Nestlé-Danone and the bottled water sectorM34

Table of contents

INTRODUCTION 3

I. PRESENTATION OF THE STRUCTURAL FEATURES OF THE BOTTLED WATER INDUSTRY 4

I.1. STRATEGIC SEGMENTATION (MARKET SEGMENTATION) 4I.2. MACRO ENVIRONMENT 5I.3. ANALYSIS OF THE COMPETITIVE INDUSTRY 6I.4. ASSESSMENT OF THE ATTRACTIVENESS OF THIS INDUSTRY USING COMPETITIVE FORCES ANALYSIS 8

II. ASSESSMENT OF DANONE AND NESTLÉ'S CURRENT SITUATION 10

II.1. GROWTH OPTIONS AND METHODS OF THE TWO COMPANIES 10A. GROWTH OPTION AND METHODS FOR NESTLE 10B. GROWTH OPTION AND METHODS FOR DANONE 11C. COMPETITIVE STRATEGY 11II.2. ANALYSIS OF THEIR STRENGTHS AND WEAKNESSES 14II.3. EVALUATION OF THE SITUATION OF THE TWO FIRMS TAKING INTO ACCOUNT THAT OF THE NEW ENTRANTS

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III. Recommendations 21

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Introduction

Water is something that anyone around the world could get from the tap for free, but now it is a huge part of the beverage industry. Bottled water has become the industry's fastest growing segment, both in volume and value.

DANONE and NESTLE represent the main leaders of this market. The attractiveness of this market and the exponential growth in consumption of bottled water (138 billion litres consumed in 2003) now pushes competitors such as Pepsi and Coca-Cola to put a foothold in this market.

The bottled water industry is divided into three segments (purified water constitutes a separate segment):

- Spring Water

- Natural Mineral water

- Table water

Because of this diversification, but also because of the legislation effective on water, (which is very specific in some countries), the leaders had to struggle hard to gain maximum market share in this area.

The consumption of bottled water has grown in recent years and the explosion of emerging markets allows new players to enter this market. To ensure sustainability, DANONE and Nestle are now constantly trying to do better in all strategic areas (communication, distribution...).

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I. Presentation of the structural features of the bottled water industry

Bottled water industry is becoming the world’s most attractive beverage categories. A heightened emphasis on healthy lifestyles and improved consumer awareness of the need for proper hydration led many consumers to shift traditional beverage preferences for bottled water.

I.1. Strategic segmentation (market segmentation)

The market is divided between 2 segments: the HOD segment & the purified water segment.

1) The HOD segment.

HOD, Home and Office Delivery, concerns large bottles market and it is one of the fastest-growing segment in the water industry (28% of the bottled water market). Furthermore the growth rate is about 15% per year. Danone and Nestlé, the two leaders made a lot of acquisitions, but also some joint ventures (Danone) and some local agreements. Danone, the global leader in volume, leads with 80% of the demand in volume.

HOD sales of bottled water represent 80% in South America, 35% in USA and 2% in Europe. Those sizes of bottled are mainly developed in South America and absolutely not in Europe where there are not allowed.

However the market is difficult and costs a lot. Then it is critical to develop some logical skills. That is why it needs strict logistic cost control.

2) The purified water segment.

The potential of growth is kind of important. Indeed, water is much easier to produce. The different companies have higher margins with this kind of water than with mineral or spring water. The four challengers are present on this segment; nevertheless, Coca-Cola and Pepsi Co have better retail positions and geographical coverage.

I.2. Macro Environment

PESTEL

Political:

The European law focused on:

- The quality of microbiology- Water chemical quality- Taste of the water- General aspect.

Political aspect can change in function of the country.

Economical:

The kind of distribution network depends on the country.Economical crisis doesn’t impact on drink and food industry because of it vital aspect.

Social:

Social authorities cheer people to drink water.

Developed countries (without USA) take care of the label and the quality of the water.Price is one of the main key factors in the purchase in United Stated.The bottled water demand is high in emerging country, because of the poor quality of tape water but also due to expensive and difficult access of health care.

