The Best Stock to Play the Bottled Water Craze

The hottest drink on the planet is water. And it’s particularly popular here in the United States.
Industry tracker Beverage Marketing Corporation (BMC) reports that U.S. sales of non-alcoholic beverages rose 2.2% in 2014. That is the fastest growth since 2006 and was largely fueled by bottled water sales.
This comes against a backdrop of declining soft drink sales. Beverage Digest said that in 2014 Americans consumed the lowest amount of soft drinks per capita since 1986. Americans imbibed only 12.76 billion gallons of soda last year, the 10^th consecutive year of decline.
The bottled water craze should not come as a shock to industry watchers. Millennial consumers, especially in the developed world, are moving in a big way toward more natural food and drinks.
A survey conducted late last year by Harris Poll showed that 96% of Americans think they should be drinking more water. And 95% thought that bottled water was a healthier choice than soft drinks.
BMC says Americans last year drank, on average, a record 34.2 gallons of bottled water per person. That’s a $13 billion market. More health-conscious Americans consumed 10.87 billion gallons of bottled water, up 7.3% from 2013.
Based on the current trend, BMC forecasts that bottled water will become the No. 1 packaged beverage sold in the United States by 2016. The total amount of bottled water consumed in the U.S. should surpass soft drinks by 2017.
But that’s not to say it’s only a developed world phenomena. Sales of bottled water in China, for example, have doubled in the past five years.

Global Bottled Water Battle

According to the market research firm Canadean, global sales of plain bottled water are set to surpass those of soft drinks in 2015. That is a first.
This thirst for bottled water here and around the world has set off a mad scramble among the top four players in the sector: France’s Danone (OTC: DANOY), Switzerland’s Nestle SA (OTC: NSRGY), and Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) in the U.S.
Danone’s emphasis is more on the developing markets. It sells more water in China that it does infant formula. This helped Danone’s sales of bottled water to grow by double digits every year since 2011.
In contrast, Nestle’s emphasis is on developed markets like the U.S. In fact, Nestle’s water division surpassed Dr Pepper Snapple Group (NYSE: DPS) last year to become the No. 3 seller of non-alcoholic beverages in the U.S.
No. 1 and No. 2 were, of course, Coca-Cola and Pepsi. Their respective water units, Dasani and Aquafina, showed volume gains last year. This helped offset the decline in soda sales.

The Best Bottled Water Stock

My favorite company among the big four bottled water stocks is Nestle.
Unlike Coca-Cola and Pepsi, it is not saddled with the baggage associated with the soft drinks industry. And I like its emphasis on the U.S. market, where bottled water consumption is growing at roughly the same rate as in emerging markets.
As this Wall Street Journal chart shows, Nestle is the U.S. market share leader in bottled water sales by volume:

Source: The Wall Street Journal

Nestle is investing $200 million to add seven U.S. production lines for water. The production capacity is double what the company added over the past five years.
The company is also placing greater focus on sparkling waters versus plain water. It is a faster-growing business (14% vs. 8% last year). In effect, Nestle is saying people still want bubbly drinks – but just healthier bubbles.
Nestle is also moving in a big way into the home water delivery business. It says this business grew twice as fast (by 14%) last year as deliveries to stores. And in the first quarter of 2015, it grew by 21%. The water delivery business now accounts for about 20% of Nestle’s $4 billion U.S. water business.

The Future

Can anything slow down the bottled water craze?
Environmentalists would like to try. They say most of the plastic bottles are not recycled.
The bottled water companies counter by saying they have greatly reduced the weight of the plastic bottles, thus lowering the environmental impact. These companies also validly argue that bottled water is not the only product sold in plastic bottles.
To date, though, environmental arguments have not slowed down sales.
What could change the equation regarding bottled water sales? Technology. There could be, at some future date, new technology that will purify tap water in a cost-effective way while producing great-tasting water. No technology has quite hit on the magic formula yet.
Until that happens, demand for bottled water will continue to rise. That’s good news for all the major players in the sector – and Nestle in particular.

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