The Crazy Costs and Challenges of starting a Water bottling Business

Bottled water is drinking water i.e. distilled water, mineral water, or spring water packaged in plastic or glass water bottles. Bottled water may be carbonated or not. Sizes range from small single serving bottles to large carboys for water coolers or dispensers. Despite being a high-income generating business, the bottled water industry has several challenges surrounding it. These challenges are as follows:

1. Competition

The barriers to entry in the business have considerably reduced. Partially this is because there are now more companies supplying water purification and packing technology of different quality. The technological advancement and increased competition among the machinery vendors have made the water treatment machines more affordable to a big number of entrepreneurs. Also, with competition among the water treatment and vending firms becoming much more intense, more companies are exiting the business. This has created a second-hand market for water treatment machinery, which is sold at prices way below that of new machines.

2. Standards

Standards in the industry have been compromised. Though many companies have the Kenya Bureau of Standards (KEBS) certification, some fake it, while others put up a show to get the certification but don’t keep up with the required standards thereafter. This reduces the cost of production for such firms and enables them to get higher margins in addition to competing on prices and cost leadership.  The market is biased towards the bigger players, with 5 brands dominating the market in terms of volume and value. These are Keringet, Highlands, Aquamist, Quencher, and Dasani.

3. Expansion difficulties

This can be attributed to a lack of access to cash that can be used to expand and hire qualified persons like salespeople and marketing personnel. Many also get into the business attracted by the supposedly high margins, but they have a poor understanding of the purification technology, management, and specialized skills like distribution. The fact that they are not able to grow creates a vicious cycle where they are not able to hire skilled personnel and thus remain at the same level. 

4. Expensive laboratory tests

The very sure way to know the elements in your water is to take a sample to a laboratory for testing. Testing prices range between Kshs. 750 and Kshs. 5000. 

5. Uncertainty in sources of water

• tap water - The biggest challenge with using council tap water is that there may be supply disruptions during which you have no water supply from the tap. Another challenge is that if your store location does not have a connection to the waterline, making a new connection might be difficult and/or expensive.

•  Groundwater - In almost all cases, drilling a borehole or digging a well for small-scale water treatment and vending businesses is so expensive that sales from the business will never pay back the expense, at least in the medium term. The average charge for drilling a borehole in Kenya is KShs.6, 500 per meter.

        6. Expensive licenses

• Kenyan bureau of standards - All water treatment and vending businesses must obtain a permit to use the standardization mark from KEBS. KEBS certification fees are Kshs. 31,900 annually. 

• County government license - County governments are responsible for issuing business permits. These permits vary based on the county as well as the size of the business but typically cost between 8,000 and 20,000 Kenyan shillings per year.

• Public health department - The public health department certificates that the shop location follows the law for health regulations and ensures that shop employees are in good health. The average cost is Kshs. 1,000- 7,000 per year and each employee's health certification for Kshs.600.

• Water resources management authority (WRMA) - apart from businesses using municipal tap water, all businesses will be required to either have a WRMA permit themselves or to make sure that the owner of their water source, ground, or surface water, has a permit.

• National Environmental Management Authority - businesses that plan new construction of buildings, boreholes, or the abstraction of surface water require NEMA approval to ensure proper drainage and the mitigation of environmental impact.

7. High tax rate by the Kenyan Revenue Authority

• Value-added tax: All bottlers of water must register with KRA and charge customers 16 percent VAT on the sale of both new water bottles and water refills.

• Excise tax: The license costs KShs.50, 000 per year. 

• Corporate income tax or turnover tax: for almost all water treatment and vending businesses, the corporate income tax rate is 30 percent. Small businesses, whose annual gross turnover (revenues) does not exceed KShs.5 million, can choose to pay a turnover tax of 3 percent instead of the corporate income tax.

8. Poor transport infrastructure 

This hinders the ease of the accessibility of the premises.

9. High cost of high capacity water storage tanks

. The best tanks for water storage are made with food-grade plastic material. Tank prices keep changing , but on average a 55,000-liter tank costs between Kshs. 70,000 and 80,000, while a 10,000-liter tank sells for between Kshs.140,000 and 200,000

10. High cost of refillable bottles

 The cost of buying new refillable 18.9-liter bottles means that businesses will need a policy on exchanges of 18.9-liter bottles to make sure that any bottles exchanged are in good condition and can be re-sold. 

11. Limited spaces in supermarkets 

Supermarkets consider their shelf space in terms of profits. They want to allocate space only to items they think will sell fast and most. For water, they are likely to first stock more established brands, companies doing some form of marketing and advertising, companies offering extremely high margins, companies that can be trusted with KEBS mark, and other accreditations or companies with a unique and functional product.

12. Pricing

Pricing as a market entry strategy can only work to some extent. The price you set will depend on your costs, which in turn depends on your efficiencies, sources of supplies, and management levels. Some firms can offer lower prices by using shortcuts, for instance packaging water directly from taps, not paying taxes, and using recycled bottles. The problem with such shortcuts is that if the authorities discover, it could mean the end of the businesses. 

13. Pre-existing middlemen in the chain of bottled water supply.

When using wholesalers and distributors, the firm’s margins reduce. However, the wholesalers had the advantage of understanding the local environment. Established wholesalers also have existing relationships with local retailers, making it easy for them to push your products. Attractive commissions and a promise of support in terms of marketing will entice the wholesalers to take your product.

• Other challenges may arise from;

 the high costs of skilled, semiskilled, and unskilled labor

high cost of fliers, brochures, labels, and sealers.

High initial capital (not a major factor)

• The above challenges can be eliminated by proper planning, good leadership, and good marketing in the bottled water business.