Technological:

Company invest on Research and development to improve the quality of the water and to realize new products. Flavour water is one of the last innovations in this sector.

Food industry launched new product that combine powder and water. Environment:

Springs of water are vulnerable to pollution. Selling out of natural sources

Legal:

Specific standards in different countries (quality of the ingredients, labelling, sale...)French law requires companies to provide drinking water to its employeesPossibility of selling tap water retired / purified from the area of EUIn France: names and labels not controlled accreditation bodyFor fountains in France: no possibility of home delivery

I.3. Analysis of the competitive Industry

DANONE NESTLE PEPSICO COCA COLA

Net sales 2002 (€bn)

13,5 60,5 23 18

Net profit (€bn) 1,3 5,2 3 2,8

Net Margin 9,5% 8,4% 13,1% 15,5%

% of sales in water activities

36% 8,6% NC NC

MARKET SHARE

North America 12% 30% 10% 6%

Latin America 14% 4% 10% 8%

Asia 14% 6,5% 1% 6%

Europe 13% 16% 1% 2%

HOD segment Present (leader) Present Not present Not present

Purified water Present Present Present Present

Acquisitions Arco Iris, McKesson Water, Château d’eau, Patrimoine des eaus du Quebec, Naya Inc, Sparkling Spring Water

Powwow Opalia, Aqua, Spring Water, Saint Spring, Sparkling.

Joint Venture Suntory Water (in USA), Eden Springs, Coca-Cola, Polska Woda

Local agreements Ultra Pura, Aqua pura

We can easily notice that Coca-Cola and Pepsi Co are aggressively entering in the market and are making a large number of acquisitions. Plus, Asia now represents the most attractive market with a growth in excess of 16%.

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I.4. Assessment of the attractiveness of this industry using competitive forces analysis

To assess the attractiveness of the bottled water sector using competitive forces we have to use the five forces framework analysis. It is composed of the threat of entry into an industry; the threat of substitutes to the industry’s products or services; the power of buyers of the industry’s products or services; the power of suppliers into the industry; and the extent of rivalry between competitors in the industry. (Johnson, Scholes and Whittington, 2009, p.30).

So we will decompose each of those Porter’s forces to analyse the bottled water industry.

The threat of entry

In the bottled water market the level of competition is not so high so the entry is easy. However it is a mature market so there are a few new entrants. Besides, the launch costs are relatively high so there are barriers from the outset and brands’ image of existing players such as Nestlé, Danone or even Coca-cola, are so strong that it is increasingly difficult to launch new products. (Brulhart & White, 2009, p.4).

Substitute Product

Many substitutes products are present in the beverage market. Water is the cheaper but soft drinks are more often consumed and very appreciated in most countries. However, in the Figure 1, we can see that from 2003 to 2005 the annual growth in volume of non alcoholic drinks have less increase compare to the water growth. Indeed, it reached 7% whereas sodas, fruit juces and energy drinks reached in average 6%. (Brulhart & White, 2009, p.4-5).

Power of Buyers

For those companies buyers are retailers such as Carrefour or Tesco, which have a strong negotiating power because they can easily switch from one supplier to another. (Johnson, Scholes and Whittington, 2009, p.34).

Power of Suppliers

The suppliers to the bottled water industry are municipal water systems, spring operators, bottling equipment manufacturers, deionization and filtration equipment manufacturers. Manufacturers of bottles and plastic caps or label printers and secondary packaging suppliers also represent them.

Competitive rivalry

The bottled water market is concentrated in two major players, Nestlé and Danone which account for 18% and 46% of market share depending oh the geographical area (Brulhart & White, 2009, p.6). But due to the strong attractiveness of this market other giants in soft drinks such as Coca-Cola and Pepsico implant themselves, and also some local outsiders in different countries. Eventually, buyers are also becoming competitors within the market

such as Casino or Intermaché. We can talk about an oligopoly competition. It dominates by only several big players like Danone, Nestle, Coca-Cola and PepsiCo.

