January 20, 1998 America's New Drink? Water -- Just Water -------------------------------------------------------- By CONSTANCE L. HAYS [A] bottle of water instead of a Coke? It sounds downright un-American. But that's what Bonnie Netjes chooses all the time. "I am not a pop drinker," declared Ms. Netjes, a clothing-store owner from Rock Rapids, Iowa, who has also pretty much given up coffee. "I just decided to drink more water a few years ago. I go for the cheapest kind because I can't tell there's a difference in taste." And there are millions like her. Over the last year or so, bottled water has come into its own as an emerging alternative to soft drinks, complete with national distribution, heavy-duty marketing and even a price war. This is water, just water -- no sparkle, no fizz, no flavoring, and no guarantee that it's greatly different from what comes out of your tap. While this business used to be the province of small companies with regional followings, now some big corporate hitters -- including at least one soft-drink giant -- are getting into the game. No wonder, for sales are booming. Sales of large bottles -- the kind that feed water coolers -- have grown respectably. But it is the smaller bottles -- whether the single-serving size, for washing down a hot dog, or the 1.5-liter models, found on desks or in gym bags -- that have really taken off. Sales of domestic water in small bottles exploded from 4.4 million gallons in 1984 to 750 million last year. By contrast, the overall market, including bulk sales, has grown from 843 million gallons to 2.95 billion, which is still dwarfed by the 14.6 billion gallons of carbonated soft drinks sold. "It's still small, but it's very much on the radar screen," said Michael Bellas, chairman and chief executive of Beverage Marketing, whose database on what people drink is a kind of Rosetta stone for the industry. Health trends and pollution concerns have always driven sales, and both of those have broadened in the years since bottled water first appeared in the United States. The use of filters like Brita has also grown, reflecting concern about just what is passing through a household's pipes. But there is more to the story. Clearly, bottled water has evolved from its elitist beginnings -- when people could be overheard debating the relative merits of various European waters -- into a product that is decidedly more mainstream. Witness Pepsi-Cola's Aqua Fina, which is basically purified tap water drawn at 11 of its bottling plants. It has been distributed nationally since fall. Great Brands of Europe, a unit of Danone Group, is pushing Dannon water, a spring water that has been in national distribution for a year, and is intended as a family-oriented alternative to its pricier Evian brand. Crystal Geyser sells spring water from a pair of sources -- one in California, the other in Tennessee. And a year ago, Coca-Cola Enterprises, which includes most domestic Coke bottlers, made an unsuccessful bid to buy Naya, a spring-water brand based in Quebec. Wall Street is also getting washed by the wave: AquaPenn, a Pennsylvania spring-water company with national distribution, plans a public stock offering, the first by a water company in recent memory. And the evidence of water's omnipresence can be found everywhere: Even New York City hot-dog vendors now sell bottles of Poland Spring, a unit of Nestle, along with standbys like Coke and Snapple. "Historically, the industry has felt that spring water was a higher priority, but you can't build a national brand like that," Bellas said. "The game is going to go to the low-cost producer that's regionally diversified, and the one that can put some marketing muscle behind these waters." It was only in 1984 that smaller bottles first appeared on store shelves, when wine coolers were all the rage. While wine coolers are all but extinct, sales of nonsparkling, or "still," water in small bottles grew 30 percent last year, compared with about 3 percent for carbonated soft drinks, according to Beverage Marketing. In fact, the small bottles have had double-digit sales growth every year since 1984 -- except for a dip in 1991, the year after Perrier was found to contain traces of benzene along with its bubbles. Much of the gain has come since 1992, when half-liter bottles -- which can fit into vending machines, lunch boxes and minibars -- became the package of choice. Profit margins are also higher on those bottles. The growth has come mainly at the expense of diet soda. "There's been a lack of excitement in the diet-soda category for years now, with people concerned about what they are putting into their bodies," Bellas said. "Water has nothing. No guilt." With so many new entrants, "the bottled water industry is highly competitive," notes the prospectus for AquaPenn's planned offering. Being big, and having a distribution system, seem to be the keys. Some companies, like Great Brands of Europe, which owns Evian, Dannon and Volvic, and the Perrier Group, a unit of Nestle SA, have acquired a string of regional waters. Pepsi, a unit of Pepsico, is so far the only company marketing tap water, said Jennifer Levine, a spokeswoman for the International Bottled Water Association. What about quality? Water sources must be licensed and monitored regularly by federal inspectors. There are both federal guidelines