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HOW TO START A BOTTLED WATER BUSINESS IN AFRICA (KENYA)

ByJuma Chai

Mar 22, 2021

 

 

Introduction

This guide focuses on the business of packaging water in bottle for sale to different kinds of consumers.

In Kenya bottling water became a business of interest in the early 2000s. The business is driven by:

  • Health Concerns – More consumers mistrust tap water and go the extra mile to access clean drinking water. In urban areas where there are water shortages and residents have to resort to purchasing , bottled treated water becomes a leading source of drinking water, while the purchased water is used for other household chores.

Consumers are also becoming more health conscious from reading and listening to material appearing in different media. For instance a lot has been written about the health benefits of drinking a certain amount of water everyday in regard to the skin and aging.

  • Convenience to do with ease of carrying and accessing clean water when on the move and away from home.
  • Lifestyle Changes through exposure, education and increasing income made carrying and drinking water on the move a mark of prestige.

That is no longer the case as it was say 6 years ago. Bottled water is increasingly becoming a mass product. Aspirational consumers who still want to use to signify class differentiate by going for drinks of brands considered prestigious, which in most cases than not are the pioneers and more established brands.

Related to lifestyle is the consumer who doesn’t want to take pure water, either flavoured or plain. For instance in areas where tap water is ‘salty’ or ‘tastes funny’ . In such cases consumers who can afford will go for bottled water .

Value of Water Industry

The exact value of the bottled water industry is not exactly known. The often quoted figure is Kshs. 12 billion. But from government statistics this is more like the value of the soft drink industry. Water contributes about 15% of the soft drink industry and thus the value of the bottled segment is in excess of Kshs.2 billion.

In terms of volume , bottled water contributes 500 million liters , about 0.7 % of the total commercial value water consumed in Kenya. Government data indicates the industry has been growing at an annual average rate of 12%, a rate that is expected to continue as demand increases and more entrepreneurs join the business.

Competition Landscape – An Overview

Officially there are about 600 water bottling companies. The figure is definitely higher if you take in to considerations the number of firms operating below the line without proper registration. Some of the latter are strap jobs operating from the owner’s small residential houses; some directly bottle and pack tap water while process just by boiling.

Even among those who undertake full purification process there are those not fully registered, this is mainly to avoid paying necessary taxes and maximize profits in the competitive market. (S

The barriers to entry in the business have considerably reduced. Partially this is because there are now more companies supplying water purification and packing technology of different quality. . (more below) . The technological advancement and increased competition among the machinery vendors has made the water treatment machines more affordable to a big number of entrepreneurs.

Also with competition among the water treatment and vending firms becoming much more intense , there are more companies exiting the business. This has created a second hand market for water treatment machinery, which are sold at prices way below that of new machines.

On the other hand standards in the industry have been compromised. Though there are many companies who have the Kenya Bureau of Standards (KEBS) certification some fake it, while others put up a show in order to get the certification but don’t keep up with the required standards thereafter. This reduces the cost of production of such firms and enables them to get higher margins in addition to competing on prices and cost leadership.

Packaging technology has also expanded and there are now many more players. This ,unlike say 10 years ago, when getting packaging was relatively expensive and required quite some effort. Nowadays with the growth of printing technology even small bureaus can do labels.

As the industry matures players are learning new tricks in production, sourcing, suppliers, distribution and all other aspects of the business. These are trickling down to would be entrepreneurs further lowering the barriers to entry in terms of knowledge.

The low barriers and expected margins will continue to attract new players in the business hence increasing competition to a point of saturation and maturity. At that point the industry will stop being so attractive to new entrants. Only players who are able to compete by quality, branding,

 

distribution, cost management and overall marketing will be left. Presently, in 2014, the business is still far from that point.

The market is biased towards the bigger players with 5 brands dominating the market in terms of volume and value. These are Keringet, Highlands, Aquamist, Quencher and Dasani. These control about 60% while of the market, while the 40% is shared by the 500 plus small firms.

The five leading firms have been able to reach a level of domination because they have been able to build more established brands. Keringet and Aquamist were among the first bottled water firms in Kenya. Since initially their target market was high value customers they were very particular about process, standards and branding. This way not only were they able to grab a big chunk of the high end customers but also a significant number of corporate customers.

Corporate customers have the advantage of volume, predictable monthly quantities and certainly lump sum payments. Quencher, Highlands and Dasani were relatively late entries in the market but they were products of companies with other established brands, and thus it was easy for consumers to identify and trust them.

Comparatively the dominating companies have definite distribution systems in addition to being better capitalized. This helps them to invest in branding , buy advertising space and participate in other marketing activities, which eventually leads to more sales.

Of note is that many of the small and medium firms that have existed for over 5 years have experienced only marginal growth during the period with some forever remaining at the stage where they struggle to acquire customers and survive. They have remained the same size and not significantly expanding their market.

This can be attributed to lack of access to cash that can be used to expand and hire qualified persons like salespeople and marketing personnel. Many also get into the business attracted by the supposedly high margins but they have poor understanding of the purification technology, management and specialized skills like distribution. The fact that they are not able to grow creates a vicious cycle where they are not able to hire skilled personnel and thus remain at the same level.

Low capital also means the firms are not able to invest much in advertising and other marketing activities. Instead they rely almost entirely on distribution. Whereas some have elaborate and innovative distribution methods others are crude and with no proper plans.

One of the consequences of the flourishing of many bottle water brands has been mistrust among consumers. When they see a water brand they don’t recognize they purchase with reluctance or avoid them completely. There is little consumer loyalty for brands produced by the small and medium firms. In a way this means that the market is pretty open for the firm, new or existing, which implements a superior or innovation distribution and marketing strategy

 

The mistrust is more among higher income consumers who are also the people who purchase water regularly. This is especially so if they are purchasing water from a supermarket. This sets in motion a chain process where supermarkets too are reluctant to stock bottled water from new, smaller and unknown companies.

Lack of access to medium range capital is a common problem across the industry. Whereas many of the small firms have enough money to start and run for a few months, they lack capital to help them expand their market, facilities and distribution.

Competition in the business is based on

  1. Price
  2. Cost Leadership
  3. Marketing & Distribution
  4. Location

These will become clearer in the sections to follow.

Equipment

There are a wide variety of water treatment and purification equipment.

