Industry Analysis - Bottled water PDF

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Bottled Water Industry in Canada

MT8213 Technology and Organizational Strategy

Individual Research Paper Bottled Water Industry in Canada

Malcolm D’Souza

Ryerson University October 31, 2013

Page 1

Executive Summary The Canadian bottled water industry had a large growth spurt during the early 2000s which led to greater sales volume, consumption per capita and revenue growth. In the mid-2000s larger global enterprises started entering the market and more brands were made available which leads to the current saturated market with minimal growth prospects for the next few years. The key success factors in the industry are firstly price, followed by quality and convenience. With a large selection of products, consumers turn to being price conscience in a product they feel has little differentiation. Quality of the product is reflected in terms of tastes and perceived purity of bottled water over publicly sourced alternatives. The growing trend towards healthier lifestyles indicate being hydrated through the intake of water is needed on a more regular basis. This leads to convenience of being able to purchase and consume bottled water that can be easily transported. The 2008 economic crisis had a significant impact on the industry as consumer confidence in the economy declined. Firms have used technology to use less plastics in containers in an effort to reduce costs. However, as water is the primary ingredient being sold, there is very little differentiation in most segments. In response, newer segments with additives such as carbonation, flavouring and enhancements such as vitamins have created growth segments within the industry. Environmental concerns have impacted the industry. There is a growing concern regarding the number of single use bottles being collected in landfills. The industry has responded through the benefits of recycling. Some organizations are pushing for the total ban of single use plastic bottles. Larger organizations are evaluating the use of filtered water. Many large public events are promoting the idea of reducing their carbon footprint and offering water stations to refill any time of container for individual use. The market is saturated with many product offerings coupled with little forecasted growth. New entrants must decide on cost or product differentiation. Each of these are difficult. From a cost perspective, challenging the incumbents with efficient economies of scale and established marketing budgets to meet current market demands from the supply channel dominated by large supermarket chains. This report analyzes the current bottled water industry in Canada to provide a clearer picture of the potential obstacles and opportunities for firms entering this market

Table of Contents Executive Summary...........................................................................................................2 Introduction........................................................................................................................5 Analysis..............................................................................................................................6 Industry Analysis using PESTLE. Framework...............................................................6 Political.......................................................................................................................6 Economic....................................................................................................................6 Figure 1: Index of Consumer Confidence, 1982-2010...............................................6 Social..........................................................................................................................7 Figure 2: Household Incomes ($) and low income household (%)............................7 Technological..............................................................................................................7 Legal...........................................................................................................................8 Environmental.............................................................................................................8 The Canadian Market.....................................................................................................9 Market Volume............................................................................................................9 Figure 3: Market Volume............................................................................................9 Per Capita Consumption..........................................................................................10 Figure 4: Per Capita Consumption...........................................................................10 Market Value.............................................................................................................11 Figure 5: Market Value in Canadian Dollars.............................................................11 External Industry Analysis using Porter’s 5 Forces Model..........................................12 Figure 6: Industry analysis using Porter’s Five Forces Model.................................12 Internal Rivalry - HIGH.............................................................................................13 Figure 7: Company Concentration...........................................................................13 Bargaining Power of Suppliers - MODERATE.........................................................13 Bargaining Power of Buyers - HIGH........................................................................14 Figure 8: Store Based Retailing...............................................................................14 Threat of New Entrants - MODERATE.....................................................................14 Threat of Substitutes - HIGH....................................................................................15 Conclusion.......................................................................................................................16 References.......................................................................................................................17 Appendix..........................................................................................................................19 Figure A: Unemployment Rate in Canada, 1982-2012............................................19 Table A: Household Incomes ($) and low income household (%)............................19 Figure B: Market Volume by geography...................................................................20 Figure C: Per Capita Consumption by geography...................................................20

Figure D: Market Value by geography ($US)...........................................................21 Table B: Pricing by Segment....................................................................................22

Introduction Beverages are consumed throughout the world and at all times of the day for a various reasons. From the morning coffee to the end of meal digestif the world consumes purchased beverages valued at billions of dollars annually. The focus of this report is the Canadian bottled water industry. In order to understand the perspective of the industry, below is a high level overview of the beverage industry: 

Beverages o Alcohol   

Beer Wine Spirits

     

Carbonates Concentrates Fruit/Vegetable Juice Ready to drink Coffee/Tea Sports/Energy Drinks Bottled Water

o Soft Drinks

   

Still Carbonated Functional Flavoured

Four segments of still (unaltered), carbonated (both naturally and artificially), functional (added vitamins; enhancements) and flavoured comprise of the bottled water industry. In Canada, safe drinking water is readily accessible to most across the country. However, there is a growing demand for bottled water which is sold at a premium compared to public sourced water. Some reasons for this market trend are: -

Higher disposable income Improved affordability Perceived purity Taste preference Healthy alternatives to coffee and sugary drinks Hydration

The industry has major enterprises competing globally as well as with regional and niche markets. This report will give an overview of the bottled water industry in Canada and its prospects for growth.

