Executive summary

Business overview

Premium Water Holdings is a holding company that produces and sells natural mineral water. It was established on July 1, 2016, through the merger of Water Direct Corporation and its distributor, FLC Inc. Premium Water Holdings is a subsidiary of Hikari Tsushin, Inc. (TSE Prime: 9435) (as of end-FY03/21, the Hikari Tsushin Group held 70.7% of shares outstanding, including indirect holdings).

The group provides water dispensers to subscribers free of charge (though a small number, around 5%, pay a fee) and sells them natural, filtered mineral water bottled by Premium Water (hereafter, “Premium Water” refers to companies in the Premium Water group) or OEM suppliers. Corporate partners make regular deliveries of the company’s water bottles to subscribers to replenish their dispensers. The group handles nearly every part of the business process, including development, production, quality control, sales, and after-sales services. As of March 31, 2021, subscribers numbered 1.22 million (+22% YoY) and the company had the top industry share in terms of value at approximately 31% (Shared Research estimate based on industry statistics). To improve hygiene and subscriber convenience, the company has implemented a “one-way bottle system,” in which bottles are recycled after use rather than returned.

In FY03/21, revenue was JPY56.3bn (revenue grew by 26.7% per annum over the past three years, while the number of subscribers grew by 23.3%, and ARPU by 2.0%) operating profit was JPY4.4bn (versus an operating loss in FY03/18), and OPM was 7.8% (negative in FY03/18). Meanwhile, ARPU was roughly JPY3,930 and the churn rate was 1.4% (both are monthly metrics; Shared Research estimates based on company data). Customers mainly sign three-year contracts which require fees of JPY10,000–20,000 for early cancellation. Competitors typically have customers enter one- or two- year contracts. The company charges JPY3,680 (excluding tax) for a set of two bottles of 12L each, and subscribers consume an average of about 300L per year. Shared Research estimates the lifetime value (LTV) per subscriber to be approximately JPY275,000 (based on an average duration of 70 months x ARPU of JPY3,930). Meanwhile, customer acquisition cost (CAC) (including the cost of supplying a water dispenser) is roughly 20% of LTV (Shared Research estimates the subscriber acquisition cost at JPY36,000 and the dispenser supply cost at JPY20,000).

The company’s water dispensers provide subscribers with the convenience of being able to enjoy hot or cold drinking water in their homes at any time. The company’s bottled water can also be stockpiled in preparation for natural disasters. When used for this purpose, the larger bottles (12L versus 2L) means that fewer bottles are required than when stockpiling cases of store-bought bottled water. When using alternatives such as tap water or bottled water purchased at stores, consumers may have to spend time, money, and effort to boil water.

Two of Premium Water Holdings’ seven water sources are processed by its own plants (Fujiyoshida and Asago) and five are owned by other companies that supply Premium Water Holdings on an OEM basis. The company plans to bring a new Gifu plant online at the beginning of 2022. The sum of material costs (raw materials for containers), product purchasing costs, and depreciation and amortization accounted for a little under 25% of revenue in FY03/21 (11.9% for material and product purchasing costs, 12.4% for depreciation and amortization). The group can supply water to 1.4 million subscribers from the five sources. Adding the Gifu plant will raise this capacity to 2.15 million subscribers, about 1.8x the number at end-FY03/21.

Logistics expenses amount to around 25% of revenue, making it the largest single cost item. In FY03/21, subscriber acquisition costs, comprising agent commissions and personnel costs, also amounted to around 25% of revenue. Direct sales accounted for half of revenue and agency sales for the other half. By sales method, demonstrations (booth sales) accounted for just under 60% of revenue, call-center telemarketing accounted for just under 40%, and online sales accounted for the remaining few percent. The company’s sales staff numbered approximately 1,000 (600 in-house, 400 external agents) in FY03/21.

The water delivery business is characterized by a heavy initial cost burden due to the need to spend on subscriber acquisition and water dispenser provision. It can thus take time for revenue to reach the break-even point. Although superior convenience and quality differentiate the product from alternatives, performance depends on acquiring subscribers through booth sales and telemarketing. The top reasons given by consumers for not using water dispensers include electricity costs, spatial requirements, and satisfaction with the water they currently drink––whether tap water, water bought at stores, or tap water filtered through a water purifier (source: July 2019 survey by MyVoice Communications, Inc.). The company’s water costs JPY77 per 500ml, compared to JPY31–33 for store-bought water delivered in cases of 2L bottles and JPY1–2 per month for tap water. Premium Water Holdings’ revenue exceeded the break-even point in FY03/19. However, its financial base at present appears less than solid (net debt of JPY21.0bn and equity of JPY10.5bn at end-FY03/21).

Subscribers of water delivery services total 4.6 million for the industry at large (2021 estimate by Japan Delivery Water & Server Association). The penetration rate is 8% according to Premium Water Holdings, but the company aims to raise this figure to 20% and 10 million subscribers over the medium term. In addition to growing the subscriber base organically through direct sales and agency sales, the company plans to promote more dramatic growth by acting as an OEM supplier for other companies and pursuing M&As.

