Tendencies of the bottled water market development in Ukraine in 2008

General review
Market leaders
Market segmentation
Market segmentation by the type of water
Market segmentation by the type of container
Import and export
    Export growth and…
          ...import stability
Conclusions

General review

All players of the bottled water market 2008 were greatly surprised with significant reduction of the sector development rates. A certain, rather slight reduction was prognosed by experts in 2007. Indeed, in 2007 market growth came to ... % and the average for the period of 2000-2007 was a little less than ... %. It allowed analysts to look optimistically into the future: the prognosis for 2008 was exactly the average value of ... %. Though de facto according to Nielsen Ukraine the growth of mineral waters of Ukraine in the first 6 months of 2008 came to only ... %.
In other words one can speak of not just of the slowdown of market growth rates but even of the production volume reduction.

Record low growth of Ukrainian bottled water market in the latest years can first of all be explained by macroeconomic quotients. According to the data provided by Goskomstat of Ukraine inflation index in the first half of 2008 was ... %. First food prices grew. Since rapid growth of the bottled water market in Ukraine for the last eight years was always associated with increase of the actual income of the population, the current drop of demand can hardly be difficult to explain. In our opinion the demand for bottled water is focused on the low-price segment, where regional and seasonal manufacturers of bottled waters come to the first place. Besides, weather factors played their role: compared to 2007 the summer of 2008 was not so hot in Ukraine.

Market leaders

In fact positions of all `tycoons` in the first half of the current year got worse in comparison with the same period of the last year. The only exception is the constant leader IDS Group holding (TM `Mirgorodskaya`, `Morshinskaya`, `Truskavetskaya `, `Truskavetskaya kristalnaya`, `Truskavetskaya zapovednaya`, `Staryi Mirgorod`, `Sorochinskaya`, `Alyaska`). According to Nataliya Matusevich, IDS Group`s development and marketing manager, the company has increased its manufacture rate and now, according to Nielsen Ukraine, the total share for IDS Group since the beginning of the year (January—May 2008) is ... %, which is ... pct more than for the same period of 2007 and ... times as much as their closest pursuer, Coca-Cola Beverages Ukraine Ltd. IDS Group`s disposals increased by more than ... % and constituted ... mln. dal.
Some factors enabled such result. First, active promotion provided by TM `Morshinskaya`. In the first half of 2008 brand’s disposals increased by ... %. `Morshinskaya`s` share increased too, by ... %, which is ... pct more than in the same period of the last year.
Second, this fivefold budget increase for the promotion of TM ` Truskavetskaya `, especially in the Russian market, where consumer’s loyalty for this brand is three times as high as for TM `Mirgorodskaya` (according to IDS Group).
Third, setting into operation three new lines on the Morshinsk plant of mineral water `Oskar` in 2007, also modernization of productive capacity on Mirgorodsk plant of mineral water in 2006.
As it was last year, Coca-Cola Beverages Ukraine Ltd took the second place in the bottled water market of Ukraine. According to our estimation the company controls a little more than ... % of the natural market, that actually corresponds to the level of 2007. Thus, lagging from the leader has increased.
In the Ukrainian market of bottled water Coca-Cola Beverages Ukraine Ltd. is represented by `BonAqua` international brand and local trade mark `Yurske dzherelo`. Company`s main efforts are aimed at promotion of `BonAqua` drinking water. The result of this is the current increase of brand`s recognizability in Ukrainian market by ... %. TM `Yurske dzherelo` was created in 2002 for maintenance of company’s positions in the middle price segment. Though it failed to do it.
Still all bottled water of the company is manufactured at the only plant in Kiev region, though Coca-Cola Beverages Ukraine Ltd bought former `Kolos` in Lvov in 1994. Taking into account the high potential of Ukrainian market the company’s management considers the possibility of expanding manufacture geography. It is still unknown whether it will be resumption of work of the plant in Lvov or construction of a new one.
Beer titan CJSC `Obolon` (TM `Obolonskaya`, `Obolonskaya-2`, `Obolonskaya-3`, `Obolonskaya plus lemon`, `Prozora`) has considerably lost its positions on the market of bottled mineral water. In the first half of the current year manufacture decreased by ... % in comparison with the same period of 2007 and in natural expression it amounted to ... mln dal. In our opinion it is due to the general situation on the market of packed water as well as to gradual decrease in sale of bottled water of TM `Obolonskaya`, even though its promotion on the market is hardly invested.
PC Plant `Rosinka` (TM `Sofiya Kiyevskaya`, iodinated water `Doctor`) has experienced manufacture slump too. By the end of July ... mln dal were produced compared to ... mln dal for the same period of 2007 (source `Ukrpivo`). Manufacture slump amounted to ... %.

According to the data provided by research company Nielsen for June/July’06—April/May’07 and June/July’07—April/May’08 the leading ten manufacturers of bottled water had ... % of the market, that is ... pct more than for the same period of the previous year and we can still observe the recently appeared tendency for market consolidation.