In terms of operations the machines can be classified as:

  1. Manual
  2. Semi Automatic
  3. Fully Automatic

In terms of Features the equipment can be classified by:

  1. Capacity – This implies the amount of water usually in liters that the equipment can treat within an hour. For instance 1000 liters per hour, 2500 liters per hour and so forth.

 

  1. Treatment Technology – There are various types of impurities found in water depending on the source and location. Hence different methods and technologies are used to treat the water.

Factors To Consider When Purchasing Equipment

  • Market

This will determine the equipment capacity that you need. ‘Treatment system capacity’ as mentioned refers to the number of liters that a water treatment system is able to treat in an hour or a day. When you are trying to decide which treatment equipment to buy, you will have to balance treatment system capacity with the total cost of the equipment.

At a minimum, you will want to ensure that your system is capable of treating sufficient volumes of water to serve the demand. If you purchase low capacity equipment and your market is big then you will experience shortages. On the other hand if you acquire high capacity equipment when your market is small you will have so much underutilized capacity which in the long run becomes a cost.

Systems with greater treatment capacity are more expensive to purchase and more expensive to operate. For some businesses, it may be a better idea to start with a smaller system that can be expanded at a later date, than to spend a lot of money in the beginning on a bigger system. Shop around for equipment that can easily be scaled up if need be.

This allows you to reduce start-up costs and invest more money in equipment after the business is established and demand levels at a particular location are better understood.

  • Capital

The amount of capital you have will determine how much you allocate to purchase equipment. Remember other than the treatment equipment; there are other start up costs like rent, renovation, bottles and marketing.

Manual systems are cheaper than fully automated equipment. However manual systems could be time consuming if you are dealing with high volumes. In the long run initial savings in manual systems can turn out to be costs due to associated inefficiencies and extra manpower that could be needed to meet increased demand and inefficiencies. A semi automated system is a good start.

On average 65% of the smaller water processing firms use semi automated systems, 20% fully automated and only 15 % manual equipment.

 

  • Ease of Use

If you are getting into water the first time the idea of operating water treatment systems can be intimidating. However, you can buy complete and simple systems that are made for small-scale water treatment and vending businesses. You do not have to be an expert to use these systems on a daily basis.

Almost all water treatment equipment suppliers will provide you and your employees with training on how to operate the equipment as part of their sales package. Many equipment suppliers will also offer equipment maintenance services. Check with the water treatment equipment supplier regarding training and maintenance before making an equipment purchase. For this reason it’s much better to buy equipment locally rather than import. Locally you are sure of almost immediate and easy support.

  • Source of Water

Your water source will determine the kind of treatment that is required and hence the equipment that you need. The very sure way to know the elements in the water your water is to take a sample to a laboratory for testing. Testing prices ranges between Kshs. 750 and Kshs. 5000.

When purchasing equipment show the test results to the suppliers and they should advise you on the best fit for the kind of water. However as expected there are some greedy suppliers who could sell you equipment that you may not need. To be sure shop whether what you are purchasing is right, shop around and get quotations from different suppliers. Also ask the suppliers for references of their past system installations.

Among the laborites where you can take water for testing include:

Company Contacts
AgriQ-Quest Kenya (Quest Laboratories Plessey House, Baricho Road
Ltd.) Phone: 020.551.988
Kenya Bureau of Standards (KEBS) Testing Popo Road, Off Mombasa Road,
Laboratories behind Bellevue Cinema
Phone: 020.600.5490 / 0722.202.137 /
0734.600.471
E-mail: info@kebs.org
Website: www.kebs.org
Nairobi Water Conservation and Pipeline Dunga Road, Industrial Area
Corporation Phone: 020.653 1044 or 020.653.1046
E-mail: info@nwcpc.go.ke
   
Website: www.nwcpc.go.ke
SGS Kenya Victoria Towers, 2nd Floor
Kilimanjaro Avenue, Upper Hill
Phone: 020.273.3690 or 020.273.3699
Website: www.ke.sgs.com

Types of contaminants found in water:

  1. Microbes

Waterborne microbes are small organisms that can be harmful to human health. They are divided among three main classes: bacteria (for example, those causing typhoid, cholera, and dysentery), protozoan parasites (such as Giardia and Cryptosporidium), and viruses (such as rotavirus and norovirus).

Water contaminated with microbes can cause disease among consumers within a few days of drinking. This can be very dangerous for infants and children. Microbes are likely to be found in all surface waters and shallow groundwater, as well as in poorly operated and maintained municipal water systems.

It is rare to find microbes in borehole water, but if the borehole is connected to a poorly managed storage facility or piped network, the water can be contaminated with microbes during storage or distribution.

  1. Suspended solids

These are basically earth or dirt that is in the water. Suspended solids affect how the water looks, giving it a cloudy or muddy appearance (known formally as “turbidity”). In addition, other

 

contaminants may be attached to the suspended sediment particles, including both microbes and chemical contaminants such as the agricultural and industrial pollutants described below.

Suspended solids are mainly a problem in surface waters such as rivers, earth pans, and unprotected springs.

  1. Salinity

This refers to how salty the water is by measuring the amount of major salts such as sodium, potassium, calcium, magnesium, chloride, sulfate, and carbonate.

Salinity is also known as TDS (for “total dissolved solids”). Water with high salinity is not suitable for drinking. Salinity is usually low in surface waters but can be higher in groundwater, particularly along the coast.

IV. Naturally occurring trace contaminants.

These include chemicals such as arsenic and fluoride that are harmful for human health when consumed over long periods. High fluoride levels are often found in groundwater in Central, Nairobi, and Rift Valley Provinces.

  1. Industrial contaminants.

These include both heavy metals such as mercury, lead, and cadmium as well as many of the chemicals used in fuels, manufacturing, and processing. They also include lightweight organic compounds often used as solvents (known collectively as volatile organic compounds (VOCs), petroleum hydrocarbons, benzene and related compounds (known as BTEX, for “Benzene, Toluene, EthylBenzene, and Xylene”), and heavier compounds such as PCBs (polychlorinated biphenyls), which tend to be found in sediment.

Industrial chemicals are more likely to be found in groundwater but also may be found in rivers adjacent to or downstream of zones of heavy industry.

VI. Agricultural Contaminants.

The agricultural materials of concern for human health are pesticides, herbicides, and fungicides. These contaminants generally are not immediately dangerous, but if people drink them in high concentrations over long periods of time, they may

increase the likelihood of some diseases, including cancers. Agricultural contaminants are primarily found in groundwater from intensively farmed regions and in rivers that are downstream of these areas.

