Troubled waters for Danone

Coca-Cola and Danone formed their bottled water joint venture in the US three years ago, with the French group distributing its iconic European water brands such as Evian through the vast distribution network of the US soft drinks group, thus giving Coca-Cola a foothold in the fast-growing bottled water sector.

But according to reports in the press, the two companies are close to winding up the deal, with just negotiations over what happens to the various brands produced by the venture still to be completed.

The consensus among analysts is that Coca-Cola will buy out Danone's 49 per cent stake in the joint venture, called CCDA, and retain the rights to distribute Evian in the US. But the future of the venture's biggest brand, Dannon, still remains unclear.

Coke is not expected to continue production - it already has its own bottled water brand, Dasani, and likely sees Dannnon as a direct competitor; Evian is less of a threat as it is focused on the premium water segment - but reports in the French press suggest that Danone is keen to continue distributing both Evian and Dannon for at least the next five years.

It is strange that neither company has chosen to comment on why the CCDA venture is to be wound up, given that both companies have ploughed hundreds of millions of dollars into it 2002, and that it seems to be performing within both firms' expectations. And with bottled water sales continuing to grow rapidly as a result of the product's perceived healthiness, it certainly seems odd for Danone to want to withdraw completely, as it has done with other segments such as beer, glass packaging or prepared foods.

Despite its failure to take off in Europe (it is essentially 'purified' tap water, and sceptical European consumers have proved unwilling to pay over the odds for it) Coca-Cola's Dasani brand has outperformed its core cola brands in the US in recent months, registering double-digit growth at a time when soda sales are in decline.

Danone has moved aggressively into the water market in the last five years or so, although the dairy group's relative lack of experience in this field has led it seek joint venture partners in many markets rather than go it alone.

In the home and office delivery (HOD) sector, for example, the company operates through its DA Waters unit, a joint venture with Japan's Suntory group, but here too it has struggled to turn a profit, recently announcing a €600 million charge relating to its investment in the partnership.

A slowdown in water cooler volume growth - in part due to the rising popularity of mains-sourced coolers in many offices - as well as aggressive pricing by its competitors were cited as the principal reasons for the charge, having more than offset the cost synergies generated by the combination of Danone and Suntory's HOD businesses.

Danone said it had set itself the deadline of the end of the first half of 2005 to find a solution to its HOD problem - one likely to be exacerbated by the expected withdrawal of Suntory from the partnership - but it has, as yet at least, made no suggestion that it intends to exit the market it only entered back in 2000. Yet with European HOD sales expected to go the same way as those in the US - mostly backwards - the French group may decide to get out while the going is good.

It is unlikely that Danone will withdraw entirely from bottled water - its biscuit arm is considered more vulnerable, as it has less to offer than yoghurts or water in today's health-obsessed climate - but a withdrawal from the US retail market, and from the global HOD segment, remains a high possibility, leaving the group back where it started in 2000, with its European retail business focused primarily on Evian and Volvic.