LOW

HIGHLOW

HIGH

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II. Assessment of Danone and Nestlé's current situation

II.1. Growth options and methods of the two companies

A. GROWTH OPTION AND METHODS FOR NESTLE

The growth option for Nestle is huge thanks to its power and its investment in and outside Europe. Nestlé is a company which have a lot of cash flow thanks to their investment and it permits the company to make acquisitions, and for the future it seems to be a real advantage to stay leader and compete with Danone in the emerging countries where Danone is still number one. In these countries like Brazil, Mexico, Argentina or Thailand and Pakistan the options for the growth prospect appear to be very high. Nestlé is completely aware about that and don’t hesitate to invest a lot in these countries and continue to innovate and its acquisition and joint venture policy. The brand also understands that in some countries it is a good thing to use local water brand like in Arabic countries (Saudi Arabia, Jordan and Egypt).

That’s why Nestlé saw bottled water demand there grow at a 20% annual rate. And top-line growth from its production and distribution emerging markets network helped it lift margins in its water division by 10 basis points in the first half of the year.

In term of communication, both companies decided to invest a lot (70€m for Nestle and 50€m for Danone). Therefore, Nestlé invest more than Danone and use different methods to consolidate its brand image (traditional advertising/sponsoring/endorsement contract). In order to reach consumer and get the attention of the new ones, Nestlé continue to have a huge portfolio and continue to develop new brand well targeted in other countries. In each country where Nestlé wants to be, the brand tries to adapt the price, type of water, format to the local specificities.

In terms of production Nestlé uses the multi-site concept. That means that the company produce the same brand water at different places in the world. It permits to Nestle to ensure profitability and a global presence all other the world and omnipresence thanks to its distribution circuit.

Nestlé tend to be always trendy by having different type of bottle for all kind of target. The R&D is huge and represents around 11% of net sales.

One thing is certain, is that Nestle will always run business where the company is sure to be a big competitor and have profitability on the new market.

B. GROWTH OPTION AND METHODS FOR DANONE

We know that Danone is the world leader in bottled water in terms of volume thanks to its 2 big brands: Evian and Volvic. Danone is very presents in Western Europe.

To respond to the demand in North America, Danone signed a contract and a joint venture with Coca cola to distribute products. This partnership helps the two companies in terms of production, sales and distribution.

This is the same thing in Japan where Danone signed a partnership with Mitsubishi and Kirin Beverage Corp (one of the Japanese drinks leaders). It permits to Danone to control the distribution network.

As we said before, Danone is leader in emerging countries and the develop world with 31% of its sales. Danone knows that in these kind of countries growth options are huge and the demography tends to increase a lot. In each developing country (Latin America, Mexico, Argentina, Uruguay), Danone has its own brand adapted to the country.Same thing in Asia (China and Indonesia). For example, DANONE has lunched a brand of purified water in China and has taken 30% of the market. That’s means that DANONE wants to be a big player in Asia by playing in all the

For Danone the growth policy is also having an active marketing approach that aims to identify consumer needs. Like Nestlé, Danone innovate every day to respond to the demand in each country (products and consumption habits). That’s why flavoured appear in the last few years like Blackberry, Salvetat strawberry, and new format like 5 litre format.

With innovation, Danone uses a lot of advertising and promotional strategies and plan to still increase its advertising budget. Moreover, advertising tries to be adapted in each world sector where Danone is. It permits to the company to be very reactive and flexible everywhere to the market conditions. In reality, Danone use CRM methods to see potential growth with for example, surveys and huge database.

In conclusion, Rick Haffner, head of global beverage research at Euromonitor, sees the future like:

• He believes bottled water sales will continue to grow on a long-term basis, largely “driven by emerging markets.”

• Haffner attributes the trend to rising incomes and a desire for clean drinking water.

He estimates long-term emerging market growth running at 5% to 7% per year in volume terms… compared to a meagre 1% in the developed world.

C. Competitive strategy

In terms of competitive strategy, both brand use different options in each countries. But we can see that Nestlé is often more expensive in Value than Danone which permit the

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company to be leader in terms of value and of volume for Danone. We can also see that Danone try to lunch different product like sweet waters.

