Nestlé stocks up its fridge with £370m deal to buy water coolers supplier

The Swiss food giant Nestlé demonstrated its thirst for global water domination yesterday by buying Europe's leading supplier of water coolers for €560m (£370m). Powwow joins Nestlé's fridgeful of water brands, which include Vittel, Perrier and San Pellegrino.

The deal, clinched at a record price of nearly five times last year's sales, helps Nestlé to accelerate away from its main European rival Danone in what one analyst has dubbed "the global water wars".

It also turns up the heat on Coca-Cola and Pepsi, the world's largest carbonated soft drinks companies. Faced with more discerning consumers, the duo have jumped at the chance of fattening up their bottom lines, rather than their customers, by moving into water and selling what has become the industry's fastest-growing segment, both in volume and profits.

Powwow, Europe's leading brand in the home and office delivery (HOD) market, was snapped up from Hutchison Whampoa, a Hong Kong conglomerate, which will use the cash to soften the financial blow of launching 3, Britain's first third-generation mobile telecoms business. It takes Nestlé's share of the European water cooler market to 35 per cent – streets ahead of Danone. Analysts at Dresdner Kleinwort Wasserstein said that Europe provided "by far the greatest global growth opportunity for HOD water". The category accounts for just 3 per cent of the total European water market compared with a global average of 30 per cent. This extra platform for growth comes when sales of the Swiss group's traditional confectionery business are flagging.

With a retail value of £1bn in the UK alone, the bottled water market has become the Holy Grail for food and drinks companies. They cannot ignore global annual growth rates of more than 10 per cent – or as much as 13 per cent in developing countries. For the US drinks giants, the explosion in water sales is vital to counter the softer growth of carbonated soft drinks, which has recently slowed to around 2 per cent growth from around 7 per cent achieved during the Eighties.

Cynics may scoff at the need to pay money for something that we can get free from any tap, but drinking bottled water is the one trend from the Eighties that never went out of fashion, even if Perrier, the original designer water brand, did.

Rita Clifton, chairman of the brand consultancy Interbrand, puts the popularity of water down to a "powerful triangle [of] health, image and purity". Customers are literally lapping up marketing campaigns from the likes of Danone and Nestlé that have seen sales soar on the back of revitalising older brands by simply changing the packaging, or adding extra minerals or flavourings. She adds: "Investment behind water brands may be about image and perception but no one is marching consumers into stores to force them to buy these products." The water market can be split up into three main types: spring, mineral and purified. Andrew Wood, a food and drink analyst at Sanford C Bernstein in New York, says the distinction between these types of water is key in certain markets.

For example, in mature European markets, consumers pay more for spring and mineral waters (which are bottled at source, generally from an underground spring) than for purified water (which can bottled anywhere). But in Asia and other emerging markets, customers prefer purified water because they may not trust what comes out of the ground.

In the US, the world's most valuable water market, price and brand awareness usually win out, Mr Wood says. Hence the two best-selling bottled waters last year in the US were the purified brands dreamt up by Pepsi and Coca-Cola – Aquafina and Dasani.

Although Nestlé owns 72 bottled water brands, it believes the future of its global water business lies in the purified brand it concocted from scratch, Nestlé Pure Life. A spokesman for Nestlé Water, which contributes around 10 per cent of the mighty Swiss group's sales (that's the same as coffee), said that with luck Nestlé Pure Life would eventually become as widely known and sought after as Nescafé, long synonymous with coffee in the developing world. "We are convinced Nestlé Pure Life and Nestlé Aquarel [a European spring water brand] will be the flagships of the company," the spokesman said. Meanwhile, Coca-Cola's European head of new beverages, Robert Foye, is working on quadrupling its sales of water in Europe by 2006, by which time he hopes it will represent 10 per cent of the group's total European business, up from 1.5 per cent today. Coke may still be sore at letting Pepsi get a head start in the US market – its Dasani only came on the scene in 1999 whereas Aquafina was launched in 1994 – but it has not tarried in making up for lost time. Initiatives such as selling Malvern Springs, its UK spring water brand, through its Coca-Cola vending machines will certainly help to achieve its goals.

While water sales look certain to soar exponentially, advertising experts believe it will take a little longer for groups to amass the same degree of brand loyalty that dominates the rest of the fast-moving consumer goods market. Evian's attempt to associate itself with detoxing aside, Nick Howarth, managing director of HHCL/Red Cell, a brand consultancy, warns: "It will be a very difficult market in which to create genuine product differentiation." Let the water wars commence.