Coca-Cola Snaps up European Bottled Water Companies – Will PepsiCo Follow Suit?

11 October 2006 - This year has seen a flurry of acquisition activity as The Coca-Cola Company (TCCC) attempts to firm up its position in European bottled water. Following last years' purchase of Eastern European water brands, recent acquisitions in Italy and Germany are further evidence of the company's strategy to expand into this high-growth sector.

Globally, bottled water is the second largest soft drinks sector behind carbonates; accounting for more than a third of total volume sales of soft drinks in 2005, according to Euromonitor International. Over the last five years, average annual growth of bottled water (10% off-trade volume CAGR) has outpaced that of the soft drinks category as a whole (6% CAGR). In fact, bottled water was the fastest growing soft drinks sector in actual terms between 2000 and 2005, a trend that Euromonitor International forecasts will continue between 2005 and 2010. TCCC and PepsiCo have made inroads into this attractive market over the last five years: between 2000 and 2005 both companies significantly outperformed the market as well as the two leading players – Danone and Nestlé.

For TCCC this exceptional growth has largely been driven by gains in North America, Asia Pacific and Latin America. While the company is particularly strong in Australasia (where it has a 34% share in off-trade value terms) and Eastern Europe, Western Europe stands out as the one region where the company has less of a presence, with a ranking of 7 in the bottled water industry.

PepsiCo has relied on North America to drive growth. While the company is well-positioned in Eastern Europe, it is much weaker in Western Europe where it ranks 31st (with 0.3% share in retail volume terms).

Room for expansion in fragmented Eastern Europe

TCCC and PepsiCo occupy the top two spots in Eastern European with a joint share of 16% in off-trade volume terms. While PepsiCo has traditionally been the leader in this market, it was overtaken by TCCC in 2005 following a string of acquisitions.

In July 2006 PepsiAmericas purchased the remaining 51% stake in Romanian bottler and distributor Quadrant-Amroq Bottling Co. This purchase may signify renewed interest in the Eastern European market, which is forecast to experience strong growth over the next five years, according to Euromonitor International.

Russia is a high growth market where PepsiCo might consider boosting its share through acquisition. The company, which already leads the Russian market for bottled water, is rumoured to be in talks with juice producer Wimm-Bill-Dann. Should this purchase go through, PepsiCo would also acquire the company's Essentuki, Yasnogorskaya and Zapovednik brands which collectively account for 3% of the bottled water market in total volume terms.

With the second highest forecast growth in Eastern Europe behind Russia, Ukraine is another attractive market. The number one player, Georgian Glass & Mineral Water Holding, accounts for 20% of the market in off-trade volume terms followed by TCCC with 8% share. Despite not having a presence in bottled water, PepsiCo is in a strong position in Ukraine due to its early entry into the market. The potential acquisition of Wimm-Bill-Dann would give it a foot in the door of the Ukrainian market (the company's Essentuki brands has 0.8% share in off-trade volume).

TCCC turns to Western Europe

Both TCCC and PepsiCo have a weaker presence in Western Europe than in Eastern Europe. In 2005 the companies ranked 7th and 31st respectively in volume terms. Additionally, Western Europe is a more consolidated market (the top two players Nestlé and Danone have a combined volume share of 25%) which limits opportunities for smaller players. Euromonitor International believes that despite being well-established, this market still presents opportunities. Total volume growth in Western Europe (8819 million litres between 2005 and 2010) is forecast to be approximately double that in Eastern Europe (4960 million litres).

Growth through acquisitions remains an option, particularly for major global players. TCCC's recently purchased the Apollinaris brand (the fourth largest bottled water brand in Germany) and the Italian Traficante group. In addition to giving the company a foothold in the key German and Italian; Euromonitor International expects these acquisitions to boost TCCC's position in Western Europe from 7th to 5th in off-trade volume terms.

Interestingly, PepsiCo was rumoured to be interested in the Apollinaris brand last year and recent reports indicate that the company is on the look out for acquisition targets in Western Europe. Turkey, which Euromonitor International forecasts will be the fastest growing market in Europe in actual terms, appears to be a particularly attractive market for PepsiCo to pursue more aggressively. The company already has a presence with its Aquafina brand and although PepsiCo is up against some strong competitors in this market (including Nestlé, Danone and TCCC) there are many smaller companies such as Niksar, Kizilay Maden Sulari and Sirma which might be potential acquisition targets.

There are also opportunities for PepsiCo to enter new markets by buying up smaller companies. Germany and Spain stand out as two of the fastest growing markets over the next five years and countries where PepsiCo currently has no presence. Although the global bottled water leaders Danone and Nestlé are established players in the German market, the degree of consolidation is low and there are numerous potential targets such as Franken Brunnen, Vilsa-Brunnen O Rodekohr and Adelholzener Alpenquellen which PepsiCo could use as a platform to enter the market.

Spain is set to be the second fastest growing market in Europe in actual terms according to Euromonitor International. However PepsiCo would be up against some stiff competition in this market: the three leaders (Danone, Leche Pascual and Nestlé) account for a third of sales by off-trade volume. Despite this there are a range of small local players only operating in the bottled water sector such as Fontaga, Aguas de Fuensanta, Manantial de Fuencaliente and Aguas Minerales de Firga; which could serve as effective entry vehicles.

Follow the leader

It seems likely that PepsiCo will follow TCCC's lead and look to firm up its position in the European bottled water market through acquisitions. Euromonitor International expects the company to look for acquisition targets in markets which are not too consolidated and which are forecast to experience strong growth over the next five years.

Euromonitor believes that the company is more likely to make acquisitions in a country where it can expand its existing business rather than entering a completely new market. With Russia and Turkey forecast to experience the highest growth in actual volume terms in Eastern and Western Europe respectively these are the markets we expect PepsiCo to pursue.

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Chris Wetherall
Euromonitor International
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