STILL WATER RUNS DEEP

Water is flooding retail beverage aisles -- flavored water, that is.Meeting consumer demand for alternatives to other beverages on the market, a raft of new diet, fruit-flavored waters from Kraft's Veryfine Products, Nestle Waters, Coca-Cola and Pepsi-Cola have hit the market."The new waters attract people who want to eliminate carbs and calories, but who may not want regular water or diet soft drinks,"

Water is flooding retail beverage aisles -- flavored water, that is.

Meeting consumer demand for alternatives to other beverages on the market, a raft of new diet, fruit-flavored waters from Kraft's Veryfine Products, Nestle Waters, Coca-Cola and Pepsi-Cola have hit the market.

"The new waters attract people who want to eliminate carbs and calories, but who may not want regular water or diet soft drinks," said Steve Harkins, direct-store-delivery category manager, Piggly Wiggly Carolina Co., Charleston, S.C., operator of about 126 stores.

Flavored water is the fastest-growing segment of the water category at many retailers, such as Big Y Foods, Springfield, Mass., said Peter Dudis, category manager for the 51-unit chain. Big Y recently reset the subcategory to make room for the new introductions, which are adding sales to the category, he said.

"Although [flavored water] has been a small part of sales, it is quickly growing," Dudis noted.

That's certainly true. Though flavored bottled water accounts for just 3% of single-serve water wholesale revenues, wholesale sales could jump from last year's $170 million and a projected $375 million this year to $600 million in five years, predicted research firm Beverage Marketing, New York.

Since the new introductions will likely receive strong marketing support, continued category growth looks promising, said Valerie Skala Walker, vice president and analytic product manager, Information Resources Inc., Chicago. Skala Walker predicted that flavored water could easily be a $500 million segment in the food, drug and mass merchandiser channels by the end of 2005.

"Anytime you have this much manufacturer attention put behind major introductions, you can generate category growth," she said.

FLAVORED WATER GUSHER

Flavored water is making a splash at a time when bottled water is the fastest-growing major beverage category in the United States. Seeking areas of opportunity, manufacturers have zeroed in on single-serve bottled water with a hint of flavor, be it raspberry, lemon, orange or strawberry.

IRI sales data shows the top three flavored-water brands -- Propel, Fruit2O and Glaceau Vitamin Water -- all posted strong growth in food stores for the 52 weeks ending March 20. Propel Fitness Water from PepsiCo's Gatorade Co. garnered $119.4 million in dollar sales, a 40% increase; Fruit2O from Kraft's Veryfine Products, $38 million, a 43% rise; and Glaceau VitaminWater from Energy Brands, Whitestone, N.Y., $27 million, a 94% gain.

Retailers, attracted by flavored water's margins, which can be as high as 25% to 28%, are trying to ride the wave as long as it lasts, by adding more space or creating new sections.

Until this year, some Felpausch Food Centers stores carried no flavored water. That changed when the new brands were launched. Felpausch, Hastings, Mich., reset its bottled water aisle to fit in a new 4-foot flavored-water section, said Shane Gonser, a category manager for the retailer.

Gonser said he expected flavored water to grow the water category because it attracts consumers who may not have been satisfied with plain water.

"Water with a hint of flavor may be just what they're looking for," he said.

Due to space restrictions, Piggly Wiggly stores don't have a separate flavored-water section. Instead, flavored varieties are integrated with regular bottled water, based on vendor. To spur impulse sales, some stores also merchandise them in refrigerated cases.

Other retailers, however, wouldn't reset their sections even if they had the space.

McKay's Markets, Coos Bay, Ore., carries flavored water, but it's concentrating on regular water, which remains the big seller, said Butch Hutchinson, grocery-merchandising manager.

The retailer has doubled the space devoted to bottled water over the last three years. Most stores now have 12- to 16-foot sections.

McKay's heavily promotes the big draw in its stores: case sales. Consumers prefer cases because they like having plenty of single-serve water on hand, Hutchinson said.

In response, McKay's frequently runs price discounts on cases that hold 24 16-ounce bottles. For added exposure, cases are merchandised on endcaps in other areas of the store.

Twice a month, it pushes case sales of its Western Family private-label water. Depending on the promotion, a 24-pack retails for $2.99 to $4.99.

Continued new-product activity is likely to keep the subcategory lively. Kraft's Veryfine Products just announced that Fruit2O would branch out into new areas with the launch of Fruit2O Plus 10, flavored water fortified with 10 vitamins and minerals, and Fruit2O Splash Zone, Fruit2O packaged in kid-friendly pouches. Fruit2O Plus 10 is sweetened with Splenda and is calorie-free. Fruit2O Splash Zone contains high fructose corn syrup and sucralose and is 35 calories per 6.75-ounce pouch.

Other major beverage companies have introduced flavored waters of their own. Among the introductions this year: Aquafina FlavorSplash from Pepsi-Cola North America; lemon- and raspberry-flavored Dasani water from the Cola-Cola Co.; and Nestle Pure Life Natural Fruit Flavors from Nestle Waters.

Meanwhile, a small company has seized on the desire for customization with a product that's designed to let consumers enjoy fruity water in a way that's convenient, economical and diverse in use.

Water Sensations, Southport, Conn., introduced a fruit-flavored, Splenda-sweetened, pouched liquid that's designed to be mixed with drinking water. The company said Kroger, Big Y and Price Chopper are among chains that agreed to carry the product in their stores.

COUNTING CALORIES

Calories count when it comes to product success in the flavored segment, according to a Beverage Marketing report. Relatively high calorie counts were the main reason for the failure of other flavored waters -- including Dasani Nutriwater and Aquafina Essentials, the report contended.

Veryfine's early success using Splenda in Fruit2O likely encouraged the use of sugar substitutes in the new entries, said Gary Hemphill, senior vice president, Beverage Marketing.

"Companies have seen the success of Fruit2O, and are looking for ways to grow their water trademark," Hemphill said.

Hence the new introductions from PepsiCo, Coca-Cola and Nestle Waters are calorie-free, sweetened with Splenda.

"The introduction of Nestle Pure Life Natural Fruit Flavors water meets consumers' desire to reduce caloric intake without giving up flavor," said Angela Vradenburgh, senior marketing manager, Nestle Waters North America, Greenwich, Conn.

"Consumers like that these waters are low in calories," Gonser of Felpausch added.

Taste is as important as calories, however, said Skala Walker of IRI. Key to product survival is whether consumers will not only enjoy, but also crave the flavored waters every day, she said.

Brand marketers said their products deliver when it comes to flavor.

"Many consumers strive to drink more water but find plain water boring or don't like the taste," said Brian Saed, brand director, Fruit2O. "Fruit2O provides an effortless and enjoyable way for consumers to help get the water they need while giving them the great taste they want."

Harkins of Piggly Wiggly predicted that many consumers would remain loyal to flavored waters. Others may switch only temporarily.

"Sometimes sales start out fast when everyone wants to try a new item, then fall off after the novelty wears off," Harkins said.