Trevor Lloyd-Jones takes a chastened look at the highly competitive bottled water sector.
Bottled water markets the Middle East are rapidly gaining share in the world's fastest-growing beverage category, according to the October 2007 report by food and drink consultancy Zenith International.
Bottled water sales in the region advanced by 6.7% in 2006 in volume to reach a total 13,686 million litres. This represents 7.3% of the global total, a substantial leap from just a few years ago, when the region was a tiny market dominated by bulk water sales.
Adam Beresford-Browne, regional manager, Zenith Regional, said: "In some ways it is a difficult market to talk about. When you consider that Arabs like water to be water and expats bring their own regional tastes with them, it is difficult to get an overview of these tracks that are poles apart.
"But what is sure is that Emiratis are keen to follow the latest global trends, in beverages as in other products, if it is in keeping with national pride," he adds.
Zenith's report surveys the entire Middle Eastincluding Turkey and concludes that all markets have achieved strong volume increases, but their profiles are quite different in nature. The region's markets are often young and emerging, with evolving distribution structures and a rapid influx of new players. The Middle East also has some emerging markets, but is generally characterised by a mature and well established bottled water industry.
Zenith recently opened a regional office in Dubai and has several initiatives planned to grow its profile and its contribution to the development of the local industry.
"The huge response we have received shows that the take up and interest is here for our services," says Beresford-Browne.
The companywhich for several years has organised the Global Bottle Water Congresshas launched the First Beverages Middle East Congress planned for 22-24 January 2008, in Dubai.
Middle East sparkling at 6.3%
Rising standards of living plus a greater appreciation of health and hydration have helped almost double consumption per person since 2001 to 1,056 litres a year in the UAE and 3,020 litres per year in Saudi Arabia. Since the West European average is just 110 litres per person, the huge potential for bottled water is clearly evident.
"In 2006 Kuwait was the fastest-growing market and for 2001 to 2006 we have measured an annual growth rate of 9.5% for the whole region. This compares to Western Europe with 2.3%," says Beresford-Brown.
It is a significant result considering we are forecasting that Africa will be the fastest-growing market globally in the next five years, with 9.3% growth."
Middle East bottled water volumes have jumped by an impressive 48% since 2001 or 9.5% CAGR a year, and Zenith believes they will climb by 36% more from 2006 to 2011, reaching 18,577 million litres, with small packs taking most of this share.
The regional growth forecast for 2006-2011 is 6.3% a year and the UAE has recently overtaken Italy with the highest per-capita consumption of bottled water worldwide.
Growth in the cooler industry stands not only to boost still water volumes, but also to promote a shift away from mineral water to spring or spa and other water types.
The advent of greater international competition has also brought more non-mineral waters to retail outlets, posing a potential challenge to the curative mineral waters that have traditionally attracted considerable consumer loyalty.
While older consumers continue to underpin traditional mineral water brands, younger consumers are increasingly taking to newer international brands and sparkling water.
Differential pricing and local brands
Bulk buying is having a big impact on the water sector.
The world's top four bottled water groups - Nestle, Danone, Coca-Cola and PepsiCo respectivelyheld a combined 33% share of total global volume in 2006. The top five global brands in volume terms were Danone's Aqua, Nestle's Pure Life, PepsiCo's Aquafina and Electropura and Poland Spring from Nestl Waters North America. Coca-Cola had two brands in the top ten: Dasani and Ciel.
While the global giants are also growing in the Middle East there are some local differences and there are some important local players that have built their business by bottling at source from the scarce water resources that exist here.
"The bulk water market is huge here and for nearly 30 years Oasis has been very strong in that segment, although there are some 30 companies now competing in that area," says Beresford-Brown.
Significantly, the UAE bottled water market leader Masafi responded to consumer demand with the launch of its five-gallon pack earlier this year, joining other local names such as Al Ain Water and Gulfa despite earlier claims that the bulk segment ran contrary to its more premium brand positioning.
Essentially, consumers are starting to demand higher standards in the water they require for home delivery, and they want their favourite brand to be in their home, whether it is the local names or Arwa (Coca-Cola), Aquafina or Pure Life. Another major part of the bulk water market is water delivered to the construction sites and labour worker compounds, which is a major element putting downward pressure on the suppliers regarding the price.
The bulk water market is growing and will continue to grow, even for those companies that only maintain constant market share, since the population growth continues at such a high rate and with demand from the hotel and hospitality industry.
With the proliferation of flavoured waters innovation came to the fore last year. Masafi announced 65.6% market share in the non-carbonated flavoured water segment within a few months of launch.
Flavour of the month
The flavoured water industry in the UAE is currently registering 14% year-on-year growth and other parts of the Gulf seem to be following. Masafi, for example, recently introduced Mint Lemon
The company moved into the flavoured segment nearly three years ago and claims to be the first UAE company to do so although it has since been followed by Oasis BLU as the first national sparkling water and sparkling flavoured water.