Earnings trends

In FY03/22, the company recorded revenue of JPY68.5bn (+21.5% YoY), operating profit of JPY6.1bn (+38.8% YoY), pre-tax profit of JPY5.5bn (+38.6% YoY), and profit attributable to owners of the parent of JPY3.5bn (+10.9% YoY). 

The company ran aggressive contactless sales activities such as telemarketing and online marketing, while taking steps to prevent the spread of COVID-19 in demonstrative marketing (booth sales). The company also implemented various measures to improve customer retention rates, such as strengthening services in response to customer inquiries. As a result, revenue grew on increased new subscriber acquisitions and home delivery shipment volume.

Despite an increase in logistics and sales promotion expenses, operating profit increased due to a decline in manufacturing costs stemming primarily from an increase in factory operating rates associated with a rise in customer count, and other cost reductions. The company made efforts to reduce various expenses, such as by building a logistics network to stabilize logistics expenses. The gross profit margin contracted 0.7pp YoY to 84.8% and the SG&A-to-revenue ratio was down 1.2pp YoY to 76.0%. Other income increased JPY2mn YoY, while other expenses decreased JPY304mn YoY. OPM improved by 1.1pp YoY to 8.9%.

The company forecast for FY03/23 calls for revenue of JPY75.0bn (+9.6 YoY), operating profit of JPY7.0bn (+14.8 YoY), and profit attributable to owners of the parent of JPY4.0bn (+12.9% YoY). It plans on an annual dividend of JPY22.0 per share (JPY20 in FY03/22, comprising ordinary dividend of JPY10.0 and commemorative dividend of JPY10.0).

While economic activity in Japan heads toward normalization with the third COVID-19 vaccinations well underway, the company believes uncertainty still looms due to the spread of new variants, parts and materials shortage, soaring energy and daily necessities prices, and many other factors weighing down the economy.

In the water delivery business, the company believes that demand for water dispensers will continue to grow due to increased awareness and lifestyle changes caused by COVID-19.

The company did not announce quantitative targets for its medium-term management plan at the start of FY03/23. When it released such targets in the past, performance finished above plan in the first year of the plan, and targets for the rest of the years became meaningless. The company recognized that it could be misleading if it were to present conservative forecasts and then achieve targets one year ahead of schedule each fiscal year for the duration of the plan. For this reason, the company decided to limit the scope of its forecasts to the following fiscal year only.

Strengths and weaknesses

Shared Research sees the company’s strengths as: 1) its sales capabilities, which have made it the industry leader in new subscriber acquisition; 2) the presence of its parent company, Hikari Tsushin; and 3) the many strategic options available to it as a result of its top market share, such as the possibility of becoming an OEM supplier to new entrants. We see the company’s weaknesses as: 1) the existence of cheaper alternatives to its products, such as tap water and bottled mineral water; 2) its limited ability to control logistics expenses due to dependence on logistics companies; and 3) the lack of opportunities to cross-sell its mainstay products, unlike competitors operating gas businesses.

Key financial data

Recent updates

Acquisition of treasury shares via after-hours trading (ToSTNet-3) 

On March 28, 2022, Premium Water Holdings announced an acquisition of treasury shares via after-hours trading (ToSTNeT-3) on the Tokyo Stock Exchange.

Procedures for buyback

Based on its closing price of JPY2,372 on March 28, 2022 (including final bid-asked quotation), the company will commission the share buyback via after-hours trading (ToSTNeT-3) at 8:45 a.m. on March 29, 2022. The buy order will be placed only at this timing.

Details of buyback

• Type of stock: Common stock
• Total volume of buyback: 40,000 shares (upper limit; 0.12% of total shares outstanding)
• Total value of buyback: JPY94.9mn (upper limit)
• Public announcement of the result: To be made after trading ends at 8:45 a.m. on March 29, 2022 
  

Revisions to full-year earnings forecast and dividend forecast for FY03/22 

On March 10, 2022, Premium Water Holdings, Inc. has announced revisions to its full-year earnings forecast for FY03/22, as well as to its dividend forecast (first dividend and commemorative dividend) for the same year.

Full-year FY03/22 earnings forecast revision

• Revenue: JPY68.0bn (previous forecast: JPY65.0bn)
• Operating profit: JPY6.0bn (JPY5.4bn)
• Profit attributable to owners of the parent: JPY3.4bn (JPY3.3bn)
• EPS: JPY116.30 (EPS of JPY111.85)
  

Reasons for revisions

Based on cumulative progress through March 10, 2022 and information available as of the same date, the company projects that revenue will exceed its previous forecast.

Additionally, the company projects that profits will outperform its previous estimates primarily because it shipped more household water than expected as net growth in contracts in force outpaced its initial predictions. The company has been closely monitoring impact associated with the COVID-19 pandemic since December 2021 and had originally forecast lower net growth in contracts in force.

Revised dividend forecast

Revised dividend forecast for common shares

The company recognizes that returning profits to shareholders is an important management issue. However, the company has previously refrained from issuing dividends, believing that because it is currently growing, the best ways to return profits to its shareholders are to stabilize its management base by enhancing internal reserves and to further increase corporate value through investments targeting business expansion.

