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(solution) BUSINESS STRATEGY & POLICY 4~5 pages research paper. (APA


4~5 pages research paper. (APA references.)


7 external factors





general economic conditions

global forces.

natural environment.


dominant economic features

industry analysis


Driving forces

Key success factors

Porter's 5 forces of competition

1. The Rivalry among competing sellers in the Industry

2. Potential entry of new competitors

3. Analyzing the affect of substitute products

4. Bargaining power of suppliers

5. Bargaining power of sellers

Competition in the Bottled


Water Industry


John E. Gamble


University of South Alabama BOTTLED water was among the world's most attractive beverage categories


with global sales in 2001 exceeding 32 billion gallons and annual growth


averaging nearly 9 percent between 1996 and 2001. Bottled water had long been a


widely consumed product in Western Europe and Mexico, where annual per capita


consumption averaged about 30 gallons in 2001, but until the mid-1990s bottled water


had been somewhat of a novelty or prestige product in the United States. In 1990


approximately 2.2 billion gallons of bottled water were consumed in the United States


and per capita consumption approximated 9 gallons. U.S. per capita consumption had


grown to nearly 20 gallons a year by 2001 and was expected to grow to 26 gallons


a year by 2005. The rising popularity of bottled water in the United States during


the 1990s allowed the United States to become the world's largest market for bottled


water by 1996 (see Exhibit 1).


Exhibit 1 2001 Rank
























United States


















Spain All others


Worldwide total CAGR* (19962001)


9.2% 1 996


3,495.1 2O01


5,425.3 2,674.2












854.5 3,496.5 5.5 2,502.6 5.4 2,336.5 2.2 1,198.3 7.0 475.7 1,139.6 19.1 2,064.6 6.6 2,007.8 28.9 1,352.1 21.4 884.0 1,091.4 4.3 4,205.4 7,488.4 12.2 21,182.4 32,104.1 *Compound average growth rate.


Source: Beverage Marketing Corporation, as reported by Bottled Water Reporter, April-May 2002. Copyright © 2002 by John E. Gamble. All rights reserved. 8.7% The growing popularity of bottled water in the United States was attributable to


concerns over the safety of municipal drinking water, an increased focus on fitness and


health, and the hectic on-the-go lifestyles of American consumers. The convenience,


purity, and portability of bottled water made it the natural solution to consumers' dis satisfaction with tap water. The U.S. bottled water market, like most markets outside


the United States, was characterized by fierce competitive rivalry as the world's bot tled water sellers jockeyed for market share and volume gains. Both the global and


U.S. bottled water markets had become dominated by a few international food and


beverage producers like Coca-Cola, PepsiCo, Nestle, and Groupe Danone, but they


also included many small regional sellers that were required to develop either low-cost


production and distribution capabilities or differentiation strategies keyed to some


unique product attributes. At the close of 2002, industry rivals were entering new distribution channels, developing innovative product variations, entering into strategic


agreements to penetrate new international markets, and acquiring smaller sellers that


might hold strong positions in certain U.S. regional markets or emerging markets. In dustry analysts and observers believed the recent moves undertaken by the world's


largest sellers of bottled water would alter the competitive dynamics of the bottled water


industry and mandate that certain players modify their current strategic approaches to


competition in the industry. Exhibit 2




COUNTRY MARKET, 1996, 2001 Per Capita




(in gallons)






1 Country


Italy 1996


33.5 2OO1


43.4 Compound








5.3% 25.7


28.1 34.7


34.3 6.2


4.1 4 Belgium-Luxembourg 28.8 32.6 2.5 5


6 United Arab Emirates


Germany 25.7


25.6 31.3


28.1 4.0


1.9 7 Spain 22.3 27.3 4.1 8


9 Switzerland


Lebanon 21.1


12.7 23.8


22.5 2.4


12.1 10 Saudi Arabia 15.1 22.5 Austria 18.5 20.5 2.1 12 Even though it was the world's largest market for bottled water, the United States re mained among the faster-growing markets for bottled water since per capita consump tion of bottled water fell substantially below consumption rates in Western Europe, the


Middle East, and Mexico. Bottled water consumption in the United States also lagged


per capita consumption of soft drinks by a wide margin. However, many U.S. con sumers were making a transition from soft drinks to bottled water as the soft-drink


market had grown by less than 1 percent annually between 1996 and 2001 and the


market for bottled water had continued to grow at annual rates near 10 percent during


the same time period. By 2002, 70 percent of U.S. households purchased bottled water


at least once a year and the average water-buying household purchased 22 twelveounce bottles a year. Exhibits 2 through 5 illustrate the growing popularity of bottled


water among U.S. consumers during the 1990s and through 2001.