 

Methods of Water Treatment

There are basically three methods used in water treatment, and these depend on the type of contaminants in the water. These methods are:

1) Physical Filtration

Almost all water treatment systems include some form of physical filtration, which removes suspended solids and sediment (sand and dirt). The suspended solids and sediment levels in your source water will determine your requirements for physical filtration. Sand filters or mixed media filters either packaged in large columns or in smaller pressurized vessels (called pressure sand filters or PSFs) are required to remove large particles. Column filters and PSFs can be backwashed to maintain their performance.

If your source water has low levels of suspended solids and sediment, you may only require particle filters with small pore sizes that remove low levels of turbidity. These particle filters cannot be backwashed and need to be replaced on occasion.

In some cases a water treatment equipment supplier may also recommend passing source water through activated carbon filters.

Activated carbon can reduce the levels of industrial and agricultural contaminants. Activated carbon filters will also require replacement according to your equipment supplier’s recommendation.

2) Ultraviolet Irradiation

Ultraviolet (UV) irradiation, which exposes source water to ultraviolet light, is very effective for killing pathogenic microbes; however, UV irradiation will not remove any of the other classes of contaminants.

Physical filtration + UV irradiation, therefore is only an effective treatment system for water sources that do not contain naturally occurring trace contaminants, industrial contaminants, and agricultural contaminants. Usually the only place to find this kind of water is through the municipal supplier or from protected surface waters, such as natural springs, that are not contaminated with agricultural or industrial run-off waste.

 

In Indonesia, for example, many water treatment and vending businesses obtain their source water from protected mountain springs, which they then treat with a combination of physical filtration and UV irradiation.

3) Reverse Osmosis Membrane Filtration

Reverse Osmosis (RO) membrane filtration uses pressure to ‘push’ water through filters with extremely small pores. These filters trap a large number of all classes of water contaminants, including microbes, naturally occurring trace contaminants, industrial contaminants and agriculture contaminants.

These contaminants are discarded in ‘reject water’, which is the water that does not pass through the RO membrane. Physical filtration + RO membrane filtration is commonly used by water treatment and businesses that rely on source water that is contaminated with trace, industrial, and agricultural contaminants.

Treatment Benefits Purchase cost Operating Operation Water Usage
Technology ( Kshs) Costs ( Kshs)
Reverse Effectively 350,000 – 0.43-2.08 per RO RO systems
Osmosis + removes 700,000 membranes produce both
UV Irradiation microbial, liter must be drinking
chemical, and replaced over water and
mineral time. reject
contamination water. The
reject water
is not safe for
human
consumption.
UV Irradiation Effectively 50,000 – ~ 0.38 per Operating All water
removes 350,000 liter costs are produced is
microbial lower than fit
contamination. RO+UV for drinking;
Only because there is no
appropriate there are reject water.
for treating fewer
water with consumables
acceptable to replace
chemical and
mineral
content.

Equipment Suppliers

There are quite number equipment suppliers. Like mentioned above make sure the supplier understands your needs, sells you relevant equipment, trains and gives you support after installation.

Below are some of the equipment suppliers. We are not endorsing them but these are some of the most established. That said Davis and Shirtliff have a rather good reputation in the market and variety of relatively affordable but quality equipment. There are also many independt and ssmalle dealers largely importing from China. Shop around for more.

Company Contacts
DavChem Phone: 020.350.1738/6005 or 0722.719.796
E-mail: info@davechemeastafrica.co.ke
Website: www.davechemeastafrica.co.ke
Davis and Shirtliff Phone: 020.696.8000 or 0711.079.000
E-mail: d&s@dayliff.com
Website: www.dayliff.com
PureFlow Phone: 020.236.7055/6 or 0715.626.413 /
0735.588.113
E-mail: info@pureflow.co.ke
Atlas Kenya Phone: 0720 121 644 ,
info@atlaskenyaltd.co.ke
www.atlaskenya.co.ke

Sources of Water

Your business must have access to a reliable, consistent water supply. Running out of water is potentially disastrous for any water treatment and vending business.

 

You have three potential water sources: tap water, ground water, and surface water. Most of the existing water treatment and vending businesses in Kenya get their water from tap water provided by the local authorities or from groundwater supplied by private boreholes and wells.

All water sources must be tested to determine the kinds and levels of contaminants that must be removed by your shop’s water treatment equipment.

A. Tap Water: The most cost effective

Local authorities tap water is almost always the most cost-effective

source of water for businesses, because it is usually much cheaper to use and treat than other water sources. As the water quality provided by water utilities is generally of a higher standard, tap water may only require minimal treatment to

remove possible microbial contamination (bacteria, viruses, and other parasites).

The biggest challenge with using council tap water is that there may be supply disruptions during which you have no water supply from the tap. Another challenge is that if your store location does not have a connection to

the water line, making a new connection might be difficult and/or expensive.

B. Ground Water (Boreholes and Wells):

Private boreholes and wells can offer an independent, consistent supply of water to a business. In some cases the building landlord can supply this private water source; in other instances you need to reach a supply agreement with a private borehole owner in the immediate area. Make sure that your water source is properly licensed and that the connection is secured before committing to a lease.

In almost all cases, drilling a borehole or digging a well for small-scale water treatment and vending businesses is so expensive that sales from the business will never pay back the expense (it is cost prohibitive), at least in the medium term

The average charge for drilling a borehole in Kenya is KShs.6, 500 per meter and

the average borehole depth in Nairobi is 200 to 220 meters. At this rate the average charge for drilling and finishing casing a Nairobi borehole is KShs.1.365 million. Add to this about KShs.500, 000 for average pump, control panel, and piping costs and the total is KShs.1.865 million.

For most businesses this is much more than all other start-up costs combined. At a least price point of KShs.10 per liter, a business would have to sell approximately 3,100 additional liters per month for 60 months in order to cover the cost of the

borehole. This represents roughly 15 to 25 percent of the water sold per month by most demonstration businesses.

 

Drilling a borehole or digging a well for commercial use also requires an abstraction permit from the Water Resources Management Authority (WRMA) and a license from the National Environment Management Authority (NEMA).

Obtaining these licenses often takes a lot of time and effort

C. Surface Water: Contaminants a potential concern

Surface water refers to springs, ponds, lakes, streams, and rivers. Microbes are usually the main contaminants in surface waters, although, there may be additional chemical contaminants in urban settings.

