Bottled Water Industry Issues & Trends

  

- Alan Leff

In our January 2005 Industry Forecast, we asked several water industry experts to comment on
the effects of current and future trends in the water industry. Alan Leff, director of quality
production for Primo Water Corp., a bottled water distribution company, provided insight into
current bottled water issues, such as industry consolidation water rights, drinking water
guidelines and water taxation. With 2006 fast approaching, we checked back with Leff for an
update on some of his industry predictions.

WQP: How is the increase in consolidation of bottled water plant ownership affecting the
bottled water industry in the U.S. and the world market?

Alan Leff: Five years ago, the U.S. bottled water industry consolidation made many former
owners wealthy. Outside of the U.S., this continued to occur through 2003. Consolidation today
is putting more money-losing owners out of their misery than making them wealthy. Small pack
bottled water has become a commodity it the U.S., with margins that are extremely thin or non-
existent. The major brand owners are controlling the market price and squeezing out the smaller
local players. This is leading to further consolidation or elimination of brands. Consumers will
have fewer choices, but manufacturers will ultimately be able to charge more because brand
supply will be constrained.

WQP: What is the current situation with regard to bottled water manufacturers and
groundwater rights?

Leff: Manufacturers continue to be challenged in the area of water rights. There is still a
government perception that bottled water is the major taker of groundwater. A recent study
sponsored by the Drinking Water Research Foundation has shown that bottled water only
accounts for about 0.007% of all groundwater withdrawals. Nonetheless, when bottled water
manufacturers request government agencies to increase current permitted withdrawals or to
allow new permits in order to expand capacity, bottlers are met with significant resistance. This
resistance will continue until permitting agencies, regulators and legislators are properly
educated regarding the insignificance of the bottled water industry withdrawals.

WQP: What do you think will be the result of increased taxation of bottled water manufacturers?

Leff: I don’t see the Boston Tea Party becoming the Boston Bottled Water Party. Dumping
bottled water into Boston Harbor would only increase the quality of the water surrounding
Boston, but the industry would probably be breaking some environmental permitting
requirement. I am still hoping that exclusive bottled water taxation will be avoided. However, if
government agencies need further revenue and see the water resource as a source of revenue, that
taxation should be based on all commercial withdrawals. As pointed out in the above response on
groundwater rights, the bottled water industry is an insignificant user of groundwater. It would
be unfair to require the industry to pay a significantly disproportionate fraction of the tax burden
based on its very limited withdrawal of the resource. This is not taxation without representation,
but if the regulators do not listen to the industry, the result may be the same.

The result of a bottled water manufacturer’s tax is that the consumer will effectively pay for the
tax on bottled water. There is no room in the bottled water earnings margin to accommodate a
tax. The taxation process becomes a great way for the government to tax the wage earners
without taxing them directly.

WQP: How are municipalities handling the WHO recommend- dation to adopt Water Safety
Plans in order to minimize risks of water contamination?

Leff: Municipalities are slowly implementing Water Safety Plans. This is not because they do not
want to reduce their risks of delivering contaminated water. More municipal system time and
dollars are being spent on upgrading systems and segments of systems than where systems
already either contaminate municipal water or are at risk to contaminate water.

WQP: You previously discussed Annexe 2001 and possible water rights issues in South Asia and
the Middle East. Have there been any new developments in these areas or others worldwide?

Leff: Water rights is still a global issue. There are more new issues than resolutions. The U.S.
and Canada have been working together on water conservation and quality issues (e.g. Devils
Lake in North Dakota that feeds rivers in Canada); however, Annexe 2001 issues are still
outstanding. Globally, areas that are suffering from drought are susceptible to water rights
conflict.

WQP: Have there been any new developments in the bottled water “hot spots” of India, China,
Indonesia and the Philippines?

Leff: To the best of my knowledge, the old “hot spots” are the same as the new “hot spots.” The
only difference is that the spots may have become hotter without resolution. The industry hopes
to resolve issues before the hot spots become boiling. It will be most interesting to see how
countries respond to the quality recommendations published in the 3rd Edition of the WHO
Guidelines for Drinking Water Quality published last year. Will new spots be created and/or
heat up the existing spots? wqp