The Wall Street Journal reports today that Danone is exploring the potential sale of its bottled water business to a Japanese beverage firm. Danone markets a variety of bottled water brands around the world, including 2 of the world's top 5 brands: Evian and Volvic. Why might Danone be considering exiting the business? The paper indicates that Danone has become less enamored with the business because of slowing growth, associated in part with short term recessionary pressures coupled with longer term environment concerns about bottled water. Of course, the paper also indicates that the French government may be concerned about losing national control of a iconic brand such as Evian.
A broader lesson exists here though. Consider bottled water relative to the soda business. Why is the bottled water business not as attractive as the soda business (think carbonated cola)? Clearly, the carbonated cola business has a much higher degree of product differentiation than bottled water, not in tangible terms but in the all-important intangibles. As a result, we see much more price competition in the bottled water business. Moreover, the cola business has much more substantial barriers to entry, particularly with regard to distribution. Bottled water also has a much closer substitute, namely tap water! We could go on. The point is simple: while these two businesses might appear quite similar at first glance, a closer look reveals stark differences in industry structure between carbonated cola and bottled water.