We can sum things up through the strategy clock, as following:

Thanks to this study, we can give some objectives for both brands:

Objectives for Danone:

Increase the number of sales in order to raise up the turn over Diversification by lunching new products or propose less expensive products. Capture new market share

Objectives for Nestlé:

Sustain the high brand awareness of the company

High

HighLow

Low

Price

P e r c e i v e d p r o d u c t o r s e r v i c e b e n e f i t s

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Be more present in market where the completion is less high and become leader thanks to its power

Take off competitors from market Try to lunch new aromatic waters

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II.2. Analysis of their strengths and weaknesses

STRENGHTS: DANONE

A leader - The world’s largest food company: net sales in excess of 60 € bn- Number of Employee is around 280,000 people- Very large brand portfolio with approximately 6000 brands - 18 % of market shares in the global market for water bottled.- The global leader in bottled water- Diversification in a lot of brands: 70- 30 % of the market in North America- 16% of the market in Europe- Net sales in 2002: 60,5 € bn- Net profit in 2002: 5,2 € bn- Broad portfolio of brands

Promotion - Top 50 list of Fortune’s ‘America’s Most Admired Food Companies’, and

ranked on top on Consumer Food Products- Strong internal growth and strong cultural environment- Powerful marketer. The quality of the Nestle products embeds an element of

trust in the mind of the consumer that makes Nestle one of the powerful brands to be followed

- The decentralized culture in the organization encourages employees- Customer base loyalty for Nestle is very vast and powerful- Powerful brand positioning in the consumers mind

Position - Strongest positions in Europe and North America - Nestle: is developing rapidly with nestle Pure Life in Latin America- Market leader in Vietnam- Present in several different fields: nutrition, dairy products, ice cream,

drinks, cooking products, chocolate and confectionary, pet foods, catering strategy

- Bought more than 12 large players in Europe, Asia, the Middle East and the Americas

Product - The name Nestle also visualizes the high standard and quality of the product- Nestlé provides quality brands and products and line extensions that are

well-known

WEAKNESSES: DANONE

Position - The immense diversification portfolio of the firm makes it impossible to run every

division smoothly- In Asia, where is the most attractive market nowadays, Nestle have only 6.5% of market

share while Danone has 14% market share. In Latin America Danone has neglected this market (only 4%)

Promotion - Retailers do not get to set high margins to indulge more in sales- Logistics costs are quite high- The immense diversification portfolio of the firm makes it impossible to run every

business unit smoothly- Transportation as well as storage problems.- Supply Chain having a complex stature - It is also perceived that Nestle puts profit first

Product - Regulators like FDA and AMA (American Medical Association) are pressing on the firm for

removing tags (“low cholesterol” or “heart healthy”)- Many products are not understandable in different countries

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OPPORTUNITIES: DANONE

Market - The sales of bottled water are expanded and are likely to continue this year.- 2003: sales reached 138 billion litter ( compare to 2001 83 Billion)- Market in expansion who should double between 2003 and 2010. - Asia is the market who is growing faster with 16%

Demand - France is a very sensitive country about quality. The level of consumption is

High.- Emerging country start to consume water in bottle. - The treatment of tape water can change the taste and the smell of the water- Consumer behaviour are different and depend of the zone in the world- Water drawn from an underground source in Asia is reluctant to buy- Large distribution circuits : Home, Office, Restaurant, Bar, Pub, Vending

machine, Gym club, mass retails, gas station.

Legal - Tape water have to respect the strong norms imposed by European Union.- Government built a bad image of the soft drink permit the development of the

bottles of water

Trends - Tap water is perceived as polluted- HOD: fastest growing and dynamic segment is the water industry today- HOD: represent 28% of the total volume of the sales- HOD Annual Growth in Europe is 40% since 1993- HOD is still in it early phase of development in France and in Europe : About

2.3 Litre per persona while in US it represent about 20 litres- Growth of 20% of the fountain in France- 98% of the fountain in France are out of home while in US it’s 50%- Large format of bottle will probably replace traditional packaging- Marge for HOD: 40%