Almost one-half of bottled water consumed in the United States in 1990 was bulk


water delivered to homes and offices in returnable five-gallon containers and dis pensed through coolers. Only 186 million gallons of water were sold in one-liter or


smaller single-serving polyethylene terephthalate (PET) bottles. In 2002, bottled water


sold in one-liter or smaller PET containers accounted for 36.2 percent of industry vol ume and 50.8 percent of dollar sales and had grown by 29.1 percent annually between


1995 and 2001. The sales of bulk water sold in 5-gallon containers or 1- or 2.5-gallon


high-density polyethylene (HDPE) containers accounted for 60.9 percent of gallonage


but only 43.3 percent of dollar sales. Convenience was the primary appeal of smaller,


single-serving PET containers since consumers could purchase chilled water they


could drink immediately. Water purchased for immediate consumption grew from


8.3 percent of industry sales volume in 1990 to 16.7 percent of sales volume in 2000.


Portability also partly explained the appeal of water bottled in PET containers since the


small plastic bottles were easier to carry than glasses or cups of tap water. In 2001,


consumers began to prefer PET containers not only for immediate consumption but France


Mexico 11 | Industry Conditions in 20O2 2


3 Cyprus 14.2 20.2 7.3 13 Czech Republic 12.9 19.6 8.7 14 United States 13.1 19.5 8.3 Thailand 14.5 19.4 6.0 3.3 4.9 8.2% 15 Global


average O *3 Source: Beverage Marketing Corporation, as reported by Bottled Water Reporter, April-May 2002. Exhibit 3 U.S. P ER C APIT A BEVER AG E CONSU MPTI ON,


1 9 96 AND 2 0 0 1 Beverage


Soft drinks G al lon s p e r


P e rs o n


1 99 6


53.4 G a ll on s p e r


P e r s o n 2 0 01


55.3 Compound




Grow th




0.7% Coffee Bottled 22.3 21.9 - 0.4 water*


Milk Fruit 13.0


24.2 19.9


19.9 * 8.9


-3.8 beverages 15.0 15.5 0.7 9.7 9.3 -0.8 1.9


29.3 2.0


23.5 1.0


-4.3 23.2 24.5


191.8 1.1 Tea




Beer and spirits Tap


water/all other Total 192.0


*Note: The per capita consumption of bottled water as presented by Prepared by


Beverage Marketing Corporation presented in Exhibits 2 Source: Beverage Aisle,


August 15, 2002.


I Beverage Aisle varies slightly from the calculations




1991-2OO1 1991 V olu m e S ale s ( in


m illions of gallons)


2,355.9 1992 2,486.6 5.5 2,658.7 1993 2,689.4 8.2 2,876.7 8.2 1994 2,966.4 10.3 3,164.3 10.0 1995 3,226.9 8.8 3,521.9 11.3 1996 3,495.1 8.3 3,835.4 8.9 1997 3,794.3 8.6 4,222.7 10.1 Year Annual


C ha n ge


2.1% I ndu stry Rev en u es


( in m illions of d ollars)


$2,512.9 An nua l


C h ang e




5.8 1998 4,130.7 8.9 4,666.1 10.5 1999 4,583.4 11.0 5,314.7 13.9 2000 4,904.4 7.0 5,809.0 9.3 2001 5,425.3 10.6 6,477.0 11.5 S ource: B everage Marketing Corporation, as reported by B ottled Water Reporter, A pril-May 2002. Exhibit 5 Year






P e r C a p it a C o n s u m p t i o n


( in gallons)


9.3 An nu al Chang e


? 1992 9.8 1993 10.5 7.1 1994 11.5 9.5 1995 12.2 6.1 1996 13.1 7.4 1997 14.1 7.6 1998 15.3 8.5 1999 16.8 9.8 2000 17.8 6.0 2001 19.5 9.6 Source: Beverage Marketing Corporation, as reported by Bottled Water Reporter, April-May 2002. also for home use as the take-home PET market for the first time exceeded the volume


sales of chilled PET water sold for immediate consumption. Water packaged in PET


containers sold through take-home channels accounted for 28 percent of industry sales


volume in 2001 and was expected to account for more than one-half of industry growth


between 2002 and 2007.


