Lessons From the Growth of Bottled Water
I’ll admit it I am fascinated by water.
Not just any water…A very special water – the kind you find in a bottle. In fact, I think many great business lessons can be found in the world of bottled water.
My water fascination dates back to at least 2011 when I wrote the following…
“…bottled water is truly a phenomenon of our time. When I was a kid, water didn’t come in bottles, occasionally I was even reduced to drinking it straight from a garden hose. In fact, 30 years ago there was hardly a bottled water industry. But bottled water caught on quickly…To put < sales> in perspective, more money is spent on bottled water than on movie tickets or iPods. Think about it, bottlers and distributors have elevated water to a place where it sells for 4 times the price of a gallon of gasoline, even though we get it free from our home taps. But I hear a few of you saying, that there is a qualitative difference between bottled water and tap water. In truth, approximately ¼ of all bottled water is tap water repackaged by either Pepsi or Coke. Of course, there are those sophisticated brands like Fiji or Pellegrino. Fiji produces a billion bottles of water a day in a country where more than half of the locals don’t have safe drinking water and while the town of San Pellegrino is known for water from volcanic mineral springs, Pellegrino’s bottled water requires the injection of bubbles at the companies bottling plant.
So maybe it’s not the quality that drives sales but rather it’s the convenience. A convenience that results in 38 billion water bottles being sent to landfills annually and over a billion dollars’ worth of plastic being pushed underground each year. Now lest you fear that I am trying to guilt you out of drinking bottled water, I tout no such social agenda. I drink my share of bottled water. My favorite is Ethos water, a Starbucks brand that offers a portion of the proceeds from each bottle I purchase to help secure safe drinking water in a world where 1 in 6 people don’t have a reliable, healthy source.”
So, that was what I wrote in 2011 and we all know iPods gave way to streaming audio and smartphones, but how has bottled water done?
Just recently Ad Age ran an article with the headline There’s a Clear Winner in Beverages: Bottled Water Tops Soda. The article went on to note:
“Industry tracker Beverage Marketing Corp. today announced that bottled water surpassed carbonated soft-drinks in 2016 to become the largest beverage category by volume, capping what it described as a “remarkable, decades-long streak of vigorous growth.”…Total bottled water volume grew from 11.8 billion gallons in 2015 to 12.8 billion gallons last year…On a per capita basis, bottled water consumption exceeded 39 gallons compared with 38.5 gallons for soda. Carbonated soft-drink per-capita consumption exceeded 50 gallons as recently as 2006. Beverage Marketing Corp. projected that bottled water would hit the 50-gallon mark by the middle of next decade.”
Back to the business and customer experience lessons of bottled water…There are few products more ordinary or readily available in countries like the United States than water. Generations ago, no one would have envisioned people paying for and walking around with bottles of water; however, lifestyle trends created an opportunity for companies to package and deliver a readily available product in a new way. In the 1970s Perrier was the first to bring bottled water (albeit an effervescent version) to America. Subsequently, two trends paved the way for the explosion in the bottled water market that we are experiencing today:
- Consumer trends toward healthier choices in hydration.
- A desire for “grab and go” lifestyle products.
H.L. Menken once wrote, “No one in this world…has ever lost money by underestimating the intelligence of the great masses of the plain people.” While I don’t think paying $60,000 for a 750 ml bottle of Acqua di Cristallo water necessarily reflects a problem of intelligence on the part of a purchaser (the bottle is made of solid gold and the water is dusted with gold flakes), I do think a considerable amount of money can be made from:
- Tailoring products to fit with hectic lifestyles of customers.
- Thinking about how you can make doing business with your company easier.
- Removing pain from the life of your customer.
- Helping your customer achieve health or pleasure.
So, what lessons can you take from the growth of “bottled water?” More importantly, how can you take the ordinary in your products and deliver those products in ways that offer extraordinary value to your customers?
I’ll sip my $2.25 bottle of Ethos Water knowing that between 5 and 10 cents of that purchase goes to a positive social cause. In fact, Ethos was the first company I’m aware of that linked a cause to consumption, a trend later followed by brands like Warby Parker and TOMS shoes. Maybe that’s one last lesson we can learn from at least one bottled water brand…you can “do well and do good” at the same time!
Sizing up Strategic Beta
Interest in strategic beta ETFs is rising. A few simple guidelines can help investors pick from among the often-bewildering number of options.
The number of strategic beta ETFs has grown at 20% a year, consistently in good markets and bad, since the year 2000. With good reason: Strategic beta ETFs offer a more thoughtful passive option than cap-weighted indexes—and they can do so with a more transparent process and lower fees than actively managed funds.
Bright future, dim past
All well and good, but how should investors assess any particular strategic beta ETF? Close to 40% of these funds have been in operation for less than three years. This lack of an established track record can make it hard to validate their claims. ETF sponsors may try to make up for that shortcoming with back testing, running simulations of holdings they might have had against actual past market performance, but that has its limitations:
Back testing doesn’t always account for fees, liquidity or transaction costs.
Back tests are “selection biased”—that is, back testers have a tendency (conscious or not) to engineer positive outcomes. Live outcomes are therefore likely to be inferior.
Too great a focus on recent history can lead to “driving in the rearview mirror.” While an index or ETF may solve the problems of yesterday well, an investor’s focus should instead be on solving the potential problems of tomorrow.
Three steps to an informed judgment
Because the indexes tracked by strategic beta ETFs are by design somewhat exotic, effective assessment of them calls for some digging:
- Investors first have to understand who the index designer and asset manager are (they may not be the same people). They should have a clearly expressed investment philosophy and the expertise to enact it in practice.
- The properties of the portfolio should reflect the investment philosophy. Not only does the transparency of ETFs allows examination of the holdings to ensure that this is the case, it also measures such as active share relative to a cap-weighted benchmark or turnover can indicate whether an ETF is performing as designed.
- Performance can also be used to confirm that an index is doing its job. While short-term results shouldn’t be given too much sway, the index designer should be able to explain when and why an index will perform and when it might not.
One key aspect of performance shared with traditional passive management is tracking error. Like earlier cap-weighted index tracking funds, strategic beta ETFs should have minimal tracking error to their own indexes. Beware, though, the tracking error to the benchmark can be large and dynamic, it is by this differentiation that strategic beta adds value.
Made to measure
Strategic beta does not defy analysis, despite its novelty. Indeed, it has a lasting advantage over standard active manager due diligence. Strategic beta, after all, is rules-based. What an investor sees in straightforward, well thought-out index composition rules is what the investor will get. In that sense, strategic beta is relatively immune to the personnel changes, style drift and index hugging that can challenge actively managed mutual funds.
Learn more about ETF due diligence here.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. J.P. Morgan Exchange-Traded Funds are distributed by SEI Investments Distribution Co, One Freedom Valley Dr., Oaks, PA 19456, which is not affiliated with JPMorgan Chase & Co. or any of its affiliates.
For additional disclosure
For a longer discussion, please see our recent publication Strategic Beta’s due diligence dilemma (J.P. Morgan, April 2017).
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