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Mexico's Water War

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This story appears in the March 12 issue of Forbes magazine.

In Mexico City most restaurants won’t give you a glass of tap water. Drinking fountains? A rarity. Having dinner with friends? They’ll hand you a plastic bottle.

It isn’t just tourists who won’t drink the water in Mexico. It’s nearly everyone, making the country one of the most valuable markets in the world for beverage companies. Mexicans are the world’s biggest drinkers of soda, putting away 166 liters of the bubbly stuff per person in 2010, and of bottled water, chugging down 248 liters per capita in 2011, according to preliminary estimates from the Beverage ­Marketing Corp. The latter figure is more than double Americans’ annual consumption of 110 liters.

With growth in the soda segment flattening out, in part due to government antiobesity campaigns (soda sales have been banned in schools), the growth and competition are in water, where market leader Danone is fighting it out with Coca-Cola and Pepsi.

“Soft drinks are no longer such a great business in Mexico,” says Ana Trulin, an analyst in Mexico City with Euromonitor. “Water is the big profitmaker.”

Analysts project Mexican bottled-water sales will grow to $13 billion by 2015, up from $9 billion in 2011, surpassing the U.S. to become the world’s largest market.

By volume, 85% of bottled water in Mexico is sold in 10- to 20-liter jugs commonly delivered to homes, says Jose Martinez, an analyst with Beverage Marketing Corp. Pepsi­Co, the dominant bottled-water seller in the early 2000s, still has a strong grip on the jug market, but that’s not where the big money is. Single-serve bottles are roughly ten times as profitable, analysts say, and in that category it’s been left in the dust by Coca-Cola and Danone.

France’s Danone has grabbed 26.5% of ­Mexico’s bottled-water market thanks to clever advertising for its Bonafont brand, which is pitched to women seeking to lose weight in a country with the second-highest obesity rate, after the U.S. Marketed as the “light water,” Bonafont features peach-colored labels with silhouettes of slim, athletic figures; in its ­latest campaign, “the Bonafont Challenge,” the company is encouraging Mexicans in five cities to drink 2 liters of Bonafont water a day for 15 days to feel “much lighter, hydrated and healthy.”

Coca-Cola has 23.5% of the market, and Pepsi trails with 13%. Analysts say Pepsi is absorbed with consolidating its largest Mexican bottlers, Embotelladoras Unidas and Empresas Polar, giving Coke and Danone room to build market share.

“The big fight here is between Coke and Danone,” Trulin says. “Coke is going to start stepping hard on Bonafont’s toes.”

Spearheading the charge for Coke in Mexico is Pablo Lopez, marketing manager for its water brand Ciel (add the letter “o” and you have “sky” in Spanish). The world’s largest soft drink company plans to invest $1 billion this year in Mexico as part of a $5 billion, five-year expansion plan. The goal for Ciel is to double sales by 2020 and overtake Danone.

“The market is extremely competitive, especially in the single-serve ­category,” Lopez concedes. “But we are confident we can get there.”

Analysts say roughly a third of this year’s investment budget, and a good proportion going forward, will go to Ciel.

Ciel is doing a little bit of everything, rolling out a round, 350ml bottle designed for children and plugging flip-top bottles and bottles made of a thin, ­flexible plastic that’s easier to recycle. With TV spots that feature sexy young celebrities twisting the bottles into compact strips and the slogan “Dale la Vuelta”--”Turn it Around”--Ciel is hoping to seduce Mexico’s growing base of eco-friendly consumers.

Bonafont launched a slew of new flavored waters in different sizes over the past two years; Ciel plans to counter with new products in its flavored, mineralized and “purified” lines, as well as extensions of its Ciel+ functional brand, to court Mexico’s growing ranks of health-conscious consumers.

For its part, a Danone spokeswoman says the brand hopes to introduce new Bonafont flavors to boost market share.

On the marketing front Lopez is ­focusing on the young and ­active with a campaign using the slogan “Eso que te mueve,” or “That which moves you.”

Bonafont is viewed as a more fashionable premium brand than Ciel, and that shows up in the bottom line. According to analysts, Coke is likely making a 15% profit margin on Ciel sales, while the pricier Bonafont boasts margins of around 18%. Analysts say Coke’s margins on water are one to two percentage points higher than on soda due to lower costs.

Beverage companies owe their strong profits in Mexico in large part to a pervasive mistrust of tap water that took root in the early 1990s amid cholera outbreaks. Health authorities encouraged Mexicans to turn to bottled water, which led to a proliferation of unregulated companies hawking ­”purified” water.

Many Mexicans also took to boiling tap water to ensure its safety, but a climb in natural gas prices in the middle part of the last decade made that a more expensive proposition.

The National Water Commission says 9% of the population lacks access to tap water and 13% to sanitation.

In Mexico City, where a powerful 1985 earthquake fractured many water mains, authorities have struggled to maintain the water delivery system. About 30% of the city’s water is lost to leakage.

In 2010 the UN Development Program ranked Mexico 106th out of 122 countries for drinking water quality.

Ramón Aguirre Diaz, director of Mexico City’s water utility, says water quality isn’t as bad as believed: 95% of Mexico City’s drinking water is potable and 80% to 90% elsewhere in the country.

But he concedes that the water can taste bad in poorer areas of the capital. The delivery network needs heavy maintenance, pressure is insufficient, and widely used home water tanks are often dirty and poorly maintained by their owners, he says.

Last year the government committed to spend $12 billion on water and sewage infrastructure, but Diaz says ­ordinary Mexicans should realize they share the blame for the country’s water problems. “Many people prefer to carry cool-looking water bottles instead of paying municipal water bills,” he says.

President Felipe Calderón ­proposed last year to raise water fees to promote conservation and raise money for improvements.

“If we got a new tariff system, we could sell 1,000 liters for 9 pesos [70 cents] in residential areas and 3 pesos in poorer neighborhoods,” Diaz enthuses. “Those same 1,000 liters cost 18,000 pesos [$1,400] in branded bottles.”

But, he says, people happily pay it. “Drinking bottled water has become chic in Mexico.” And lucrative.