Market segmentation

Segmentation of bottled water market

Considerable decrease of growth rates of manufacture in the whole sector caused by inflation processes and absence of heat in the beginning of summer is the most notable phenomenon of the first half of the current year. Still the end of season is far and most probably market growth rates will increase and by the end of the year they will amount to ... —... %.
The tendency for insignificant increase of share of bottled water among nonalcoholic beverages still exists. This is due to further decrease in consumption of sweet carbonated water. In other words Ukrainian consumers tends to give more preference to bottled water and juice.

Decrease in consumption of sweet carbonated water is caused by the fact that the consumer chooses healthier beverages which corresponds to the worldwide tendency for the healthy way of life. Most probably this tendency will remain in future, so the segment of high-vitamin functional beverages will constantly grow.

Market segmentation by the type of water

Carbonated water still has the highest weight on the market of bottled water in the structure of sales. According to the data provided by Nielsen in June/July 2007— April/May 2008 the share of carbonated water on the market was ... %, that is ... pct less than for the same period of 2006—2007. It is worth mentioning that the tendency for decrease in consumption of carbonated water became evident few years ago. Following the worldwide tendency for the healthy way of life consumers gradually go over to plain and low-carbonated water. The share of the latest has increased by ... pct up to ... % of the market in June/July 2007 and April/May 2008.
The segment of plain water shows the most positive dynamics. Its share on the market for the above mentioned period was ... %, having thus increased by ... pct.

In general, according to experts` expectations such ratio of carbonated/plain water on the market will remain for long. Very high consumer loyalty to carbonated water in Ukraine will allow the category to retain its market positions in the nearest future. At the same time the share of plain water will gradually increase in accordance with European tendencies. About ... % of bottled water in Europe is plain with low mineralization level. Generally for the last ... years the share of plain water in Ukrainian market has increased by ... —... % per year. Sales of plain water in large containers (...,... and ... liters) which is positioned by the manufacturers as water for family consumption, cooking, hot drinks and other needs will be of relative importance.

Market segmentation by the type of container

In spite of problems with utilization which have already become global, PET-containers still remain the definite monopolist in the structure of sales of bottled water. Its low price and usability made it irreplaceable for the market of beverages. According to the data provided by Nielsen for June/July 2007—April/May 2008 the share of PET-containers in the structure of sales amounted to ... %, having increased in comparison with the same period of 2006—2007 though increased just by ... pct.
In Ukrainian market plain water is sold only in plastic containers. As it was mentioned before sales of plain water segment increase mainly because of family packing. Thus total share of large containers in the structure of sales in the mentioned above period amounted to ... %, ... % of them referred to water in ... L PET-containers, that is ... pct more than for the same period of 2006—2007.
Sales of plain water in ... L containers have increased too. Its share has increased by ... pct and amounted to ... % of bottled water sales.
It is worth mentioning increase in sales of plain water in ... and ... L containers have increased by ... and ... pct and amounted to ... % and ... % of the market correspondingly.

As for carbonated water segment, here ... containers occupy the leading position in sales. Their share in the structure of sales in June/July 2007—April/May 2008 amounted to ... %, having decreased by ... % for the same period of 2006—2007. Decrease in share of sales of water in ... L containers is due to general decrease in carbonated water consumption.
The level of sales of carbonated water in ... L containers remained same, ... % of the market. For this type of container it can be called a positive moment. Sales of water in ... and ... L containers have decreased by ... and ... pct and amounted to ... % and ... % of the market correspondingly, that is due to the tendency for reduction in carbonated water consumption.
It is worth pointing out that only carbonated water is sold in glass apart from plastic. At the same time the share of sales of water in glass is very low, less than ... % of the market, ... %. at present two companies in Ukraine, IDS Group and OJSC `Rosinka` pour water into glass containers but if the products of the former are positioned as premium, the latter sells its water in the average price segment. Apart from Ukrainian water the water imported into Ukraine and sold in glass containers is represented only in premium segment.
It is worth mentioning the increase in sales of low-carbonated water in ... L containers. For the mentioned period sales have increased by ... pct and amounted to ... % of the market.
General tendency for price growth concerned the category of packed water too. Increase in average price in the category for the first half of 2008 amounted to ... %. By the end of the year the average price per liter is expected to increase by ... % (data provided by IDS Group).

Import and export

Export growth and…

Each year a distinct tendency for export growth of packed water is observed in Ukraine. In 2007 import and export volumes were approximately equal (export — ... mln dal; import — ... mln dal) but during the first five months of 2008 balance shifted in the direction of export: ... mln dal against ... mln dal. Such interest in foreign markets shown by manufacturers is due to certain satiety of the domestic market and great decrease in demand for water this year.
Though in terms of value the shift is observed in the direction of import. For five months of this year products for $... mln were imported with the value of exported products being just $... mln, so mineral water was imported at average price of $... per liter* (last year it was $... per liter) and Ukrainian water was sold for export for $... per liter (last year it was $... per liter).

