Although it has achieved great success in other part of the world, the Danone and its Evian bottled water brand are facing significant pressure while handling the U.S. market. After the cola giants Coke and Pepsi set up their own bottled water brands, Dasani and Aquafina, Danone is the number four in the U.S. market with only a 3.5% market share in 2001.
Danone is facing two main problems when dealing with the U.S. market. Firstly, the U.S. customers do not accept the premium on the Evian brand, they care less about the type of the bottled water and prefer cheaper water like Aquafina or Dasani. Then, the distribute system in U.S. market is quite different from that in Europe.
To carry out a strategy for its further business in the U.S., Danone made the first agreements in April 2002 with one of its most powerful opponents Coca-Cola to let Coke take charge of the Evian brand in North America. Coca-Cola will help Danone within the distribution and market performance, and will get incentives in return of the annual sales growth of Evian bottled water. The second agreement carried in June 2002 is mainly about the two companies announced a joint venture. Danone will contributes license for use several value brands and production facilities, while Coca-Cola pays cash for ownership interest and provide management. Coca-Cola needs to help achieve a guaranteed profit level; however, the penalty is not clear.
The alliance of the two companies provokes debates about whether it is a way to improve sales condition or it is a sign of Danones' unofficial quit from the U.S. bottled water market. What is the right decision for Danone remains to be proved.
Why Evian's market share in the U.S. kept falling after the cola giants start their bottled water brands in the late 1980s?
The Japanese strategist Kenichi Ohmae developed the 3C's Model indicated three main players that are necessary for successful business strategy: the corporation, the customer, and the competitors. (Kenichi Ohmae, 1982)
When mention the competitors, Coke and Pepsi who sell purified water that avoid extra handling and transport costs, enjoy much lower cost than Evian does. Meanwhile, their distribution systems are well developed thanks to their successful operating on other beverage such as cola. The result is that they can have their cheaper products on more shelves quickly. What is more, as Coca-Cola, Pepsi and Nestl are all well-known companies throughout the America, not only their products' quality are guaranteed, but also their bottled water brands do not need too much promotion.
For the customer part, in the European market where Danone has achieved great success, the customers understand the differences between glacier-sources water and purified water or tap water. They are willing to pay the premium price to purchase the consistent quality and taste of bottled water. But the U.S. customers seem to ignore the classifications of bottled water, and they are extreme price-sensitivity, their first choice is often the cheapest water on the store shelves.
Obviously, the Danone Corporation itself has done quite few when facing the hard situation. The company was not well prepared for the entry of cola giants at the beginning. The former achievement within other part of the world especially in Europe makes the company blind worship its "Danone business equation" and refused to change its business strategy to fit the U.S. market. Also, Danone did not introduce its innovative products which are very popular in the European market, and few marketing activities such as advertises are mentioned to introduced to encourage the U.S. market accept the "glacier premium".
Positive and negative sides of Danone's strategy of running business on its own in the U.S. market.
Generally speaking, one advantage of "going it alone" strategy is it will help keeping the company's national, historical and family pride. The following will analyse the pros and cons of two parts of this remaining one single business entity strategy respectively.
The first part is to admit that the Evian brand is not a U.S. market leader but a niche product which is a high-end premium bottled water with the label of "health". As the U.S. bottled water market determines the market leader by price and logistics, Evian has to make full use of its nature of unique pristine qualities to provide higher-margin product for specialized customers who understand and appreciate the price premium of bottled water which has better resource and quality. Such customer can be created by purposeful marketing and advertising. Though the group size of these customers might be not so big, the sale profit can be guaranteed by the higher sale price. Clearly, segmentation will help the company focus its strategy but the development of broad-brand equity might be inhibited.
The second part is about to place its locally-sourced spring water compete against the "Big Three" of the U.S. bottled water market in the mid-market which has high sale volume and is price-driven. This plan sounds a good way for Danone to get the lost market share back in the U.S. The defect of this strategy is that large sum of investment need to be paid for acquiring the production facilities and distribution systems, the cost-recovery, however, would take a very long-time. Since the result of compete against Nestl and cola giants in the U.S. market are not so lucidity or even optimistic, this plan is unsuitable for Danone. Besides, manage large number of new employees for production and distribution would be another problem for the company.
The effect of Danone give up the whole U.S. bottled water market.
The impact of keeping Evian brand only as a niche player in the U.S. market has been cited before as only a smaller group of specialized customers will be considered as target, and Evian will be redefined as a high-end premium bottled water in the market.
There are many other ramifications of Danone's getting out of the U.S. market.
Firstly, since there is no report of loss in the American market, it keeps earning money for the company though not as much as other market does, abandon the U.S. market means the company will lose the market share and profit from the market.
Secondly, the company has to deal with assets and employees that will no longer working for the corporation. Since there are only a few potential buyers for these assets, powerful buyers can minimize their cost of purchase. Thus the company may suffer a sizeable loss on that.
Thirdly, leaving the U.S. market might be a negative signal to other markets and its stakeholders that the company is unable to handle such a profitable market. The direct result may reflect on its share price which will experience a significant fall. What is more, the exiting strategy will blemish the value and goodwill of both Evian brand and the Danone Group and it is not good news for the company's business in other market.
Finally, once exit, the re-enter to the market will be much tougher. While remain in the market helps keep the long-term opportunities for the company, it is really difficult for any external company to find a chance to get in and earn money.
Comment on the joint ventures with Coca-Cola.
Clearly, the joint ventures with the cola giant have many advantages. To be specific, since the Danone's strategy and market method cannot meet the needs of the U.S. market, shifting the marketing and distribution control to a company that has more success experience is sensible. With the help of Coke with the marketing and delivery, Danone's products can expect a sizeable increase in sell. Besides, as Coca-Cola take charge of those Danone's business in the America, the saved resources including marketing and managing expenses and human resources can be put into other markets which are more likely to gain success. In addition, the Evian's brand image of "high-end" will be maintained according to the marketing strategy of the joint ventures. In other words, to remain the corporation and its products in the U.S. market with the sale volume growth guarantee provided by Coke is a safe game for Danone.
However, there are some unreasonable factors within the joint ventures. First, as is mentioned in the case, no punishment of Coke's unable to achieve the sale promise is unclear, what if the Danone products keep losing market share? Second, as Coca-Cola gets 51% of the ownership, Danone's suggestions might be so weak while making important decisions. Besides, there seems to be an overlap between Coke's bottled water Dasani and Danone's Danone brand spring water, so it is doubtful the cola giant is willing to accomplish the sale growth of its joint ventures partner's at the expense of its own products.
In sum, the cooperation with Coca-Cola is the most ideal way for Danone when handling the U.S. market, but the result might not so ideal because of those internal and external(i.e. economic and market changes) uncertainties.
- Ohmae, K. (1982). The mind of the strategist : the art of Japanese business. New York: McGraw-Hill.
- Kotabe, M & Helsen, K. (2008). Global marketing management. Hoboken, NJ: John Wiley & Sons, Inc.