External Industry Analysis using Porter’s 5 Forces Model An examination of the external industry forces will be applied against Porter’s five forces model. The analysis will provide an overview of the issues and potential opportunities for individual firms within the industry. Figure 6 is a brief overview of the analysis and a fuller explanation follows. Overall, the key threats were Industry Rivalry; Buyer Power and Threat of Substitutes. Other elements listed as moderate were Threat of New Entrants and Supplier Power. Figure 6: Industry analysis using Porter’s Five Forces Model

Threat of New Entrants (Moderate)  High capital requirements  Four “P’s”: Product (many brands/labels), Pricing; Promotion (high costs in marketing); Placement and access to in store sales channels  Minimal growth projections

Supplier Power (Moderate)  Manufacturers members of GS1; for supply chain management  Water is expensive to ship as it is a heavy commodity. Shipment of flavoured syrup, liquids and/or powders to distribution centres  Many suppliers with capacity

Buyer Power (High) Industry Rivalry (High)  Large enterprise companies dominate market  Many brands available competing for shrinking market  Large enterprise leverage economies of scale in production and distribution  Leverage variety of products within and external to bottled water industry

Threat of Substitutes (High)    

Tap water/reusable containers Carbonated soft drinks Coffee/Tea Juices

Consumer  Switching cost low to alternative beverages  Abundance of choice  Single servings results from impulse buying  May seek alternative to single use plastic bottles  Channel Distributor  Limited shelf space for many products  Request for slotting fees  Extensive market research on turnover required 

Internal Rivalry - HIGH The industry is fragmented with many firms competing either on cost or as a product differentiator. Figure 7 provides a breakdown of the main competitive groups. In the early 2000s, the top groupings provided 100% of the product offerings. As more firms enter the market, the share of the top groups now comprises of 85% of the product offerings. The group under “Other” has been shrinking which is attributed to the larger product offerings within the industry. Private labels has had flat growth since 2008 indicating a saturation in providing new offerings. The Danone group as divested most of its holdings since having a large market share in 2003-2004. Coca-Cola and Pepsi each represent a single digit share within the industry.

Figure 7: Company Concentration

Bargaining Power of Suppliers - MODERATE The bottled water industry is nearing the mature stage. Efficiencies in bottling are in place and with little forecasted growth within the market, the bargaining power of suppliers is not a major concern for firms. Locally sourced water is owned by the firm. For enterprises not dependent on the local water supply as a differentiator can work from distribution centres close to their target markets which in turn reduce transportation costs.

Bargaining Power of Buyers - HIGH Consumers Price sensitivity is a key driver for consumer choice in terms of bottled water. As the primary ingredient is water, differentiators could be flavours, enhancement and carbonation either separately or in some combination.

Distribution Channels Overall, there has been a slight decline through in-store sales. Non store sales have grown through direct selling which now accounts for 9% of sales (Euromonitor, 2013). Supermarket sales is the dominant avenue for sales which usually come with added costs for firms. Large supermarkets tend to require an upfront slotting fee (Federal Trade Commission, 2002). As well, large retail chains require sales forecasting and marketing plans to increase turnover of inventory.

Figure 8: Store Based Retailing

Source: Euromonitor, 2013

Threat of New Entrants - MODERATE New firms will need to decide on either a cost or differentiation strategy. There are substantial start-up cost in entering the bottled water market. Bottling facilities need to be secured. The industry has many firms which currently have a large product selection. It will be difficult on both ends to either provide a cost advantage or a differentiated product.

Marketing is major component for established firms and new entrants will need to develop plans to counter established brands. Tied with marketing efforts is access to distribution channels such as supermarkets which can incur significant up-front costs through slotting fees. Firms must also comply with Federal regulations under the Food and Drug Act which would add to the start-up cost in entering the industry. As well, industry groups membership in GS1 Canada and the Canadian Bottle Water Association.