However, in FY03/17, which it positioned as a second founding period, the company conducted a business merger with FLC Inc. and began to focus on significantly increasing contracts in force within its water delivery business. By the end of FY03/22, the company expects contracts in force within its water delivery business to exceed the one million mark (versus a total of 320,000 at the time of the business merger). The company was also able to steadily expand its manufacturing bases, establishing a new production site for household water in Gifu Prefecture during January 2022. In addition, the company expects to post its highest revenue and profit since publicly listing its shares. Accordingly, the company plans to pay a year-end dividend of JPY20 per share (JPY10 per share as an initial dividend and JPY10 per share as a commemorative dividend) for FY03/22, the fifth year since its second founding period.

Dividends on class A preferred shares

When it issued 28 class A preferred shares on September 28, 2017, the company decided that it would pay an annual dividend of JPY2mn and issue dividends on class A preferred shares if it issues dividends on common shares. In the event that dividends on these class A preferred shares were not issued, these dividends would be carried forward to the next fiscal year or later. However, as of March 10, 2022, the company had not paid any dividends since issuing this class A preferred stock. In FY03/22, the company has decided to issue a dividend on common shares and accordingly plans to pay a dividend on its class A shares in accordance with the stipulations indicated above. The company projects that its annual dividend for class A preferred shares will be JPY9.0mn. This amount includes the preferred dividend for FY03/22 (record date of March 31, 2022) and previously unpaid preferred dividends for the period spanning from the issuance of these class A preferred shares through FY03/21.

Trends and outlook

Quarterly trends and results

Full-year FY03/22 results (out May 12, 2022)

Summary

In FY03/22, the company recorded revenue of JPY68.5bn (+21.5% YoY), operating profit of JPY6.1bn (+38.8% YoY), pre-tax profit of JPY5.5bn (+38.6% YoY), and profit attributable to owners of the parent of JPY3.5bn (+10.9% YoY). It will start paying dividends from end-FY03/22 at JPY20 per share (JPY10 in ordinary dividend and JPY10 in commemorative dividend) for the fiscal year. 

Achievement versus company forecast (upwardly revised on March 10, 2022): Revenue achieved 100.7% of the corresponding projection in the company’s full-year FY03/22 forecast, while operating profit achieved 101.6% and profit attributable to owners of the parent 104.2%. All items finished slightly above the revised forecast.

Consumer spending, particularly on daily necessities, continued to be favorable as consumers spent more time at home and exhibited more demand for at-home meal consumption amid the COVID-19 pandemic. Under these circumstances, awareness regarding water delivery (water dispensers) rose due to associated properties of convenience and safety, such as the easy usage of both hot and cold water and the prospect of receiving regular home deliveries of quality natural mineral water from Japan. 

The water delivery business forecasts further growth in demand amid market expansion spurred by changing consumer lifestyles and values, with companies from other sectors entering the market. As the industry leader, the company will continue to drive growth of the water delivery business.

Under the state of emergency, the company began conducting demonstrative marketing at different facilities than before, and succeeded in opening up new sales channels. It also aggressively pushed forward telemarketing and online marketing, thereby establishing a system to run marketing activities even under conditions that differ from normal times. In addition, the company sought to provide various supplementary services to improve retention of existing customers and enhance customer satisfaction, bearing in mind that long-term subscriptions to its water delivery service can lead to stable earnings. As a result, the number of contracts in force rose from 1.22mn at end-March 2021 to 1.43mn at end-March 2022.          

Revenue up 21.5% YoY: The company ran aggressive contactless sales activities such as telemarketing and online marketing, while taking steps to prevent the spread of COVID-19 in demonstrative marketing (booth sales). The company also implemented various measures to improve customer retention rates, such as strengthening services in response to customer inquiries. As a result, revenue grew on increased new subscriber acquisitions and home delivery shipment volume.

Operating profit increase of 38.8% YoY: Despite an increase in logistics and sales promotion expenses, operating profit increased due to a decline in manufacturing costs stemming primarily from an increase in factory operating rates associated with a rise in customer count, and other cost reductions. The company made efforts to reduce various expenses, such as by building a logistics network to stabilize logistics expenses. The gross profit margin contracted 0.7pp YoY to 84.8% and the SG&A-to-revenue ratio was down 1.2pp YoY to 76.0%. Other income increased JPY2mn YoY, while other expenses decreased JPY304mn YoY. OPM improved by 1.1pp YoY to 8.9%.

Profit attributable to owners of the parent up 10.9% YoY: Finance expenses and income tax expenses increased.

Additional information: The Group aspires to simultaneously pursue environmental conservation aimed at contributing to a carbon-neutral society, and profit generation. It has begun taking steps to sustainably protect and nurture Japan's natural water resources, in the view that it is the responsibility of those who use water resources to include in the scope of their efforts not only water used as products, but also efficient use of water utilized in processes from water sampling to manufacturing. In an active effort to fulfill its social responsibility, Premium Water Holdings accordingly is broadening the scope of initiatives toward achieving the Sustainable Development Goals (SDGs). 

