This article first appeared in The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

LIKE most fast-moving consumer goods companies in the country, Malaysia’s largest bottled water producer Spritzer Bhd is facing a double whammy — rising costs of doing business and a slowdown in consumer sentiment.

“Things are getting tough, especially this year when prices are all going up. It’s not just our raw material prices that have gone up, it’s an increase in overall [operating] costs,” Spritzer’s group financial controller Sow Yeng Chong tells The Edge.

The main raw material sourced by Spritzer is polyethylene terephthalate (PET) resin, which is used to make the plastic water bottles.

Sow says in the bottled water business, it is not water processing that takes up a significant portion of direct costs. On the contrary, it is the packaging costs.

“Packaging costs make up 70% to 75% of our product costs. It’s not just PET resin costs that have gone up, the costs of labels and cartons have also gone up.

“PET resin prices follow the [trend] in oil prices as it is a processed product of [crude] oil. So if oil prices increase, PET resin prices will go up as well. Besides, the prices are quoted in US dollars, so, with the weak ringgit, we end up paying more [for PET resin],” he says.

Brent crude oil futures have increased to US$55 per barrel last Thursday, from US$45 per barrel a year ago.

“The increase in PET resin prices has been gradual, but if you were to compare the prices today with those of a year ago, the increase is substantial. PET price a year ago was RM3,700 per tonne, and currently it is about RM4,500 per tonne,” Sow says.

With the rising costs, he says the group is considering passing on the additional costs to consumers. However, he adds that this will not be an easy task, given the level of competition in the market.

“In the early days, the price of bottled water was higher, but nowadays with more players in the market, it has come down.

“Due to the generic nature of our product, it is not easy to raise prices. If you push the price too high, it will be at the expense of sales,” Sow says.

“However, due to the higher input costs, we are seriously considering passing on the additional costs to consumers; otherwise, it would compress our [profit] margins. The [quantum] of price increase will not be large as we are bound by the Anti-Profiteering Act.

“We are currently discussing this with our customers and distributors and we hope to make a decision once things are finalised,” he adds.

Spritzer’s main products are bottled water, which makes up 90% of its revenue, while 10% is derived from non-water sales, which consists of packaging materials sold to external parties.

Of its bottled water products, about 90% of revenue is derived from mineral water and drinking water products, namely its two top brands Spritzer and Cactus. The remaining 10% are from functional and flavoured water such as Spritzer plus Fibre and Spritzer TINGE.

“The production process for Spritzer and Cactus is the same; it is just that we use different water wells [for the two brands], which also means different mineral content. We use our best water source for Spritzer,” Sow says.

Hence, the selling price of Spritzer is higher than that of Cactus. A check in a ­hypermarket shows a 1.5L bottle of Spritzer is priced at RM2.85 — 96 sen higher than a similar sized bottle of Cactus, which sells for RM1.89.

Spritzer has a 40% market share of the domestic bottled water market and the group intends to grow this to 50% over the next few years.

“Once you have reached this level, growing our market share by 1% is not an easy thing to do, as the market is mature and competition intense.

“Internally, we intend to grow our revenue to be more than the industrial revenue growth rate, which is 8%. [In fact], over the past few years we have managed to outperform the industry growth rate.

“For this year, however, we think our ­revenue growth rate will be much in line with the industrial growth rate due to the competitiveness in the market,” he says.

Spritzer announced a change in its financial year last year, from May to December. For the seven months ended Dec 31, 2016, the group had reported a net profit of RM12.51 million on the back of revenue of RM185.94 million.

Sow says the group’s decision to change its financial year was to streamline its Malaysian operations with its China subsidiary Spritzer (Guangzhou) Trading Ltd, as companies in China are required to close their financial year in December.

The group’s decision to expand to China was part of its efforts to grow its export markets, which currently contribute less than 10% to revenue.

Spritzer (Guangzhou) commenced business operations as an importer and exporter of beverages and related products in April last year. Products exported to China include Spritzer mineral water, Spritzer TINGE and Spritzer plus Fibre.

However, Sow says the China operations will require a three-year gestation period to start generating positive cash flow.

“So far, we have spent more than RM10 million on advertising and promotion as well as marketing in China. Our capital expenditure has been minimal as we are not setting up a plant there.

“We still need to spend money in China to gain market acceptance, but we believe this year it will be less,” he says.

As at Dec 31, 2016, Spritzer had cash of RM18.58 million, and total borrowings of RM20.05 million.

Another new market that the group has ventured into this year is the UK.

“The product we are selling in UK is called Acilis, which is the reverse of the word Silica, as research papers published by [scientists] at Keele University found that the mineral in our water has been proven to help remove aluminium from the human body.

“However, this is [still on a small scale for now] as distribution channels have not been established yet,” Sow says.

The group’s largest export market is Singapore due to its proximity to its mineral water plant in Yong Peng, Johor. Spritzer’s other mineral water plant is in Taiping, Perak, and the group also has a drinking water factory in Shah Alam.

Its three plants are currently running at 70% utilisation rate, and have an annual production capacity of 650 million litres of bottled water.

Spritzer’s share price closed at RM2.32 last Thursday, for a market capitalisation of RM423.59 million. Year to date, its share price has declined 4.9%.

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