The Water Bottle Market in the United States Greta Fails and Ludovic Rajibe Experimental Economics 488 Fall 06

Overview of the Bottled Water Industry Overview of the Bottled Water Industry The cost of bottled water compared to other products: Cost of a gallon of gasoline : $3.19 Cost of a gallon of gasoline : $3.19 Cost of a gallon of milk : $2.99 Cost of a gallon of milk : $2.99 Cost of a gallon of Fiji water : $ 9.46 Cost of a gallon of Fiji water : $ 9.46 Cost of a gallon of tap water: $0.01 Cost of a gallon of tap water: $ liters/gallon, Fiji is $2.50/liter liters/gallon, Fiji is $2.50/liter

Revenues from Bottled Water The market has been expanding exponentially The market has been expanding exponentially 154 billions liters sold worldwide in billions liters sold worldwide in 2004 Revenue of $26 billion in the US Revenue of $26 billion in the US Sales increase 7% annually Sales increase 7% annually

Types of Bottled Water There are three main types of bottled water: Natural mineral water - which is found underground and which is characterized by a constant level of minerals Natural mineral water - which is found underground and which is characterized by a constant level of minerals Spring water - is obtained from underground water that flows naturally to the surface Spring water - is obtained from underground water that flows naturally to the surface Purified water - can come from any source, including spring water, well water, seawater, or municipal water. This source water is then processed and purified. Purified water contains no dissolved solids. Purified water - can come from any source, including spring water, well water, seawater, or municipal water. This source water is then processed and purified. Purified water contains no dissolved solids. Water quality in the US is regulated by the Food and Drug Administration.

Major Categories of Bottled Water Distributors Firms that sell a particular brand like Evian and Fiji Firms that sell a particular brand like Evian and Fiji Soft drink companies like Pepsi and Coca Cola that have entered the market – Coca Cola sells bottled water under the Dasani brand name and Pepsi under the AquaFina brand Soft drink companies like Pepsi and Coca Cola that have entered the market – Coca Cola sells bottled water under the Dasani brand name and Pepsi under the AquaFina brand

Market for Bottled Water 54 % of Americans drink bottled water 54 % of Americans drink bottled water More than half of the bottled water consumed is purified water (basically filtered tap water) More than half of the bottled water consumed is purified water (basically filtered tap water)

What drives the sales of bottled water in the US market? Taste Taste Perceived quality differential between tap and bottled water Perceived quality differential between tap and bottled water Health reasons – less calories than soda Health reasons – less calories than soda Convenience and availability – sold in every store Convenience and availability – sold in every store

Hypothesis Taste is the main driving factor behind the sales of bottled water. Taste is the main driving factor behind the sales of bottled water. People buy bottled water that tastes the best. People buy bottled water that tastes the best. Within their budget limit, people are going to buy the bottle of water that tastes the best. Within their budget limit, people are going to buy the bottle of water that tastes the best.

Predictions The majority of customers will claim that the most expensive bottled water tastes the best. The majority of customers will claim that the most expensive bottled water tastes the best. Tap water, which is free, will be perceived as the worst. Tap water, which is free, will be perceived as the worst.

Experiment The experiment was divided into two parts: The experiment was divided into two parts: A branded taste test and a blind taste test A branded taste test and a blind taste test In the branded test, students were given 5 types of water and asked to taste and compare them. They knew the brand of the water they were tasting as they completed questionnaires. In the branded test, students were given 5 types of water and asked to taste and compare them. They knew the brand of the water they were tasting as they completed questionnaires. In the blind test, students repeated the same experiment, but this time were not told the identity of the water they tasted. Their answers to the questionnaire in this round were based on taste alone. In the blind test, students repeated the same experiment, but this time were not told the identity of the water they tasted. Their answers to the questionnaire in this round were based on taste alone.

Results – Question 1: Tasting a Difference BRANDEDBLIND ID#NOYESNOYES Tot ID#PS/EPS/DPS/TPS/FE/DE/TE/FD/TD/FT/F 14Y/YY/NN/NY/Y N/YY/NY/Y 30% 15Y/YY/NY/Y Y/NN/NY/Y20% 17Y/YY/NN/YY/NN/YY/NN/YY/YN/NY/Y60% 19Y/YY/NY/YY/NY/Y Y/NY/Y30% 21N/YN/NN/YN/NY/NY/YN/YY/YY/NY/Y50% 23Y/Y N/YY/NY/Y Y/N30% 24N/YN/NY/YY/NN/YY/NY/Y Y/NN/Y60% 26N/Y Y/NN/NN/YY/NN/YY/YN/NY/Y60% 28Y/Y Y/NY/Y 10% 31Y/Y Y/NY/Y N/YY/Y20% 35N/YY/Y N/YY/NY/Y N/YY/Y40% 37N/YY/N N/YY/YN/YY/Y 60% 39Y/YY/N Y/Y Y/NY/Y30% 41N/YY/Y N/YY/Y N/Y Y/Y 40%

Analysis: Question 1 – Tasting a Difference On average…  Participants were able to taste a difference 2/3 of the time  This statistic was consistent across the tests Yet, on the individual level…  39% of responses switched between rounds  No single person’s answers remained consistent  Participants switched anywhere from 10%-60% of their responses  Significance of the switches (YES to NO, and NO to YES)

Results: Question 2 – Ranking Preferences ID# POLAND EVIAN DASANI TAP FIJI POLAND (E) EVIAN (D) DASANI (B) TAP (C ) FIJI (A)

Analysis: Question 2 – Ranking Preferences 1.Fiji (1.9) 2.Evian (2.5) 3.Dasani (2.9) 4.Poland Spring (3.0) 5.Tap (4.4) 1.Dasani(2.2) 2.Fiji(2.4) 3.Poland Spring(2.6) 4.Evian(3.5) 5.Tap(3.9) Branded Test RankingsBlind Test Rankings  Preferences differ between tests, providing evidence that taste is not the only factor at work  Range of average ranks  Only one person maintained the same rankings between tests  36% of participants changed all their rankings  93% changed at least 2 rankings  62% of all rank changes were greater than a 1 rank difference (switch from a 5 to a 3 or better)

Results: Question 3 – Identification CORRECT RESPONSE Number of individuals who correctly identified the brand POLANDECACADAEECEBCCA3 EVIANDDEEDBBAAADCAAB3 DASANIBABABEEBDEBABBD6 TAPCBCDCCCCCDCEDEC9 FIJIAEDBEADDBBADE-E2 Number of correct responses

Analysis: Question 3 – Identification  Only one person able to correctly identify all the cups  Tap and Dasani were easiest to identify (~50% correct responses)  Fiji, Evian, and Poland Spring only identified 15%-20% of the time  Able to identify the extremes but unable to delineate the middle

Conclusions  Inconsistencies across students’ responses provide evidence that taste preferences are not solidified and that students’ in fact claim to prefer brands when they actually rank others higher  Taste differences are negligible and unidentifiable  The influence of the brand name, and all that it connotes, is the driving factor when purchasing