Threat of Substitutes - HIGH There are a number of substitutes for the end consumer to choose which fit within the same price points as bottled water. The beverage industry has a vast variety and consumers can choose amongst carbonated soft drinks such as Coca-Cola, Pepsi and a number of other brands. As well, there are fruit and vegetable drinks; sports and energy drinks as well as ready to drink coffee and teas. Large enterprises provide a number of substitute products that complement their overall selection. Niche markets will need to differentiate their offerings to offset cost efficiencies of the global firms.

Conclusion The Canadian bottled water industry had a large growth spurt during the early 2000s which led to greater sales volume, consumption per capita and revenue growth. In the mid-2000s larger global enterprises started entering the market and more brands were made available which leads to the current saturated market with minimal growth prospects for the next few years. The key success factors in the industry are firstly price followed by quality and convenience. With a large selection of products, consumers turn to being price conscience in a product they feel has little differentiation. Quality of the product is reflected in terms of tastes and perceived purity of bottled water over publicly sourced alternatives. The growing trend towards healthier lifestyles indicate being hydrated through the intake of water is needed on a more regular basis. This leads to convenience of being able to purchase and consume bottled water that can be easily transported. The 2008 economic crisis had a significant impact on the industry as consumer confidence in the economy declined. Firms have used technology to use less plastics in containers in an effort to reduce costs. However, as water is the primary ingredient being sold, there is very little differentiation in most segments. In response, newer segments with additives such as carbonation, flavouring and enhancements such as vitamins have created growth segments within the industry. Environmental concerns have impacted the industry. There is a growing concern regarding the number of single use bottles being collected in landfills. The industry has responded through the benefits of recycling. Some organizations are pushing for the total ban of single use plastic bottles. Larger organizations are evaluating the use of filtered water. Many large public events are promoting the idea of reducing their carbon footprint and offering water stations to refill any time of container for individual use. The market is saturated with many product offerings coupled with little forecasted growth. New entrants must decide on cost or product differentiation. Each of these are difficult. From a cost perspective, challenging the incumbents with efficient economies of scale and established marketing budgets to meet current market demands from the supply channel dominated by large supermarket chains.

References Canadian Bottle Water Association: www.cbwa.ca

Canadian Open: www.rbccanadianopen.com

Conference Board of Canada (2013). Consumer Confidence. Retrieved October 31, 2013 from the Conference Board of Canada: http://www.conferenceboard.ca/topics/economics/consumer_confidence.aspx

Council of Canadians (www.canadians.org)

Euromonitor International (2013, September) Bottled Water: Finding the Profit amidst the Volume. Retrieved from Passport GMID Database

Federal Trade Commission (2003, November) Slotting Allowances in the Retail Grocery Industry. Retrieved from www.ftc.gov

Grant, R. (2013) Contemporary Strategy Analysis: Text and Cases, 8th edition. Wiley

GS1 Canada: Canada's Voice in Collaborative Commerce (www.gs1ca.org)

Health Canada (2011, October). Frequently Asked Questions about Bottled Water. Retrieved October 23, 2013 from Health Canada: http://www.hc-sc.gc.ca/fnan/securit/facts-faits/faqs_bottle_water-eau_embouteillee-eng.php

Human Resources and Skills Development Canada. (2013, October). Indicators of Wellbeing in Canada: Work- Unemployment Rate. Retrieved October 31, 2013 from HRSDC: http://www4.hrsdc.gc.ca/[email protected]?iid=16

Statistics Canada (2013, July). The Canadian Bottled Water Industry. Retrieved October 27, 2013 from Statistics Canada: http://www.agr.gc.ca/eng/industrymarkets-and-trade/statistics-and-market-information/by-product-

sector/processed-food-and-beverages/the-canadian-bottled-water-industry/? id=1171644581795

Statistics Canada. (2013, June). Average after-tax income, by economic family type, 2011 constant dollars. Retrieved October 31, 2013 from Statistics Canada: http://www5.statcan.gc.ca/cansim/pick-choisir

Statistics Canada. (2013, June). Persons in Low Income, After Tax. Retrieved October 31, 2013 from Statistics Canada: http://www.statcan.gc.ca/tables-tableaux/sumsom/l01/cst01/famil19a-eng.htm

Appendix Table B: Pricing by Segment...