Using surface water also requires an abstraction permit from WRMA and a license from NEMA.

Reliability of Your Water Supply

Regardless of your water supply, you must take steps to ensure you do not run out of water.

When you are researching various locations, consider the reliability of the water supply.

Water storage tanks are useful to protect your business against supply disruptions (when there is no water available), so determine if possible shop locations have enough space for the storage tanks. The exact amount of storage space a business requires will depend on the projected sales volumes and the reliability of supply in the area. In addition to speaking with the landlord, it is important to check with neighboring businesses (who do not have a financial interest in your relocating to the area) to get an opinion from someone else on any problems with the water supply in the area.

Competition & Location

In choosing your location, you should broadly consider the level of the competition in the area. You are selling safe drinking water and your competition is any other water that customers perceive is safe to drink. T

This could consist of traditional bottled water whether it is purchased at supermarkets or delivered, other water treatment and vending businesses, good-quality municipal supply, water treated at home (for example, treatment by boiling or using chlorine or filters).

Competition can be beneficial to your business because it increases public awareness of the water treatment and vending business model. That fact aside, there are few benefits to the business owner to competing directly with another business for the same customers. It is advisable not to locate your shop too close to another water treatment and vending business. The level and type of competition will also inform your marketing message. More on this later.

 

Licenses

Kenyan Bureau of Standards

All water treatment and vending businesses must obtain a permit to use the standardization mark from KEBS. The law says you need to have the mark, but it also helps customers trust the quality of the business product if they can see it on the water bottles. Multiple business owners have reported customers asking to see their KEBS certificate and documentation.

KEBS will only give you the standardization mark after the water treatment equipment has been installed at the shop and they can test the system’s product water. KEBS certification fees are Kshs. 31,900 annually.

The standardization mark states that KEBS finds that the product meets KEBS standards. KEBS drinking water standards are based on World Health Organization guidelines. At present, KEBS treats all small-scale water treatment and vending shops as mini bottling plants (factories) and applies the following standards: Kenya Standard 459 parts 1 and 7 (KS-459-1 and KS-459-7) and the code of hygiene for both the premises and the operator (KSEAS 39). You can purchase these documents from KEBS.

KEBS issues a standardization mark separately for each site so if you package water at two separate store locations you will have to apply for two separate standardization marks.

Council Government License

County governments are responsible for issuing business permits. These permits vary based on the county as well as the size of the business, but typically cost between 8,000 and 20,000 Kenyan shillings per year.

In addition, the counties also regulate certain advertising and promotional activities, such as store branding and signage and the distribution of fliers. These fees are typically several thousand shillings, but vary based on county, size of signage, and other factors determined by the government.

Public Health Department

The public health department certificates that the shop location follows the law for health regulations and ensures that shop employees are in good health. The nominal cost of the public health license is KShs.1, 000 per year, but some businesses have recorded actual expenditures as

 

high as KShs.7, 000 to obtain this license. Employee health certification costs KShs.600 per employee.

Water Resources Management Authority

You will need an abstraction permit (official permission) from WRMA for the use of either ground or surface water (any natural water resource). Aside from businesses using municipal tap water, all businesses will be required to either have a WRMA permit themselves or to make sure that the owner of the source of their water (for example, the owner of a private borehole) has a permit.

National Environment Management Authority

Based on experience, almost all water treatment and vending businesses will not have to deal directly with NEMA. However, businesses that plan new construction of buildings, boreholes, or the abstraction of surface water require NEMA approval to ensure proper drainage and the mitigation of environmental impact.

Kenya Revenue Authority

Three taxes nominally apply to small-scale water treatment and vending businesses in Kenya:

Value Added Tax (VAT), Excise Tax, and Corporate Income Tax or Turnover Tax.

Value Added Tax

All bottlers of water are required to register with KRA and charge customers 16 percent VAT on the sale of both new water bottles and on water refills. However, businesses can deduct VAT they pay on goods and services for the business

from the amount they remit to KRA. Contact your accountant for exact details depending on nature of your business.

Excise Tax

Businesses must also obtain a license to manufacture excisable goods . The license costs KShs.50, 000 per year. The excise tax on bottled water is set at the maximum of KShs.3 per liter sold or 5 percent of total water sales for the month.

Excise tax collected in a given month must be remitted to KRA by the 20th day of the following month.

There is considerable variation in interpretation of and compliance with the excise tax law. Many businesses report remitting excise tax only on new, branded bottle sales, rather than on all refills. You may wish to seek further guidance and clarification on excise tax from your accountant KRA.

 

Corporate Income Tax or Turnover Tax

For resident, limited companies (almost all water treatment and vending businesses we have worked with or interviewed are this kind of business), the corporate income tax rate is 30 percent (KRA, Income Tax at a Glance, 2011-2012).

Small businesses, whose annual gross turnover (revenues) does not exceed KShs.5 million, can

choose to pay a turnover tax of 3 percent instead of the corporate income tax (KRA,

Turnover Tax, 2011-2012). Kindly contact your account and KRA for more information on this.

Kenya Revenue Authority (KRA) Information Centre

Address: Office of the Commissioner General,

Times Tower, 30th Floor, Nairobi

Phone: 020.281.7700 or 020.281.7800

E-mail: cic@kra.go.ke

Website: www.kra.go.ke

(For more on Tax please also see our Small Business Tax Guide which is updated monthly)

Location & Premises

When thinking of the location and consequently the premises it’s important to think of:

  1. Source of Water
  2. Market for your product
  3. Location vis a vis your potential customers
  4. Size and modifications required of the premises in terms of production.

a) Source of Water

See above Sources of Water

b) Market for your Product & Potential customers

 

As a small business it makes sense to locate within a reasonable distance of your market. This will save you on distribution costs in addition to making it easy for your customers to access your products. This also means that you should locate with in an area with a high number of potential customers.

As much as you may be eyeing the wider national market its good to think of the local as your first market and which will provide the basis of your growth. For a small business a branded water shop at or near your location is a great way of penetrating the market.

From such a shop customers can purchase water from you directly and retailers can purchase in wholesale for to resell to their customers. This way you cut wholesalers and other middle men that you have to deal with before getting your product to the consumer. Eventually this increases your profits.

