Bloomberg News

Nestle Taps China Water Thirst as West Spurns Plastic

January 10, 2013

CHINA NESTLE

Bottles of Nestle pure water are on display in Shanghai, China. Photographer: Imaginechina via AP Images

Nestle SA’s (NESN) water business has suffered as western consumers turn to the tap due to environmental concerns about plastic bottles. Fortunately for the Swiss company, in China environmental concerns are instead driving growth.

“China is a key priority for us,” said Gilles Duc, the head of Nestle Waters in the country. “The market is increasing a lot and we want to participate in that growth.”

While the tough economy and green opposition to bottles are weighing on the water business in Europe and the U.S., it’s growing fast in China where industrial and agricultural expansion have polluted supplies.

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Sales of bottled water in the country will climb to $16 billion by 2017, versus $9 billion in 2012 and $1 billion in 2000, according to researcher Euromonitor International. The market in western Europe will remain flat at $21 billion and North America will increase 18 percent to $26 billion over the same period, Euromonitor predicts.

“You don’t dare drink the tap water in China and so many people are moving from rural areas to work in the cities” where bottled water is more common, said Hope Lee, a Euromonitor analyst in London.

Sharp Contrast

Nestle’s water business in China climbed 27 percent last year, according to Euromonitor, trailing only China Resources Enterprises Co. Nestle was the ninth-biggest seller of water in China last year, with 1.7 percent of the market by value, up from 0.7 percent in 2009, according to Euromonitor. Local rival Hangzhou Wahaha Group Co. is the leader with 14 percent.

China is Nestle’s eighth-biggest water market by volume and is “probably moving up one or two places each year,” Duc said.

The Swiss company’s growth in China contrasts sharply with its fortunes in more developed markets. In Europe, the U.S., and Australia, Nestle’s share by retail sales fell to about 10 percent in 2011 from more than 12 percent in 2006, according to Euromonitor.

“People would have considered it okay to just boil tap water a few years ago, but consumption is changing because of environmental concerns."

Water has shrunk as a percentage of Nestle’s revenue for four years running and accounted for 8 percent, or 6.5 billion Swiss francs ($7 billion), of its 2011 sales. Its bottled water revenue increased 5 percent in 2011 at constant exchange rates, versus 16 percent growth at rival Danone, which makes three- fifths of its water sales in emerging markets -- more than double what Nestle does, according to Bloomberg Industries.

While Nestle 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,” said Richard Withagen, an analyst at SNS Securities in Amsterdam.

Electric Tricycles

Nestle owns more than 60 water brands including Vittel and Pure Life, the world’s best-selling label.

About half of the water Nestle sells in China is delivered in five-gallon (18.9 liter) jugs. In Shanghai, Nestle 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 okay to just boil tap water a few years ago, but consumption is changing because of environmental concerns,” Duc said. “There’s a big psychological factor pushing this market forward.”

Plastic Bans

The trend in China stands in contrast to western countries, where opposition to plastic bottles is mounting. San Francisco in 2007 barred city agencies from buying bottled water. Concord, Massachusetts, this month forbade the sale of single-serve plastic water bottles, following the lead of Bundanoon, Australia, where in 2009 voters approved a similar ban.

About 70 percent of China’s lakes and rivers have been polluted by industrial facilities such as power and chemical plants and paper and textile factories, according to the Worldwatch Institute, an environmental research group.

Availability of natural fresh water in China is just one quarter of the global average, and the north of China already faces a scarcity of water, the World Bank reports. In Shanghai, “almost all” surface water has been polluted and doesn’t meet drinking standards, according to the city’s Water Authority.

Sediment, Bacteria

Purified water from treatment plants is often contaminated again en route to homes. About half of tap suppliers provide substandard water due to deteriorating pipes harboring contaminants, sediment and bacteria, according to China’s Ministry of Housing and Urban-Rural Development.

Nestle highlights such concerns with television advertisements such as one for its Pure Life brand that shows children making faces after tasting water. One child pours his glass into a fish tank instead of drinking it, then his face lights up when his mother offers the Nestle brand instead.

Nestle Waters has opened two facilities in China since 1998, one close to Beijing that extracts spring water from a local source, and another near Shanghai that taps an aquifer. The company, based in Vevey, Switzerland, also bought Yunnan Dashan Drinks Co., a natural spring water producer in the southwest of China, in 2010.

Nestle charges about 16 yuan ($2.57) for a five-gallon container of purified water and 18 yuan for mineral water. A container of Coca Cola Co.’s Ice Dew costs 16 yuan, while Nongfu Spring Drinking Water Co. charges 20 yuan.

“Chinese consumers tend not to be very confident about some local products in terms of quality and safety,” said Duc. “We want consumers to understand that for the same price they get European technology and Nestle quality, and if that’s something they value, they go for our brand.”

To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net


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