How Sparkling Water Caught On in China | Market Inventors

A QDaily series on things that suddenly become popular: we trace how each one spread and what set off the buying.

Start with the numbers.

For the past five years, Nestlé's two sparkling water brands, Perrier and San Pellegrino, have grown their sales in China by more than 30% a year on average, according to figures Teresa Leong, Nestlé's international brand marketing manager, gave QDaily. The bottled water market as a whole grew about 20.5% a year over the same period.

On Yihaodian, the online retailer, sparkling water sales in 2013 were nearly three times those of 2012. Growth slowed in 2014 but still ran at 50% to 70%, Zhao Jiayu, Yihaodian's senior product director, told QDaily. And this July, during a Guinness World Record promotion for imported water held to mark Yihaodian's sixth anniversary, imported water sold seven times its usual amount, with sparkling water a large part of that.

In March this year the market research firm Mintel surveyed 2,941 people aged 20 to 49. Half had drunk sparkling water in the previous six months: 34% had drunk the unflavored kind and 30% a flavored one, such as lime.

Sparkling water has been sold in China for nearly 20 years. "It still makes up only about 1% of the bottled water market, but consumption is growing fast in China," said Xu Ruyi, Mintel's research director for China. Mature categories such as carbonated soft drinks, by contrast, now grow at single-digit rates.

If sparkling water's moment in China had a starting date, Zhao Jiayu thinks it was last summer.

You may remember the dead pigs found floating in Shanghai's Huangpu River last March, and the report in May by the Beijing Times that Nongfu Spring's bottled water failed to meet standards. The cause of the first was never settled, and the second turned into a public shouting match. "But one drinking-water scare after another made consumers pay attention," Zhao said. Last summer, she said, sales of all imported water on Yihaodian rose, not just sparkling water.

Those scares were a trigger. The underlying causes run deeper: more than ten years of slow groundwork in the Chinese market, a growing class of young, middle-class consumers who want to live healthily, and years of effort by global brands and retailers to build the market.

Reason 1: Getting onto more shelves, especially in retail

"Chinese consumers know relatively little about naturally carbonated water brands, so from our side at Nestlé, the answer is to get the product onto as many shelves as possible," Teresa Leong said, retail shelves above all.

Like cheese, whose rise in China QDaily has covered, sparkling water first went through high-end restaurants, sold business to business. In retail it was mostly limited to imported-goods supermarkets and a few large hypermarkets. Restaurants did the early work of introducing it to customers. A Mintel report says the number of restaurants in China has grown 107% a year since 2008, and 61% of people order sparkling water when they eat out.

Nestlé followed by spreading into more channels: coffee chains such as Starbucks, bars, more hypermarkets, convenience stores and e-commerce. Take Perrier. "High-end restaurants and bars are now mainly about building the brand's image and recognition. High-end supermarkets and hypermarkets give us steady sales growth," Teresa Leong said. "Convenience stores and e-commerce are the new retail channels, and e-commerce is the one we care about most right now."

Retail, including hypermarkets, supermarkets, convenience stores and e-commerce, now accounts for the largest share of Perrier's sales in China. The pricier San Pellegrino still sells mostly through restaurants. "That has to do with how they taste. Perrier is more strongly carbonated, which suits young people out to relax and have fun. San Pellegrino's bubbles suit the palate after a meal and help digestion, and it costs more."

Reason 2: E-commerce pushed hard, and brands even changed their packaging for it

"E-commerce is our fastest-growing retail channel, and the new channel we most want to develop," Teresa Leong told QDaily. Nestlé began working directly with Yihaodian about two years ago.

As Zhao Jiayu remembers it, Yihaodian was already selling sparkling water when it launched in 2008. Back then most customers bought single bottles, apparently just to try it. Now the best sellers are four-packs and six-packs, and customers typically reorder about once a week. This summer had few hot spells, yet some brands still sold out. "We stocked roughly 2.5 times last year's sales volume," Zhao said.

At first Yihaodian bought all its stock from distributors. In 2012 it began dealing with brands directly, Nestlé among them, and as sales grew it gained more say. Packaging shows this most clearly. "The four-packs and six-packs came out of our talks with the brands," Zhao said. Yihaodian sells mainly to households, which prefer multi-packs, and single bottles cost too much to ship. Yihaodian and the brands then designed the four- and six-bottle boxes together and tested them to survive an 11-meter drop without breaking. "Both we and the brands put a lot of thought into it."

The first sparkling water Yihaodian sold all came in glass, because the category started out in restaurants, and imported Perrier and San Pellegrino are bottled in glass. "Glass isn't really suited to e-commerce. We asked Nestlé whether they made plastic bottles overseas, and they said yes," Zhao said. So Yihaodian worked with the brands to bring in plastic bottles, which cost about half as much as glass and sell for about half the price. Not every customer wants the same thing: some are used to glass and feel plastic is a step down. "The product inside is exactly the same, but we respect customers' choice. We sell both, and for now plastic is a supplement."