The convenience and portability of bottled water were two of a variety of reasons


U.S. consumers were increasingly attracted to bottled water. An increased emphasis on


healthy lifestyles and improved consumer awareness of the need for proper hydration


led many consumers to shift traditional beverage preferences toward bottled water.


Bottled water consumers frequently claimed drinking more water improved the appearance of their skin and gave them more energy. Bottled water analysts also be lieved many health-conscious consumers drank bottled water because it was a symbol


to others that they were interested in health.


A certain amount of industry growth was attributable to increased concerns over


the quality of tap water provided by municipal water sources. Consumers in parts of


the world with inadequate water treatment facilities relied on bottled water to provide


daily hydration needs, but tap water in the United States was very pure by global standards. Municipal water systems were regulated by the U.S. Environmental Protection


Agency (EPA) and were required to comply with the provisions of the Safe Drinking


Water Act Amendments of 2001. Consumer concerns over the quality of drinking water in the U.S. emerged in 1993 when 400,000 residents of Milwaukee, Wisconsin, became ill with flulike symptoms and almost 100 immune impaired residents died from


waterborne bacterial infections. Throughout the 1990s and into the early 2000s, the


media sporadically reported cases of municipal water contamination, such as in 2000


when residents of Washington, D.C., became ill after the city's water filtration process


caused elevated levels of suspended materials in the water. Consumer attention to the


purity of municipal water was also heightened in 2000 when the EPA proposed revis ing the standard for arsenic content in tap water as specified by the Safe Drinking Water Act Amendments of 1996 from 50 parts per billion (ppb) to 10 ppb. Prior to the


congressional discussion of acceptable arsenic levels in drinking water, most Ameri cans were unaware that any arsenic was present in tap water.


Even though some consumers were concerned about the purity of municipal wa ter, most consumers' complaints with tap water centered on its chemical taste, which


resulted from treatment processes that included the use of chlorine and other chemicals


such as fluoride. In a tap water tasting in Atlanta hosted by Southpoint magazine,


judges rated municipal water on taste and found some cities' waters very palatable.


Water obtained from the municipal source in Memphis was said to have "a refreshing


texture" and tap water from New Orleans was commended for "its neutrality." How ever, other municipal systems did not fare as well with the judges?some of whom


suggested Houston's water tasted "like a chemistry lab," while others said Atlanta's


municipal water was akin to "a gulp of swimming pool water." 1 However, there were


positive attributes to the chemicals added to tap water, as chlorine was necessary to kill


any bacteria in the water and fluoride had contributed greatly to improved dental health


in the United States. In addition, tap water had been shown to be no less healthy than


bottled water in a number of independent studies, including a study publicized in Eu rope that was commissioned by the World Wide Fund for Nature and conducted by re searchers at the University of Geneva.


Bottled water producers in the United States were required to meet the standards


of both the EPA and the U.S. Food and Drug Administration (FDA). Like all food and


beverage products sold in the United States, bottled water was subject to such food


safety and labeling requirements as nutritional labeling provisions and general Good


Manufacturing Practices (GMPs). Bottled water GMPs were mandated under the 1962


Kefauver-Harris drug amendments to the Federal Food, Drug and Cosmetic Act of


1938 and established specifications for plant construction and design, sanitation,


equipment design and construction, production and process controls, and record keepln


g. The FDA required bottled water producers to test for the presence of bacteria at


least weekly and to test for inorganic contaminants, trace metals, minerals, pesticides,


herbicides, and organic compounds annually. Bottled water was also regulated by state


agencies that conducted inspections of bottling facilities and certification of testing fa cilities to ensure bottled water was bottled under federal GMPs and was safe to drink. Bottled water producers were also required to comply with the FDA's Standard of


Identity, which required bottlers to include source water information on their products'


labels. Water labeled as "spring water" must have been captured from a borehole or


natural orifice of a spring that naturally flows to the surface. "Artesian water" could be


extracted from a confined aquifer (a water-bearing underground layer of rock or sand)


where the water level stood above the top of the aquifer. "Sparkling water" was re quired to have natural carbonation as it emerged from the source, although carbonation


could be added to return the carbon dioxide level to what was evident as the water


emerged from the source. Even though sparkling water was very popular throughout


most of Europe and the Middle East, it accounted for only 9 percent of U.S. bottled


water sales in 2001.


