The Canadian Bottled Water Industry

Domestic Market

From 1999 to 2009, sales of goods manufactured by the Soft Drink & Ice Manufacturing Industry increased 31.7% from a value of $3,062.3 million to $4,032.6 millionFootnote [note 3].

From 1999 to 2009, annual per capita consumptionFootnote [note 4] of bottled water increased 107.3% from 32.7 litres to 67.8 litres. However, per capita consumption decreased 6.6% since 2007 when it peaked at 72.6 litres.

Although bottled water has moved from being a niche or specialty item to a mainstream product, soft drink and fluid milk sales still outweigh bottled water sales in terms of percent share of the beverage market place. Measured by volume (hectolitres), sales of bottled water accounted for 10.6% of all non-alcoholic beverage sales in 2009, according to Beverage Marketing Corporation (Figure 2).

The domestic market continues to be the most important for this industry as demand has grown to the point where there are now more than 100 different brands of bottled water available in Canada, of which 20% are imported. This brand proliferation has resulted in the segmentation of bottled water products into three price categories: premium, regularly-priced and private label brands. By offering consumers a wide range of choices, the industry is better positioned to compete with other beverages in the market place.

Bottled water competes with a variety of other cold beverages, including carbonated soft drinks, milk and dairy beverages, fruit and vegetable juices, soya beverages, energy drinks, relaxation drinks and sport drinks and to a lesser extent with hot drinks such as coffee, tea and hot chocolate.

From 2008 to 2009, total bottled water sales volume declined 3.4% from 23.7 million hectolitres to 22.9 million hectolitres (Table 1).

Statistics Canada data show that the Canadian market for the Soft Drink & Ice Manufacturing Industry totalled $4,499.2 million in 2009, an increase of 56.5% over 1999 when the domestic market was valued at $2,874.4 million.

Value-added is a measure of the value of an establishment's outputs minus the cost of inputs and in the Canadian Soft Drink & Ice Manufacturing Industry it fluctuated from a low of $1,037.1 million in 1999 to a peak of $1,886.8 million in 2009. In 2009, the proportion of value-added to sales of goods manufactured was 46.8% -- higher than the Canadian food and beverage manufacturing industry as a whole for which the proportion of value-added to the total value of sales of goods manufactured in 2009 was 36.4%.

Employment

From 1999 to 2009, employmentFootnote [note 6] in the Canadian Soft Drink & Ice Manufacturing Industry decreased 15.5% from 13,217 people to 11,162 people (Figure 3), reaching its lowest level of 9,323 people in 2003. Between 2005 and 2007, employment increased, but then declined again due to a tightening economy.

The overall decline in employment was accompanied by an improvement in labour productivity for the Soft Drink and Ice Manufacturing Industry from 2005 onward as measured by output per production worker. A reduction in the number of employees and a streamlining of operations along with other cost-cutting measures has improved industry productivity. In making these improvements, the industry better positioned itself to compete in the domestic market against other beverages and in foreign markets such as the U.S.

Investment

Data from Statistics Canada on investment in the bottled water industry is not available. However, the bottled water industry's capital investment is estimated to be in the hundreds of millions of dollars and growing. In order to meet the increased demand in the consumption of bottled water over the past 10 years and to respond to consumer environmental concerns, potential new capital investments are being considered. However, growth rates in new buildings and capital equipment such as bottling lines will be determined by growth in demand in domestic and export markets.

Profitability

Profitability is affected by the prices firms have to pay for inputs to production. In order to maintain profits, manufacturers are under increased pressure to improve productivity and cut costs. For the bottled water industry, increased energy and transportation costs and increased packaging costs have affected the cost of production. The value-added per production worker provides some indication of profitability. For the Canadian Soft Drink & Ice Manufacturing Industry, the value-added per production worker has increased since 2005 from $321 thousand to $369 thousand in 2009. Profitability for the Soft Drink & Ice Manufacturing Industry has improved, especially since 2005 (Figure 4).

Trade Performance

The Canadian bottled water industry serves mostly the domestic market.

