The road ahead for the bottled water industry will require players to be nimble footed and market savvy
With the market inundated with several mineral water brands, industry experts predict some flooding out in the bottled water industry. Masafi bottled water has already changed hands from National Beverages to Matrah Cold Stores. Meanwhile, National Beverages has launched Dima. A host of new brands from the UAE has also entered the market.
With close to 25 players in the market, bottled water segment is witnessing a phase of unprecedented action. The industry sells spring water, mineral water, treated water, desalinated water and more as bottled water. But the moot question is whether this quest to quench the thirst of the desert nation will yield the desired results for all the players in the market.
Fragmented market
The five-gallon segment itself boasts of 12 local and eight players from the UAE. As competition intensified, most companies have seen their margins drop. Saibal Sen, general manager, National Mineral Water, says, "Like most FMCG products, the industry works on high volume and low margins."
The entry of Aquafina is seen as a turning point for the business. The brand, since its entry in January 2004, has taken the bottled water market by storm, thanks to Pepsi's unmatched reach. Pepsi, with close to 80 per cent market share in the beverages category, has an enviable presence in Oman. To take a specific example, Pepsi has 8,000 coolers in Oman, more than double that of any of its rivals.
Backed by a strong distribution network, Aquafina has raced to become the market leader in a short span of time. While there are no official numbers, market estimates peg Aquafina's share at around 25 per cent. Pepsi's ability to market its products as a package gives Aquafina an edge in negotiating with retailers ranging from Carrefour to a neighbourhood grocery store.
Rethinking basics
As the market gets more competitive, most distributors realise that the rules of the game are changing. Sen says, "With one player being so dominant, we have to recognise that things are going to change." National Mineral Water which markets four brands - Tanuf, Jabal Akhdar, Salsabeel and Assaha - is undergoing a complete rethinking of its marketing, communication and packaging strategy.
Even the five-gallon trade, which was seen as markedly less cluttered than the small pack size is also in for change. For instance, Oasis Water Company, which operates exclusively in the five-gallon segment with an eponymous brand name is now looking at entering the small pack size market later this year. Nauzer R Nowroji, general manager, Oasis Water, says, "We felt the cost of packaging smaller bottles was economically unviable, but now we are rethinking our position."
With the number of players increasing, cosmetic changes are in the air. The packaging has under close scrutiny, as players have realised that it is a key component in attracting customers. Dima, the latest entrant, has launched its bottled water in an unconventional PET bottle. Ashish Sethi, CEO, National Beverages, says, "We have come up with a design which has convenience and good looks rolled into one."
Distribution focus
Bottlers and distributors are also taking a hard look at one of the most important components of the trade - distribution. It is a business where reach is a critical factor. Most companies have been striving to have a pan Oman coverage. Berthe Zeeni, trade marketing manager, Coca Cola, says, "Arwa is distributed through our fleet of trucks via seven depots serving 7,000 customers across the sultanate by a well-trained and professional sales team."
National Mineral Water has established stocking and distribution centres at seven places. National Beverages distributes Dima through a fleet of 60 trucks plying twice a day. The latter has increased its fleet strength by 20 per cent recently.
Apart from being the backbone of the trade, distribution is the highest cost component of the business. Nowroji estimates that in this business, the manufacturing cost is 25 per cent, but the distribution cost is as high as 50 per cent. And with the diesel prices going up by 46 per cent, most distributors and bottlers are struggling to realign their costs. Biju George, market mana-ger, Matrah Cold Stores, says, "As soon as one moves out of Muscat, people demand cheaper water while distribution cost increases for every additional kilometre that we traverse." Compared to UAE or Kuwait, Oman being geographically a larger country adds that much to the distribution costs.
Realising the importance of keeping distribution costs under control, most companies have been working on rationalising overheads. National Beverages has mapped and realigned the productivity of its vehicles. Sethi says, "We are trying to cover more retailers on every trip that a truck makes. Secondly, the drop size per trip has also been increased." The players in the five-gallon segment like Oasis and Salsabeel are making sure that all their trucks going into the interiors of the sultanate come back with empty bottles.
