Tax Debate Swarms Bottled Water

It’s back to the barricades once again for the convenience store industry, which—as in the past—is being targeted by environmental special interest groups and revenue-hungry legislators. This time they’re focusing on bottled water containers.

Bottled water remains a tremendously popular and trendy product category, which is just what attracted the attention of these two groups in the first place. Both want to make selling bottled water more of a hassle and less profitable.

The battle, as with other product categories in the past, must be fought in local legislatures across the country, and must see suppliers, wholesalers and distributors joining forces with retailers.

"I’m glad somebody is calling attention to this subject," said Tariq Khan, a 7-Eleven franchisee based in Rockville Centre, N.Y. and the former National Chairman of the National Coalition Association of 7-Eleven Franchisees. "I am one of the very, very active members of the retail industry in the State of New York trying to stop the legislation that wants to put a 10- to 15-cent deposit on bottled water."

Khan and his associates successfully staved off legislation last year that would have imposed deposit fees on bottled water and other beverages. This year, New York Gov. Eliot Spitzer is once again trying to get that provision into his budget.

Said Khan, "I don’t see a whole lot of effort being put by suppliers. When we talk to them in conversation here and there, they are not in favor of (such legislation). They’re telling me they have their own association, and they are saying the same thing we are." Indeed, he added, some distributors have voiced support for such legislation because they stand to earn handling fees from removing the empty bottles.

The focus on bottled water by various legislatures and specialty groups will remain an ongoing story for the foreseeable future, and few are saying with certainty how it’s going to fully play out. Bottled water saw solid growth in 2007, though the final figures—unavailable at presstime—should show a slight slowdown compared to 2006.

What can be said with certainty is that consumers are looking for healthier refreshments, and bottled water has always been well positioned to fill that need. Those who bottle water with tap water are probably making an erroneous comparison. Consumers who buy water in single-serve bottles, the most prevalent SKU in the category in convenience stores, are thinking of it as an alternative to other refreshment beverages in the cooler.

So-called value-added waters, whose sub-segments are flavored and enhanced waters, are also performing well and growing. Coca-Cola is leading the way among these products following its May 2007 purchase of Energy Brands Inc, which developed popular brands such as Vitamin Water, Fruit Water, SmartWater and Vitamin Energy. Carbonated soft drinks, on the other hand, are not expecting any kind of dramatic turnaround; results should remain flat to down.

"Sales on water are still growing in the convenience business," says Tony Frankenberger, vice president of procurement and purchasing for McLane Co., the industry top distributor. His own company’s 2007 sales of bottled water were up over 2006 by approximately 8%, with most of the increase coming from the multi-pack segment. "The 8% growth on bottled water is much higher than the total beverage category growth, which is at about 3%. While the environmental impact is a concern, the c-store customer is typically on the run, and the behavior does not seem to be changing much.

Bottled water is growing in popularity because people appreciate its consistent quality, taste and accessibility, especially when people are on the go, said Steve Seager, senior retail marketing manager for Nestle Waters North America Inc. in Greenwich, Conn.

"People often choose bottled water over other packaged beverages because it does not contain calories, caffeine, sugar or artificial flavors or colors they may want to avoid. In 2006, Americans avoided 256-billion calories by choosing bottled water over other packaged beverages containing calories, lowering obesity risks," Seager said. Nestle management feels that "any actions that discourage the choice of water, whether from a bottle or the tap, are not in the public’s best interest," he added.

Beverage industry insiders generally view obstacles like these as just that, obstacles that may reduce margins, but will eventually be overcome; not something that will permanently damage the business. Bottled water, they claim, remains poised for continued long-term growth.

Stephen Kay, a spokesperson for the International Bottled Water Association (IBWA), pointed out that the bottlers, suppliers and distributors that make up IBWA’s membership roster are actively working for retailers’ benefit through their participation in association efforts to combat what he terms "onerous tax measures" and "present the environmental facts and positive aspects of bottled water. They are giving us the financial and personal wherewithal to fight and represent the best interests of the bottled water industry and our customers—meaning the retailers—so that prices aren’t jacked up through taxes. We’re fighting measures at the state and local levels, and so again, the membership is participating through in-person testimony or writing letters to and meeting with their elected officials and the media." The issue is one retailers are keenly aware of.

"The net of the help is really that the distributors and the manufacturers need to address the issue first," says Jeffrey Leedy, senior vice president of Marketing and chief customer officer for Rutter’s Farm Stores in York, Pa. "I know Nestle is minimizing some of its packaging going forward. I don’t know if Coke and Pepsi and some of the other bottled water companies are doing the same. I think they need to make the commitment."

The responsibility at retail, Leedy suggested, is "to help drive the recycling effort just because there are more products that can get recycled than ever before."

According to Leedy, it is the customer who "will finally be the one who pressures manufacturers into changing. In the final analysis, the customer will choose. When he stands in front of the cooler, if he is sensitive to the issue then somehow the minimization of the packaging will drive the purchase decision. I think that’s where it will come from. Consumer companies, if nothing else, know how to respond to the needs of their customers. When they see this, they will deliver. And packaging costs tons of money, anyway."

 As more beverage options become available, Frankenberger observed, the singe-serving water door is "shrinking or becoming mixed with flavored waters or functional beverages." The retailer, then, "must decide what the best-selling items are, and what the proper mix should be for that door to best manage in-stocks, profits, etc.," he said. "Overall, the retailers will continue to stock what is selling in their stores."

What’s intriguing about the bottled water debate is that other products, most notably laundry detergents, seem to get a pass from lawmakers and environmentalists. Yet few, if any, of those manufacturers have the "green" commitment bottled water companies have demonstrated.

"Bottled water packaging is made from materials that are 100% recyclable," Kay said. "We are working to increase consumer opportunities and educate them about recycling. Bottled water is one of thousands of packaged food products, so a lot of these measures that have bottled waters squarely in their sights are really denying consumers the healthy beverage choice either by increasing the price or making it unavailable, as some of these activist groups would have it."

In the State of Washington, Kay noted, special interest groups have been "looking to basically ban the convenience size plastic water bottles that these convenience stores sell," he said. "Since all of the competing beverages are similarly packaged, to focus specifically on bottled water is to miss opportunities to address our environmental challenges in a comprehensive, all-inclusive and long-term way."

True, but the specialty groups and legislators will do it anyway, which means the industry has yet another fight on its hands. And like so many others, it’s one the industry can win, if all the different parts will come together to form a united front.