and stricter ones adopted by the International Bottled Water Association, all adopted within the last six years, Ms. Levine said. She traces the burst of water sales to increased use of polyurethane soft-drink bottles, which are ideal for water since they impart no plastic taste, and to the nutritional-content labels required since 1993 on most foods and beverages, which revealed to consumers just what they were drinking. "The more people realize what's in some of these drinks, the more they turn to water for what it doesn't have -- sugar, Nutrasweet, caffeine," she said. Selling water on a national scale has prompted companies to stake out different niches. Naya, sold only in bottles of 1.5 liters or less, is aimed at the under-30 male with extreme-sports commercials. The company spent $6 million on advertising last year, up from $500,000 in 1995, said Steve Wassek, vice president and general manager for its distributor, Nora Beverages USA, whose parent company is based in Montreal. Naya has also tried to win loyalty from gay and lesbian consumers, he added. "We looked at Evian, and they'd gone country club," he said. "The different directions we've taken say a lot about the category growth and how it's become a much more mass-market product." Evian begs to differ. "That's not a fair characterization, based on our ubiquitous availability," said Michael Neuwirth, a spokesman for Great Brands of Europe, based in Stamford, Conn. Still, since Evian is imported from a spring in the French Alps, the company clearly saw a need for something more middle America. Thus began Dannon Natural Spring Water, which comes from two springs: one in Henefer, Utah; one in the Laurentian Mountains, in Quebec. "We have focused on building awareness of the brand among families, and have developed partnerships with the national PTA and the American Youth Soccer Organization," Neuwirth said. "It's a family-focused brand, because of the pricing." Dannon water typically sells for 69 to 79 cents for a 1.5-liter bottle, he said, compared with $1.59 for Evian. So far, there has not been the kind of frenzied, taste-test-driven advertising of the cola battles, said Jane Lazgin, a spokeswoman for the Perrier Group, which includes 14 brands but has no truly national brand except its sparkling water. "Relatively speaking," she said, "bottled water is still in its infancy. We're not here to confuse the consumer, who in many ways is new to the market." The consumer is probably already confused, though. Crystal Geyser Alpine Spring water, for example, does not come from the Alps. It comes from springs in California and Tennessee. "Alpine is a description," said John Stallcup, vice president for marketing at Crystal Geyser, which is based in San Francisco. "It means high mountains." The expanding market has produced its own price war, with prices falling from about $1.09 for a 1.5-liter bottle to as low as 69 cents, Bellas said. For soft-drink producers like Pepsi, the decision to sell water might seem a little odd. Profit margins are much narrower than in soft drinks, and Pepsi is alone among the top three soft-drink companies in creating a bottled water for the U.S. market. Larry Jabbonsky, a Pepsi spokesman, said Pepsi saw water as one more drink to serve to its customers. "We clearly want to play in any growing nonalcoholic beverage category," he said, noting the generally fragmented nature of the water business, which Pepsi gingerly tested in 1995 and took full scale across the country in late 1996. He would not disclose how much water Pepsi has sold, but industry analysts say it is a tiny fraction of soft-drink sales. Still, the company, which has traded on the un-European, low-budget aspects of its brand, seems pumped up. "In Wichita, as we speak, it's the No. 1 bottled water," Jabbonsky said, adding that sales had also been strong in gas stations and convenience stores. "Based on what they tell us, Aqua Fina consumers couldn't care less about whether it's derived from a source or a spring." Meanwhile, Coca-Cola and Cadbury Schwepps, which makes 7-Up, Dr Pepper and other soft drinks, have so far stayed away, which may heighten the appeal for Pepsi. Coke does sell a bottled water, Bon Aqua, in about 30 countries overseas, but has no brand available domestically. Many Coca-Cola bottlers, who see a strong market for water, now carry Naya or Evian. "Each and every year our volume grows," said J. Bruce Llewellyn, the chairman and chief executive of Philadelphia Coca-Cola Bottling Co., which sells a lot of Evian. "Water quality in the U.S. is getting progressively worse. Every time there's a water main break on 23rd Street and people have to boil water for a week, or there's problems with the Ohio River, it clears out the supermarket shelves." The presence of giants like Pepsi in the bottled-water market may create problems for some of the other brands that are distributed by Coke and Pepsi bottlers. History has shown those companies to be forceful about eliminating products that compete with their own. And that competition is alive and well. "I don't like the dyes, the coloring," said Trevor Watson, a 44-year-old vinyl salesman in Manhattan who tends to pick bottled water over other soft drinks. "If I can't get water, I will drink soda. But I will drink half, that's it." Copyright 1998 The New York Times Company