By The ETHIONOMIST

I recently went out scouring the market to shop for my bare essentials, (which are shrinking by the day, darn inflation!) and decided to look for my favorite bottled water brand (I am not telling you which one, being a respectable journalist and all that, ok, I am freelance but should it matter?), and was faced with a lot of new brands that have crowded the shop front of my corner grocery shop.  It seemed completely foreign to me, faced with brand names for almost anything and everything.  You probably have noticed it too; it’s become the norm to see new bottled water brands on a monthly basis. For a split second, I felt sorry for the people coming-up with the names, who seem to have exhausted local and gone continental, global.  No offense.  I will keep it real.  Bear with me.  Anyway, I asked the shop keeper for my brand,

“May I have a bottle of…”

“Yelem” came back the dreaded reply, which apparently has become the first Amharic word foreigners seem to be learning these days, ‘allegedly’.

My apologies, unfortunately, I keep going on tangents, I can’t help it, but I will eventually get to my point. Don’t bother telling me to “focus”.  Sometimes it’s about the journey.  Really.

Anyway, I asked the shopkeeper “why?”

Instantly came back the reply, “who cares, water is water.”

WRONG.  I didn’t have time to explain.  As a consumer, shouldn’t I choose what I want?  Anyway, I felt a bit irritated and decided to do a little bit of research, a little digging to find out what is going on in the industry, why not?  Isn’t it John Wooden that said, “Little things make big things happen”?  And in this case, they certainly did.  Big time!

First of all, let me give you the low-down, the 411.  I have friends in the industry, (as you do), so I started asking for what is going on.  Apparently, a few heavyweights in the industry are locked at loggerheads, and we are in the middle of what Economists call a “price-war” for almost a year now, and here is where ETHIONOMICS comes in, as it is no longer Economics.  Apparently, wholesale prices are now well below what they were a year ago, and even two years ago in some cases.  Who would have imagined this, especially in a time of rampant inflation of over20%?  Competition is no longer led by realities in market, but has become a simple piss-contest as that between 5^th grader boys.  It has become a show of who has the deepest pockets, and who hasn’t.  Pure ETHIONOMICS.

• You ask, isn’t this good for consumers though? Well, you would be right, except for the retail trade, that would be the corner-shops for you and me, are benefitting the most and not passing this down to consumers.  AHA!  So, shops are chasing small discounts, and hence stocking-up on the brand that has the smallest wholesale price for the day, but charging the same old prices to consumers (that would be you and me).  Welcome to the other side of ETHIONOMICS.Of-course they can always fall back on the usual, “Yelem!” and who would challenge that?

Gossip has it that a lot of bottled water companies are under financial distress, and commercial banks are struggling to collect debts.  Well, it’s barely a secret that you can “buy” new business proposals on the open market when applying for a loan when setting-up your company.  Legend has it that it is in-fact the same business proposal that makes the rounds to set-up a bottled water company.  So who is to blame for the rising NPL (non-performing loans) that were granted without proper consideration of existing firms and industry past and future trend analysis and prospects?  Another side of ETHIONOMICS, you say?  You would be right.

