest in Coke-owned premium Swiss mineral water brand Valser, which is currently sold only in Europe. The one-month campaign offered users early access to the brand’s Classic (sparkling) and Silence (still) water varieties, in exchange for feedback that will help Coke gauge positioning and level of demand for the product ahead of formal introduction at retail. The brand is currently being piloted in select restaurants in the Atlanta area, according to the company. Valser was introduced in China last year, where it raised eyebrows with an approximately U.S. $9 price tag.
Nestle: From Spring to Sparkling
While Coke has been building its presence in sparkling water through acquisitions and line extensions, Nestlé Waters North America (NWNA) has taken a different approach. In January, the company announced a comprehensive revamp of its sparkling water portfolio, with new flavors, packaging and design for carbonated products released under its six regional spring water brands, which include Poland Spring, Deer Park, Zephyrhills, Ozarka, Ice Mountain and Arrowhead. The push is part of a stated goal by NWNA to double household penetration for sparkling water over 2016 levels by 2020.
In a call with BevNET, Andrius M. Dapkus, vice president and general manager for domestic brands at NWNA, said the company has been “extremely pleased” with the results thus far; total category buying households have increased from around 5 million prior to launch to over 9 million currently, he said. Meanwhile, the percentage of households that purchase regional spring and sparkling water has more than doubled, indicating a consistent shift in consumer behavior.
“When you talk about true organic growth, sparkling will be the single biggest contributor that we have to our business,” he said. “From a focus perspective, it’s a top priority for us.”
Dapkus credited NWNA’s ability, through in-store displays and advertising, to present its regional spring water brands as a cohesive family of products with distinct use occasions as a marketing asset for the brand. The company has also invested significantly in a TV and digital media campaign to drive engagement with consumers.
According to Nielsen all channel sales data, Nestlé Holdings has seen dollar sales for flavored sparkling water products rise by 19.4 percent over a 52-week period ending on August 11, 2018, giving it an 8.8 percent dollar share of the category. Deer Park, Ice Mountain and Poland Spring have been particularly successful. The latter, which has a 2.2 percent dollar share of the sparkling flavored water category, grew its dollar sales by 18.7 percent over the period. Meanwhile, Ice Mountain saw sparkling flavored water sales increase 63.2 percent, while Deer Park rose 22.4 percent. Total retail sales for flavored sparkling water products from Nestlé Holdings reached approximately $200 million in sales, compared to $3.7 billion for its total bottled water sales over the past year.
“It’s really a two-pronged attack that we are bringing – one is the broad-based media investment to drive overall brand awareness and consideration,” he said, noting that the vast majority of the company’s sparkling business is driven by base volume rather than promo volume. “We are then completing that process in-store with good execution at retail with the off-the-shelf display activity as well as the strong presence on-shelf.”
While expressing satisfaction with the regional sparkling rollout so far, Dapkus underscored the importance of continuing to innovate within the category, with a particular eye on easing soda consumers away from soda use occasions. He hinted that Nestle’s other sparkling brands, including Perrier and S. Pellegrino, would also have a role to play in growing within the premium import segment of sparkling.
“Sparkling [water] need occasions tend to be more based on emotion,” he said. “It plays more in the emotional spaces – like a pick-me-up, or someone looking for energy and enjoyment. While sparkling kind of represents a base entry point into those occasions, there’s a lot more opportunity to stay in the healthy space by adding either a little bit of sweetness through juice or tea. We want to expand the portfolio to attack those need states more aggressively.”
PepsiCo: Building Around Bubbles
Up until mid-August, PepsiCo’s sparkling water trajectory seemed to be on a clear path. With the spring launch of Bubly, a zero-calorie flavored sparkling water line in 12 oz. cans created as a multi-channel offering, the company had a colorfully branded new seltzer product that would complement premium still water line LIFE WTR, launched in 2017, as a choice for younger consumers. Similar to LIFE WTR, Pepsi backed Bubly with a splashy TV debut in a commercial aired during the Academy Awards broadcast in February.
Standing on its own or judged by its ability to offset declines in other categories, such as CSDs and juice, Bubly has enjoyed a successful debut thus far. According to Nielsen data, the brand has fueled PepsiCo’s share of the sparkling water category, which rose from just 0.6 percent in January to 4.2 percent in August. Having been on the market for less than a year, Bubly has posted over $61 million in sales, according to market research group IRI.
During an earnings call in July, outgoing CEO Indra K. Nooyi noted that Bubly and LIFE WTR were products that could quickly achieve scale in Pepsi’s DSD system without necessarily cannibalizing shelf space from core CSDs, an issue that the company has at times faced when building smaller brands.
On that same call, PepsiCo vice chairman and CFO Hugh F. Johnston noted that the company was looking to continue segmenting its its water business with new innovations while the case pack water business provides the base volume. However, the announcement in August that Pepsi had entered an agreement worth $3.2 billion to purchase Israeli company SodaStream, known for its line of table-top appliances for making sparkling water at home, has shifted the landscape for both the soda maker and the sparkling market as a whole.
In an indication of the ripple effects of the SodaStream deal, the most expensive brand acquisition in PepsiCo’s history, the company sent a letter to franchise bottlers last month affirming that the purchase will not affect current operations or relationships. In entering the at-home market for the first time, there has been speculation that Pepsi could integrate some of its signature soda brands into the appliance, an idea the company briefly experimented with in 2014.
While the impact of the SodaStream deal begins to be felt over the coming months, PepsiCo’s rivals Coke and Nestlé – not to mention the likes of LaCroix, Talking Rain and upstart private label manufacturers – are unlikely to wait to see the results. Now that even the likes of Anheuser-Busch is showing interest in sparkling water with last year’s purchase of HiBall/Alta Palla, the battle over bubbles is likely just beginning.
Editor’s Note: A prior version of this article, referred to lawsuits that had been filed against the Company’s CEO, Nick Caporella. We have since learned that the lawsuits referenced in the article were dismissed by the court after the plaintiffs retracted and recanted their allegations in writing as “factually unsupportable.” We apologize for the error and for not reaching out to National Beverage Corp. or Mr. Caporella for response prior to publication of this article.