The Private Side of Bottled Water

As the economy continues to struggle, consumers seek less-expensive water products

Water is a resource everyone must have to survive, so it clearly makes sense to carry it in your stores. But how about private label bottled water? Should it be a staple at convenience stores?

The answer is yes, according to Sebastian Concha, global drink analyst at Mintel. "Private label water has been popular worldwide and within the U.S.," he said from his office in Chile. "We've also seen that consumers want to buy local water, brands that they believe are bottled close to them. People are really questioning why they should buy water that comes from the [Swiss] Alps, for example. They are asking why they should buy water from outside of their state or country when they feel they have local water that is good enough to drink."

If he were a convenience store owner trying to decide whether or not to sell private label water, Concha said he would do so unless he wanted his location to be perceived as a premium store. "But, the trends we're seeing in the industry are saying, 'go to cheaper alternatives.' That either means selling private label products or going to local water manufacturers who can give you a break on price," he explained.

Assuming consumers continue to harbor those opinions — which Concha believes will happen in the United States at least for the short term — private label water, especially brands convenience store retailers promote as coming from a local source, can be profitable ventures. "Consumers are often protective of their community," said Concha. "In the U.S., people feel they are protecting their country and their state by buying local water."

Cost is another reason to sell private label brands. C-stores can often sell private label water for a cheaper price than the large manufactured brands. The U.S. Department of Agriculture's ERS Report Summary found that all private label products sell for an average of about 23 percent lower than national brands, both with or without promotions.

"I think we will continue to see this trend [in the future]," Concha relayed. "The economic situation in the United States has not improved that much to make people want to go back to buying premium brands. Quite honestly, I think people don't believe they get as much out of a premium brand as they did eight or 10 years ago. So even if economic conditions improve, it's hard to see people moving back to premium brands."

While the cost of private label water is cheaper than national brands for consumers, c-store retailers can also see enhanced gross margins on the products. That's the case for Delek US Holdings Inc. — operator of MAPCO Express stores — which reported in a January U.S. Securities and Exchange Commission filing that it earned more than a 70-percent gross profit margin for private label water, compared to a 40-plus percent margin for branded waters. In total, the company's private label products accounted for more than 4 percent of Delek's sales during its 2011 fiscal third quarter.

QUENCHING A THIRST

Jim Wisner, president of Wisner Marketing Group, said during a 2011 NACS Show Workshop that private label products are growing thanks to their reduced cost, along with improvements in product quality, retail consolidation, community pressure, improved packaging and more. "The best way [for a retailer] to improve the mix is with a strong private label program," Wisner advised during the workshop entitled, "The Ins and Outs of Private Label."

Premium bottled waters such as Voss, Perrier and Evian were considered status symbols for the first half of the 2000s and even a little bit longer, said Concha. "But it's not as cool as a status symbol as it was in 2001 to be seen with those brands. Today, you'll even see some celebrities walking [down the street] with filtration packs. Economic concerns, environmental packaging concerns regarding the carbon footprint of the bottle and a growing skepticism about what bottled water really is transformed consumers' perceptions."

Taste is another factor. Although scores of taste tests have offered different conclusions about different waters, Concha said most people would be unable to tell a difference in taste between tap water and bottled water. And when comparing bottled waters to each other, he speculated that any difference consumers ever decipher is probably psychological as opposed to an actual flavor variance. Therefore, if consumers can't decipher a difference in taste, it perhaps would make them more even more likely to purchase a c-store private label brand.

Concha noted that in developed countries, such as the United States, premium bottled water sales began to drop in 2007 and 2008, with a large decline in 2009. The world economic crisis was a main reason for consumer buying changes. In 2011, however, the decline in bottled water consumption ended, Concha said. But there was one change compared to the early 2000s. In 2011, consumers purchased water in bulk more often, as opposed to individual bottles.

"People knew there was a better value when they bought water in bulk," he said. "Also, consumers became very skeptical about if it was worth it to buy premium water."

Considering consumers have soured on premium bottled water purchases, private label brands can provide an excellent opportunity, according to Concha. Filtration systems, which have experienced sales increases during the past two years, could provide a challenge. However, Mintel's global drink analyst believes there should be sufficient enough demand in the market so that both private label and filtrated products can be successful.

Sales trends regarding all bottled waters offer another positive sign for the market. Despite double-digit losses in 2009, bottled water sales last year were expected to average $12,071 per store, nearly $350 higher than in 2010, according to the 10th annual Convenience Store News Industry Forecast Study (for the full report, see the January issue of Convenience Store News). The Forecast predicts 2012 will be even better regarding overall bottled water sales.

Although the opportunities to offer private label water at c-stores are evident, at least one dissenting analysis exists. According to a Deloitte LLP survey, 49 percent of shoppers say they are no longer interested in trying private label brands. In addition, among the 4,086 U.S. household shoppers and food preparers surveyed for "The 2011 American Pantry Study," 90 percent said they have already figured out which store brands and private labels work for their families and which do not. Nearly the same number — 88 percent — of the people surveyed said they've established which store brands and private labels are good and which are not.

For comments, please contact Brian Berk, Managing Editor, at [email protected].