The FDA's definition of "mineral water" stated that such water must have at least


250 parts per million of total dissolved solids and its standards required water labeled


as "purified" have undergone distillation, deionization, or reverse osmosis to remove


chemicals such as chlorine and fluoride. "Drinking water" required no additional pro cessing beyond what was required for tap water but could not include flavoring or


other additives that account for more than 1 percent of the product's total weight. Both


"drinking water" and "purified water" had to clearly state that the water originated


"from a community water system" or "from a municipal source."


Bottled water producers could also voluntarily become members of the Interna tional Bottled Water Association (IBWA) and agree to comply with its Model Code,


which went beyond the standards of the EPA, FDA, or state agencies. The Model Code


allowed fewer parts per million of certain organic and inorganic chemicals and micro biological contaminants than FDA, EPA, or state regulations and imposed a chlorine


limitation on bottled water. Neither the FDA nor the EPA limited chlorine content.


IBWA members were monitored for compliance through annual, unannounced inspec tions administered by an independent third-party organization. Distribution and Sale of Bottled Water


Consumers could purchase bottled water in nearly any location in the United States


where food was also sold. Supermarkets, supercenters, and wholesale clubs all stocked


large inventories of bottled water, and most convenience stores dedicated at least one


stand-up cooler to bottled water. Bottled water could also be purchased in most delis


and many restaurants; from vending machines; and at sporting events and other special


events like concerts, outdoor festivals, and carnivals. Bottled water could also be de livered directly to consumers' homes or offices.


The distribution of bottled water varied depending on the producer and the distribution channel. Typically, bottled water was distributed to large grocers and whole sale clubs directly by the bottled water producer, while most producers used third


parties like beer and wine distributors or food distributors to make sales and deliveries


to convenience-store buyers. Similarly, food-service distributors usually handled land ing accounts with restaurants and delis and making necessary deliveries to keep the


account properly stocked. Most distributors made deliveries of bottled water to convenience stores and restaurants along with their regular scheduled deliveries of other foods


and beverages. Therefore, these third-party food and beverage distributors almost never


made deliveries to one-time or infrequent events like art festivals or sporting events,


since they were better equipped to represent a variety of food and beverage companies


that wanted their products available for sale in locations where consumers made fre quent food and beverage purchases. Similarly, vending machine servicing did not match


the resources and competitive capabilities of most food and beverage distributors. Because of the difficulty for food-service distributors to restock vending machines


and provide bottled water to special events, Coca-Cola and PepsiCo were able to dom inate such channels since they could make deliveries of bottled water along with their


deliveries of other beverages. Coca-Cola and PepsiCo's vast beverage distribution sys tems made it easy for the two companies to make Dasani and Aquafma available any where Coke or Pepsi could be purchased. In addition, the two cola giants almost


always negotiated contracts with sports stadiums, universities, and school systems that


made one of them the exclusive supplier of all types of non-alcoholic beverages sold


in the venue for some period of time. Under such circumstances, it was nearly impos sible for other brands of bottled water to gain access to the account.


Coca-Cola and PepsiCo's soft-drink businesses also aided the two companies in


making Aquafma and Dasani available in supermarkets, supercenters, wholesale clubs,


and convenience stores. Soft-drink sales were important to all types of food stores


since soft drinks made up a sizable percentage of sales and since food retailers fre quently relied on soft-drink promotions to generate store traffic. Coca-Cola and Pep siCo were able to encourage their customers to purchase items across their product line


to ensure prompt and complete shipment of key soft-drink products. As a diversified


food products company, PepsiCo had exploited the popularity of its soft drinks,


Gatorade sports drinks, Frito-Lay snack foods, and Tropicana orange juice in persuad ing grocery accounts to purchase not only Aquafina but also other new brands such as


FruitWorks, SoBe, Lipton's iced tea, and Starbucks Frappuccino.


Since most supermarkets, supercenters, and food stores usually carried only three


to five branded bottled waters plus a private-label brand, bottled water producers other


than Coke and Pepsi were required to compete aggressively on price to gain access to


shelf space. Market surveys indicated that wholesale prices for branded bottled water


ranged between $3.50 and $7.00 per case?depending on the appeal of the product and


the competitive strength of the seller. Some supermarkets and other grocery chains required bottled water suppliers to pay slotting fees in addition to offering low prices to


gain shelf space. Grocers expected to pay less for private-label products and typically


required private-label suppliers to prepare bids offering both purified and spring water


in packaging of various sizes. Contracts were awarded to the low bidder and typically


re-bid on an annual or biannual basis.


