Topo Chico will join Coca-Cola's incubator-like "Venturing & Emerging Brands" unit. Will it become the next brand with $1 billion in annual sales?

Coca-Cola has acquired Mexican sparkling water brand Topo Chico for $220 million from its Latin American bottling partner Arca Continental, potentially expanding its sparkling water business in the U.S.

Topo Chico offers sugar-free, calorie-free, and low-additive sparkling water in original and lime flavors. With over 120 years of history, its water source is in Monterrey, northeastern Mexico. In the U.S., the brand's market is primarily Texas (contributing 70% of sales), but it has begun expanding into other states. Topo Chico reportedly has a loyal fan base, with its retro packaging and "niche" positioning attracting millennial consumers.

Matt Hughes, vice president of Coca-Cola's Venturing & Emerging Brands unit (VEB), said Topo Chico's popularity in Texas was a key reason for the acquisition. "We invest in brands that are popular. Topo Chico has passionate fans, has grown quickly in the past, and will continue to see rapid growth," he said. He added that they will respect the brand's original attributes and not expand too quickly.

Topo Chico will join the VEB unit, which has an incubator-like mission to discover and nurture the next beverage with $1 billion in annual sales. In addition to the newly added Topo Chico, Zico coconut water and Honest Tea are also part of this unit.

Image from Topo Chico Facebook

According to market research firm Information Resources Inc., annual bottled sparkling water sales in the U.S. are around $2.3 billion. In the year ending November 2016, the best-selling sparkling waters in the U.S. market were private-label brands from various supermarkets (combined sales of $448 million), followed by Sparkling Ice (from Talking Rain), La Croix (from National Beverage), Perrier and San Pellegrino (both from Nestlé). Topo Chico ranked seventh with sales of approximately $63.5 million.

In developed countries like the U.S., consumers moving away from sugary sodas is nothing new. Meanwhile, another trend is the rise in sparkling water sales: according to Nielsen, sparkling water sales in the U.S. increased by 13% in the year through September.

Coca-Cola's acquisition of Topo Chico aligns with new CEO James Quincey's strategy—invest in more new products and brands, promote low-sugar and no-sugar beverages, and become a total beverage company that adapts to changing consumer habits and achieves balanced growth.

Compared to Nestlé, Coca-Cola's sparkling water business (especially mid-to-high-end sparkling water) is still relatively small. It lacks a sparkling water brand with broad global distribution and high market share like Perrier or San Pellegrino. More than 70% of Coca-Cola's global sales come from its sugary carbonated brands like Coca-Cola, Fanta, and Sprite.

However, Coca-Cola has recently begun to focus on this healthier category: in 2015, it added a sparkling water product to its North American premium water brand SmartWater. In 2002, Coca-Cola acquired a Swiss sparkling mineral water brand, Valser, which entered the Chinese market in the first half of this year: Coca-Cola's Tmall store launched Valser sparkling water products (priced between 10-29 yuan per bottle depending on size and packaging).

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