In general from the point of view of export structure there is a tendency for diversification of product markets. Thus, in the past more than ... % of exported water went to Russia but now export share of the northern neighbor is constantly decreasing by volume up to the loss of leading positions. In the first half of 2008 export share of Russian market appeared at the second place for the first time (... mln dal or ... % in export structure), having lost the first place to Panama (... mln dal, ... %). Though Russian export share by value occupies the leading position ($..., ... % in export share). It almost corresponds last year indexes. The average price of water exported to Russia was $... per liter, a little less than in 2007. On the other hand in accordance with the general tendency each liter of water exported from Ukraine to Panama cost just $.... Turkey got down from the second place (2007) and now it occupies the second place by volume (... mln dal, ... % in export share). Though absolute value is expected to occupy the same positions as in 2007. Among long-term tendencies there is still Moldova’s considerable export share by value, ... %, the second place after Russia. The cost of water exported to Moldova amounted to $... per liter. While the share by volume was very small (... th place, ... mln dal, ... %). Another stable tendency was further decrease in USA export share. The USA didn’t enter even the leading ... (... mln dal). Though, on the other hand, the same volume was exported for the whole period of 2007.
Among serious `newcomers` there are Malta (... mln dal, ... %) and Bulgaria (... mln dal, ... %). Speaking about finance Bulgaria is a little ahead of Malta ($... thousand and $... thousand). The share of export from these countries is ... % each.
Among surprises is appearance in the list of the countries, exporting Ukrainian water, Georgia, usually more often seen in import analyses.

Import stability

No substantial changes took place in the import structure if compared to 2007. The greatest share of import, both natural and financial, belongs to three countries: Georgia, France and Russia. France and Russia occupy equal positions, both natural and financial, which can be explained by the competition in the same price segment, premium, which is proved by comparison of prices for the imported products: French mineral water cost ... $ for a liter, while Russian mineral water cost ... $ for a liter. Since the beginning of the year Russian manufacturers imported ... mln. dal (... %), French manufacturers — ... mln. dal (... %). As for the price, France with its $... (... %) slightly outgoes Russia, the total cost of the imported products of which being $... (... %).
The real leader of sales of imported mineral water in Ukraine is Georgia with its ... % by volume and ... % by value. The average price of one liter of water from Georgia was $....

Thus, it is obvious that the tendency of export growth will be observed in future and outlets will remain diversified with approximately equal shares in the first five. The share of the Russian market will not decrease substantially and there is a possibility of appearance of new important outlets (such as appearance of the outlet of the Marshall Islands among the greatest outlets, where ... mln dal of Ukrainian mineral water went, just ... mln dal less than to the familiar market of Moldova. For fair, the campaign against bottled water as a product indirectly affecting the impairment of ecological situation on the earth and advocacy of town water as an alternative to packed water taking place in western countries, will influence the distribution of power in the sector in the nearest future. So far the perspectives for the market of bottled water are rather positive. As for import no changes are expected. Segment premium, in which products from all the three importer countries is present, is rather small and new players can have problems with finding their place here. In other segments the supply of local manufacturers of mineral water is so excessive that even such a tycoon as PepsiCo still has not run a risk of investing money into development of its trade marks of bottled water in Ukraine, though the possibility of it is not denied by the leading market players.

Conclusions

In spite of rather serious decrease of dynamics of bottled water market’s growth in Ukraine in the first half of 2008 there is still a general positive tendency of development. However, this tendency spreads on some countries of Eastern Europe, though Ukrainians still have a long way to go before they get to European customers of water. To get to the average European level each Ukrainian would have to drink three times as much water within a year. Such an essential difference in consumption is easily explainable. The culture of mineral water consumption in Ukraine is now in the stage of formation. Historically in Ukraine and on the territory of the former USSR mineral water was associated with treatment, not with everyday consumption. Besides, consumers` loyalty to sweet carbonated beverages decreases slowly, hereto emergence of new mixed drinks, such as IceTea, amends the situation. Another sign of immaturity of mineral water market is its pronounced seasonality. Thus, Ukrainians consume water mostly to quench their thirst, usually in hot summertime and less often — to cook and make hot drinks.

On the other hand, manufacturers invest much money in promotion of their brands, modernization of plants, approximating the quality of products to the world standards while the price remains very low compared with many other countries. Increase in information awareness of the population, urge towards the healthy way of life, growth of actual income will enable further development of mineral water market of Ukraine.

Concerning perspectives for the second half of 2008, market growth rates are expected to increase, which is due to August heat, as well as slowdown of inflation processes in Ukraine, though in our opinion last year’s level will not be achieved. Redistribution of force among main players of the market is hardly possible. The first three places will remain the same: IDS Group, Coca-Cola Beverages Ukraine Ltd., closed Corporation `Obolon`. Most probably we will not see new brands on the market in the nearest future, though there is a high probability that PepsiCo, having made a serious step on Ukrainian market of nonalcoholic beverages buying the company «Sandora», will try to extend its presence on the market with the help of mineral water. Unlike in Ukraine, in Russia PepsiCo`s positions in this market are really strong: it successfully competes with company Coca-Cola occupying the second place.