You can estimate the number of potential customers within your area of location by making some logical assumptions based on the following questions that you should ask yourself:

i. . Who are my target customers? (For example, what is their likely household
income?)
ii. . Do my target customers live nearby or do they work nearby?
iii. . What is the demand for treated drinking water in the area?

To get a rough idea of the demand of treated water in an area

1) Calculate the total estimated size of the primary market.

You can do this by multiplying the number of homes within 1 km of the location by the number of people living in each home (four people in each home is a reasonable estimate for

Nairobi based on our surveys). Then multiply that number by the number of liters of drinking water consumed per person per day (1-1.5 liters per day). Then multiply that by the number of days per month.

  1. Next, estimate what percentage of these people treat their drinking water or want to pay for treated drinking water.

In middle-income neighborhoods 95-100 percent of consumers either treat their water at home (for example, filtering, boiling, addition of chlorine, in-home treatment system) or purchase bottled water.

 

Customers who currently buy bottled water or who treat their water at home have demonstrated that they value treated drinking water and will be the easiest consumers to convert to purchasing water from your shop.

Customers who do not currently purchase treated water or treat water at home will require more education and effort to convert and are best targeted after sales at your business are better established.

  1. Then estimate the percentage of these people who you think would come to your shop. ( If you have a retail shop, if not look at number of retail shops likely to purchase from you)

Based on our experience , you should estimate carefully and conservatively.

Expect to start with low levels of sales that grow over time. Upon opening, the businesses we have surveyed have captured approximately 1 percent of the estimated market in their surrounding areas within the first couple of months of operation.

However, these businesses later experienced high sales growth rates averaging between 20 and 60 percent growth per month over the first six full months since they opened.

Almost all of the business owners we have surveyed with overestimated their first month sales.

The sales volume required to achieve profitability is a function of the price you charge customers for your water and the costs incurred by your business and may vary greatly from one business to another.

c) Size and Modification of Premises

Renovation Costs

In evaluating retail space options, determine the readiness of specific shop locations for your water treatment and vending business. The amount of money you will have to spend to start the business will strongly depend on how much of the space needs to be changed before you can open the business.

Compare the estimated costs of preparing your shop for business before signing a lease. Start-up costs that you did not plan for can kill your business before it opens its doors.

In some cases, it may be more economical to pay a higher monthly rent and/or goodwill for places that are ready for business than to pay several months of rent while your shop is still being prepared.

Things to think about when choosing a retail location?

 

  1. Is the site easily visible to a passerby?
  2. How much foot and vehicular traffic c is around the site?
  3. Are there other prominent retailers in the immediate vicinity?
  4. How many households do you estimate are within 1 km of the shop?
  5. What type of neighborhood is it?
  • Income Level?
  • Security?
  1. How accessible is the site? Is it easy for customers with heavy water bottles to enter and exit the store?
  2. Is there any/adequate parking available?
  3. Is there a place for you to have a signboard or place other signage to drive business to your shop?

You should think about what changes need to be made to a shop space when you are comparing

different locations for your

Business.

Store buildout includes all of the expenses (partitioning, plumbing, electrical work, painting, etc.) required to prepare the shop for business.

As much as you can you should keep their buildout expenses as low as possible while creating a functional, smart retail space. Spending less money in the beginning will help keep financial pressure down.

Of course, as an owner wants to present customers with a good-looking shop to support the quality and trustworthiness of his or her product, but many aesthetic

Improvements to the retail space can be postponed until you understand the local demand better and the business is able to use some of its profits to pay for these costs.

Signing a Lease

You should not sign a lease until you have all the money required to cover all start-up expenses. Otherwise, you run the risk of paying several months of rent for an empty shop as you wait for the rest of your start-up capital.

Some landlords require new tenants to pay “goodwill” at the lease signing. This is typically in the form of a onetime cash payment to the landlord. The amount can almost always be negotiated and is not charged by all landlords.

Businesses have received requests for “goodwill” as high as KShs.500, 000. Large “goodwill” payments can dramatically increase your start-up capital requirements and, possibly, the amount of time it will take to pay-off your business debt. You should carefully consider these effects before settling on a retail space requiring a “goodwill” payment.

 

Storage

Water storage tanks help protect a water treatment and vending shop when water from the main source is not available. Most small and medium water treatment businesses have between 5,000 and 10,000 liters of raw water storage, but each business should make its own estimate of how much water it should store and how much space is available.

If space is available, many businesses can start with a limited amount of storage in the beginning and add additional storage capacity when they need it in the future.

As there are many vendors producing tanks and there is a variety of designs, it is a good idea to shop around for the best deal and the right size for your needs. The best tanks for water storage are made with food grade plastic material.

Tank prices keep changing, but on average a 5,000 liter tank costs between Kshs. 70,000 and 80,000, while a 10,000 liter tank sells for between Kshs.140,000 and 200,000 .In terms of planning for storage space, 5,000 liter tanks are roughly 185 cm x 195 cm and 10,000 liter tanks are 220 cm x 286 cm.

If you want to place your tanks on a roof or a stand, remember that the roof or

stand needs to be strong enough to bear the heavy weight of the tank when full. A 5,000 liter tank contains 5,000 kg of water!

Below is a list of some water tank manufacturers. Many have distributors all over the country but in case you can’t find get in touch with the companies directly. These are not the only companies selling plastic tanks, and this is not an endorsement of their services:

Company Contacts
Kentainers Phone: 020.251.9098 / 9099
E-mail: info@kentainers.co.ke
Website:
www.kentainers.com/kent/kentainers.html
PolyTanks PolyTanks Phone: 020.20.500.4401 /
0721.378.629 / 0734.440.444
E-mail: zanillya@polytankskenya.com
alphonce@polytankskenya.com
manish@polytankskenya.com
Website: http://www.polytankskenya.com
Roto Moulders Phone: 020.531.063 / 542.022 / 542.403
E-mail: info@rotomoulders.com
Website: www.rotomoulders.com
Top Tank Phone: 020.393.9000
E-mail: mail@toptank.com

Website: www.toptank.com

Bottles and Caps

There are several companies that manufacture plastic bottles, caps and seals. Among the major ones are Fineline, General Plastics, Malplast and Safepak. There are shops which sell bottles but on average they tend to be much more expensive than when buying from the plastic manufacturing companies.

Shop around for the best prices on bottles, as prices change often and prices will be different depending on how many are ordered. In addition, stock-outs of various bottle sizes at multiple manufacturers are not uncommon.

