11/22/2007

Price We Pay For Bottled Water

An article in MSN discussed bottled water and how it is a strong part of the American economy. Bottled water costs three times more than gasoline. During its transportation empty space must be left in the trailer, because water weighs so much. This creates high transportation costs. We are taking this water from countries such as Fuji, who cannot even support its own citizens with clean drinking water.
So why do Americans pay so much for this water? It is convenient, we think it is more healthy for us than the stuff that comes out of a tap, and it is a sign of wealth. Bottled water comes in second behind carbonated soft drinks in consumer spending. For the makers and suppliers of bottled water this is great as it costs about the same to bottle and distribute as soda pop, but the marketing cost is 15% of that for soda.
The author mentioned that bottled water is a sign of the strength of the economy. If America goes into the recession that people are thinking could happen, the bottled water industry is sure to suffer. This could also have an impact on the many jobs that the production, storage, and transportation of water provides to the economy. It will be interesting to see if there is a noticeable difference in the market for bottled water in the coming months.

13 comments:

Anonymous said...

The bottled water debate has been in the press for months now, yet sales continue to increase. The point often brought up in addition to your comments is the impact of the PET bottles on the environment; essentially calling for companies to be responsible for negative post-consumer actions. Another frequent point is that tap water is "free" (only true if you do not pay your property or MUD taxes.) Whenever consumers have less to spend, luxuries tend to suffer, but as for the environment, mass participation only has success when it is more cost effective for the consumer to recycle. And Fuji is a mountain in Japan, but the nation of Fiji has a brand known as Fiji Water.

Logan said...

This is an interesting study because, as you have noted, bottled water is high on consumer's spending list. This means that when recessionary type market conditions prevail, you will see a cutback in consumer spending in all areas, but comparatively less in the bottled water market.

The reason is that, just like the Diet Coke example, bottled water has become less of a commodity and more of a necessity in the eyes of the average consumer.

Personally, I find it to be one of the greatest shams of our age to get people to pay as much for water as they do for other bottled juices and sodas.

Caden said...

I think that bottled water will continue to sell well even if the economy slows down. You may see some sales at places like convience stores slow down because you pay over $1 per bottle but at grocery stores or places like Costco you can buy bottles for around 16 cents a piece. Also the general sway of the public towards trying to be more healthy will keep sales strong for while to come.

peyton said...

I agree with Caden, I think bottled water will continue to sell, but from consumers switching from soda pop to bottled water.

Dr. Tufte said...

Well ... bottled water is certainly a luxury good, isn't it (at least in the U.S.)?

If that's the case, we'd expect its income elasticity to be greater than one, and therefore its consumption should indeed be a "good sign" for the economy as a whole.

I don't have an economic basis for this, but I am very suspicious that a lot of bottled water consumption is driven by consumers who no longer have a grounding in a rational approach to the world. There seem to be a lot of people who are opposed to modern society as a matter of faith. They see conspiracies everywhere, and usually envision people in authority as being against them. I think bottled water is a symptom of that: it's safer than tap water (because you can't see where that comes from) even if it is just bottled tap water.

So I wonder if this is a cultural neurosis. Too many people are nurturing modest mental conditions in which they are being "attacked" through their taps.

This is a Swiftian proposal, but as a society do we need to consider putting something in the water to help ease the anxieties of the people who are sure there is already smething in the water?

Matthew said...

Dr. Tufte said that bottled water is a luxury good, but I tend to favor more with his comments on how consumers are suspicious of society and therefore use bottled water. This seems to be making bottled water more of a necessity, at least in the consumer's mind. I know of several people who are completely sold on the wonderful vitamins and minerals in the “pure” and “fresh” bottled waters. These people believe that their healthy lifestyles depend on bottled water. In my friend's home town, one bad rumor got out about the city's tap water, and now they buy all of their water. When someone feels that their life, health, and/or safety is dependent upon something, they will pay a lot of money for that good, and this may be something that is happening to consumers and the bottled water industry.

Gavin said...

Extra Credit - Dr. Tufte
Bottled water is a luxury good that should be very elastic. Dr. Tufte you do make a good point that explains why bottled water consumption might not be a sign of recession. I have read articles that immigrants from Mexico purchase bottled water because they think U.S. water is dangerous. This reveals how effectively marketing can play on our insecurities.

William said...

Dr. Tufte,
One thing that I think is interesting is that the water filters have not increased in demand due to the recession. You would think if people are concerned about tap water and still trying to save money they would just purchase a filter which would help with both problems. Bottled water is definitely a luxury and I think that it will be interesting to see what happens with its demand as we get more into a recession.

Trinity said...

Dr. Tufte- I believe there is an element missing from this discussion. Personally, I believe the major appeal of bottled water for many people, is the convenience factor. Before bottled water, people that wished to drink water instead of soda or juice had to find their own container or wash old soda and juice bottles. I love tap water but often buy bottled water just so I can have something in which to carry water. In many of these cases my demand for the water is rather inelastic, despite many of the comments of bottled water being very elastic.

Grace said...

Extra Credit--Dr. Tufte,

Dr. Tufte made a good point that people are losing their grounding in a rational approach to the world. This ties back in to Jenna's comment that bottled water costs three times more than gasoline. The lack of rationality is that we are willing to pay a high price for water in a bottle when we can get it virtually for "free" from the tap while at the same time we complain about the cost of gasoline (that isn't free anywhere). It seems that we should complain more about the cost of bottled water based on the arguements we use against the cost of gasoline.

Trinity also made a good point about why people choose to drink bottled water. The convenience factor is huge--I buy bottled water when I am on a roadtrip and don't have a container and access to a tap. I don't routinely buy bottled water for everyday consumption.

I hadn't considered the idea that people drink bottled water because they are suspicious of someone "attacking them through their taps." Again, going back to Dr. Tufte's comment that people are losing their grounding in a rational approach to the world: wouldn't it be just as easy to contaminate bottled water as tap water? Come on people!!!

Reagan said...

Dr. Tufte-Extra Credit,

I agree that there is a psychological issue with bottled water. People will do costly things if they feel it raises their self image or if they perceive a risk. My question is why don't more people look for a less expensive substitute? Installing an inline water purification system in your home can reduce the cost of purified water from $1-$2 a bottle to only pennies a bottle. At work we leased an inline purification system that cost $7 a month compared to the hundreds of dollars we spent a month on bottled water. If a substitute is so much less yet so few people use it either the price of bottled water is inelastic or people are just crazy. I think people crazy and want to look cool drinking expensive water from a bottle.

Dr. Tufte said...

-1 on Grace and Reagan for a spelling errors.

I loved William's point about filters.

I didn't love Trinity's point: Nalgene bottles have not shown the same level of growth as plain water.

Grace: you've never heard of people worrying about their water??? We live in a state that has constantly opposed flouridation on that basis.

Anonymous said...

We won't expect price elasticity to be greater than one because that doesn't make any sense. 0 < e < 1. Furthermore, it is apparent that bottled water is in fact less elastic then previously thought.

This is surely due to American narcissism and ignorance, but regardless of reason, in the face of rational argument and tightening budgets, bottled water sales persist.