From 2000 to 2010, Canada's exports of bottled water decreased sharply from a value of $206.5 million (468.9 million litres) to $22.5 million (109.8 million litres) (Figure 5). While exports initially were on the rise in the early 2000s and peaked at $284.3 million in 2002, the value of exports declined after that period due to several factors. The recessionary period in the U.S. during 2002-2003 caused some decreased consumption of bottled water in that market. In addition, the rising value of the Canadian dollar made domestic product more expensive relative to its competitors in other countries. Negative campaigns and media attention across North America alleging environmental and health affects of bottled water products also caused lost sales to Canada's major market, the U.S. The recent economic downturn since 2008 also negatively impacted bottled water sales in the U.S. and other markets as consumers cut back sharply on discretionary spending (Appendix B).

Although total exports of bottled water have declined, the industry has become somewhat less dependent on the U.S. market. In 2010, the top three export markets for Canadian bottled water were the U.S. (61.3%), Japan (25.3%), and Taiwan (8.4%). In 2007, the share of exports to the U.S. was 76.7%, while the share of exports to Japan was 14.1% and Taiwan held 5.9% of bottled water exports.

From 2000 to 2010, imports of bottled water increased 103.0% from $44.0 million to $89.3 million. While France was the number one supplier of bottled water to Canada throughout this period and accounted for 40.3% of imports in 2010, Italy increased its share of imports to reach 30.2% in 2010, and to a lesser extent the U.S. also made gains and accounted for 18.4% of imports in 2010 (Appendix B).

Exports, which had been in Canada's favour up to 2006, have been surpassed by imports since 2007 when Canada's bottled water global trade deficit was valued at -$17.7 million. Since then Canada's global trade deficit has grown to -$66.8 million in 2010. Canada's trade balance with the U.S., although positive, has declined steadily since 2002 and was valued at $2.6 million in 2010. Competition in export markets has become highly competitive which in turn has recently made exporting much less profitable.

Food and Drugs Act

Bottled water is regulated under the Food and Drugs Act and Regulations as a food product.

Health Canada is responsible for establishing standards for the safety and nutritional quality of all foods sold in Canada. The department exercises this mandate under the authority of the Food and Drugs Act and pursues its regulatory mandate under the Food and Drug Regulations.

All health and safety standards under the Food and Drug Regulations are enforced by the Canadian Food Inspection Agency (CFIA). The CFIA is also responsible for the administration of non-health and safety regulations concerning food packaging, labelling and advertising.

The Food and Drug Regulations set out conditions regarding health, quality, and composition and labelling requirements that would apply to bottled water manufacturers just as they would to other food and beverage manufacturers so that consumers will have confidence in the safety of the products they purchase.

Consumer Packaging and Labelling Act

The Consumer Packaging and Labelling Act, also enforced by the CFIA, requires that pre-packaged foods either imported or made in Canada, must not bear any false or misleading information regarding its origin, quality, performance, net weight or quantity.

Mandatory Nutrition Labelling

On December 12, 2007, nutrition labelling became mandatory on most pre-packaged products. Certain bottled water products are exempt from these regulations if specific criteria are met. Exemptions can be found in section [B.01.401(2)] of the Food And Drug Regulations. Products lose their exemption status if a health claim or nutrient content claim is made.

For more information on Food Regulatory issues visit the following internet address: www.agr.gc.ca/food-regulatory-issues-division.

Natural Health Products Regulations (NHPR)

Natural Health Products Regulations came into effect in Canada on January 1, 2004. These regulations apply to specific homeopathic or traditional medicines found in Schedule 1 of the NHPR or a combination of these ingredients which are represented to diagnosis, treat, mitigate or prevent disease, disorders or an abnormal physical state or its symptoms. These types of ingredients can also be represented as restoring, correcting, modifying organic function in a manner that maintains or promotes health.

Vitamin water is regulated as a natural health product (NHP) by the Natural Health Products Directorate of Health Canada. Due to the broad definition for a NHP there is an overlap between the two regulatory frameworks. In March 2009, Health Canada released a guidance document entitled, "Classification of Products at the Food-Natural Health Product Interface: Products in Food Formats" in order to assist in classifying a product as either a food or Natural Health Product. The format of the product will be a factor in determining what regulations apply to the product and what health claims may be permitted.

The Federal Government regulates which health products can be sold in Canada. Health Canada ensures that natural health products sold in Canada (including vitamin water) are safe and effective under their recommended conditions of use and are labeled appropriately to enable consumers to make informed choices.

