Nestlé/water: tapped out
The Swiss company may struggle to find a buyer for its North American bottled water business
Bottled water no longer quenches Nestlé’s thirst for growth. The Swiss food company is mulling a sale of its North American mass-market bottled water business. It may struggle to find a buyer.
True, Americans’ love affair with bottled water is still going strong. More than $18bn was spent in 2018, according to the International Bottled Water Association.
But Nestlé’s US water brands Poland Spring, Deer Park and Pure Life compete at the bottom end of the market in a category dominated by discount private labels and Coca-Cola’s Dasani. It has been too slow to move into flavoured, sparkling water, where brands such as LaCroix have enjoyed fast growth. The result: Nestlé’s global bottled water business eked out just 0.2 per cent in organic growth last year. While the unit boasts an operating profit margin of 11.8 per cent, the bulk of this comes from higher-priced brands such as Perrier and S. Pellegrino.
Since taking the helm in 2017, boss Mark Schneider has been aggressively weeding out underperforming assets such as lunchmeat and candy. Now he is looking at water.
Will Coca-Cola and PepsiCo bite? Unlikely. Both companies already have a sizeable presence in the US bottled water market. Buying Nestlé’s unit could draw regulatory scrutiny. Danone, the French group behind the iconic Evian brand, has little US presence. It may be a contender. But it has also been struggling with stagnant water sales. It makes little sense for the company to double down on the low-end of the water market. Especially since there is little synergy or costs savings to be found in combining the two.
That leaves buyout groups as Nestlé’s best hope. Private equity has plenty of dry powder. The trouble is the bottled water business’s low return on capital. Analysts at Jefferies estimate RoE was about 24 per cent excluding goodwill in 2018 and 17 per cent including it.
The sale is a long time coming. But finding a prospective buyer for a low-margin, no-growth business such as bottled water at a time of intense consumer backlash against plastic waste is going to be difficult.