Is water cooler rental dead?
In the early 1990’s I founded a HOD business named ‘’ Les Grandes Sources Canadiennes de Piedmont’’ to service the greater Montreal area. The business strategy targeted residential water cooler rental customers only but we would take on the occasional commercial customer if he was in the close vicinity of existing residential customers. The cost of acquiring new customers was such that we would not accept water only customers. We used the full spectrum of marketing tools available at the time from direct mail, shopping mall shows, telemarketing, radio spots to name a few. Internet didn’t exist like we know it today. It worked; we were adding about 100 new residential water cooler rental customers a week. Before our second anniversary, we ended up selling the company to Nestle who beated Cott at the finish line.
That was 25 years ago. Since then bottled water grew exponentially. The market was flooded with cooler imports of poor quality sold at big box stores for under 100$. For a decade cooler renting became almost obsolete. The quality of imports has improved significantly, retail prices have gone up. Although the retail channel has picked up market shares, HOD still represent over 80% of new water cooler placements.
The US water cooler market has reached 7.2 million units ( Zenith International), 63% in businesses and 37% in residences. That’s a lot of water coolers. Nowadays, does it make sense to include water cooler rental in HOD growth plans? That brings up two sub questions: Is the market saturated? Can water cooler rental be profitable?
The first question is answered by trying to estimate the market penetration ratio of water coolers. The 2015 statistics from Census USA, showed that there were about 125 million households and 28 million businesses. But not every household and not every business is a potential water cooler customer. Of the 125 million households, 80 million houses are owned or rented by families and only 46 million homes have 3 and more members. That’s what I estimate to be the maximum residential market size thus leading to a residential penetration ratio of 5,6%. (7.2 million* 37%/ 46 million). The same applies to businesses. Of the 28 million businesses, only 5.8 million firms have more than 1 employee. But some have more than 1 location. In fact the 5.8 million businesses represent 7.6 million establishments employing 122 million people. That leads us to a commercial penetration ratio of 60% ( 7.2 million*63%/7.6 million). That number is probably over estimated as some establishments have multiple water coolers. Even though the calculations above are over simplification of the reality, they tend to indicate that the US water cooler market is far from being saturated. More realistic penetration ratios are probably in the range of 12-15% for residential and 30-40% for commercial. About 5 years ago, Zenith International estimated that the combined market penetration to be around 25%.
The second question was brilliantly answered by Steve Keim in his Bottled Water Insights blog. He’s showing what a new water cooler rental customer is worth by calculating its lifetime value. Here is an extract:
‘’ What is the lifetime contribution to overhead and profit from one incremental cooler rental customer-well, it is incremental revenue minus incremental cost. If you have a Quit rate of 19% per annum, then your customers quit, on average, in 5.26 years. If they consume 43.6 bottles per year, and average cooler rental is, say, $100 per year, then they are generating an estimated $6.00 per bottle x 43.6 = $261.60 plus $100 is a total revenue of $361.60. Incremental cost is about $0.60 per bottle COGS, plus about 0.70$ commission per bottle, plus cooler depreciation of about 420 per year or a total of about $77 a year.Net incremental contribution to overhead and profit is about $284 per year x 5.26 or $1494 contribution from one cooler rental customer of its life. That means the value of your company essentially goes up by that every time you add one more cooler rental customer inside your existing geography. Wow!!! Payback of one year is always good in financial circles, so if the entire cost of marketing to get this one cooler rental customer is $284 or less, you are doing really well.’’