Beverages

China's Unsafe Water Is Nestlé's Opportunity


Nestlé’s water business in China grew 27 percent last year

Photograph by Adam Dean/Bloomberg

Nestlé’s water business in China grew 27 percent last year

A television ad in China for Nestlé’s (NESN:VX) Pure Life brand of bottled water shows children making unhappy faces after tasting water. One child pours his glass into a fish tank instead of drinking it; his face lights up when his mother offers Pure Life instead. Water quality is a big concern for Chinese consumers. They’re turning to bottled water as a safer alternative, and that’s bolstering Nestlé’s bottled-water sales. “You don’t dare drink the tap water in China,” says Hope Lee, a Euromonitor International analyst in London. Sales are also up because “so many people are moving from rural areas to work in the cities,” where bottled water is more common, she says.

The Swiss company, which Euromonitor says is the world’s No. 3 producer of bottled water, has seen growth in its business in parts of the West slow because budget-conscious shoppers are turning to tap water and environment-conscious consumers are concerned about the growing number of plastic bottles entering the waste stream. In China, where industrial and agricultural expansion have polluted water supplies, environmental concerns of a different kind are driving Nestlé’s growth. Sales of bottled water in the country will climb to $16 billion by 2017, up from $9 billion in 2012 and $1 billion in 2000, according to Euromonitor. The market in Western Europe will remain flat at $21 billion, while North America will increase 18 percent by 2017, to $26 billion, Euromonitor predicts.

Nestlé’s water business in China climbed 27 percent last year, reports Euromonitor. The Swiss company was China’s ninth-biggest seller of water in 2012, with 1.7 percent of the market by value, up from 0.7 percent in 2009. Local rival Hangzhou Wahaha Group is the leader with 14 percent. Says Gilles Duc, the head of Nestlé Waters in China, “China is a key priority for us. The market is increasing a lot, and we want to participate in that growth.”

Nestlé owns more than 60 water brands, including Vittel, Poland Spring, and Pure Life, the world’s best-selling label. In Europe, the U.S., and Australia, Nestlé’s share of the water business by retail sales fell to about 10 percent in 2011 from more than 12 percent in 2006, says Euromonitor. While Nestlé continues to rely on developed countries for the bulk of its water business, “it recognizes that emerging markets are high-growth and profitable and that it has to increase its presence,” says Richard Withagen, an analyst at SNS Securities in Amsterdam.

About half of the water Nestlé sells in China is delivered in five-gallon jugs. In Shanghai, Nestlé has opened 12 water stores where customers can phone in orders. Tucked between a pharmacy and a beauty salon, a store in the affluent Lujiazui district sells 400 to 500 containers daily. On the busy street outside, workers stack about two dozen bottles onto electric tricycles for delivery to homes and offices. “People would have considered it OK to just boil tap water a few years ago, but consumption is changing because of environmental concerns,” Duc says. About 70 percent of China’s lakes and rivers have been polluted by power plants and chemical, paper, and textile factories, reports Worldwatch Institute, an environmental research group. In Shanghai, the city’s Water Authority says “almost all” surface water has been polluted and doesn’t meet drinking standards.

Even water that’s been purified at treatment plants is often recontaminated en route to homes. About half of tap water suppliers provide substandard water because deteriorating pipes harbor contaminants, sediment, and bacteria, according to China’s Ministry of Housing and Urban-Rural Development.

Nestlé, which has been selling water in China since the 1980s, has opened two water facilities there since 1998. One close to Beijing extracts water from a spring; another near Shanghai taps an aquifer. The Swiss company also bought Yunnan Dashan Drinks, a natural spring water producer in southwest China, in 2010.

One key to Nestlé’s success: middle-of-the-pack pricing. Nestlé charges about 16 yuan ($2.57) for a five-gallon container of purified water and 18 yuan for natural mineral water. A container of Coca-Cola’s (KO) Ice Dew water brand costs 16 yuan, and Nongfu Spring charges 20 yuan. “Chinese consumers tend not to be very confident about some local products in terms of quality and safety,” Duc says. “We want consumers to understand that for the same price they get European technology and Nestlé quality, and if that’s something they value, they go for our brand.”

The bottom line: Nestlé’s bottled-water sales growth has slowed in the West. But it’s booming in China, where 70 percent of lakes and rivers are polluted.

Doherty is a reporter for Bloomberg News in Geneva.

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Companies Mentioned

  • NESN:VX
    (Nestle SA)
    • $69.95 CHF
    • 0.00
    • 0.0%
  • KO
    (Coca-Cola Co/The)
    • $41.24 USD
    • -0.02
    • -0.04%
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