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Coke, Pepsi find water sales tough to swallow

With Americans ending their decades-long love affair with soda, a new bottled beverage is gaining favor: water.

Sales of bottled water are on track to outpace those of carbonated soft drinks by the end of this decade, if not sooner. And companies that traditionally made their money by selling sugary sodas have been riding this trend for years, diversifying into bottled water.

Coca-Cola (KO) owns Dasani and PepsiCo (PEP) owns the Aquafina line of bottled water. But they are running into a problem -- selling bottled water isn't very profitable, and there is a deeply competitive market responding quickly to shifting consumer tastes. You can get a case of private-label bottled water for $2 in some grocery stores, which makes it difficult for a beverage behemoth to get a decent profit in that situation. 

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 "Coke and Pepsi can compete in convenience stores where water is being sold one bottle at a time, but they can't make money on selling cases at $1.99 apiece," John Sicher, publisher of Beverage Digest, told the New York Times last October.

But there is a way to make some money on water -- flavor it, carbonate it and add enough vitamins and minerals to give it a premium flair. Sparkling water in particular has been soaring in popularity, with sales rising by about a third last year to $1 billion, according to Beverage Industry.

Growth in the overall bottled water category is slowing to only 2.2 percent in the same period.

“During the years following the recession, as unemployment decreased and as per capita disposable income increased, more people were buying these luxury water bottles," Jeffrey Cohen, industry analyst for IBISWorld, told the trade publication.

Coca-Cola and Pepsi are pushing into sparkling water, but there are plenty of competitors, including stalwarts like Perrier and smaller players such as TalkingRain, which makes the Sparkling ICE brand. Coca-Cola debuted Fruitwater and sparkling Dasani last year, while PepsiCo rolled out Aquafina FlavorSplash. 

And all of these players are facing an altogether different kind of competition from SodaStream (SODA), which makes home carbonating machines and flavored syrups so people can create their own sparkling waters and sodas.

SodaStream, however, saw shares dive 26 percent after reporting disappointing preliminary quarterly income. The company cited a "challenging holiday selling season" as one reason for its troubles.

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