There’s a saying about the well running dry.
But in the case of the UAE’s first bottled water company Masafi, it was faced with a challenge last year that was not so much about a supply shortage as finding a new source altogether in order to continue exporting its product.
The curveball for the 38-year-old brand came in the form of a UAE government decision to ban the export of Emirati ground-sourced mineral water from August 2013.
It was aimed to preserve the precious resource amid growing demand from a burgeoning population. But with Masafi’s product sourced from the foothills of the Hajar Mountains, as opposed to other local producers that use a desalination process, the policy was a tough one to swallow.
“That ban was on mineral water exports, so we were really the only company that was impacted by that,” Masafi CEO Reginald Randall tells Arabian Business from the company’s Dubai head office on Sheikh Zayed Road.
“It meant that we had to accelerate our plans for GCC expansion and as a result we spent a good year and a half trying to find a water source that matched our water source and we eventually found one in Oman.”
Randall says the company, which has a 34 percent share of the $599m UAE bottled water market, bought and gutted a factory 130km southeast of Muscat, installing new machinery from Germany, which is due to be commissioned by the end of February.
Crucially, he says, it is on the same Hajar mountain range, allowing Masafi to maintain consistency in its product and its much-valued brand equity, while Oman is also already a big part of its export market, making the move a “no brainer”.
Prior to the ban, exports derived from production at Masafi’s existing plant in the town of Masafi, Ras Al Khaimah, which produces an estimated 110,000 bottles an hour, made up 30 percent of its revenue, with its product sold to 52 countries worldwide.
“It’s a sizeable portion of our business,” Randall says. “It did mean that we had to produce and ship a lot prior to the ban and also put pressure on us as far as our commissioning of the new facility to get that up and running as quickly as possible.”
However, the company also introduced another plank to retain its export market. It formed a partnership with an undisclosed Turkish firm to produce spring water for Masafi’s international markets.
Randall says that production in Oman, which is expected to reach 36,000 bottles a day, will for the time being be solely for the sultanate, while Turkey will be used for all other overseas markets, which include Kuwait, Japan, Qatar, Bahrain, Saudi Arabia, Afghanistan, Jordan, Djibouti, Syria, Bahrain, Morocco, Taiwan, Germany, the UK, Bangladesh and Pakistan. “Who knows what’s going to happen in the future as far as Omani regulations are concerned and hence we went to Turkey because they are very open to exports,” he says.
Masafi, which is chaired by billionaire businessman and Mashreqbank CEO Abdul Aziz Al Ghurair, sells the bulk of its product in the UAE, which remains its biggest market within the GCC, where most of its revenue is derived.
“The Masafi brand, as it stands, is the number-one beverage in the UAE – it’s ahead of Pepsi and Coca-Cola, which is quite amazing,” Randall, a South African-born, former Coca-Cola executive, says.
He says that level of brand recognition is obviously more difficult outside the Middle East, but in the past two months he has been approached by five companies wanting to bottle and distribute Masafi in their respective countries.
“Iran, Iraq, Afghanistan, even in countries as far as Russia, people are saying ‘can we have your brand and can we distribute it?’” he says. “It is a brand that has a lot of awareness, probably I would say within the Muslim countries.”
Founded in 1976 with paid-up capital of approximately $5.5m, the company has expanded its product portfolio over the years to include natural mineral water, tissues, juices, flavoured water, basmati rice and gourmet chips, though it axed the chips line last year.
It has also innovated over that time. In 2007 it introduced the four-gallon mineral water bottle in response to demand for office-level supplies and it branched out into juices and flavoured water in response to other trends.
Randall, who took over as chief executive two years ago, says it is still finding new product offerings, recently launching an “on-the-go” sports bottle. It is also introducing new kiwi, lime and pomegranate flavours to its juice range, and continuing to explore new options for its range of tissues and kitchen towels.
Sparkling water is also on the agenda, with Randall revealing it wants to launch a premium product “within the next year or so” for hotels and restaurants.
It also is exploring healthier snacks as well as glass bottled water, but Randall says the export ban “changed the feasibilities” of the latter, meaning the bottles would have to be produced outside the UAE and imported.
He says the company competes with “anything that people drink”. “Whether it’s tea, coffee, Coke, Pepsi, juices, you name it,” he says when asked about its biggest bottom-line threat. “It’s about people’s individual choices of lifestyle, health, etc. For us, our positioning is really about being healthy and being natural.”
However, Randall says the quality of its product is also something that is important to Masafi’s philosophy. Unlike many other water brands, its plastic bottles, including gallon bottles, are used only once and all are made from the same polyethylene terephthalate (PET). This compares to some companies which use polycarbonate, “which is not good in the sun”.
“It leaches carcinogenics into the water and it gets rewashed with detergents and chlorines and everything and gets refilled and sent back to you,” he claims.
“What’s most dodgy, and I had it happening to us in Sudan, is where our delivery people were actually refilling it themselves and selling it with our caps on it, so the quality controls there are really difficult. Again, it’s people’s choice on price and value.”
