bottled water seems to be a prominent example of a product that seems to sell for a lot more than production cost. E.g. googling for (bottled water ripoff) or fraud or scam returns lots of concurring claims.
Well, so why are there no new entrants in the market in the lower price range, such as at the price close to production cost which we would expect from an efficient market with low barriers to entry? Is it the case that the vast majority of consumers of bottled water also happen to be brand conscious to an asinine degree and refuse to buy new brands? Or are there heavy regulatory costs that prevents introduction of products from new entrants, both local and foreign alike?
You are confusing accounting profits and economic profits. We don’t expect sellers in efficient markets to operate at 0 accounting profit and I don’t see any evidence that bottled water sellers are enjoying long run economic profit.
Aren’t most major brands of bottled water owned by the same companies that produce and distribute other beverages? For example, Dasani is made by the Coca-Cola company, and Aquafina by Pepsi. So they already have a system set up to bottle, distribute, and market their water.
If I decided to go into the bottled water business, I’d have to invest heavily in the means to bottle the water, package it, and distribute it to the consumers and retailers who already have most of their bottled water shelf space taken up by other brands.
I see that Costco is selling water for less than a buck a gallon in individual bottles here. Pretty cheap when you consider that they have to bottle it, advertise it, ship it and store it. Expensive compared to tap water yes but I doubt that there is a lot of profit there for Costco.
Right. It also costs just about the same to manufacturer and distribute a bottle of bottled water as it does with a soft drink or other individually packaged flavored drink. The cost of the flavoring is minuscule when produced on a large scale. Most bottled drinks are nearly equal in that regard.
Consumers are that brand conscious when it comes to bottled water just like they are with sodas, even very similar tasting ones. There is no reason for the industry to exist on the scale it does in the U.S. in the first place. Tap water is generally safe to drink and it tastes just fine in most places. It is an artificially generated demand that took off on a large scale due to several factors including marketing and irrational consumer perceptions. Oddly enough, this is not a new phenomenon at all. Bottled water was not common during much of the middle of the 20th century in the U.S. until the industry was revived but it was extremely popular in the 19th century. Lots of wild claims were made about the benefits of water from certain sources and people paid a hefty price to buy it then as well.
The reason the price of bottled water isn’t closer to its manufacturing costs is because of marketing (which yes, invokes brand loyalty), and pricing up to what the market will bear. If people will pay more for bottled water, why would any profit-conscious company *not *charge more for it? There’s a marketing principle that more expensive items are viewed as better by consumers, simply because they cost more. If a cheaper mainstream brand of bottled water came along, it would be perceived as worse than Aquafina or Dasani by many consumers, simply because of the lower price.
Additionally, it’s not so much that there are low barriers of entry to manufacturing bottled water. It’s that the existing sellers of it already had the infrastructure in place. It’s an extremely low barrier of entry for PepsiCo (or Coca-Cola) to make bottled water, because they already make bottled pop. And water is just pop without all the coloring and fizz. So it’s easy for them to make it quite cheaply, but it often sells for more per ounce than pop.
There are also marketing costs that Pepsi and Coke are passing along under the cap of that water bottle. A lot of people aren’t even aware that Aquafina/Dasani are owned and manufactured by PepsiCo/Coca-Cola, respectively, because they have a marketing campaign for those products that is completely separate from their soda campaigns.
In a nutshell, there is a **lot **more to pricing than the cost of the ingredients.
I have never seen Costco advertise anything, outside of those “current deals” posters at the front of the store and the occasional mailer I get with coupons.
Thudlow Boink’s point about retailers reallocating their shelf space for higher end products and hence discouraging new lower end ones is interesting, thanks.
I do understand that the marketing and connections to retailers cost money to the established companies. But, now that the established companies have spent all this money on convincing a segment of the public to drink water delivered in a plastic container, I wonder why can’t McDonalds/Walmart type of new entrants capture part of this market with lower priced equivalents, effectively free-riding on the marketing expenditures of others.
I am not certain which Costco poduct Si Amigo refers to (that link seems to be for less than a gallon for 4). But even 1 per gallon seems expensive, if the product basically costs as much as a sealed plastic container. Walmart sells 5 gallon plastic buckets complete with a nice metal handle for around $2 nowadays.
