Fast-growing demand for bottled water will continue over the next five years as health-conscious consumers shun sugary drinks like traditional carbonated soft drinks and fruit juices, research by credit agency Moody’s has found.
This trend will help food and beverage companies offset declining demand in mature segments like prepared dishes, frozen food and fresh dairy products in Europe, says Moody’s Investors Service in a new report, ‘Soft Beverages, Europe: Bottled Water Growth To Offset Slowdown In Other Segments, But Impact on Credit Quality Limited For Now’.
Moody’s also expects the water segment – including still, carbonated and flavoured water – to support revenue growth for the likes of Coca Cola, which face volume pressure on traditional carbonated soft drinks in certain mature markets, as well as the likes of Nestle and Danone.
Paolo Leschiutta, co-author of the report, said: “Increasingly health-conscious consumers are drinking more water. As such, bottled water, which is nearly a quarter of the overall soft drinks market in terms of value, will help organic revenue growth in the drinks sector. This will benefit Nestle and Danone, which are the two largest global players in the segment.”
Bottled water volume growth will remain strongest in emerging markets, benefitting Danone with its established presence in China and Mexico, where concerns about the quality of public water supplies are driving demand for its Aquadrinks products, the report notes. Although only 20% of Nestlé’s water sales are in emerging markets, it is the market leader in the growing US and global carbonated water segment.
While bottled water volumes will increase, companies will struggle to improve the profitability of the fragmented water market, the report claims. A large number of small players and high price competition means that margins tend to be lower than other food and beverage products, diluting overall group margins. As a result, Moody’s does not expect it to contribute to margin improvements during the next 12 to 18 months.
Beyond the 18-month time horizon, profitability should improve as companies’ investments in new and premium bottled water products begins to pay off. A shift towards higher-margin carbonated, flavoured or premium segments and away from still water will help companies to increase their price power and their returns, improving credit quality over time, Moody’s says.