More information on Natural Health Products Regulations can be found at Health Canada's website as follows: http://www.hc-sc.gc.ca/dhp-mps/prodnatur/about-apropos/index-eng.php.

Health Claims

A health claim is any representation in labelling or advertising that states, suggests, or implies that a relationship exists between consumption of a food, or an ingredient in the food, and health.

All health claims are subject to subsection 5 (1) of the Food and Drugs Act which prohibits false, misleading or deceptive product representations. In Canada, specific health claims are permitted on foods and Natural Health Products. The terms "food" and "drug" are both defined in the Food and Drugs Act. Natural health products (NHP), which are a subset of drugs, are defined and regulated under the Natural Health Products Regulations (NHPR). These definitions are important in determining the correct classification of a product (i.e. food, drug or NHP) and whether a specific claim is permitted on a product.

Food and beverage products are permitted to make a function claim when used under the specific conditions set out in Table 8-2 of the CFIA's Guide to Food Labelling and Advertising (GFLA). Function claims are claims about the specific beneficial effects that the consumption of the food or a constituent of the food (i.e. nutrient or other component) has on normal functions or biological activities of the body. Permitted variations on function claims can be found in Table 8-2 of the GFLA. Beverage manufacturers may wish to make a new function claim but must have scientific evidence to validate the claim prior to its use on food labels or in advertisements. The Food Regulatory Issues Division of AAFC can provide assistance to manufacturers considering making a new function claim or another claim requiring a pre-market submission to Health Canada.

For more information on regulatory issues or information on making health claims, please contact the Food Regulatory Issues Division.

Environment

With respect to the environment, bottled water manufacturers, like all food and beverage manufacturers, must meet all federal laws (e.g. the Canadian Environmental Protection Act, the Canadian Environmental Assessment Act) and each province's legislation and regulations.

Canadian bottled water companies must also adhere to provincial regulations when taking water at source. Some provincial governments are reviewing their water and environment regulations to improve water management.

In Canada, each province has the authority to regulate its own water standards which are based on national guidelines for Canadian drinking water quality. These guidelines are published under the auspices of the Federal-Provincial-Territorial Committee on Drinking Water, composed of representatives from all provinces, the Yukon, Northwest Territories and Nunavut, Health Canada and Environment Canada. Health Canada acts as Secretariat to the Committee and as such prepares the technical documents which are reviewed by committee members. The guidelines can be viewed at the following website: http://www.hc-sc.gc.ca/ewh-semt/water-eau/drink-potab/guide/index-eng.php

In addition, companies which are members of the Canadian Bottled Water Association (CBWA) must adhere to standards set by the industry including an annual unannounced plant inspection which involves audits of product quality and plant operations.

The Canadian bottled water industry has been involved in implementing a Hazard Analysis Critical Control Point (HACCP) system which was funded by Agriculture and Agri-Food Canada's Canadian Food Safety and Quality Program (CFSQ). HACCP is an internationally recognized system in which critical points in a process are identified and controls are put into place to ensure food safety hazards are eliminated.

Challenges

The Canadian bottled water industry faces a number of challenges. These include increasing transportation and packaging costs related to the higher price of petroleum, pricing pressure from private label products, the demands of large grocery chains in order to gain store listings, competition from imports and declining exports due to the increasing value of the Canadian dollar and a declining economy, and recent negative media attention. These factors impact upon the profitability and growth of the industry moving forward.

The concentration of major retail chains has continued to be a challenge to the bottled water industry and has resulted in a higher degree of competition for shelf space. For water bottlers, the domestic market will likely continue to be the most important market for the foreseeable future. The Canadian market is small, but sophisticated, and extremely well served which means that competition will continue to be strong.

During the past decade, the growth of warehouse club stores that emphasize value, as well as the increasing concentration of the distribution sector in general, have increased pressure on manufacturers to reduce prices and focus on efficiencies. Furthermore, the introduction and increasing prevalence of private or own-label products by retailers have further pressured manufacturer margins and increased retailer leverage. Although making goods for private label leaves retailers in control of the "brand equity" resulting from consumer loyalty and leaves lower margins for manufacturers, it has provided real growth opportunities for some small- and medium-sized manufacturers without requiring the expenditures needed to launch their own brands. These market forces will continue to be a challenge in the future.