Full-year company forecasts

Summary

FY03/23 company forecast

The company forecast for FY03/23 calls for revenue of JPY75.0bn (+9.6 YoY), operating profit of JPY7.0bn (+14.8 YoY), and profit attributable to owners of the parent of JPY4.0bn (+12.9% YoY). It plans on an annual dividend of JPY22.0 per share (JPY20 in FY03/22, comprising ordinary dividend of JPY10.0 and commemorative dividend of JPY10.0). 

Assumptions (company forecast at the beginning of the period)

While economic activity in Japan heads toward normalization with the third COVID-19 vaccinations well underway, the company believes uncertainty still looms due to the spread of new variants, parts and materials shortage, soaring energy and daily necessities prices, and many other factors weighing down the economy.

In the water delivery business, the company believes that demand for water dispensers will continue to grow due to increased awareness and lifestyle changes caused by COVID-19.

Basic policy (company forecast at the beginning of the period)

In FY03/20, the company worked to build a system that allows it to conduct sales activities even under abnormal circumstances. Taking advantage of changes in individual lifestyles, such as longer hours spent at home, the company aims to increase the number of new contracts by using a variety of sales methods, with the aim of further promoting the use of water dispensers as an integral part of household infrastructure. At the same time, the company will continue to implement measures to improve the retention rate of existing customers and strengthen the production system.

Medium-term management plan

Long-term targets

In the medium term, the company targets a household penetration rate of 20% and 10 million subscribers (the industry as a whole served 4.6 million subscribers in 2021 according to Japan Delivery Water & Server Association and had a household penetration rate of 8% according to the company). In addition to organic growth through direct sales and agency sales, the company plans to expand its subscriber base through OEM supply and M&A activity. In FY03/21, the company’s contracts with 1.22 million subscribers generated revenue of JPY56.3bn. It plans to achieve revenue of JPY500.0bn once it reaches 10 million subscribers.

Organic growth of 20% per year in the number of contracts 

Premium Water Holdings plans to acquire new subscribers through direct sales and agency sales to grow its fiscal year-end subscriber count by about 20% per year. The company aims to increase direct sales by roughly 10% per year and agency sales by roughly 30–40% per year.

Direct sales

According to the company, its internal sales force (about 600 as of end-FY03/21) has been growing by about 10% per annum. The company plans to maintain this pace of growth and increase direct sales by around 10% per year.

Sales agents

External sales agents number around 400 and are expected to increase by about 30–40% per year as the company partners with more agencies.

OEM supply for other companies

The company plans to be an OEM supplier of other companies’ home-delivered water products, taking advantage of the economies of scale and production efficiency it enjoys as the company with the highest market share (approximately 31% share in terms of value in FY03/21; Shared Research estimate), as well as the logistical efficiency resulting from its access to abundant water sources across Japan.

M&As

The company is proactively looking into M&A deals in order to secure access to water sources and other resources.

Medium-term management plan

In May 2018, the company announced a medium-term management plan ending in FY03/23 in which it disclosed its revenue, operating profit, and EBITDA targets for each fiscal year. In May 2019, the following year, the company upwardly revised the figures for each year of the plan and changed the final year to FY03/24. However, targets for revenue and operating profit in the company’s most recent forecast for FY03/22 exceed those set for FY03/24 in the medium-term management plan. The company’s FY03/24 forecast is as follows.

For FY03/24, the company is targeting revenue of JPY64.0bn (versus actual revenue of JPY56.3bn in FY03/21 and a target of JPY65.0bn in FY03/22), operating profit of JPY5.1bn (versus JPY4.4bn in FY03/21 and JPY5.4bn in FY03/22), and OPM of 8.0% (versus 7.8% in FY03/21 and 8.3% in FY03/22). The company has not announced rolling targets for FY03/23-FY03/25. Since performance was above plan in the first year of the medium-term management plan, targets for the rest of the years became meaningless. The company recognized that it could be misleading if it were to present conservative forecasts and then achieve targets one year ahead of schedule each fiscal year for the duration of the plan. For this reason, the company decided to limit the scope of its forecasts to the following fiscal year only.

(Reference) Medium-term management plan announced in May 2019

Targets for FY03/24 in the medium-term management plan were revenue of JPY64.0bn, operating profit of JPY5.1bn, and OPM of 8.0%.