The trade operates at two levels. One is the retail trade dominated by the 250ml, 500 ml, 2ltr and 5ltr bottles, the usual denomination being a case of 12 bottles. On the other hand the five-gallon business dominates the home and corporate trade.
In the five gallon business, the longevity of the bottle is a critical factor. Nowroji says, "After the expenditure on logistics and distribution, the cost of bottles is the highest." On an average, a good quality bottle lasts anywhere between 12 to 16 months. Oasis and Salsabeel, the dominant players, source their bottles from some of the best manufacturers in Saudi Arabia, Turkey and Dubai.
Retailing mores
The growing importance of hypermarkets like Lulu, Carrefour, Sultan Centre and Safeer as shopping destinations is impacting the trade in a variety of ways. With hypermarkets emerging as volume drivers, it is imperative for serious players to have a reasonable presence in them.
Being a bulk product occupying a large amount of space, there is only so much space that hypermarkets can offer various companies. This allows hypermarkets to insist on rock bottom rates. Sen says, "Hypermarkets and supermarkets drive a hard bargain and with growing competition we have been caught between a rock and a hard place."
On the other hand, hypermarkets are also being used by various companies to push sales. Dima, being a new entrant, is concentrating on large retail chains, as it is a relatively easier option than covering a host of small retailers. Pradip Mandhana, marketing manager, National Beverages, says, "In terms of sales volumes, a large proportion of our sales comes from hypermarkets and supermarkets."
Marketing and promotions
There is also a growing awareness about the need for greater visibility. Sen concurs, "We will have to spend more on communication and promotion to create our differentiation." Oasis has been amongst the first companies to realise the importance of promotions. It orga-nises events like Fun Day, an all expenses paid outing for a day, every year for loyal customers. The number of customers attending these has jumped from 5,000 to close to 11,000 in the last four years.
Oasis has also tried out cross promotions. For example it tied up with Pizza Express, wherein every Oasis customer got a discount coupon encashable at the Pizza Express outlets. Nowroji says, "It works as an entry and a loyalty benefit rolled into one."
Multinational brands like Arwa are also bracing up to launch promotions. Zeeni says, "We plan to grow Arwa in the next couple of years through line extensions as well as innovative marketing and distribution strategies."
Looking ahead
Despite being a daunting market, it is still seen as one that has the potential to grow. Sethi says, "It is a challenging market but not a saturated one." So how can the market be grown?
One suggestion is to offer new pack sizes. George says, "The population is growing and so is the thirst factor. The thirst points are also growing. When people travel they can't carry large cases and so is a need to provide single serve offerings of 200 ml to 500 ml." Probably, producing and marketing smaller size bottles make sense as the returns on smaller pack sizes are larger. Both the 200 ml and 500 ml bottles cost 100bz each.
With the per capita consumption of bottled water being low in Oman, converting tap water drinkers is the obvious solution to push up sales. Zeeni says, "The market can be grown through major brands interacting with the government in promoting safe and healthy drinking habits and highlighting jointly the benefits of bottled water over tap water."
The use of bottled water for value-added products could open up new vistas for the industry. Nowroji says, "If we have to increase the size of the market, we will need to value add to it and diversify into alternative product lines. For instance, in Dubai a lot of bottled water goes into making ice. Internationally, bottled water is used to make a variety of sports drinks." Exploiting new distribution channels like restaurants and schools is another option being considered by companies.
At a fundamental level, there is a need to further strengthen the distribution network. Sethi says, "As there is no real national player with an all-pervasive reach, we can grow by making bottled water available in places where the organised trade does not reach." There is a growing awareness that a large part of business will come from the interiors and companies which are keen on growth need to have a strong presence there.
Consolidation and shakeout
While there is a consensus on the ability to grow the market, analysts are of the opinion that the present market size is too small to accommodate all the players.
As a result, the industry may go through a phase of consolidation soon. Sen says, "Only the more efficient and the best marketers will survive, others who may survive will be relegated into being marginal players selling a few cases a day." Nowroji echoes the sentiment, "I see a shakeout in the next six to seven months, the smaller players having to either increase prices or suffer loses."
One way or the other, the action seems to be set to continue in the bottled water industry. Watch out for this space.
By Mayank Singh
businesstoday 2005