THREATS: DANONE

Competition - High Competitive sectors. - Exist more than 50 brands sell in hypermarkets in France.- Attractive sector draw big groups as Coca Cola, PepsiCo and Castel Neptune.- One of the priority of Coca Cola and Pepsi Co is to penetrate the European market thanks

to their impressive resource.- Pepsi Co and Coca-Cola have a strong distribution networks. - Mains Leader in the industry signed partnership agreement with strong local brand in

order to penetrate new market. - Strong direct competition from hard discounts-

Market - High Cost sector- Lack of awareness among the target market.- Habits of consumption are very different in function of the country- Evolution of the trends - Versatile demand face to the number of offers

Legal - Norms and law are different in each country- French legislation prohibits Direct Home Delivery

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STRENGHTS: NESTLE

Leadership - Large brand portfolio- 1973: BSN merged with Gervais Danone became the leading French food

manufacturer. - Danone focused it activity on 3 core business: Fresh dairy product (47%),

drinks (27%) and biscuits, cereals (23,3)%.- Owns 2 of the Five leading brands of bottled water: Evian and Volvic.- Top-Selling brand of bottled (Aqua in Indonesia)- Significant market share in Western - Danone signing an agreement with Suntory Limited to sell HOD.- Well positioned on the premium segment with Evian- Partnership with Coca-Cola in US- Group is market leader in value in Japan: Signed a partnership agreement

with one of the Japanese drinks leader.- Number one in terms of value in Mexico, Argentina and Uruguay. - Key player in Asia (40% of the bottled market) in Middle East market and in

North Africa. Strong marketing strategy to identify consumer needs.

- Second biggest company in Water bottles industry: 13,5 € bn - Danone has a large market share in the water market: the largest in Latin

America (14%), Asia (14%), and Europe (13%)- Danone is the world leader in Home and Office Delivery segment: this

market accounts for 80% of demand in term of value.

Promotion - Agreements with competitors: Evian is sold throughout the Coca-Cola

distribution network- Danone is today more considered as a brand than a company, which gives

her more legitimacy to impose its products.- Advertising and promotional strategies are a key element in the success of

the group. The decentralization of marketing business unit permits the company to react rapidly to the evolution of each market.

- Customer are segmented by profile and Danone can personalize their relationship with the users (thanks to magazine, news letters and discount coupons.

WEAKNESSES: NESTLE

Position

- In 2000 due to sell off Danone sold it beer business and withdrew form glass packaging

- Standardization of products does not take into account the socio-cultural differences

Promotion - Disadvantage in term of distribution: strong position in mass retail but

not in other circuits

Product - Due to the presence all over the world Danone have to adapt to the law

and the regulations of each countries. - They have to adjust to production norms, the quality of the ingredients,

labelling constraints and issues related to sale.

Position - Strong position in mass retail and in restaurants: the reputation of the group

allows him to be present in the bigger retailers- The globalization of its products allows the group to meet universal needs: a

strong position in emerging countries (60% of the sales are made there)- 31% Of its sales in emerging countries.- Market share and notoriety well established in order to be essential and to

have a large margin of negotiation- Signed a high number of joint ventures: Joint venture with Polska Woda in

order to penetrate the polish market. The group does the same with US market and the Asian Market.

- Large financial capacity that can result in self-financing

Product - Expansion with the arrival of the arrival of new brands formats- Flavoured water is a success for the group thanks to it Taillefine brand. - New Formats have been launched in several countries (5 liter bottle) - Strong innovation capabilities (good know how and process) and to adapt to

international consumption trend.

OPPORTUNITIES: NESTLE

Market - Sales of bottles water expended and it’s likely to continue this year.- 2003 : Sales reached 138 billion litter ( compare to 2001 83 Billion)- Market in expansion who should double between 2003 and 2010.

THREATS: NESTLE

Competition - High Competitive sectors. - Exist more than 50 brands sell in hypermarkets in France.- Attractive sector draw big groups as Coca Cola, PepsiCo and Castel

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- Asia is the market who is growing faster with 16%

Demand - France is a very sensitive country about quality. The level of consumption is

High.- Emerging country start to consume water in bottle. - The treatment of tape water can change the taste and the smell of the water- Consumer behaviour are different and depend of the zone in the world- Water drawn from an underground source in Asia is reluctant to buy- Large distribution circuits : Home, Office, Restaurant, Bar, Pub, Vending

machine, Gym club, mass retails, gas station.

