Some like it hot

VT Tyndall Global Select Fund

Some like it hot

With the heat wave spreading across Europe and people being encouraged to monitor their water intake, recent weeks should prove to be a boom time for the major bottled water producers. The prevalence of Chilly, Yeti, and Sigg insulated bottles are noticeable, but so is the amount of traditional plastic bottles containing both carbonated and still water from various springs around the world.

On a personal note, a recent trip to my local déchetterie showed that, despite the Swiss efficiency in separating and recycling rubbish, the sacks for PET plastic were all close to overflowing with the increase in bottle usage in recent weeks.

Concerns over plastic pollution has been a problem that all bottled water producers have had to deal with over the past few years and has been a perennial headwind as eco-concerned consumers increasingly switch to tap water as drinking water quality improves globally. Despite these issues the bottled water market has doubled in the past decade and now is estimated to be valued at $303.92bn and Grand View Research expects the market to grow at 6.7% per annum to $509.2 by 2030.

In an effort to address the concerns of environmentally concerned investors and consumers, Danone, Nestlé and Coca-Cola have all stated aims of using 50% recycled plastic in their products by 2025, however Greenpeace criticise this aim, and argue that the water manufacturers should promote reusable solutions and not produce 500bn plastic bottles per year. The large manufacturers, however, are not standing still, with both Coca-Cola and Pepsi offering water brands in cans, and home carbonation has experienced a resurgence with PepsiCo buying SodaStream and Nestlé piloting Refill Plus. Reusable glass packaging has also returned to the market as the consumer goods companies try and espouse their environmental credentials.

With the projected growth in the market, it could be assumed that this is an area where the major consumer goods companies are looking to invest to increase their market share, however while this is true in parts it does not paint the whole picture. In Nestlé made an operating margin of 6.4% in its water division, and Danone 8.9% which is well below the group averages. Recently Nestlé has let it be known that they are looking to divest their US water operations and focus on premium water; they currently have Perrier, San Pellegrino, Acqua Panna, Vittel and Buxton within their stable while Danone own Badoit, Volvic, Evian and Aqua within theirs.

The global sparking water market is currently $33.43bn, so small in comparison to the overall market, however it is expected to grow at a CAGR of 12.6% compared to the overall market of 6.7%, benefiting from the increase in focus on healthy living across all age brackets, which sees a shift from sugary carbonated and sodas to sparkling water. The higher growth and shift in consumer lifestyles have seen the traditional carbonated drinks players such as PepsiCo, Coca-Cola and Keurig Dr Pepper invest heavily in the space in their attempts to diversify, bringing flavoured and caffeinated carbonated products to the market in addition to more traditional waters.

Whether you favour carbonated, still or tap water, please do remember to keep hydrated in these times, and if you have a choice between San Pellegrino or Badoit, this fund manager would be pleased if you chose the former. The VT Tyndall Global Select Fund invests in Nestlé.

28th July 2022
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Data source (unless otherwise stated): Bloomberg
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