Although retail concentration has increased over the years, bottled water enjoys a wider variety of distribution channels than many other processed food products channels that they must continue to exploit. The industry distributes its products through supermarkets and grocery stores, drug stores, convenience stores, gas stations, mass merchandisers and warehouse outlets. Restaurants and fast-food chains are also major purchasing points for bottled water. Vending is another distribution channel for bottled water, making it available to consumers at strategic locations.

Increased competition from other non-alcoholic beverages, such as energy drinks, sports drinks and relaxation drinks, has provided consumers with more beverage choices. Changing consumer preferences and demographics, with a larger segment of older consumers who are increasingly concerned about their own health, as well as concerns about obesity have resulted in an increased demand for new products. The bottled water industry is well placed to respond to consumers' demands for new products. The industry has also reduced prices, cut costs and improved efficiencies to remain competitive in the marketplace.

Higher oil prices have resulted in increased packaging costs (PET plastic) and higher transportation costs and distributions costs. In response to these price fluctuations, the industry's bottling and distribution systems have become highly automated and very efficient.

Regulatory Challenges

Revisions to Division 12 of the Food and Drugs Act and Regulations, which defines standards for bottled water and ice, are underway in consultation with the bottled water industry. Health Canada and CFIA will jointly publish and post online the government response to the consultations which will outline the intent going forward, and the regulatory process will follow. The summary of consultations and stakeholders' comments which had been received as of November 2008 is posted on the following website: http://www.hc-sc.gc.ca/fn-an/pubs/securit/water-eau-eng.php.

Under the authority of the Codex Alimentarius Commission, international standards for bottled water are being developed. The Codex Alimentarius is a collection of internationally recognized standards, codes of practice, guidelines and other recommendations relating to foods, food production and food safety. These texts are developed and maintained by the Codex Alimentarius Commission, a body that was established in 1963 by the Food and Agriculture Organization of the United Nations and the World Health Organization (WHO).

With respect to provincial regulations, bottled water companies may own or lease land with a source and, in some provinces require licences, subject to renewal, to take water. These companies monitor their sources but have neither the responsibility nor the ability to influence water protection beyond their sources from surrounding areas.

Bottlers are vulnerable to ground water contamination that may seep into their sources from surrounding areas. They are also vulnerable to changes in usage policies and licensing requirements by provincial governments.

The Province of Ontario enacted the Clean Water Act on July 3^rd, 2007. This Act requires water bottlers using more than 50,000 litres per day to obtain a "Permit To Take Water". The Province has proposed a levy, charging water bottlers, canning companies and other heavy commercial water users $3.71 per million litres of usage to cover a portion of the costs of the programs required to manage water for the environmental, social and economic benefit of Ontarians.

Environmental Challenges

With respect to the environment, water bottlers, like all food and beverage manufacturers, must meet all federal laws (e.g. the Canadian Environmental Protection Act, the Canadian Environmental Assessment Act and each province's legislation and regulations.

Environmentalists are concerned about the extraction of water from lakes, streams and wells for shipment elsewhere. They feel that over the long term, extraction from these sources may reduce the water table in the vicinity. This is one of the issues which alarms residents when bottlers arrive in their area. The Canadian bottled water industry is an efficient user of its water source. The industry uses only 1.3 litres of water to make one litre of bottled water in comparison to other beverage manufacturing industries which may use several litres of water to make one litre of a particular beverage.

Another environmental issue that bottlers have faced is waste resulting from packaging after it has fulfilled its intended purpose. Waste reduction is important everywhere and particularly for large urban centers that are rapidly using up their landfill capacity and are experiencing difficulty and expense in finding, developing and ultimately being able to use acceptable new landfill sites. The reduction of materials in secondary packaging (e.g. cartons) can potentially provide both financial and environmental benefits. In the food and beverage manufacturing industry in general there are some difficulties with reducing bulky packaging. Plastic and cardboard can help protect food during transportation. There is a trade-off between the volume of packaging materials needed to identify brands and increase the attractiveness of a product on the one hand, while minimizing packaging requirements from an environmental and cost control point of view, on the other hand.