Convenience-store buyers also aggressively pressed bottled water producers and


food distributors for low prices and slotting fees. Most convenience stores carried only


two to four brands of bottled water beyond what was distributed by Coca-Cola and


Pepsi and required bottlers to pay annual slotting fees of $300 to $400 per store in re turn for providing 5 to 10 bottle facings on a cooler shelf. Even though bottled water


producers were responsible for paying slotting fees to gain shelf space, food-service


distributors handled sales transactions with convenience stores and made all deliveries.


Food and beverage distributors usually paid the bottlers of lesser-known brands $3.75


to $4.25 per case, while popular national brands commanded wholesale prices in the


$5.00-$6.00 range. Typically, a distributor would represent only one or two bottled


water producers and required producers to make deliveries to their warehouses. Some


bottlers offered to provide retailers with rebates of approximately 25 cents per case to


help secure distributors for their brand. Food distributors also asked bottled water supPliers to sponsor annual trade shows at which participating vendors (including bottled


water producers) would offer discounts of approximately 25 cents per case to conve nience-store customers willing to commit to large quarterly purchases. Food and beverage distributors usually allowed bottled water producers to negotiate slotting fees


and rebates directly with convenience-store buyers. There was not as much competition among bottled water producers to gain shelf


space in delis and restaurants since volume was relatively low?making per unit dis tribution costs exceedingly high unless other beverages were delivered along with bot tled water. PepsiCo and Coca-Cola were among the better-suited bottled water


producers to economically distribute water to restaurants since they likely provided


fountain drinks to such establishments.


Bulk water sold in returnable five-gallon containers was delivered to home and of fice users directly by bottled water producers. These producers usually specialized in


home and office delivery, but might also sell a PET product through convenience and


supermarket channels. Retail pricing to bulk water purchasers ranged between $5 and


$7 per five-gallon container. Consumers of bulk water were also required to rent a


cooler at $10 to $15 per month. Most bulk water sellers used a delivery route system


with scheduled visits for deliveries of water and empty container pickup. Suppliers to the Industry


The suppliers to the bottled water industry included municipal water systems; spring


operators; bottling equipment manufacturers; deionization, reverse osmosis, and filtra tion equipment manufacturers; cooler manufacturers; sellers of racking systems; man ufacturers of PET and HDPE bottles and plastic caps; label printers; and secondary


packaging suppliers. Most packaging supplies needed for the production of bottled wa ter were readily available for a large number of suppliers. Large bottlers able to com mit to annual purchases of more than 5 million PET bottles could purchase bottles for


as little as $0.05 per bottle, while regional bottlers purchasing smaller quantities of


bottles or only making one-time purchases of bottles could expect to pay as much as


$0.15 per bottle. Most PET and HDPE bottle producers preferred to reward customers


choosing to develop ongoing relationships with their lowest prices. Suppliers of sec ondary packaging (e.g., cardboard boxes, shrink-wrap, and six-pack rings) and suppliers of printed film or paper labels were numerous and aggressively competed for the


business of large bottled water producers.


Equipment used for water purification and filling bottles was manufactured


and marketed by about 50 different companies in the United States. About 10 manu facturers offered a complete line of filling equipment, filtration equipment, distillation


equipment, deionization equipment, bottle washers, labeling equipment, packaging


equipment, and reverse osmosis equipment, with others specializing in a few equip ment categories. A basic bottle-filling line could be purchased for about $125,000,


while a large state-of-the-art bottling facility could require a capital investment of more


than $100 million. Bottlers choosing to sell spring water could expect to invest about


$300,000 for source certification, road grading, and installation of pumping equip ment, fencing, holding tanks, and disinfecting equipment. Bottlers that did not own


springs were also required to enter into lease agreements with spring owners that typ ically ranged from $20,000 to $30,000 a year. Companies selling purified water merely


purchased tap water from municipal water systems at industrial rates prior to purifying


and bottling the water for sale to consumers. Sellers of purified water were able not


only to pay less for water they bottled, but also to avoid spring water's inbound ship ping costs of $0.05 to $0.15 per gallon since water arrived at the bottling facility by


pipe rather than by truck. Key Competitive Capabilities in the Bottled


Water Industry


Bottled water did not enjoy the brand loyalty of soft drinks, beer, or many other food


and beverage products, but it was experiencing some increased brand loyalty with


10-25 percent of consumers looking for a specific brand and an additional two-thirds


considering only a few brands acceptable. Because of the gr...


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