FY03/20 plan: Revenue of JPY43.0bn (actual: JPY45.5bn), operating profit of JPY1.2bn (actual: JPY1.9bn), and EBITDA of JPY6.8bn (actual: JPY8.0bn)

FY03/21 plan: Revenue JPY49.0bn (actual: JPY56.3bn), operating profit of JPY2.1bn (actual: JPY4.4bn), and EBITDA JPY8.3bn (actual: JPY11.4bn)

FY03/22 plan: Revenue of JPY54.0bn (versus company forecast of JPY65.0bn [announced on May 13, 2021]), operating profit of JPY3.0bn (versus forecast of JPY5.4bn), and EBITDA of JPY9.6bn (unannounced)

FY03/23 plan: Revenue of JPY59.0bn, operating profit of JPY4.1bn, and EBITDA of JPY11.0bn

FY03/24 plan: Revenue of JPY64.0bn, operating profit of JPY5.1bn, and EBITDA of JPY12.3bn

The company’s basic approach

Household penetration rate of home-delivered water is 8% in Japan (2021 estimate), leaving plenty of opportunity for growth

While the drinking water market in Japan alone is worth about JPY5tn (source: Yano Research Institute), the water delivery market in 2021 is estimated to amount to JPY179.0bn (source: Japan Delivery Water & Server Association), or only about 3% of the overall market. The company estimates that the household penetration rate of water delivery in Japan in 2021 is only 8%, significantly below the 32% in China, 50% in the US, and over 60% in South Korea (all company estimates). While Premium Water Holdings recognizes the need to take into account the drinkability of Japan’s tap water*1, the company believes that it can increase the household penetration rate of water delivery to 20% or more as Japan is undergoing a cultural shift toward purchasing drinking water rather than relying on tap water. 

Japan’s water resources are drawing attention from some foreign investors

According to the company’s president, Yohei Hagio, it is difficult to achieve differentiation in water products, due in part to the fact that consumers can hardly tell a difference in taste when both alternatives are soft water. The water collected from the foot of Mt. Fuji percolates through basalt deposited by the seven historical eruptions of the volcano, and is similar in composition and taste to, for example, Crystal Kaiser in the U.S. (water percolated through basalt from the Rocky Mountains which erupted twice). Water sourced from Hawaii is similar to the water in Japan since Hawaii is also a volcanic region. Since Mt. Fuji has erupted seven times, while there have only been two eruptions in the Rocky Mountains, the mountain has more layers that filter water from snowfall and rain. Water sourced from the foot of Mt. Fuji is also high in vanadium (91μg/L in the case of Fujiyoshida). Due to these characteristics, the water resources of Japan, where volcanic areas and hills cover three quarters of the land, are drawing attention from some foreign investors.

Comparison with alternative products

Convenience and the peace of mind that comes from having safe, high-quality drinking water differentiate the company’s water delivery services from alternatives. However, the company depends on sales activities including booth sales and telemarketing to acquire subscribers. The top reasons consumers cite for not using the company’s products are the electricity costs, a lack of space to install a water dispenser, or satisfaction with the water they currently drink––whether tap water, mineral water, or tap water filtered using a water purifier (source: July 2019 survey by MyVoice Communications, Inc.). While tap water costs JPY1–2 per month and commercial mineral water delivered to the home by the case (of 2L bottles) costs JPY31–33 per 500ml, the company’s water costs JPY77 per 500ml (see below).

Business

Overview

The Premium Water Holdings group

Group companies operating businesses under Premium Water Holdings

Premium Water Holdings is a pure holding company of subsidiaries and affiliates that produce and sell natural mineral water. The company was established on July 1, 2016, through the merger of Water Direct Corporation and its distributor, FLC Inc. (see History). The group consists of Premium Water Holdings, ten consolidated subsidiaries (including Premium Water, Fuji Water, and FLC), and four equity-method affiliates (see Group companies). Hikari Tsushin, Inc. (TSE Prime: 9435) is Premium Water Holdings’ parent (as of end-FY03/21, the Hikari Tsushin Group held 70.7% of the company’s shares outstanding, including indirect holdings).

Business summary: water dispenser rental and subscription-based sales of natural mineral water

The group rents water dispensers to subscribers free of charge and replenishes them with regular deliveries of bottles filled with natural mineral water. Premium Water Holdings produces much of the water that goes into these 12L bottles, withdrawing it from sources in Japan, filtering it, and filling bottles with it at its own plants or those of its suppliers. Home deliveries are conducted by external delivery service providers. Shared Research estimates that the company leads the Japan market with a 31% share (FY03/21; value basis; based on industry statistics).

The company’s natural mineral water

The company provides natural mineral water, which is non-fortified water that is collected from specific water sources, treated through precipitation, and filtered. This rare type of water contains dissolved natural minerals that allow consumers to enjoy “the true taste of nature” (see below). Premium Water Holdings is committed to delivering natural, non-heat sterilized water directly to customers.

Now that the company is past the heavy initial cost phase, it is able to maintain profit growth as it increases the subscriber count

The water delivery business is characterized by a heavy initial cost burden due to the need to spend on subscriber acquisition and water dispenser provision. It can thus take time for revenue to reach the break-even point. After the July 2016 merger, the company spent heavily on customer acquisition, resulting in two consecutive years of operating losses in FY03/17 and FY03/18 (operating losses of JPY570mn and JPY1.2bn, respectively). Revenue exceeded the break-even point in FY03/19 and reached a record-high JPY56.3bn (+23.9% YoY) in FY03/21. Operating profit in FY03/21 was JPY4.4bn (+136.3% YoY) and OPM was 7.8%.

