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How Coca-Cola will fix its bottled water problem

Brian Sozzi
Editor-at-Large

Coca-Cola (KO) is back to showing nice sales and volume gains in its Diet Coke and Zero Sugar soda franchises in the United States. Now it just needs to get its water business back to tip-top health amid a barrage of new entrants.

“Our performance in the water category has not been as strong as we'd like. We're working on further plans to address this in the marketplace in the near future,” Coca-Cola CEO James Quincey told analysts on the company’s third quarter earnings call this month.

Quincey is right to call out the core water business — which is led by brands Dasani, Smartwater and Topo Chico — as in need of improvement.

Unit case volume — a key performance measure for beverage companies — in Coke’s North America water, enhanced water and sports drink business only rose 1% in the third quarter. The overall business, which Coke refers to as “hydration” and also includes VitaminWater and Powerade, has seen volume relatively flat for the nine months ended Sept. 27.

For perspective, unit volume for trademark Coke products rose a solid 2% in the third quarter. Over at Coke rival PepsiCo (PEP), sales of bottled waters such as LIFEWTR and Propel surged by double-digits in the third quarter. PepsiCo executives added on its earnings call that its new bubly sparkling beverage continued to “post very strong growth and is gaining share in the flavored sparkling water category aided by packaging and flavor innovation.”

Coke’s water business has lagged for most of the year, with the likes of Propel benefiting from aggressive marketing of new waters with flavors and electrolytes. Meanwhile, boxed waters from upstart beverage makers have finally started to take hold at retail. The supermarket aisles have also been overrun with water drinks offering various health promises and interesting flavors.

Flat water business

Sales of Coke’s water business have been flat this year, according to data from Nielsen. The total bottled water business in the U.S. (still and sparkling) is up about 5% to $12.8 billion, per Nielsen.

Nielsen data estimates Coke has about a 14% market share of the U.S. water business. Coke’s water business sports the second highest gross profit margin in its beverage portfolio, behind sparkling beverages and ahead of coffee and tea, according to data from Coke. The business in North America is its third largest as a percentage of revenue behind sparkling beverages and juice, dairy and plant-based drinks.

So, it would behoove Coke to right the ship in water so to speak. A Coke spokesperson declined to share the company’s plan of attack to alter the course of its water sales. But experts point to Coke moving more aggressively on two fronts that are already in motion.

In this Thursday, March 16, 2017, photo, bottles of Lifewtr and Smartwater are displayed in Philadelphia. As bottled water surges in popularity, Coke, Pepsi and other companies are using celebrity endorsements, stylish packaging and fancy filtration processes like “reverse osmosis” to sell people on expanding variations of what comes out of the tap. They’re also adding flourishes like bubbles, flavors or sweeteners that can blur the lines between what is water and what is soda. (AP Photo/Matt Rourke)

The first is to “premiumize” its water portfolio, adding variations of core Smartwater that suit different consumer needs along with flavored sparkling beverages. For instance, Smartwater is currently hawking three new water formulas besides the original: waters with antioxidants, alkalines, and sparkling. Dasani has introduced slim cans and bottles of flavored sparkling waters.

The other aspect will center on moving away from plastic bottles altogether and into aluminum cans to play to health minded, conservationists. The Dasani brand has a goal to remove about 1 billion of virgin PET plastic bottles from the supply chain over the next five years. Moving into recyclable, reusable packaging should also help the margins of the water business even with volume challenges.

It’s unclear how long before Coke’s water business does turnaround even in the face of these efforts.

“The algorithm will get better over time as SmartWater/Topo Chico and a new flavored sparkling [water] will come at a premium price but volume will still be challenged as they will not push as much Dasani (less profitable),” veteran beverage analyst Laurent Grandet at Guggenheim Securities tells Yahoo Finance.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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