New bottles are required to be capped and sealed (KEBS, 1996). This is also good practice for refills as it provides protection against contaminants and demonstrates to customers that the water in the bottle has not been tampered with since leaving your shop.

The high cost of a new 18.9 liter bottle stops many customers from purchasing new, filled 18.9 liter bottles. As a result, customers usually choose either 5 liter or 10 liter bottles.

In addition, the high cost of buying new refillable 18.9 liter bottles means that businesses will need a policy on exchanges of 18.9 liter bottles to make sure that any bottles exchanged are in good condition and can be re-sold. Some businesses have instead decided not to accept such bottle exchanges and instead are careful to sanitize (clean), refill, and then return the same bottle directly to the same customer.

Here is contact information of some of the companies producing bottles:

Company Contacts
Dynaplast Phone: 020.553.615
E-mail: kilu@flexopac.com
Fineline Phone: 0726.991.999
General Plastics Phone: 020.530.032 E-mail:
mail@genplastkenya.com
Malplast Phone: 020.201.6993
E-mail: info@malplast.co.ke
Safepak Phone: 020.2403222 (safepak.co.ke)

 

Labels and Seals

Shrink seals are the most commonly used. The price ranges from Kshs.0.3 to Kshs.0.5. A plain seal with a single colour and without writings will average Kshs.0.30. The more additions such as colour and text it has the more costly it becomes.

Labels are required for all new bottle sales. The costs of labels can be very different depending on the quantity ordered and the design of the label (number of colors, size of the label, whether it is self-adhesive).

Labels in the market are largely ordinary paper labels , water proof label and even wrap shrink

sleeves which “shrink and wrap” the bottle. Paper labels are the easiest and least expensive to

use. Wrap sleeves require a bigger investment in designing, development and minimum

quantities. ( “Shrink sleeves are plastic labels that are printable in up to 8 colours. The fixation of

the label on to the product, using heat, brings the film to shrink onto the container leaving it

unmoveable. There are five different kinds of materials used as the shrink film namely: PVC,

PET, POF, BOPP and BOPP pearilized. The labels are then cut to the right format and shrank

with help of temperature to adhere to the shape of the packaging.”). Statpack

(www.statpack.co.ke) is one of the leading companies in shrink sleeves and sleeve label

applicators.

We have seen label costs ranging between Kshs1 and Kshs.5 depending on the material. Some minimum level of quality (for example, label is professional in appearance, colors and writing do not run, even when wet, label stays stuck to the bottle even when chilled, KEBS guidelines are followed) is essential. Remember to find a balance between quality lables and costs.

One way of lowering your labeling costs is to use the same label size and design for multiple bottle sizes and then use another, small sticker or an ink stamp that shows the volume of each bottle.

KEBS guidelines (KEBS, 2007) also place some limits on what can appear on labels, specifically:

  • The use of the term “Natural Drinking Water” is prohibited for water that has been treated.
  • No claim can be made concerning medical (preventative, alleviative, or curative) or other beneficial effects relating to the health of the consumer. This is however disregarded by some bottling companies who claim the water they sell contain “minerals that help in digestion” or similar claims.
  • Labels may not use any statement or pictorial device which may create confusion in the mind of the public about the nature, origin, or properties of the drinking water.
  • The use of more than one brand name for similar products bottled from the same water source is prohibited.

Brochures and Fliers

At start-up, most businesses distribute fliers or letters to customers in the surrounding area that explain their product, value proposition, pricing, and business location. As with labels, prices for producing these materials vary with the quantity produced, whether the materials are printed in color, and the quality of the paper used. Typical prices are 1 to 30 Kshs. per flier depending on quality, quantity and the vendor.

As with labels, there is no evidence to suggest that more expensive fliers lead to greater sales, although there are some basic quality standards (labels must appear professional and be easy to read) that must be met. Businesses can distribute fliers to likely customers using either shop employees or casual hires made specifically for the purpose.

Signage and Branding

Signs and/or exterior branding are the first things many customers see identifying the business. It is important that a sign show the product and the service the business provides.

Successful water treatment and vending businesses in Kenya have used both

simple painted signs as well as more elaborate, backlighted signs. Before ordering signs or arranging for branding to be applied to the outside of the shop, it is important to check with the landlord of the retail space whether there are any restrictions on the type of signage and paint that may be used.

Within the shop, branding and signs can be used to tell your customers about the product you are selling. Customers may not know about the water refilling concept or they might not trust the low prices of the refill water relative to premium brands available for sale in the supermarket.

To teach customers about the quality and safety of refill water, most businesses do at least two things:

  1. Display a copy of their KEBS standardization mark certificate and/or water quality tests results in an area where they are easily seen by customers in the shop.
  2. Put up diagrams explaining the treatment process and showing that the way the water is treated in the shop is the same as the way that major bottled water companies treat their water.
  3. By explaining that the water produced by your business meets the same quality guidelines and is treated in the same way as other bottled water, you can address most of the quality concerns customers may have.

 

Capital

From the above we can estimate the capital that is needed. The amount will depend on the equipment you chose, scale and location. That said that said the table should provide you with a guideline of what is needed to start the business and the capital and an estimate of the capital that could be required.

Item Cost per Item Unit Quantity Cost
Capital Costs and One-Time Expenses
Shop Buildout 80,000 Shop buildout 1 80,000
Water Storage 75,000 5000 Lt 1 75,00
Tanks
Water 500,000 System 1 500,000
Treatment
Equipment
System
Shop ‘Goodwill’ 100,000 Unit 1 100,000
(if required by
landlord)
Shop Security 60,000 Unit 1 60,000
Deposit (3
months rent)
Initial Bottle 25,000 Unit 1 25,000
Inventory
Capital Costs and One-Time Expenses Subtotal 840,000
Annual Expenses
Licenses
KEBS 31,900
Standardization
Mark
County License 10,000 (Avg)
Public Health 1000
Licenses
Excise Tax 50,000
License
Total 182,900
Six Months Estimated Working Capital
Rent 20,000 Monthly 6 120,000
Salaries, Wages, 20,000 Monthly 6 120,000
Commissions
Electricity 3,500 Monthly 6 21,000
Water 3000 Monthly 6 18,000
General Office 2000 Monthly 6 12,000
Expenses
Marketing & 3,500 Monthly 6 21,000
Labels
Six Months Estimated Working Capital Subtotal 312,000
Sample Set Up Costs Total 1,334, 900

Kindly note the above are estimates the figures could be slightly lower or higher. You can get cheaper equipment, for instance at Kshs. 150,000 or higher at Kshs.1, 500,000. Not all premises require goodwill. There are businesses which start with only enough money to run for two months. Though possible this is not advisable since the business will need to survive before the break even point.