The bottled water industry has reduced the amount of plastic in its PET bottles which has contributed to lower energy use and lower greenhouse gas emissions. Many water bottlers manufacture their own PET bottles at their bottling facilities, saving energy that would be required to ship empty bottles into their plants. Some bottled water companies use recycled PET (rPET) in their packaging. The large format polycarbonate segment of the industry re-uses its bottles on average 45 times before recycling them.

Packaging materials used by the industry, including cardboard, plastics, and aluminum, are either recyclable or re-usable. Bottle deposit laws and other regulations to ensure recycling and re-use of packaging are a significant regulatory concern to the bottled water industry. The industry has been actively involved in provincial recycling efforts throughout the country and is an active participant in environmental stewardship organizations across Canada.

Recycling regulations on containers vary from province to province. In virtually all Canadian provinces and territories, PET containers used for beverages are collected for recycling through deposit return programs. In some jurisdictions, e.g., Manitoba, Saskatchewan, Alberta, British Columbia, and the Atlantic provinces, consumers pay levies on beverage containers at the point of sale to cover costs of their respective container recovery system. In some provinces/territories, a deposit is charged and a potential refund of 5 to 30 cents provides an incentive to consumers to return the container to a collection center. All packaged beverages (except those consumed 'on-premise', for example at a restaurant or other such away-from-home location) are included in such programs. In other jurisdictions, containers are collected in a Multi-material Collection (e.g. curbside blue box programs) system as an alternative to being restricted on the choice of containers. According to the Canadian Bottled Water Association (CBWA), 97% of the population in Canada has access to recycling facilities, and PET recycling rates range from 60% to 85%.

According to Stewardship Ontario, plastic water bottles are the third most recycled product in Canada, behind newspapers and aluminum. They are also the third most valuable item in a recycling program and, when recycled, are used to make playground equipment, automobile parts, carpet, fleece clothing, sleeping bags, etc.

The Canadian beverage industry, in partnership with governments, has initiated Public Spaces Recycling to capture recyclables that are abandoned by consumers in parks, recreational facilities, transit stops, public schools, and gas stations. This initiative has enjoyed success in the provinces of Nova Scotia, Quebec, Ontario, Manitoba, and British Columbia.

According to a March 19, 2008 press release by Refreshments Canada, "PET" beverage containers (including water bottles) account for 0.3% of solid waste generated in Canada.

Some bottled water companies have undertaken initiatives to reduce their carbon footprint. These include improved energy efficiency and the use of alternative energy sources in manufacturing facilities, and reduced fuel consumption with improved delivery routes and upgrades to distribution vehicles.

Supply Chain Management

Like other food and beverage manufacturers, the bottled water industry is using GS1 Canada. GS1 Canada is a member organization of GS1, a global organization with over 100 members with the goal to develop standards and solutions to improve supply chain management. Canada's previous national electronic product registry/catalogue known as ECCnet, developed by the Electronic Council of Canada has merged with and is now administered by GS1 Canada. The registry facilitates E-commerce by ensuring the integrity of product data using international standards of data exchange. As part of its E-commerce development, food and beverage manufacturers are developing the capability to track and trace their products throughout the food chain to specific batches at manufacturing plants and will eventually be able to trace batches back to their origin.

Opportunities

The industry expects growth over the next five years as consumers become more concerned about the quality of municipal water. Recent media attention on aging municipal water infrastructure has raised some concerns for consumers of tap water. In addition, recent processing innovations in the industry may attract additional consumers to this product category. Functional products such as flavoured water, vitamin water, and oxygenated water have generated new interest in the category. Increasing obesity concerns will also continue to attract consumer interest in bottled water.

More competition is expected in the market as new age and functional products increase their appearance in the Canadian market. The Canadian market is still considered to be small and, because domestic bottled water consumption is well behind U.S. levels, growth is anticipated. In 2009, per capita consumption in the U.S. was 104.48 litres.Footnote [note 9]

According to Euromonitor International, bottled water sales in Canada are expected to reach a volume cumulative average growth rate (CAGR) of 1% over the forecast period of 2010 to 2015. The industry is well positioned to respond to continuing consumer demand for healthier beverage products. The industry is also actively involved in environmental improvements in the packaging and distribution of its products.