-By Bob Phillips

Bottled water, a category once routinely counted on for a steady stream of double-digit growth, has gradually slowed to a trickle, prompting some grocers to find new streams for growth, including superpremium labels to lift the segment back up from the commodity pool.

Dollar sales of bottled water in supermarkets saw double-digit growth as recently as 2005, 2006, and 2007, according to data collected and analyzed by The Nielsen Company from stores with at least $2 million in annual sales. But the flow has since slowed dramatically. For the 52 weeks ending June 14, 2008, dollar sales grew just 4.6 percent, says Nielsen.

How you characterize the slowdown depends on whether you see the glass as half empty or half full. The half-empty adherents point to a variety of factors that are turning bottled water consumers away from supermarkets, including:

A sagging economy that makes tap water look like a much more attractive option for many cash-strapped shoppers, Environmental issues concerning PET bottles from eco-conscious consumers, and Strong channel encroachment from mass merchandisers and club stores.
Meanwhile, the half-full school emphasizes that even with slower growth in the most recent 52-week reporting period, the category broke the $4 billion barrier for the first time in history. That represents an increase of nearly 60 percent (58.1 percent) in just four years, according to the Nielsen data -- a robust performance by anyone's standards.

However, it's the most recent reporting period and that 4.6 percent dribble of growth that are disconcerting for grocers that have come to rely on stronger dollar growth from the category.
What's to blame? "An economic slowdown has resulted in slower growth of all liquid beverage refreshments, including bottled water," notes Tom Hipwell, v.p. sales for Greenwich, Conn.-based Nestlé Waters North America, adding that the category's gradual maturing exacerbates the effect.
 
Hipwell makes a half-full observation. "In supermarkets, the bottled water segment grew 11 million gallons over the past year, which is twice as much volume growth as other liquid refreshment category segments." He cites Nielsen supermarket data, which shows CSDs down 100 million gallons as of the latest 52-week reporting period.

Temporary drought?

Some retailers say they expect the flow to pick up again.

At Ukrop's, bottled water had been enjoying double-digit growth for the past several years, but suddenly things began to sour in the past quarter, with dollars down approximately 10 percent over the previous year.

The Richmond, Va.-based grocer has actually been able to increase its share of bottled water dollar sales in its market area, but that only goes to show that the competitors are feeling the pain even more. Still, officials contacted at Ukrop's say they remain optimistic that the decline is temporary, and that it will eventually correct itself.

The main concern, according to Ukrop's company sources as well as other retailers, is whether bottled water prices will continue to hold up so that margins in the category don't erode to CSD levels.

Chuck Alwine, owner of Newtown, Pa.-based Grapevine Natural Foods, an independent natural grocer with over $1 million in annual sales, knows all about the volume-driven game played in the mainstream, having spent six years at Food Lion before launching Grapevine Natural Foods in this Philadelphia suburb in 1985.

"It's real tough for me to sell Poland Spring anymore and be competitive," says Alwine. "About the best I can do on a 24-pack is $5.99, two for 10 bucks. I guess I'm in the game, but I know you can find it cheaper elsewhere."

Two destinations increasingly popular with bottled water consumers are the mass and club channels, where shoppers can grab relatively inexpensive 48-packs displayed on pallets.

"I can't play that game," admits Alwine. "A couple of years ago, I could bring in a couple of pallets of Poland Spring and it would make a couple of bucks. Now it's not worth it for me to do that, because of floor space. If there's a deal out there, I’ll get 10, 20, or 30 cases at a time, and we'll jam it in the cooler. But we'll supplement it by ordering other niche brands like Penta, Evermore, and Mountain Valley."

Breck Speed, the c.e.o. of Hot Springs, Ark.-based Mountain Valley Spring Water, sees the slowdown in category dollar growth as nothing more than a function of maturation. To him, that's nothing to be concerned about at all.

"Bottled water has slowed in growth, but that's because we are now the No. 2 beverage category," points out Speed. He adds that New York-based Beverage Marketing Corp. projects that bottled water will overtake CSDs as the No. 1 beverage category in the United States over the next five years.

"An interesting dynamic within the bottled category is that certain segments are growing faster than others," notes Speed. "Premium waters are still showing double-digit growth as consumers become knowledgeable and more picky about water. Filtered tap water and cheap case water are most vulnerable to slow growth."

One of the premium brands that Alwine sees gaining legs is called Isbre, imported from Norway and marketed as "glacier water."

"I'll tell you what -- It's good water, really good water," says Alwine. "It's got a clean, crisp flavor. You can totally tell the difference. We're charging 50 cents more for a 16.9-ounce bottle, and people are buying it. They think it's worth it. In fact, I've sold a few cases recently."

And, importantly from the retailer's perspective, margins are continuing to hold even as the category matures.

"I'm not finding that I'm having to cut [the price on] anything," says Alwine. "I'm able to sell a 16.9-ounce bottle of Poland Spring that I bought on deal for $1. I don't know when the next deal will come around, but I've got 10 cases on the floor, so I'm all right with that. I’m making a good margin."

And those margins are holding even on promotion, certainly vis-à-vis other beverage categories, such as CSDs and beer.

"Grocers continue to experience a double-digit margin stream even while on promotion from the bottled water segment," notes Hipwell. "Can the same be said of soft drinks?"

In the end, while things may not look as rosy as they did a half-decade ago, it's not exactly the end of the world as we know it, either.

"As far as the economy is concerned, I spoke with one of my vitamin suppliers just today, and she's convinced that things have bottomed out," says Alwine. "I'm not sure if I agree with her on that, but it's not all gloom and doom, either."