There are many water purification businesses which have started with about 500,000.

In a survey of 101 water bottling companies.

43% said their start-up amount was between Kshs.301, 000/= and 500,000/=, (29%) had theirs between Kshs.151, 000/= to 300,000/=, (16%) had start up capital of over Kshs. 500,000 while (12%) had between Kshs.50, 000 and 150,000.

Capital of Kshs.500, 000 is enough though not fully adequate to a small water processing plant.

Make sure to have enough money to run for at least 6 months before the business picks up.

Sources of Capital

From the small and medium water bottled companies surveyed, these were given as their source of capital

Commercial Banks & Micro Finance Institutions – 26 %

 

SACCOs – 16%

Family – 14%

Informal Money Lenders – 11%

Friends – 7%

Marketing & Distribution

Most of the entrepreneurs starting small and medium water bottling firms initially have their eyes set on using supermarkets as their main channel of distribution. However the reality is that it’s easier said than done to get shelf space in the major supermarkets. And increasingly space in the small neighborhood supermarkets is becoming harder to get.

Supermarkets consider their shelf space in terms of profits. They want to allocate space only to items they think will sell fast and most. For water they are likely to first stock more established brands, companies doing some form of marketing and advertising, companies offering extremely high margins, companies which can be trusted with KEBS mark and other accreditations or companies with a unique and really functional product . E.g. through packaging or flavor.

And even if a company meets all the above there is only a certain limited number of space available, so the supermarket cannot stock every brand coming its way.

With the supermarket space getting increasingly competitive, water firms have opted for other distribution channels. As much as possible the water firms try to eliminate middle men such as wholesalers, agents and distributors. This however is not entirely possible especially for firms with limited capital to purchase vehicles and hire sales representatives beyond a reasonable radius of their operations.

 

Outside the supermarket chain majority of the firms distribute through wholesalers or appointed distributors ( 40%), followed by those selling to retailers directly ( 28%) , then the group retailing directly through shops or delivery to customers ( 21%) and a few exporting the water . (11%).

Other than the top brands the rest only carried local advertising through posters, brochures, small bill boards and sometimes in store promotions. Advertising helped the brand become more visible and hence making customers more likely to trust it.

For most of the firms pricing was the major way through which they entered the market. Among the many small and medium brands where consumers cannot really tell the difference between one brand and the other hand when purchasing from retail shops they simply say “Give me water?” Pricing as a form of marketing tended to work.

When purchasing from supermarkets consumers have the luxury of looking at the brands, sources, company packing, KEBS mark and any other attribute that makes them trust the brand more. And as much as they consider price, they also look for the most trustworthy of the brands.

Pricing as market entry strategy can only work to some extent. The price you set will depend on your costs (see more below), which in turn depends on your efficiencies, sources of supplies and management levels. Some firms are able to offer lower prices by using shortcuts for instance by packaging water directly from taps, not paying taxes and using recycled bottles. The problem with such short cuts is that if the authorities discover it could mean the end of the businesses. Several bottled water firms have been closed by KRA and the owners penalized for not paying taxes.

When using wholesalers and distributors the firms margins reduce. However the wholesalers had the advantage of understanding the local environment. Established wholesalers have also existing relationships with local retailers, making it easy for them to push your products.

Attractive commissions and a promise of support in terms of marketing will entice the wholesalers to take your product. With so many brands to choose from wholesalers are increasingly dictating the terms of the relationship with water firms.

Firms that sell directly to retailers are seeking to cut the wholesalers and distributors from the chain and thus increase their margins. Others have been unable to identify or form relations with wholesalers. While this method of distribution may lead to higher margins it requires an extra investment in logistics, time and personnel.

The cost of distribution ranges between 3 and 5% of the retail price. Selling directly to retailers is not possible beyond a certain radius. For instance if your firm is in Nairobi , selling directly to retailers in Nakuru or even Thika will mean spending a few days to adequately cover one town.

Most of the sales to retailers is through consignments; meaning that you will leave the water with the retailer and then come back after a few days to collect the cash. The face to face interaction is standard in the business. Most retailers have cash flow problems, or try maintaining their cash

 

flow in such a way that they are in good records with banks or other financing institutions. Because of this, and the somehow accepted practice of consignment selling for many goods, they try to postpone paying their creditors for as long as possible. That is why even if you request send money through mobile after they have made sales, most will likely have an excuse for not doing it.

As noted there are firms with specialized water retail shops. The shops are located either outside their treatment plants or in a nearby town center. Such shops act as wholesale and distribution centers, refilling centers, and direct retail to consumers. Specialized water shops are not still very common in Kenyan urban areas, and so if located in high potential areas they help move the water, sometimes enough numbers to sustain the business.

The big brands like Aquamist use regional distributorship, direct sales to big retailers and corporate. By the look they tend to cut out the intermediaries.

With the market become increasingly competitive and the traditional distribution and marketing channels becoming saturated or less effective some firms are experimenting with below the line marketing. The most common of these has been to produce custom labels for outlets like hotels or other institutions. This marketing method has now been extended to individuals having events like birthday parties or even weddings.

When thinking of distribution think of such factors as the minimum quantities, your packaging, stock levels, partnerships , minimum order quantities , channel choice and prices.

Revenue

Sample Revenue from a small water treatment and bottling firm in its second year of operations.

Item Amount
Revenue 400,000
Fixed Costs 110,000
Variable Costs 161,000
Capital Costs 18,000
Total 289,000
Earning Before Taxes 111,000

Margins in the business range between 20% and 40% of the selling price. And will depend on your costs, efficiencies and pricing.

The production cost of a 500ml bottle ranges between Kshs.7 and Kshs.11 depending on individual efficiencies. When selling in wholesale the price will range from Kshs.12 to Kshs.15 or slightly higher again based on your branding , costs and efficiencies. ( 1st Quarter 2015)

Fixed costs on the other hand range between Kshs. 5 and Ksh.10 per liter.

