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M E M O / N O T E D E S E R V I C E |
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To / Destinataire |
ToChair and Members of the Planning and
Environment Committee / Président et les membres du Comité de
l’urbanisme et de l’environnement
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File/N° de
fichier: ACS2005-PWS-UTL-0016-IPD
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From /
Expéditeur |
A/Deputy
City Manager, Public Works and Services / Directeur municipal adjoint intérimaire, Services et Travaux publics |
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Subject /
Objet |
Bottling City of Ottawa Water: Discussion Paper /
Embouteiller l’eau d’Ottawa, document de discussion
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Date: 13 May 2005 / le 13 mai 2005 |
Background
In recent years, there has been a significant
increase in bottled water use, driven by marketing strategies designed to
convince the public of the purity and safety of bottled water. In essence, the bottled water market is
capitalizing on the health-based benefits of good hydration, access convenience
of bottled water and public concern for tap water quality.
During the 2005 budget deliberations,
discussion evolved from the desire to generate new sources of revenue. One of the ideas that was raised was the
potential to generate profits from the City’s single largest product: “Drinking Water”.
This report will evaluate the opportunity to
bottle tap water for profit in the City of Ottawa.
Discussion
In order to assess proceeding further in the
development of this project, a number of important factors need to be
addressed: the City’s mission, the
City’s skill sets and expertise, the competitive edge of City water, the market
size and potential revenues.
City’s Mission
Beginning with amalgamation in 2000 and
continuing through to the Universal Program Review of 2003 and the Competitive
Service Delivery Reviews of 2004, the City has assessed a number of its
programs and activities in order to evaluate its need to be the provider of
such activities. One of the criteria
used to assess the City’s position is the presence of private companies already
delivering the service in Ottawa.
Simply stated, if a good or service was being delivered privately, the
City should reassess its need to compete with the private sector. At least a few dozen companies are in the
business of providing bottled water.
The business of bottling water for sale would duplicate a business
process already well established in the marketplace.
Skill Sets and Expertise
The City of Ottawa delivers over 365 million
litres per day of a high quality, reliable, drinking water product to its
customers. This drinking water supply
is monitored and reported in over 350 different parameters, of which some 84
have set health-based standards or guidelines.
City water continues to meet or exceed all federal and provincial
health-based water quality guidelines and standards.
The business of selling bottled water includes
sourcing or obtaining good water. But
the business is more about product transport, bottling, packaging, warehousing
and product distribution. It is also
about managing the risk of water contamination by managing stock shelf
life. There are issues about branding
and marketing the product, managing an image, advertisement and promotion. These skill sets are not currently part of
the City’s expertise.
Industry reports[1]
show that up to 90% of the retail cost of bottled water is not related to the
cost of producing or extracting the water.
The cost of actually producing the water is a fraction of a percent of
the retail cost of bottled water. In
other words, the relative value of the City’s expertise in drinking water in
the bottled water industry is negligible.
Municipal tap water is provincially regulated
by the Ministry of the Environment, and is subject to federal guidelines. Bottled water is considered to be a food,
and as such is regulated by Health Canada’s Division 12 of the Food and Drug
Regulations. The regulatory environment
of bottled water is different than the Federal Protection Water Guidelines.
Selling bottled water is a completely different
business line for which the City has no actual expertise. There are no synergies or obvious links
between tap water and bottled water.
None of the players in the bottled water industry are municipal water
providers. They are either
multi-national brand companies (Aquafina, Dasani) or ultra-specialized
companies (Labrador, Naya).
Competitive Edge
The bottled water market is highly competitive,
highly branded and almost saturated.
The effort required to successfully penetrate the barriers to entry into
the marketplace and be sustainable are formidable.
In order to gain a market share, a new provider
of bottled water would have to convince the buyer that its product fulfills the
buyer’s need in some better or special manner.
The new product will be required to demonstrate a competitive edge or
advantage over the existing brands already in the marketplace to obtain a
market share. Our opinion is that the
City offering may be insufficient to alter consumer behaviour to achieve a
worthwhile market share.
Market Size
From a macro perspective, the bottled water
market can be divided in two segments:
the sport bottle (350-700 ml bottle) or the portability segment, and the
bulk container (18 litre bottle) or the water cooler market segment.
The portability segment is identified by the
need for the user to drink on the go, away from home. It consists of sport bottles bought at convenience stores and carried
by the consumer. These bottles are
healthy alternatives to soda cans, sugar drinks and juice boxes of all
types. The market drivers are the
availability and visibility of the product in every corner store and retail
outlet.
The next challenge is distribution and
retailing. To gain market shares and
produce a viable and sustainable volume of sales, the product has to be
available in literally thousands of retail outlets of all types, and the
distribution channels would have to be widespread. In the case of the City, the business would have to be developed
from the ground up. Furthermore, the
City does not have a line of similar products to absorb overhead costs and to
which it could apportion fixed asset costs.
In contrast, when a PepsiCo truck drops off two cases of Dasani water
bottles, it also drops off two cases of Pepsi, two cases of Seven-Up and two
cases of ten other products, hence amortizing the cost over a lot more shelf
space.
The water cooler market segment is a
significantly different market. The
distribution centres are limited to either food supermarkets or point-of-use
delivery. By and large, this market is
regional and so are the competitors.
This market is characterized by house brands, as opposed to the bottling
giants like Dasani and Aquafina.
Potential Revenue
A study of the American Beverage Market
conducted in 2004[2] showed the
following results:
Consumption:
22.6 gallons annually per capita, or 85 litres.
Producer Revenues: 1.29 US$/gallon or 0.42 CAN$/litre.
Based on these figures, under the hypothesis
that the Ottawa market mirrors the global American market:
Total consumption within reach: 127.5 ML.
Total revenues within reach: $53.6 M.
If we assume a 5% market share, and a 5% net
profit, the potential new revenues are $134,000. In comparison, the City generates $200,000 of revenue (profit)
per year selling bulk water to water haulers through hydrants, with hardly any
effort.
Any profit generated would be offset by the
expenditures necessary for bottling, quality testing control, transportation
and vehicle costs, staff resources and an advertising program.
Based on the foregoing, there is a high risk of
a deficit position or too low a return on investment to warrant a business case
to proceed with a City bottled water initiative.
Conclusion
Staff do not recommend that the City engage in
further studies for the bottling of City water for profit.
Original signed by
R.G. Hewitt
cc: Kenneth J. Brothers, Director, Utility Services
Dixon Weir, Manager, Drinking Water Services
Michel Chevalier, Manager, Customer Services and Operational Support
Geoff Simpson, Manager, Financial Services Unit