Perhaps another relevant question here would be what percentage of groceries spending of the typical bottled water consumer is spent on bottled water. If they are sufficiently rich that the typical expenditures are just noise in the balance sheet, presumably cheaper product would be pointless. OTOH if many of them are not-so-rich “hipsters”, for them cheaper could mean better.
That’s 13 cents a bottle. I also guarantee that WalMart has their house/generic brand at a similar price.
One thing I was taught in my Operations Management courses, is that you should always try to avoid shipping air and rocks. Air because it is cheap per unit volume, and rocks because they’re cheap per unit weight. Water is like rocks. It’s dirt cheap and heavy, so it costs a lot to ship, as a % of your total cost.
13 cents to get a 16oz bottle of water manufactured, filled, shipped to a retail location, and sold at a (slim) profit. I think that qualifies as being a “low price” option.
In reality, you’re not buying water, you’re buying the bottle, and they throw the water in for free.
Yes I do. Nothing in life is free. The ad didn’t creat itself, they had to hire someone to do it, maintain, take pictures, blah, blah, blah . . a website is nothing more than a permanent ad.
Check your math. It’s about $0.007 per ounce and at 128 ounces in a gallon it works out to be about $0.94 a gallon. Don’t feel bad, I had to check it a couple of times myself.
To address the OP; WalMart and Costco do sell bottled water at near their cost with minimal profit, the OP also is correct in his assumption that people pay more for perceived quality generated by advertising. In short, most people are suckers; surprise!
There is a sucker element to it, I’m sure, but I think when people buy bottled water they’re also paying for the peace of mind that it was bottled by someone they trust, rather than drawn from a rusty tap at some gas station, or possibly from some bacteria-infested vat out back.
Interesting thread, however, there ARE big barriers to entering the business:
-need to pay for “shelf space” at supermarkets
-advertising costs
-transportation costs
It is indeed amazing that Americans will spend so much money for a product that is basically free (at the tap).
Where I live (Boston, MA area) our water comes from a huge reservoir in Central MA (the Quabin). It tastes batter than bottled water, and is considerably purer.
Now I agree-in places like LA (alkaline water) or parts of Florida (Iron and manganese), or Texas (alakalies and fluorides0, the local stuff might taste off-so buy a Brita filter.
Bottled water profits are near zero already, per bottle. Costco may sell their 500ml bottles for 13 cents each; that means the factory gets about seven. And those seven cents have to cover the bottle (PET resin, and electricity to run the injection molding, blow molding, and bottle delivery machines) the water (more electricity to pump the water, filter it, possibly remineralize it, disinfect it with UV and ozonate it) the caps (more injection molding and resin) the labels, the case trays, the shrink film, and then it needs to be put on a pallet and stored or shipped. Each of these steps is performed by a million dollar machine that is constantly needing replacement parts, and you’ll need a couple million a year, at least, to staff it. Then you need a building to put it in and engineers to hook it all up. And you need to clean the whole thing weekly so your product remains safe. All that for a line that will produce a million bottles a day.
The profit margin is very slim. The big three bottled water companies (Coke, Pepsi and Nestle) compete fiercely and don’t collude to keep prices artificially high. They are as low as they can go.
Aside from the cost of machinery, don’t underestimate the difficulty of securing a source of water. Given the public outcry that happens every time a bottling plant tries to even renew its permit, can you imagine the protest against a new plant? And your plant can’t be far from your market, or you’ll incur too much transportation cost to be viable.
Your premise is fallacious: you assume that profits aren’t already near zero, and you assume that there are low barriers to entry, and you are wrong on both accounts.
You’re deluding yourself with irrelevant facts. It doesn’t cost the same to put a picture of a product you sell on your own website as it does to pay to advertise through other means. Even if through some bookkeeping hanky-panky one side of Costco’s headquarters “pays” the other side of the building for doing such, it’s obviously not money coming out of Costco’s corporate wallet. It doesn’t cost me anything to move a quarter from my front right pocket to my front left pocket.