Legal - Tape water have to respect the strong norms imposed by European Union.- Government built a bad image of the soft drink permit the development of

the bottles of water

Trends - Tap water is perceived as polluted- HOD : fastest growing and dynamic segment is the water industry today- HOD : represent 28% of the total volume of the sales- HOD Annual Growth in Europe is 40% since 1993- HOD is still in it early phase of development in France and in Europe: About

2.3 Liter per persona while in US it represent about 20 liters- Growth of 20% of the fountain in France- 98% of the fountain in France are out of home while in US it’s 50%- Large format of bottle will probably replace traditional packaging- Marge for HOD: 40%

Neptune.- One of the priorities of Coca Cola and Pepsi Co is to penetrate the

European market thanks to their impressive resource.- Pepsi Co and Coca Cola have a strong distribution networks. - Mains Leader in the industry signed partnership agreement with strong

local brand in order to penetrate new market. - Strong direct competition from hard discounts-

Market - High Cost sector- Lack of awareness among the target market.- Habits of consumption are very different in function of the country- Evolution of the trends - Versatile demand face to the number of offers

Legal - Norms and law are different in each country- French legislation prohibits Direct Home Delivery

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SWOT analysisDue to the vital aspect of water the bottled of water market is attractive, dynamic and very competitive. The general growth of the last ten years permits the apparition of a lot of brands (More than 70 in France).

Bottled of water market depends on different aspects, so the company have to be aware about them. The first one are consumptions habits that are changing in function of the country. French customers don’t have the same needs than Mexican. Second Aspect very important is the government policy. This one can fixed their owns norms and laws for it country.

However the general pollution of tap water push people to buy bottled of water. Another opportunity for water brand is the decline of soda (due to the obesity).

Water brands are more and more innovative it can be an innovation about water flavour or about packaging. 10 years ago appeared a new bottled format: Fountain. This segment is a source of revenue for the Brand. This segment grows fast and is a new way to consume water.

In this market we have two mains players. Nestlé (leader in value) and Danone (leader in volume). These two groups try to penetrate new markets thanks to join venture or trade agreements. Even if this two brands play a big role in the water market there are other serious competitors as Coca-Cola and Pepsi-Co. Thanks to the brand of this group the water market is more and more attractive. Consumer’s habits change fast so the brand strategy has to follow these trends.

II.3. Evaluation of the situation of the two firms taking into account that of the new entrants

Current Product New Product

Current Market

Market Penetration

Evian, Arvi, Volvic, Talians, Aquarel, Valvert, Cristaline, Wattwiller.

Medium Risk

Product Development

Montcalm, Saint Amand, Mont Roucous.

High Risk

New Market

Market development

Salvetat, Badoit (green), Quezac, Contrex, Perrier, San Pellegrino,

Hepar, Courmayeur, Saint Yorre, Vichy Celestins.

Low Risk

Diversification

Saint Amand sparkling, Wattwiller sparkling, Badoit

(red), Eau de Perrier, Salcetat (lemon) Taillefine and volvic

with flavour.

Medium Risk

ANSOFF’S MATRIX

III. Recommendations

To maintain their market shares and develop a competitive advantage, Nestlé and Danone should:

Danone Diversification strategy Spread French products on the world market Try to increase the profitability by cutting costs With a good distribution circuit in Europe, they should target the HOD and Purified

Water in order to increase their revenues on this market

Nestlé

Cut prices on product in which the investment is already payed back in order to take off the competitors on the market

Target new market with only one product Develop and communicate on their bottle “Nestle Pure Life” in order to create a new

global brand for the company

They should both stop the expansion of possible new big entrants like Coca cola and PepsiCo. They should also make more acquisitions in all over the developing countries because it is an important growing market. By improving the distribution networks in Asia and USA they could delete the competitive advantage of PepsiCo and Coca. They could develop the company outside the mass retail network and restaurant like at home with the HOD segment.

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