Porter’s 5 Forces Analysis of the Bottled Water Industry
The Bottled Water Industry Threat of entry of new competitors is low. Firstly, the competitors that currently exist are large, dominating companies who already own a huge market share of the industry. New entrants attempting to enter the market will have compete with established brands such as Coca-Cola, PepsiCo, and Nestle. These brands have decades of experience in the food & beverage industry, have developed brand recognition & loyalty and have achieved low-cost production and distribution capabilities that cannot be easily matched. Secondly, it is expensive to initially develop the infrastructure to produce the product.
The case states that prices for bottle-filling lines range from $125,000 to over $100 million, not to mention the costs associated with “source certification, road grading, and installation of pumping equipment …” which require approximately $300,000 worth of investment. Threat of substitute products/services is high. Numerous bottled and non-bottled products that can easily substitute bottled water. The main factor that differentiates bottled water from other soft drinks is that it caters to a health-conscious market because it has no sugar and no calories.
However, today, there are several healthy soft drinks that are ‘zero-sugar added’, ‘zero-calorie’ alternatives to water. Coke zero, crystal light powders, diet sodas, zero-calorie energy drinks, etc. are just some examples. Tap water is also a substitute product because many people simply trust the tap water of their municipality. Another substitute would be water filtration devices such as the Brita filter which filters tap water. Bargaining buyer power is high. Firstly, there are many bottled water lines and many non-water alternatives to choose from.
Secondly, there are no major switching costs for consumers; the price difference between Aquafina and Dasani, for example, are so minute that the buyer can easily switch. Thirdly, although it is growing, brand loyalty it currently not very strong in this industry. Many consumers are not particular about brand, and as a result, they tend to choose the product with the lowest price. High buyer power places pressure on bottled water companies to decrease their prices. Bargaining supplier power is low.
If a company sells spring water, they usually install the entire necessary infrastructure to collect, filter and bottle the water. If they sell purified water, they simply buy tap water from municipalities at industrial rates and purify that water themselves. Either way, companies in this industry don’t need to buy their water from a supplier, they get it on their own. Intensity of competitive rivalry is very high. Joint ventures and acquisitions occur frequently, as the largest competitors (Nestle, PepsiCo and Coca-Cola) fight to compete with each other by buying-out relatively smaller producers in the market.
As a result, each major company in the industry has several different lines; For example, Coca-Cola produces Dasani, Dannon, Evian, and Dasani Sensations in 4 different flavours. Companies in this industry are in constant competition with one another and they require frequent advertising to maintain brand recognition, cost-cutting strategies to price their products competitively, and innovative ideas and strategies to keep up with industry changes.
Conclusion: Based on these factors, I the bottled water industry is unattractive. The competition is fierce and dominated by large, established companies that no one can compete with, the initial start-up is expensive, there is a huge threat from substitute products taking market share away from this industry, and buyer power is very high, putting downward pressure on prices and thus cutting into profit margins.