Nestlé To Invest In Brazilian Bottled Water
The chief executive of Nestlé's Brazilian operations has said the firm plans to invest BRL1bn in the country during 2010. Ivan Zurita said 35% of the investment would go towards new factories and the expansion of existing facilities while the remainder would be used to fund acquisitions. Zurita said the firm would target acquisitions in the bottled water and dairy sectors, and he was in favour of acquisitions as they allowed the firm to gain speed in fighting for the market.
The focus on bottled water comes despite Nestlé's water division being its poorest performing unit during the last two years (see chart). Nestlé's bottled water was hit by a significant drop in demand in developed markets, where consumers have increasingly opted to drink tap water during the downturn. Consumers in developed markets have also become concerned about bottled water's ecological viability, with environmental groups successfully promoting tap water as equal in quality to many bottled water brands. This drop in demand means that despite continued growth in developing markets, Nestlé's bottled water division was the only unit to record an organic sales decline in 2008 and 2009.
Figures from Brazil's industry association for the soft drinks sector ABIR show that in the last 10 years per capita consumption of bottled water has nearly tripled in volume terms, making it one of the highest growth areas in the entire food and drink sector. Sales have primarily been driven by rising affluence, with even low-wage consumers moving away from municipal water supplies that can be unsafe. Sales are also supported by the Brazilian climate, which encourages consumption of cold soft drinks, and increasing health consciousness, with low-calorie, bottled water believed to offer both health and beauty benefits. In December 2008, Nestlé looked to capitalise on this growth with the purchase of natural mineral water brand Santa Bárbara in São Paulo state. This investment highlighted the attractiveness of the Brazilian bottled water market, which has delivered dynamic growth over the last five years, but also highlighted how small regional brands will continue to play an important part in the sector and BMI expects any acquisitions in 2010 to follow this example.
Despite being one of the largest players in Latin America's bottled water sector, Nestlé only controls about 9.5% of the bottled water market in south east Brazil. The firm's market share in the less developed north is likely to be considerably lower than this, highlighting the fragmented nature of the market. Unlike the market for carbonated soft drinks, which has gradually consolidated around a few leading brands, the market for bottled water remains dominated by small regional players. According to ABIR, Brazil has over 500 bottled water producers.
The dynamism of the Brazilian bottled water market means that even relatively small producers have strong growth prospects and should eventually deliver a handsome return on investment. The sector's growth over the last 10 years highlights the opportunity that exists in the category in emerging markets, where bottled water offers significant advantages over tap water and continues to show rapid growth. Nestlé's results suggest that its exposure to these high growth markets is not yet sufficient to offset any decline in developed markets but further acquisitions would be one way to remedy this, and appear to be part of Nestlé's solution to overcoming its current bottled water difficulties.