Today we are looking at the “R1 a litre” reverse osmosis (RO) water business. I looked at the water business before in general both the purified water business and the bottled water business and even the water hyacinth business (go and see what water hyacinth products are selling for).

Most reverse osmosis shops use municipal tap water and technically a reverse osmosis business offers a reverse osmosis service that charges people a service fee for every litre of water that is run through the purifying system, they don’t sell the actual water because it is illegal to sell municipal water in South Africa (without a unicorn “permit”). But I deal with the political and legal aspect at the end.

What is reverse osmosis?
Reverse osmosis is a process that removes foreign contaminants, solid substances, large molecules and minerals from water by using pressure to push it through specialized membranes. The system improves water for drinking, cooking and other important uses.”

Market Need
In many parts of South Africa, the municipal tap water taste like it came out of a dogs arse and many people buy drinking water for consumption (both in residential and office use). We are told to drink lots of water daily, and how will people be able to gossip in the office if they can’t chat around the water cooler? There are also some people that have “gone off-grid” completely stopped using municipal water, sunk a borehole linked to a water tank which is used for showering, washing and flushing and is buying drinking water and not just home in rural areas; my friend did this at his business in Cape Town. In both these cases, it is too expensive to buy these R10 a litre branded water from the shop and did you know not all branded waters are “spring” water? Nope Bonaqua “Still Prepared Water” is reverse osmosis tap water with a fancy name and Coca-Cola’s marketing budget.

The Solution
A reserve osmosis system attaches to the plumbing of the tap water supply, where the water gets filtered and is usually stored in a bigger tank or container where it is dispensed from. People usually bring their own container to fill (or they can buy in the shop – another revenue stream) and they pay R1 a litre, which seems to be the most common price point. Obviously, if people bringing their own containers, they can’t be rinsing it out in your shop, that is money down the drain. Other sources of revenue are selling water dispensers and coolers.

The Business
This business is pretty straightforward, you pay the municipality for the water you use (usually a few cents a litre) and then you (gross) profit from the difference, obviously factoring in the filtering membrane or media. So if you paying 10c a litre with your media, then you grossing 90c a litre. The price of water is different across the country, domestic vs commercial, and also the quantity you use. That is something you need to know. The City of Cape Town claims the average cost of water is 4c/litre (I pay double that in the Cape), but I assume that is because most are low-use domestic use. That being said, don’t think you are going to walk away with 90% nett margins, this business requires a busy sales channel and obviously one or two staff to operate the store. So it can be a tough business, your main product at R1 litre, you need to make sure you know what your breakeven point is and how you are going to traverse that. A small shops rent in a busy mall, one staff member, electricity, that is your first 1000 litres profit for the day gone. However, if income is supplemented by water dispensers then you can be making a few hundred rand per sale. But the RO processing will be your “bread and butter” so to speak.

The risks
You probably thinking wow, this business is doing something good, removing the dog arse taste from the water and selling it affordably, creating entrepreneurs, creating jobs in the shop, the value chain grows the economy in both jobs and taxes, paying the municipality for the water which creates jobs at the waterworks and pays to maintain and upgrade the water infrastructure, the municipality will have more money for research and development so they don’t run out of water in future. No, that would be common sense, this business actually operates in a legally grey area, we saw it in Cape Town with the DA clown show when the City of Cape Town was running out of water and these businesses were demonised including by the media and were fined as a scapegoat for the incompetence of the Democratic Alliance. Let me tell you this: there are many, and I mean MANY businesses out there that use far more water than a reverse osmosis shop. Each hotel guest uses 200, 300+ litres of water a day, one shower is like 60 litres alone. Many other industries are water-intensive, I’m talking thousands of litres of water an hour, most reverse osmosis systems don’t even have that capacity.

Lots more of these shops have opened in Cape Town since then, but the law hasn’t changed. Is a picture on the wall stating “You are not paying for water but the purification process” going to protect you? What happens when the next “water crisis” comes along? Best speak to a lawyer. I assume some of the shops have but maybe you just have to put a disclaimer or note clearly on the till slip “water purification fee”.

But the clown show continues to this day in Cape Town, after the Patricia de Lille went around door-to-door threatening people for “wasting” water (that they all pay for) and the City of Cape Town trespassed on people’s property, dug up the lawn and installed “new” meters with more fees. People then started using less water, while others started digging up boreholes (remember in the Cape a lot of properties already have boreholes from back in the day). After the dams “filled up” and were “overflowing” and the City of Cape Town lifted restrictions, water use didn’t go back to normal, pre “water crisis” levels.  Now the City of Cape Town is complaining that they are only selling 500 million litres a day when before they used to sell 1000 million a day but their cost to supply water has remained “not a lot less” per 1000 litres but revenue has halved (from the 1000 million to 500 million litres) and now there must be a higher fixed monthly fee. So that is the shitshow that this business operates under in the Cape which you have to consider especially if you going to put up assets as collateral for funding this venture because not only can they shut you down, your costs can double overnight, listen to this mind-boggling piece of logic, “we selling half (due to our own incompetence) now you must pay double”:

So our costs are not a lot less than for 1,000 litres, but our revenue is now halved, so we actually have to double our unit cost. And that’s really what we mean by having to increase tariffs just because our sales are down –  Gisela Kaiser, Executive Director of Informal Settlements, Water and Waste (City of Cape Town).

Water crisis in Cape Town: a failure in governance

Now you probably thinking, can’t you sink a borehole and extract water, well there are laws against that as well, so no without a license. But that is not the biggest problem in this business. This business depends on a sales channel with significant foot traffic (remember you need to move volume, lots of R1’s) and that usually means shopping centres; Hyprop ain’t gonna let you sink no boreholes on their land (it’s probably not even possible). You could truck in water and store it in a tank, like if you in a strip mall with a back entrance but is there enough space and how often would you have to refill?

The reverse osmosis value chain
Like any other business, this business has a value chain, you don’t have to purify, you can supply the equipment, you can install the equipment, you can service and repair the equipment, you can supply the purifying membrane, you can offer a cleaning service, you can supply water bottles and water dispensers. You can also deliver water to offices etc.

Image credit: mrright.in and other trademark holders