Mrwhy Do Sales Of Bottled Water Grow Every Year Despite Of The Well-Known Fact That It Is Produced From The Same Tap Water?

Why do sales of bottled water grow every year despite of the well-known fact that it is produced from the same tap water?

Bottled water industry did not exist 30 years ago and it was only in the 70’s that French companies Perrier and Evian started offering bottled water for sale. Today, every beverage company sells its version of bottled water for prices that range from 50 cents to 5 dollars per gallon. Since 70’s the sales bottled water have grown to a $16 billion per year (2007 estimate). So, what drives people to buy a product that is readily available in every home in the United States?

There have been a number of research studies on the issue and the data is readily available. In fact, ABC’s 20/20 investigated this issue and aired an episode on it in May 2005. ABC performed a number of chemical tests and concluded that there was no difference between the chemical compositions of tap water and bottled water. Moreover, most people failed to identify tap water on a blind test. Companies like Coca-Cola and Pepsi confirmed on a numerous occasions that their product is just a packaged and filtered tap water taken from sources around the country.

Let us first look at the market of bottled water at its conception 30 years ago. First entrants to market were positioning bottled water as an upscale product and were packaging it in fancy glass bottles and selling it through upscale restaurants and grocery chains. At that time, bottle water was considered a luxury good and people who purchased bottled water basis were mostly buying status and feeling of belonging to a higher society. That allowed companies to charge high prices for it. The demand and supply curves are shown in the figure below as S1 and D1.

During 1970s and 1980s high profit margins attracted more players into the market and the product gradually started to commoditize. Companies started to experience economies of scale and greater efficiencies. This ultimately shifted the supply curve far to the right (S1 to S2 on the figure below). During the same period of time the status of a luxury product was stripped away from the bottled water and products such faucet filters, refrigerators with drinking water and office water coolers were introduced. All these products were designed to produce a direct substitute for the bottled water вЂ" filtered tap water. After an initial investment into one of the filters, consumers could get access to unlimited supply of free filtered water. Therefore, the plain logic would suggest that the effect of cheap substitutes would result in the dramatic decrease of the demand for the bottled water and shift of the demand curve to the right. The “would-be” demand line is shown as D? in the figure below:

If the demand for the bottled water really changed this way, we would have seen a sharp decline