The range keeps widening. Yihaodian now carries nearly 20 kinds of sparkling water, and Perrier, San Pellegrino, San Benedetto and Paradiso, new this year, all sell well. "If a supplier ships 500 containers a year to China, we probably take about 60% of them."

Reason 3: It won over young consumers who want to live healthily

With more money to spend and more concern for their health, more young consumers are looking for something other than soda. "But they still like the kick of the fizz, so sparkling water makes a good substitute," Xu Ruyi said.

Dolly, who works in marketing for a beer brand, is a typical example. She is a sparkling water fan. By her account, she started drinking it in 2008, when she gave up soda and found she didn't like plain purified water. One scene stuck with her: at Shanghai Fashion Week that year, an elderly woman told a waiter who had handed her a bottle of purified water, irritably, "I don't drink any water without bubbles." Dolly was puzzled at the time. Only later, traveling abroad, when waiters routinely asked "still or sparkling?", did she realize how common sparkling water is outside China. Her favorite brand now is Perrier, mostly the original and lime flavors, and she always keeps some at home. When the mood takes her, she adds it to espresso to make a sparkling coffee, or uses it in cocktails.

"The other reason is that it's so easy to buy now. It's everywhere," Dolly said. You used to have to go to an imported-goods supermarket; now Starbucks, FamilyMart, Yihaodian, JD.com and Tmall all sell it.

Plenty of people have taken it up the way Dolly did. Most of Yihaodian's sparkling water buyers are between 22 and 40. "This group earns relatively well and spends freely. Most have traveled or lived abroad, and they care about quality of life," Xu Ruyi said. Drinking sparkling water lets them enjoy an upscale lifestyle and tell the people around them that they are the kind of person who cares about quality of life. That explains why Nestlé never sells Perrier and San Pellegrino on what they do, only on the lifestyle they stand for. "Our target audience is young people aged 20 to 35. People that age like fashionable, trendy things and have their own idea of how they want to live, so we want our ads to feel relaxed and fit that lifestyle," Teresa Leong said.

Reason 4: The big brands are spending more on marketing

On July 25, Perrier launched a web and mobile game called "Release to Win." Players pop bubbles, and each bubble hides a chance at a prize. Besides Perrier itself, the prizes include custom notebooks, glasses and phone cases, along with experiences such as private photography lessons, DJ and music production courses, and personal styling sessions. Whoever pops the billionth bubble wins the grand prize: a film made from the winner's own story, shared on Perrier China's official Weibo account. The game runs until September 5, and in the meantime you may see print ads for it in the Beijing and Shanghai subways.

This is the first ad campaign Nestlé has made for Perrier aimed at China, and it hired Ogilvy Shanghai to create it. According to Teresa Leong, Nestlé and the agency spent nearly two years on consumer research for it. The game targets Chinese white-collar workers, Perrier's core customers, who feel hemmed in by pressure at work and in society, as if each were trapped inside a bubble. Playing the game lets them break out for a moment, the way you pop a bubble.

"We've promoted sparkling water before, but only through distribution, with partners like Yihaodian. We started promoting it in the media two years ago. We waited to advertise because we felt distribution hadn't yet reached the level we needed. Now both distribution and acceptance among Chinese consumers are in a good place, so it's the right time to spend." Nestlé plans more marketing in the future.

Retailers such as Yihaodian are also starting to teach consumers about the category. Zhao Jiayu plans to run basic explainers in 2015 on how to choose sparkling water and the different ways to drink it. Yihaodian is also running more promotions with brands, plus online and offline events, to win a bigger market.

One More Thing

As a share of bottled water, sparkling water is low across Asia. Indonesia is among the higher at 5%, Japan is at 4%, and South Korea, Malaysia and China are all around 1%. In some European and American countries the share reaches 15% to 20%. Mintel's data show the share is rising in the US too: from 2012 to 2013, sales of sparkling water and plain water rose 63.9%, and Mintel forecasts that US sparkling water sales will grow by $500 million between 2013 and 2018. A rough estimate using the 1% share puts China's sparkling water sales in 2014 at about 700 million yuan.

Sparkling water is catching on, "but we have to admit that ordinary Chinese consumers still know little about the difference between naturally carbonated water and artificial soda water. Sparkling water is one category within premium water, and it has a lot of room to grow," Teresa Leong said. "We'll move into more second-tier cities with strong spending power, such as Shenyang and Chengdu. Chinese consumers have already embraced many things that were never part of their lives before, like coffee and red wine. So with sparkling water, we have the patience and the confidence to wait."

Cover image from prezi