Masafi juices are growing faster than industry average, at 21% over the prior year. The firm attributes this to effective distribution and the new flavours.
Currently, Masafi Juice is one of the top-ten juice brands in the UAE (out of more than 70 brands).
Natascha Edelmann, head of marketing at Masafi, says: "The market's response to our latest juice line is highly encouraging [see box]. Our aim is to strengthen Masafi's position through new flavour additions and address both core taste profiles and discerningly niche tastes.
"Masafi, which has successfully retained its market leadership in the UAE mineral water segment with more than 40% share, distributes approximately 20 million cases or 320 million bottles across the Emirates."
"With the introduction of new lines like the Masafi flavours, you would expect a slight impact on pure water sales. But they are more likely to take market share from sugary drinks," comments Beresford-Brown.
You're kidding
Catering to another niche are the Masafi Kids packs for juices and water and the '4-Kids'packs recently launched Al Ain Mineral Waters and being heavily promoted to schools. The bright green labels, with fun drawings and advice to 'Be Cool! Be Healthy!' are attracting young eyes to the shelves.
Fasahat Beg, GM, Al Ain Mineral Water, comments: "The '4-Kids' label gives children the chance to identify with a brand through a fun looking, bright and colourful, kid-oriented pack, while at the same time encouraging them to drink water throughout the day, at school, at home, or while playing. It's a healthy alternative to other beverages."
Capital growth
Al Ain Water prides itself on high quality, pure drinking water and takes great responsibility in encouraging children to be healthy. They are market leaders in cups, 330ml bottles and 5-litre large bottles, produced from one of the most modern bottling facilities in the GCC. Leading five gallon dispenser brand Ice Crystal is also managed by Al Ain Mineral Water.
"We have a 23% share of the bottled water industry in the UAE, making us the number two player here. But in Abu Dhabi we are number one with a 40% share," says Beg.
Undergoing a rebranding strategy during this year in order to raise the profile of the brand, Al Ain Mineral Water has a two-pronged strategy.
Modernising the bottles to make them more appealing to the Dubai market, the labels now have a more contemporary and modern image, depicting the greenery representing the 'Garden City' and Al Ain Tower. (Please see GMR October 2007 Brand Check.)
Phase two of its rebranding has been to increase its distribution with the opening of a distribution centre in Al Quoz, Dubai.
"Our distribution is strong in Al Ain and Abu Dhabi, so we are now in a position to expand across the other emirates. Traffic congestion was a key reason for opening up a centre in Dubai, but also because it is experiencing a growth in trade, so it is important to have a presence here," says Beg.
Concentrating on the UAE for the time being, Al Ain Mineral Water says that expansion across the GCC will emerge as a real possibility in the coming years. Available in 5-litre, 1.5-litre, 0.5-litre, 330ml and cups of 250ml and 100ml, Al Ain Mineral Water's presence in the hotel, restaurant and caf trade is growing too.
Currently onboard Etihad and at Emirates Palace, Hilton Abu Dhabi and Kempinski Mall of the Emirates, the company also distributes its water to other catering institutions, with private labelling also proving a viable policy for its business.
At the other end of the scale for commodity water usage, many more consumers now rely on bottled water for daily use, turning to it in preference to what is perceived as poor-quality mains water.
The principal issues identified by Zenith, as key to the future, are the ongoing acquisitions and route-to-market strategies of the major international bottled water players.
Zenith also highlights the threat of price erosionespecially since the bulk market is essentially a near-zero margin commodity businessthe need to uphold quality standards, the relentless pace of structural change in retailing and the entrenchment of bottled water consumption habits.
Masafi chills with Melon
Masafi Juice has launched a new flavour Mellow Melon. It will be available in 200ml, 1 litre and 2 litre bottles and is the ninth flavour in its portfolio. Masafi has also launched Apricot, Citrus, Soothing Berries and Truly Caribbean flavours this year. Natascha Edelmann, head of marketing, Masafi, said: "We are happy to announce the latest extension of our juice line. The market's response is highly encouraging. Our aim is to strengthen Masafi Juice's position through new flavour additions and address both core taste profiles and discerningly niche tastes. The combination has been increasingly instrumental in making Masafi Juice an offering of choice." Masafi currently has more than a 40% share in the UAE mineral water segment and exports around 30% of its product portfolio to different countries.
Fountain of knowledge
Could the source of the problem be well, the source, asks Trevor Lloyd-Jones
Wellness is a major factor shaping the water and soft drinks market with the 'healthier' options of still drinks, fruit juice/nectars and bottled water driving sales.