Business model

Summary

Integrated production and sales

The group’s integrated structure covers development, production, and quality control of water dispensers, PET bottles, and natural mineral water, in addition to sales and after-sales service. The company rents water dispensers to subscribers free of charge (though some 5% pay a fee) and delivers large PET bottles (12L) of natural mineral water to subscribers’ homes through delivery service providers at regular intervals to refill the servers. The natural mineral water in these PET bottles is collected and filtered at five plants nationwide, either in-house or through OEM supply*. The company will add a new Gifu plant toward the end of 2021, bringing the total to six plants nationwide. Premium Water Holdings’ manufacturing and sales operations are integrated; it undertakes development, production, quality control, sales, and after-sales service all within the group. The company uses a “one-way bottle system” for hygiene and subscriber convenience (see below).

Subscriber acquisition capabilities outperform the competition

In FY2019 (FY03/20), the company’s subscribers increased by a net 192,106. According to Yano Research Institute, this rise greatly outstripped the company with the second-largest net increase (25,000 subscribers) and the third-largest net increase (5,000 subscribers). The company had the industry’s highest subscriber count at 1.13 million (as of end-September 2020). NAC Co., Ltd. (TSE Prime: 9788) and Aqua Clara, Inc. tied for second with 480,000 subscribers, followed by Mt. Fuji Springs Inc. with 360,000, Cosmolife Co., Ltd. with 330,000, Toell Co., Ltd. (TSE Standard: 3361) with 250,000, and TOKAI Corporation (a subsidiary of TOKAI Holdings [TSE Prme: 3167]) with 140,000 (source: Yano Research Institute).

Earnings and cost structure

Earnings structure

As of end-FY03/21, the company had 1.22 million subscribers (+220,000 YoY) and was the industry leader with a 31% market share on a value basis (Shared Research estimate based on industry statistics and company data). The churn rate was 1.4% (Shared Research estimate based on company data) with most contracts running a period of three years (a cancellation fee of JPY10,000–20,000 is charged if a customer cancels contract before it expires). Three-year contracts are priced at JPY3,680/month (excluding tax) for a set of two bottles (12L per bottle), which is about 6% cheaper than the monthly price of the two-year plan. Subscribers consume an average of around 300L (25 bottles) per year.

Cost structure

Cost of revenue and SG&A expenses together amount to 91.7% of revenue (FY03/21; OPM 7.8%; 0.5% is net of other costs and revenues). Cost of revenue, including material and product purchasing costs, accounts for about 15% of revenue (material and product purchasing costs accounted for 11.9% in FY03/21), depreciation and amortization for about 12.4%, and agency commissions, contract cost amortization, and personnel expenses for about 25% (14.1% for sales commissions and 11.4% for personnel expenses). Logistics expenses account for around 25% of revenue (the single largest cost item).

Subscriber base

Singles in their 20s and couples in their 30s and 40s with children account for roughly 80% of total subscribers. Basically, the company targets general consumers, yet around 5% of orders are placed by sole proprietors and small businesses ordering under an individual’s name.

Sales staff, sales methods, sales channels, and customer acquisition cost

Sales staff and sales methods

The company acquired roughly 400,000 new customers in FY03/21. Approximately 1,000 sales staff (600 in-house and 400 external agents in FY03/21) acquire subscribers mainly through demonstrative marketing (booth sales) and call-center telemarketing. With both methods, the company communicates directly with potential subscribers to explain the appeal of its products and win contracts. While competitors tend to have subscribers enter two-year contracts, most Premium Water Holdings contracts are for three years.

Sales channels

Sales agents can be categorized into two types: those who promote water delivery contracts as agents of the company and those who receive products wholesale from the company and provide them to their own customers. In some cases, the company supplies products for other brands on a contract basis (see below).

Customer acquisition cost

The company pays sales agents a commission when they acquire a contract. Sales commissions can be categorized into three patterns: (1) commissions paid at the time of acquisition, (2) commissions paid based on service usage, and (3) a mixture of (1) and (2). The types of sales commissions to be paid are determined based on the preferences of these agencies.

We estimate that the company’s customer acquisition cost (CAC) was JPY36,000 in FY03/21 (based on the sum of sales commissions and personnel expenses divided by 400,000 new subscribers). Also, the company incurred dispenser costs equivalent to about JPY20,000/unit. In FY03/21, direct sales accounted for 50% of total sales, and agency sales for the other 50%. By method, demonstration sales accounted for around 58%, telemarketing for slightly more than 30%, and online sales accounted for a few percent.

Home deliveries at regular intervals

The company fills one-way PET bottles (12Ls) with natural mineral water and commissions a delivery service provider to make regular deliveries to subscribers’ homes (including offices of sole proprietors in about 5% of cases) and other locations at subscriber-specified times (every one to four weeks). Logistics expenses are the largest cost item, amounting to approximately 25% of revenue (see above). For this reason, when selecting water sources from the many available in Japan, the company emphasizes logistical feasibility, that is, whether or not a source can help to cover the demand of densely populated areas, in addition to typical considerations including taste, drinkability, or volume of supply.

