CHICAGO Consumers are shunning carbonated soft drinks in favor of bottled water, even in the face of recent price increases caused by commodity inflation, Nestle Waters North America's top executive said.
And even though commodity prices have moderated, those increases are here to stay, said Kim Jeffery, president and chief executive of Nestle Waters North America, at the Reuters Food and Agriculture Summit in Chicago on Monday.
"They're not going to come back down. This industry has been operating at substandard margins for the last five years due to all the competitive desire to gain market share," Jeffery said.
Over the last decade, bottled water prices have fallen 35 percent, Jeffery said, as a host of companies, including Coca-Cola Co (KO.N) and PepsiCo Inc (PEP.N) fought their way to prominence with inexpensive offerings that pressured the whole category.
Yet in the face of unprecedented commodity cost increases last year, Nestle Waters raised prices on its regional water brands and its value brand Nestle Pure Life by about 30 cents per case, or about 10 percent. That was the first increase in a decade for the company, which sells a billion cases of water a year.
"We led the category in that and we suffered for a little bit at the hands of some people who took advantage of that for a few months," Jeffery said. "We went from positive to negative for a few months."
Still, the business ended 2011 with revenue growth of about 4 percent, Jeffery said. He said 2012 was off to a good start as well. He does not see further price increases on the horizon.
Commodity prices that prompted the price increase have stabilized, though they remain at "nosebleed levels", he said.
Nestle Waters' biggest purchases include resin to make plastic bottles, cardboard and plastic for case packaging and bottle caps.
TOP SPOT IN SIGHT
The United States is the only developed country in the world where soft drinks outsell bottled water, Jeffery said, but predicted that could change as soda consumption declines and bottled water consumption increases.
Over the last decade, U.S. carbonated soft drink consumption has fallen to 44 gallons per person per year from 54 gallons, he said. At the same time, bottled water consumption went to 24 gallons from 16 gallons.
"Our category has captured 80 percent of their loss," said Jeffery, who has been with the company for 34 years. "The trends favor continued growth for bottled water. I don't think the decline for carbonated soft drinks is going to stop."
Bottled water already out sells soda in several U.S. markets, he said, primarily along the coasts.
Nestle Waters North America is a unit of Switzerland's Nestle SA (NESN.VX), the world's largest food company with brands ranging from Nescafe to Maggi to Carnation.
It sells 15 different water brands including Poland Spring, Perrier and San Pellegrino.
Jeffery sees the potential to build a stable of bottled tea brands as well. The company already owns the Sweet Leaf and Tradewinds brands, and will start selling Nestea in the United States next year following the dissolution of a joint venture between Nestle and Coca-Cola.
Jeffery said there could "possibly" be room in the portfolio for other tea brands as well.
"I think there's still another place to occupy in the category. I think there's an opportunity to do more," Jeffery said, declining to elaborate.
Jeffery is picky about the categories he wants to play in.
"Bottled water has done so well in my opinion due to the absence of negatives....I'm pretty much in the camp of, 'I want to sell healthy beverages to people'. I think the connection for tea is an easy one, especially green tea," he said.
"I have a harder time trying to understand ... products that offer efficacy. I'm not a big believer in the whole 'functional' thing. I take a couple vitamins a day. I don't necessarily need to get more fairy dust in my beverages," Jeffery said. "I'm a little bit iconoclast in that area."
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(Editing by Dale Hudson, Steve Olofsky and Bob Burdgorfer)