"Consumers are facing increasing pressure to take responsibility for their health and that of their children. In our hectic modern lives, changing eating and drinking habits is a relatively straightforward way to lead a healthier lifestyle," comments Gary Roethenbaugh, research director, Zenith.
"It is vital that the soft drinks industry provides consumers with options for all their drinking occasions."
Consumer demand for healthier products has created a trend towards more natural products or those with added 'functionality'. The success of drinks containing juice from fruits with functional properties such as pomegranate and the launch of 'added benefit' products, such as sports water, are indications that healthier and more functional products are gaining in popularity.
In the GCC, water comes usually from two sources, wells (ground water) and desalinated water. There are, moreover, constraints on both sources.
Desalination is very costly although it is produced by using associated gas locally.
Ground water, meanwhile, is constrained by its total reservoir in the country and is dependent on rainfall for replenishment, which is both scarce and erratic.
Although water production has increased during the last six years, there is increasing demand for desalinated water as the reverse osmosis process that, until the late 1990s was the key process to make sweet water from seawater and brackish groundwater, has slowly lost its importance.
What this means for the bottled water brands, including the local players like Masafi, Gulfa or Al Ain, is that these genuine mineral water products are increasingly competing with international brand water, which is derived from desalinated water: an industrial but nevertheless environmentally-sound source.
The National Food Company's Oasis - which claims a 70% share of the bulk water market - said from day one its source comes from treated desalinated water. In other words, like the international brands, the source of the water comes from the national supply, that is then de-ionised and purified by reverse osmosis, before the brand's own minerals and salts are added from a central source. It also produces Blu sparkling water in Natural Lemon and Lemon Hint.
"Quality and mineral composition is become increasingly important to consumers. Our mineral composition - e.g. sodium - is very low, and we have extremely high standards as outlined by the Abu Dhabi Food and Health Authority," comments Beg of Al Ain Water.
It's certainly interesting to observe that this is a very different consumer acceptance of water that is purified and adapted by the brand, in comparison to the consumer's refusal to accept the Coke's Dasani 'tapwater' brand in the UK some year's ago, preferring to choose a 'true' bottled at source mineral water.
Drinking 'pure' water, without any of the salts and minerals the body needs, would soon after all make us quite ill.
In contrast to tap water, which is distributed through an energy-efficient infrastructure, transporting bottled water long distances involves burning massive quantities of fossil fuels. So the ethical arguments for natural mineral water are now being called into question.
What is known is that the international players are significantly growing their market share, regardless of the source of the original or treated water. They are able to do this by building on their existing infrastructure, for Coke, Pepsi and the other brands serving the Northern Emirates and all the outlying areas of the GCC. In the case of Aquafina, this is bottled by Dubai Refreshments Co, and it is through this link that the brand is reaching the shelves, with free cases and special offers.
Unlike much of Northern Europe in particular, the Middle East still has a widespread mistrust and often poor quality mains water supply. Within the region, countries differ in levels of self-sufficiency in bottled water supply.
In Syria, for example, state control has limited bottled water imports whereas in Lebanon and the Emirates, the high quality of local production restricts imports. Despite strong growth competition in the Middle East market is intensifying due to growth of bulk waters (sizes exceeding ten litres), retail price pressures and the entry of the international suppliers.
All local bottlers use PET packaging. Still water in PET accounts for the majority of water consumed.
Pricing also varies across the region, although it remains very competitive.
Saudi Arabia has a number of key brands including Al Manhal /Pure Life (Nestl), Safia, Makkah. Masafi, Al Ain and Gulfa from the UAE are the notable brands that are exported to other Gulf states.
In terms of remaining political hurdles and trade barriers, Zenith says licensing and regulation of bottled water is now quite unified across the GCC, in relation to packaging, content and what defines water. Each local municipality in addition has the ability to add the GCC legislation, although not to detract. Countries, such as the UAE, have certainly clamped down on production standards in recent years.
It now seems only a matter of time before the very new functional drinks like weight-management (calorie-burning) drinks and sparkling fruit-flavoured waters make more of an entry into the Middle East. Although they will not record the most dynamic growth rates, CSDs and water varieties generally are expected to be the most dynamic in terms of marketing, promotions and NPD.
Key players in carbonates will exert big efforts in maintaining their popularity and credibility among the next generation of consumers, and will focus on updating the images of their products in line with consumers' perceptions towards products based on the latest trends.
Due to the increasing health trend in the Gulf led by bottled water and fruit/vegetable juice, producers of carbonates are being compelled to focus on the healthy side of their production lines, such as fruit carbonates and other low-calorie products, and they will have to continue to excessively spend on marketing and above-the-line promotions, according to Zenith.
Beresford-Brown concludes: "The Middle East is maturing with more segments coming into the market such as flavoured water, with more consumer choices generally and other trends that we see in the global market."
Gulf Marketing Review 2008