KPIs

The company’s most important KPI is its number of subscribers (1.22 million as of end-March 2021). Revenue, profits, profit margins, and return on investment are also important KPIs. In sales, the company considers its customer acquisition cost (JPY36,000 in FY03/21) as an important productivity metric. Since productivity differs depending on the sales channel and the location in the case of face-to-face sales, the company pays close attention to levels of productivity associated with both of these variables. In telemarketing operations, the key to managing the customer acquisition cost is to make calls in the order of the quality of leads on the call list.

Upon acquiring a new contract, the company conducts an in-depth analysis of corresponding attributes such as sales channel, location, and customer characteristics. It also pays close attention to average monthly usage (in bottles) and its churn rate. The company measures the acquisition cost by sales channel every month and uses the results to improve management, taking actions such as expanding the sales channels with high returns on investment.

LTV

Shared Research estimates the company’s lifetime value (LTV) per user at about JPY275,000 (based on an average contract duration of 70 months x ARPU of JPY3,930). We estimate the churn rate at 1.4% in FY03/21, which yields an average contract period of approximately 70 months. While competitors mainly conclude contracts with subscribers for one to two years, most of the company’s contracts are for three years. The average 70-month contract period implies that the average customer renews their three-year contract twice. Shared Research estimates that ARPU in FY03/21 was JPY3,930 and that CAC (including the cost of supplying water dispensers) was about 20% of LTV.

Value provided to subscribers

Convenient access to natural mineral water at any time through a water dispenser

The company’s water dispensers provide subscribers with the convenience of being able to enjoy hot or cold drinking water in their homes at any time. The company’s bottled water can also be used as a reserve in preparation for natural disasters. When used for this purpose, the larger bottles mean that fewer bottles are required than when using ordinary PET bottles. For example, 12 regular 2L bottles of mineral water are needed to provide the same amount of water as subscribers’ average monthly usage of two 12L bottles. Also, when boiling water, consumers may have to spend time, money, and effort when using alternatives such as tap water or ordinary bottled mineral water.

Many subscribers say that once they have experienced the convenience of having natural mineral water available hot or cold out of the water dispenser at any time, they are reluctant to give it up. The low churn rate of 1.4% in FY03/21 appears to back this up (Shared Research estimate). The three-year contract plan was introduced in 2014, which means that subscribers other than those acquired in the past two years have decided to renew their contracts once or twice.

The company provides subscribers with the universal value of natural mineral water, strictly controlled quality (conducting filling operations in cleanrooms and hourly quality inspections), and the convenience of water dispensers. In exchange, the company is able to anticipate stable, recurring revenue through three-year (or two-year) contracts. The company has a system in place to improve its services by rapidly implementing changes based on subscriber feedback.

Production and sale of home delivered water

Summary

The company produces natural mineral water at its own facilities (Fujiyoshida plant and Asago plant; a new plant in Kitagata, Gifu Prefecture is scheduled to come online by early 2022) in addition to sourcing a portion from other producers on an OEM supply basis. One-way PET bottles (12Ls) are filled with water and delivered to households (and some offices) on a regular basis (every one to four weeks) at a date and time specified by the subscriber. Deliveries are carried out by external delivery service providers. The company has access to seven water sources nationwide (Fujiyoshida, Asago, Northern Alps, Kanagi, Minami-Aso, and Nara), including its own plants, and will start operations at an additional plant in Gifu (Kitagata plant) at the end of 2021, raising this number to eight water sources throughout Japan. The company’s basic policy is to secure water sources close to consumers to reduce logistics expenses, which amount to approximately 25% of revenue (average for FY03/18–FY03/20). The company’s seven current water sources can supply 1.4 million subscribers. With the addition of the Gifu plant, the company will be able to supply 2.15 million subscribers (approximately 1.8x more than at end-FY03/21) through eight water sources.

Developing water sources

Necessity of having water sources close to consumers

The company recognizes that it is important to develop water sources in areas close to consumers (around densely populated areas). This is the most important consideration when choosing a new water source, followed by water quality and withdrawal volume. Looking toward the future, the company searches for water sources from which it can draw large volumes of natural mineral water. The foot of Mt. Fuji, where the Fujiyoshida plant draws groundwater, is known as a source of some of the highest-quality water in Japan*.This location carries the added advantage of being within a two-hour delivery radius of the Greater Tokyo area and the Kanto region.

Deciding when to use a company-owned plant and when to source water through an OEM agreement

The company’s equity ratio is low at 17.0% (as of FY03/21), which requires it to be cautious concerning capex. For example, if the company wanted to find a water source in Hokkaido (where it currently has none) it would first consider asking an established water distributor in the prefecture to sell some of its supply, as long as the water was high quality and the price was acceptable. However, the company may decide that it is better to build a plant of its own from scratch if outsourcing production to another company would involve heavy capital expenditures on their side.

In other words, the company is happy to outsource production to other companies if it is more advantageous to do so when considering cost, water quality, capex, and logistics expenses. The decision to collaborate with another company assumes a win-win situation for both parties. If this is not possible, the company will compare the costs of long-distance delivery to those of developing the water source with its own facilities before deciding how to move forward.

