The Chinese bottled water market

Shaun Weston12 Aug 2009

© Zang Lei/Dreamstime.com

In spite of the economic gloom, the Chinese bottled water market is still full of eastern promise. Zenith International market analyst Cecilia Martinez reports.

Against a backdrop of worldwide falling output, and despite experiencing a slowdown of its own, China remains the only large economy to continue experiencing economic growth above 5%. According to the International Monetary Fund (IMF), China's output has been forecasted to grow at 6.7% in 2009 and 8% in 2010.

By contrast, member economies of the G8 have been forecasted to contract by a further 2% by the end of 2009 and see marginal growth of 1.1% in 2010. A much faster-than-expected recovery appears to be unfolding across Asia. In April 2009, Goldman Sachs economists raised estimates of China GDP growth from 6.0% to 8.3%.

Although around 20 million jobs have been lost during the first quarter of 2009, China still seems to be better placed to weather the global recession compared to other major economies. Firstly, the country has a large pool of foreign reserves that it can use to stimulate growth without expanding its public debt, which currently stands at approximately 15%, a small percentage compared to that of most industrialised countries.

In addition, consumption currently makes up about 37% of output, compared with 70% in the US. If the government's economic stimulus is effective in providing the necessary stability for continued growth, then Chinese consumers will be more likely to spend a larger proportion of their income instead of saving it.

The positive outlook for the Chinese economy provides a positive landscape for the bottled water industry, which in other countries, where the industry is already considered to be more mature, the global slowdown has impacted volume sales of bottled water.

China's bottled water industry has advanced relatively quickly and achieved high volumes, despite very low market penetration. Indeed, volumes have surged from a little under eight billion litres in 2000 to just under 21 billion litres today, with growth well into double figures in most years, according to Zenith International.

Last year, it's estimated that 78% of value in the Chinese bottled water market was attributable to still water in retail packs – nearly 59% in sizes up to and including one litre. Bulk water obviously contributes less value sales (about 20%), but it represented just under half of China's total bottled water market by volume in 2008.

Below standards

Despite a growing economy, the quality of tap water in China still falls far behind western standards. Although the government recently reviewed some of the regulation relating to how water can be treated and how it can be described depending on that treatment, the quality of tap water – especially in the northern region – has so far failed to improve greatly. In fact, some believe the situation will only get worse due to the pollution resulting from industrialisation. Poor quality tap water is one of the factors that has helped drive growth in the Chinese bottled water market over recent years.

An important factor driving impetus has been low pricing. In past years, the price of bottled water had been declining as a result of intense price competition. Current pricing is still well below the international average, but this situation has improved in the last couple of years and prices have started to increase by about 5-10% despite competition showing no signs of slowing.

Other elements helping to boost the bottled water market include increasing consumer affluence and a growing middle class, the increase in tourism largely thanks to the 2008 Beijing Olympics and the low quality of tap water. As consumers see their disposable income rise, the public debate with regards to tap water has turned bottled water into an essential purchase item for many Chinese consumers.

The Chinese consumer has started to become more sophisticated when it comes to making decisions about consuming water, with growing awareness of the differences between source and purified waters. This has been helped by the local media paying more attention to any water quality scandals, as was the case in 2008 with the Master Kong brand, produced by Tingyi Holdings.

In its advertisements, the company described its bottled water as having a high mineral content, though it emerged that the water was in fact purified municipal water. The company later issued an apology to the public for any misunderstanding caused, and the product's packaging has since been redesigned. It's scandals such as this that have helped drive increased awareness in the origins of bottled water on sale in China.

Market players

Danone dominates the Chinese bottled water market, though its joint venture relationship with Hangzhou Wahaha – a partnership that accounted for more than 30% of market value sales in 2006 – has soured dramatically since April 2007. The ongoing three-year dispute has resulted in a series of lawsuits worldwide, which, to date, have all ended in Wahaha's favour.

Besides Wahaha, Danone also receives sizeable contributions to sales from Shanghai-based bulk water supplier Aquarius and business units Robust and Health, all of which the company has a stake in. Key international brands such as Evian and Volvic also add sales in China, albeit in much smaller volumes.

Other multinationals have an important presence in the Chinese bottled water market. These are led by Nestlé with its internationally recognised brands Vittel, Perrier, S Pellegrino, Nestlé Pure Life and Nestlé Aquarel. However, due to the higher price point for these brands, most of the contribution made in the country comes from key domestic brands.

Coca-Cola also has a share of the Chinese bottled water market, predominantly through its Ice Dew and Sensation brands. However, in the last year, the company has displayed its intention to increase its presence in China.

In September 2008, it made a $2.4bn bid to acquire leading Chinese fruit juice giant Huiyuan Juice Group, to date the largest intended acquisition of a Chinese company by a foreign company. However, six months after the bid, China's Ministry of Commerce rejected Coca-Cola's offer on the grounds that the deal would give the company an unfair advantage from its expanded market share.

This was the first prohibition decision ever issued by the Ministry of Commerce under the Anti-monopoly Law (AML). Nevertheless, Coca-Cola said it will continue with plans to invest $2bn over the next three years to expand bottling plants, distribution infrastructure and marketing spend in the country. It has also recently opened a $90m Global Technology and Innovation Centre in Shanghai. Coca-Cola controls about 50% of the Chinese carbonated soft drinks market, and is therefore well placed to develop other beverage offerings.

PepsiCo currently relies largely on volume sales of Atlantis in the country. Although the company hasn't expressed any intentions to acquire key Chinese players, it has commenced plans to expand its production, research and development, marketing efforts and sales force to build brand awareness among Chinese consumers. The four-year plan will cost PepsiCo $1bn and should help to build sales in markets away from its home market in an attempt to offset weakening sales in the US.

There are many small bottlers throughout China. Two of the most notable are Nongfu San Quan and Hong Kong-based AS Watson. There are thought to be at least 1,500 local brands in China, and their unabated proliferation puts further pressure on competition as well as preventing the market from consolidating.

Two thirds of the Chinese market is accounted for by other smaller brands across the country. The sheer scale of these lower priced brands in the market poses a challenge to international and domestic players alike.

Market outlook

In 2008, Chinese consumption increased by over 11% to an average of 15.5 litres per person. It's expected that this trend will continue, as health-conscious, young consumers drive volume growth, with bottled water consumption per person expected to reach 18 litres by 2010, equivalent to a total market volume of almost 24 billion litres.

In the years to come, China faces two significant challenges with regards to industry regulation: the preservation of water quality and consumer protection from unscrupulous operators. Issues surrounding bottled water in China continues without any signs of lessening despite the efforts of Chinese officials. In fact, across the country, a number of wells have been drilled over the past decade, some without official permits, to help alleviate the situation. On top of this, water is being pumped at a faster rate than rainfall replenishment rates.

Nevertheless, it's estimated that China wastes water at a higher rate than the world average. Meanwhile, the prospect of contamination scares in the bottled water market seem very real, especially after the tainted milk scandal, which only helped to highlight the importance of proper regulation and its enforcement.

Until the quality of tap water is consistently reliable, Chinese consumers will continue to purchase bottled water as a replacement for tap water. They will continue favouring water that can be guaranteed as pure and of the lowest price possible. With the market forecast to grow by an average of 7% per year for the next five years, the Chinese bottled water market offers a clear opportunity for bottled water manufacturers.

Zenith International offers its full range of consulting and technical services to a market viewed as a good opportunity in stalled global economic times. It believes the Chinese bottled water market is one that is poised to continue rapid expansion and which is in particular need of water resources expertise.