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Will Coke's Water Meet Its Waterloo?


Talk about carrying coals to Newcastle. Coca-Cola Co. (KO) is heading into Europe, where finicky consumers choose from the world's best-known spring waters, with Dasani, the bottled water Coke successfully launched in its home market five years ago. While Dasani now ranks No. 2 in the U.S. behind PepsiCo Inc.'s (PEP) Aquafina, challenging honored brands on their home turf could prove a far tougher battle. Dasani hit the British market in February and promptly suffered a major public-relations disaster. And Continental rivals are gearing up to fight Coke off when Dasani arrives on their side of the Channel later this spring.

You can't blame Coke for trying. Bottled water is a growing part of the company's product mix, and the British market is exploding as health-conscious consumers shift away from carbonated beverages. Water sales in Britain have nearly tripled since 1998, to an estimated $1.9 billion last year, according to Mintel International Group Ltd., a London market research firm.

But Dasani has had a rocky start among Britons. Days after Coke introduced it, the company was forced to defend Dasani's source: It's purified tap water. Pricing Dasani near the top of the market made matters worse: Only Perrier and Vittel cost more. Critics had a field day. "Tap water," ran one headline in The Guardian, "it's the real thing."

So far, Coke executives are taking the negative publicity in stride. Vinay Kapoor, Coke's director of new beverages for Europe, blames the backlash on confusion about Dasani, which undergoes complex purification processes, including a filtering technique called reverse osmosis that NASA uses to make water for the space station. Dasani also contains added minerals such as magnesium sulfate, which give it a distinctive flavor. Kapoor is counting on a marketing blitz to reverse Dasani's image. In late March, Coke will spend $14 million on TV, print, and radio ads in Britain. "We're going to face a degree of clarification," Kapoor concedes.

FRENCH CHALLENGE

That's for sure. But as Coke goes into France and Germany it faces more than a PR glitch. Coke will supply these markets from springs in Belgium and Germany, and it will spend $9 million on a print and TV campaign in France. But the challenges are many -- especially in France.

For one thing, France's per-capita consumption of bottled water already tops 140 liters a year, according to Mintel. For another, growth is at the lower end of the market, while Dasani will be in the middle. Finally, there are two European giants to contend with: Nestl? (NSRGY), which produces Perrier and Aquarel, and Groupe Danone, which brings Evian and Volvic forth from the ground. Between them the two companies control half the French market. "In France, the market is completely saturated," says Cedric Boehm, an analyst at Morgan Stanley (MWD) in London. "It has been very difficult to establish new brands."

Nestl? seems especially intent on keeping things that way. It even has a strategy-planning task force code-named Nicola -- which translates loosely as "no cola." Nestl? executives are particularly confident about Aquarel, a mid-range water that is likely to be Dasani's closest competitor.

Coke remains unfazed. Its worldwide bottled water sales have grown more than 50% in each of the last three years. In 2003, that growth helped Coke's total revenues rise 8%, to $21 billion. Coke is counting on aggressive marketing and its distribution network to put Dasani on Europe's map. But the water wars won't be won easily. By Laura Cohn in London, with Carol Matlack in Paris and Dean Foust in Atlanta


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