Like mentioned above variable costs include that of purchasing the bottle which ranges between Kshs. 2 and Ksh.7 depending on the supplier, design , and quantities involved. There is cost of water which could range between Kshs.1 and Kshs. 5 per liter. Labels which cost between Kshs.0.30 and Kshs.1.50. A shrinking bag that is used to pack 24 bottles costs an average of Kshs. 15. There is also VAT.

To break even most of the small and medium bottled water firms sell between 7,500 and 15,000 liters per month. The more profitable of the businesses sell above 25,000 liters per month.

70% of the firms surveyed said their sales turnover are low, 16% said they have moderate sales while only 14% agreed to having high sales

Pricing

Majority (37%) of the small and new bottled water firms use competitor based pricing to determine the price of their own products. 24% used used perceived pricing to determine price of their product. Others employed cost based pricing (20%) and break even pricing (19%).

To set effective, profit maximizing pricing levels, you must balance variable costs (costs that change depending on how much you produce), fixed costs (costs that do not depend on how much you produce), projected sales volumes at various pricing levels (how much people want to pay for water depending on how much it costs), and your competition’s pricing (how much other businesses are selling water for).

 

Existing businesses we have observed average KShs.3 and Kshs. 10 per liter in variable costs, although this number can change a lot depending on the cost of parts that need to be replaced in your water treatment system and whether you pay for all or some of the delivery cost (as opposed to the sole responsibility of the customer).

On refills, the variable costs consist of the following items:

  • Electricity required by the treatment system.
  • Input water.
  • Amortized cost of the water treatment system consumables.
  • Cap and seal.
  • Label (if applicable – some shops choose to sell refills without labels).
  • VAT.
  • Delivery costs (only if you choose to offer delivery for free or at subsidized rates to your customers).

To calculate variable costs, first calculate these items on a per liter basis and then multiply as appropriate for the size of a given product.

For new, complete bottle sales, in addition to the variable costs listed above, shops must add the cost of the:

  • Bottle.
  • Label (if not included above).
  • Excise tax.

All fixed costs (for example, rent, and salaries) should be allocated over projected liters sold. This calculation will be challenging for many businesses at first, when sales volumes are uncertain, but will become easier as sales levels become consistent.

Average fixed costs for new businesses are typically about Kshs.5 per liter (but could be as high as Kshs.23), but this decreases to KShs.2.8 per liter for mature businesses.

By estimating per liter fixed and variable costs, you can effectively calculate a minimum price for water that will allow for you to make as much money as you spend (break even).

You should add some profit margin to this minimum price. In theory, the lower the price, the greater the volume of water that will be sold.

By lowering their prices, businesses will sell more water, and even though they are not making as much money per liter they might earn more money overall. You will likely need to experiment with pricing to reach your profit maximizing level. In general, it is much easier for a business to lower prices for a product than it is for it to persuade customers to pay more for the same product. As a result, you may want to use sales or other promotional language as you conduct pricing experiments in order to help customers understand that the price change is only temporary.

 

The competition also plays a role in finding the best pricing levels for a business. If there are other places to buy low cost, high-quality drinking water nearby, it will be harder to change the prices.

You also must decide whether your business will pursue a high-volume low-margin or a low-volume high-margin strategy. For example, are you going to sell a lot of water a low price or sell less water at a high price?

In general, small-scale water treatment and vending shops are characterized by high fixed costs (relative to their variable costs) and low variable costs. This suggests that for many businesses the profit t maximizing strategy may be to charge lower prices in order to attract more customers, thus allowing your business to spread its fixed costs across greater sales levels.

There are shops charging between 6 and 30 Kenyan shillings per liter for refill water. Some of the most profitable shops we have observed have set prices at the low end of this price per liter range. Many of the businesses at the higher end of this range are targeting wealthy customers and are located in high rent locations.

We fully expect that we will soon begin to see some shops charging below KShs.6 per liter in an attempt to boost water sales volumes (and thus be able to spread their fixed costs over greater total sales levels). Prices will also become lower as businesses move into lower rent neighborhoods and increasingly target middle- and lower-income consumers.

Control the Big Costs

Manage your business costs using the tips below to improve the chances for success:

  • Start with a smaller water treatment system that can be expanded later. Scale up your system once your business approaches the limits of its treatment capacity.
  • Do not spend too much money on things that you might not need until demand justifies it.

These include optional capital expenditures such as automated bottle cleaning equipment, refrigerated coolers, etc.

  • Think about putting your shop in the same space where you already have a business or combining treated water sales with sales of other items. This will lower rent and employee costs, and will maximize sales per square foot of shop space.

Implementing Financial Controls

Employee theft can reduce an owner’s profits and even make it impossible for a business to meet its operating costs. While it is difficult to completely eliminate the risk of employee theft, it is important to take steps to guard against dishonest behavior and reduce the chances of and opportunity for an employee stealing from the company.

One way to help stop theft is to install a water meter measuring how much water goes into the treatment system (or measuring the product water of an RO system) and another meter at the filling stand measuring the amount of water given to customers. You should calculate for rinsing of bottles and spillage, but the numbers of these two meters can be matched on a daily basis with each other and also with daily sales receipts. If the meters and the sales receipts show that significantly more water is treated than sold, the business may have a theft problem.

Maintaining Good Business Records

Good recordkeeping also helps businesses to better understand both their customers and their own financial health. With this in mind, an Excel template has been developed that will help businesses track monthly sales by product, expenditures, tax payments, loan payments, and

Manpower

How Many People Should You Hire?

Most businesses start with one to three employees and grow over time as demand increases. It is always easier to employ more staff as business grows than to lay off extra employees.

A single employee can usually operate most water treatment and vending shops until demand

grows significantly. Due to this, most businesses hire a second employee so that one person can

be focused on sales and marketing efforts while

the other runs the store.

Sales Incentives for Employees

Sales incentives may motivate a shop’s sales team. You can develop incentives that are connected to sales goals for individual employees or for a team of employees.

 

One way is to connect sales goals to the level of sales at which the shop will be able to pay for its operating costs. For example, you could award an employee with 5 percent of all sales above the amount required to cover the operating costs of your shop.

You should also take care in making sales goals to achieve incentives – if an employee believes that the goals are unfair or too hard to meet, incentives might not be effective. Also, you have to check that sales are credited to the correct employee or employee team, and that the amount of the incentive is enough to make them want to try and sell more.

 

 

Juma Chai

A writer dedicated to providing the world with the best insights into Africa.

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