Masafi ruled out building a desalination plant in response to the export ban for similar quality and brand control reasons, with Randall saying “that would not have been true to our brand”. Scientifically, there is no difference in the quality of either product option, but they stand apart in marketing and consumer appeal terms, he explains.
He says the company aims to recycle its bottles, but admits that its overall direct recycling rate stands at only about 5-10 percent.
While Masafi has collection bins in place at various locations, getting permission for this is difficult, with the waste recycling industry tightly regulated and licences few and far between.
Randall says it collects mostly four-gallon bottles and all brands of smaller bottles too, taking them its factory where they are crushed and sold on to recycling firms. It also salvages material such as cartons, metal, pallets and shrink wraps at its factory, which is also sold.
With Euromonitor International estimating UAE bottled water consumption at 582 million litres in 2013, and expected to grow to 809 million litres by 2018, demand for the product is still strong. The UAE’s growth - from 69.1 litres per capita in 2013 to 90.1 litres by 2018 – is significant when compared to Saudi Arabia, where a high per-capita consumption of 85.3 litres is forecast to grow only minimally to 95.7 litres. Saudi residents consumed 2.50 billion litres of bottled water in 2013, with Oman (205.2 million litres), Qatar (54.6 million litres), Kuwait (143.8 million litres) and Bahrain (61.2 million litres) significantly smaller markets.
More broadly, other Middle Eastern markets include Iran (807.8 million litres), Israel (760.8 million litres), Syria (764.2 million litres) and Jordan (253.4 million litres). Globally, people are expected to consume 300 billion litres of bottled water in 2014, which will pass tea as the world’s most consumed packaged beverage.
Randall says the company, which won’t publicly release its financials, is targeting 8 percent growth in 2014 after a 4 percent increase in revenue in 2013.
India, Pakistan, Iran, Iraq and Afghanistan are key markets in sight, but Masafi is avoiding a “shotgun approach” of spreading itself too thin. The US, Randall admits, is a tougher market to crack and he envisages any further move there will be through coffee shops and niche outlets.
“Where we are getting impacted is with all these imported waters. There’s a huge influx of water, especially from Turkey and Lebanon, coming in…and they are really targeting Masafi’s price point,” he says of the firm’s competitors. “That is an area of competition for us, but obviously we welcome competition and we don’t go getting the government to stop them importing.”
While the company has accepted the UAE’s new rules, which it is treating as a permanent change, the politics are clearly still sensitive.
“It’s quite ironic, because we did try and understand and lobby with the government, but the most direct interpretation if you want to save groundwater is to go for the mineral water companies,” Randall says.
“However, when you look at the indirect use of water, for instance to produce a litre of milk you need almost 90 litres of water, however there is no ban on the export of milk. The same with dates – huge, huge water consumption and the export of dates is not stopped. If you have a look at the different price points in the market it definitely targets Masafi as opposed to the other players.”
He says the reality is shipping rates in Turkey are three to four times higher than in Dubai, meaning it has been forced to be more self-sufficient.
“In the past we were shipping to agents and they were earning a profit and obviously covering their costs and servicing the market,” he says. “Now, in many geographies, especially when there’s pressure from the government not to allow price increases to absorb the extra shipping costs, we have to eliminate that middle man and we have to do it ourselves.”
However, despite the challenges he insists that the export ban is “not an issue” as Masafi needed to find cost savings in how it transports water around the world anyway.
“It’s like soccer, there’s rules to the game and you have to stick to them,” he says.
He says the company is among the first water brands to receive the Emirates Quality Mark (ESMA) last year – a stamp that shows it complies with international quality standards and that will be mandatory for all bottled water companies in 2014.
“It’s a huge step in the right direction,” Randall says, before explaining why tighter quality controls are needed. “You can actually just drive around two streets from here and you’ll see two or three different bottling companies that are bottling the gallon bottles with water tankers that they fill up… and bring here and they pump the water out, put it through a filter and put it in these gallon bottles.
“So, there’s a lot of, shall I say, shady-type operations that I’m hoping now with ESMA coming in, these will be better regulated and the consumer will be better protected.”
It’s a strong line, which also comes from Masafi’s own experience with authorities after it was forced to recall its bottled water from shelves in 2009 and again in 2012 after some containers were found firstly with “impurities visible to the naked eye” and then excessive levels of bromate.
“We’re dealing with a natural product all the time and we have to make sure that our processes are in place to control it,” Randall says. “Obviously, the level of control, there’s no such thing as zero defect in any business or in any product around the world – it’s something people aspire to, but we try obviously to minimise that defect.”
Despite the recent massive investment in Oman, Randall says it is still looking to develop more natural source plants in neighbouring countries, though it has no specific number in mind.
Its expansion, which Randall says is mostly self-funded with occasional bridging finance taken for capital projects, is based on “establishing sources within the markets where there’s potential and growing that potential in those markets”.
There is no plan to list on the stock market, though he says “never say never”.
“We do focus on growth, but we focus more importantly on profitable growth. It’s easy to buy market share, however we try not to just do it with price discounting and rather try and build sustainable markets.”
It’s a strategy he clearly hopes will have flow-on effects.
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