Bottled Water Prices to Rise?

Analysts predicts increase in early 2006

NEW YORK -- One of convenience stores' fastest growing products may be subject to a price increase early next year, according to one beverage analyst. Bill Pecoriello of Morgan Stanley, New York, wrote in a recent report that the beverage industry "might 'test' price hikes" in the bottled water segment in the first quarter of 2006 "given significant increases in PET resin costs, which are expected to last through 2006."

"We believe Nestle, Pepsi and Coke could test higher price points for take-home bottled water in January given significant raw material [image-nocss] pressure, while private-label water suppliers have already started to move up prices in [the fourth quarter of 2005]," Pecoriello wrote in the October 3 report.

Ultimately, however, Pecoriello said he does not expect the increase to last.

"We see the impediments to price hikes sticking as 1) the temptation to 'cheat' will be high as consumers are extremely price sensitive with low brand loyalty, and 2) overall category growth could slow on any price hikes. If the move to increase prices is in fact tested in Q1 '06, we will monitor 1.) any market share shifts, or 2.) a category slowdown to assess the viability of raising prices."

Meanwhile, Morgan Stanley Consumer Research shows more consumers (67%) are turning to bottled water as a healthy alternative to other beverages, particularly carbonated soft drinks (CSDs). "Over one-third of all U.S. adults say their consumption of plain bottled water has increase in the past six months," the report said. "The growth in water consumption is coming largely at the expense of regular colas as nearly one-quarter of consumers have reduced their consumption of this category."

While all this is good news for bottled-water sales, Pecoriello said a lack of loyalty in this category may leave higher-priced products at a further disadvantage. "Share of bottled-water drinkers who are loyal to one brand has dropped from 25% in 2003 to 20% in 2005," said the report. "This drop was especially steep among heavy users who consume 14 or more servings per week. The shift in brand loyalty was largely accounted for by people [moving from] being singularly brand loyal to being loyal to a repertoire of brands. The number of people who are price-driven did not change over the period. However, the price-driven segment remains very large at 40% of all bottled-water users."

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