The failure of the government to provide essential goods and services to its citizens often presents a business opportunity. A national market in invertors owes its existence to the state’s inability to supply power. Safe drinking water flows from the tap in developed countries but not in India. If bottled water takes care of the out of home opportunity, then household drinking water purifiers are becoming popular too.
Tata Chemicals Ltd is the latest firm to diversify into this field. It has launched a water purifier, Tata Swach, joining Hindustan Unilever Ltd’s (HUL) Pureit, and positioned as an affordable product. Winning over consumers is much easier with a combination of an affordable product from a renowned brand. Why are firms getting into a market that has a number of brands, many unorganized firms and one that requires a very good service network?
One not insignificant reason is that companies make a statement by selling products that can claim to do some social good. Indeed, the Tata Chemicals statement says as much, that the product is a small step in response to their group chairman Ratan Tata’s desire to make drinking water available at an affordable cost.
But there is a sound business sense to it, if you are willing to stay for the long haul. Buying a water purifier is akin to buying a Gillette razor. The company keeps its razors at just the right price point, depending on the segment. But you go back for a refill, as its razors can use only Gillette cartridges. With patented nearly impossible to counterfeit cartridges, you keep going back for refills. That’s where the margins come in; earning a perpetual annuity income for the company. In the water purifier business, too, apart from the initial cost of buying a machine, most machines need some form of servicing. The ones sold by HUL and Tata Chemicals come with removable units that need to be replaced, at periodic intervals. That will bring in a regular income, once a large installed base is created.
Graphics: Yogesh Kumar / Mint
Still, there is the matter of distribution, where companies adopt a mix of direct marketing and retail store sales. But it is not an easy market to crack, due to widely dispersed markets and stiff competition. And competition is stepping up in the affordable segment too. The market may be big enough but penetration is low and the concept needs to be marketed. The business also closely resembles a consumer durable business. For HUL and Tata Chemicals, it is a new area. Initially, the business will make losses but if in about 5-10 years they can put together a large and profitable business, it will be worth it. But that is too long a wait for the usual investor.
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