By the way, for those of you who like facts and figures,

• It all started with HIGHLAND, from APEX Bottling Co. in the mid-nineties, some 24 years ago, (thank God for pioneers!) the Ethiopian bottled water market is still relatively young by some measure.
• Today, the Ethiopian bottled water industry has 103 players as of October 2020. (No, really, I checked.  This is data from the Association’s website.)  here’s another tangent, have you noticed how our news outlets are quite liberal with numbers? (Ethiopia has over 80 languages, yadayadayada, how difficult is it?  Count them!)
• Total production capacity is 10.4b Liters per annum. (Assuming 20k bottles per hour on average, at 50% capacity utilization).  This does not consider capacity up-grades by existing firms that are in the pipeline, or new investments that are preparing to join the industry.
• Between the years 2013 and 2020, the industry production capacity has grown over three fold!
• Total demand for water is 3B Liters per annum. (Assuming 100m population with 20% urbanization rate, and a further 20% of consumers having the ability and preference to consume bottled water over tap-water).
• There clearly is a latent over-capacity of bottled water, with supply outstripping demand by at-least 3.5 fold.
• This means, at a growth rate of 30% per annum (3 to 6 times that of annual GDP growth), it will take at-least 5 years before demand meets current supply levels, if supply is constrained at current levels (without additional investment).
• This excess supply is creating unhealthy price competitions that harm the health of the industry as a whole, is leading to inefficient resource allocation, especially in a country like ours.
• This trend doesn’t seem to be slowing down, and new entrants are joining the industry regularly, exacerbating the situation even further. This has exposed some firms with-in the industry to be under financial distress, with a number of firms at the brink of collapse.
• Existing firms with-in the industry face grim prospects, as bottled water is also heavily dependent on scarcely available foreign exchange, and limited “exit strategy options”. The main input material used to make the PET bottles is also heavily reliant on global oil prices, which is currently going through favorable prices, but could heavily impact the industry at times of rising oil prices.
• Gone are the daysof excess demand, and for over three years “excess-supply” has become the “new normal”, while investment continues to pour into the sector. (“Still going strong!”  Remember that ad?  Oh no, I am getting old… never mind.)
• Talk about a piss-contest, we are doing it at regional levels too. Ethnicity and politics have popped their ugly-head here as well; they are contributing factors for new plants being established where consumers are non-existent!
• The three main reasons contributing to this trend, IMHO, are as follows.
  • Government’s blanket tax relief incentive schemes – well, it seems nobody has told the government that the bottled water industry is already saturated, and the different blanket incentive schemes (tax relief for a few years etc…) are actually backfiring and making the situation worse on top of losing it precious tax revenue. I wonder if any of the government ministries ever measure the effectiveness of incentives as policy instruments, by economic sector or industry, and see the overall impact they have brought, or is this borrowing a page from the book of ETHIONOMICS?  And mind you, this is all happening in a country where other sectors are starving for resources.
    • Here is an example: try providing incentives for only those that use local inputs, or those localizing their supply chains.  For example, what does the government have to lose by incentivizing local juice manufacturing to replace juice imports (yes, we do import juice believe it or not, even at the worst of the forex crunch), and give those specific firms a 5-year tax incentive (just pulled this out of the hat actually).  But the principle holds.  What does the government lose here?  Absolutely nothing and everything to gain.
  • Irresponsible lending by financial institutions – Our banks and financial institutions need to learn from mistakes elsewhere, irresponsible lending has the power to drag economies into unexpected crisis, the sub-prime mortgage lending scandal is a recent example, although drawing parallels could sound far-fetched, the principle is the same. By the way,I challenge anyone contesting this fact, to check and compare past business proposals in the same sector submitted for funding, and look for similarities, even across time.
  • Destructive sentiments and emotional motivations, exhibited by some owners of firms in the industry, making price undercutting decisions based on pride, that require them to subsidize their firms from other operations. But, who cares, right?  No one is saying anything.

Hey, all is not doom and gloom, as long as we learn to live another day.  On the side of our policy makers, investigating how East Asian Tiger economies in their heyday, especially South Korea, utilized different sector specific economic incentives as policy instruments that influence an economic sector’s value chain to bend to their will effectively, might come in handy.  Our financial institutions should lend responsibly, and perhaps a bit more due-diligence might do everyone good, and a bit less NPLs on the balance sheet are not bad either.  If there is one take-away from this, it would be to think how horrifying it is to gamble with hundreds of millions of Birr worth of investment, when the country desperately needs it elsewhere.  Anyone who’s planning to come-into the sector, and I’ve heard there are quite a few, should seriously consider their prospects and do your due diligence, DULY.  Have you ever wondered why it is that we only get reports on investments coming-in, and almost never hear about those going out?  On the side of our investors, business should be strictly business, and a bit less ETHIONOMICS for everyone?  What do you say?

You can reach the writer at the.ethionomist@gmail.com