Production at company-owned plants

The company indicates that in a hypothetical area where it currently had 100,000 subscribers and could expect its subscriber count to increase to 200,000–300,000 in two to three years based on customer acquisition trends, it would build a plant to develop the local water source with its own facilities. To identify specific locations from which it will tap groundwater sources, the company consults with a water well services company to receive advice on candidate locations. Premium Water Holdings then makes a decision after considering other relevant factors. The company is able to immediately examine the water quality if there is a well at the location. If not, then it will conduct trial drilling to confirm the water quality and volume before purchasing or leasing the land.

The company’s current water sources

The company has access to the following seven water sources (all groundwater) with a maximum monthly supply capacity of 1.4 million subscribers. Its new plant in Gifu will be operational in 2021, bringing the total to eight, and the company’s maximum monthly supply capacity to 2.4 million subscribers (1.96× the number at end-FY03/21).

Fujiyoshida: The company-owned plant collects water and fills bottles. Production capacity of approx. 1.3 million bottles/month. One of the highest vanadium contents in Japan (91μg/L). Supplies subscribers in eastern Japan. Covers 750,000 subscribers/month.

Asago: The company-owned plant collects water and fills bottles. Production capacity of 300,000 bottles/month. Region contains a number of low mountains (around 1,000m). Supplies subscribers in the Kinki and Hokuriku regions. Covers 150,000 subscribers/month.

Northern Alps: OEM supply from a plant in Omachi, Nagano Prefecture. Exclusively supplies subscribers in Hokkaido (transported by sea). Covers 100,000 subscribers/month.

Minami-Aso: OEM supply from a plant in Minami-Aso, Kumamoto Prefecture. Supplies subscribers in the Kyushu region. Covers 250,000 subscribers/month.

Kanagi: OEM supply from a plant in Hamada, Shimane Prefecture. Supplies subscribers in the Chugoku, Shikoku, and Kansai regions. Covers 150,000 subscribers/month.

Northern Alps

Nara

Gifu (under construction): Located in the Motosu District of Gifu Prefecture. Trial operation scheduled for December 2021, with plans to begin sales at the end of 2021. Production capacity to be increased in stages from 500,000 bottles/month to 750,000 bottles/month. The company hopes to eventually increase the production capacity to exceed that of the Fujiyoshida plant.

Quality

The group has established its own quality standards for its drinking water that are more stringent than the official public regulations. One example is its standard for the upper limit of nitrate/nitrite content, which is 0.08mg/L versus the legal upper limit for tap water of 10mg/L. The company conducts roughly a dozen voluntary tests a day (including microbiological, physiochemical, and sensory tests) as well as regular tests for radioactive substances. The company ensures its OEM partners meet these high standards as well, screening their water quality testing and production systems before entering into contracts with them.

Versus water delivery competitors

Water delivery companies can be divided into two main categories: those who provide natural mineral water and those who provide RO water (water produced using reverse osmosis membranes to make it as pure as possible). The price of the company’s product (JPY77 per 500ml) is roughly in line with the average price of its natural water competitors (around JPY78 per 500ml). Meanwhile, RO water is typically priced about 35% lower than natural water (approx. JPY50 per 500ml).

What is natural mineral water?

According to the Ministry of Agriculture, Forestry and Fisheries’ Quality Labeling Guidelines for Mineral Water (Bottled Drinking Water), mineral water is defined using the following four categories. The bottled water produced and sold by Premium Water Holdings falls under the category of natural mineral water.

Natural water (0.1% of water products in 2020 according to The Mineral Water Association of Japan): Groundwater collected from specific water sources that is not subjected to physical or chemical treatment other than precipitation, filtration, or heat sterilization.

Natural mineral water (86.8%): Natural water produced from groundwater with dissolved inorganic salts (minerals). This includes groundwater that is fizzy due to dissolved natural carbon dioxide.

Mineral water (4.3%): Natural water that has been fortified with minerals, aerated, and mixed from multiple sources to achieve uniform quality.

Overseas, mineral water is classified according to Codex Alimentarius (internationally recognized food standards), and the above classifications used in Japan do not apply. In Japan, the safety of mineral water is regulated based on Japan’s Specifications and Standards for Foods, Food Additives, etc., established under Article 11 of the Food Sanitation Act*.

RO water

RO water is extremely pure water produced using reverse osmosis (RO) membranes, which filter out virtually all substances except for water molecules, including minerals. Accordingly, RO water is sometimes fortified with minerals before being delivered to customers. RO water is referred to as “bottled water” along with deep-sea drinking water and other types (9.5% of the total in 2020 according to The Mineral Water Association of Japan).

Material and product sourcing; depreciation and amortization

Material and product sourcing at the company’s plants amounted to JPY6.7bn, or 11.9% of revenue. Meanwhile, depreciation and amortization totaled JPY7.0bn, or 12.4% of revenue. Cost of revenue was JPY8.2bn, or 14.5% of revenue (FY03/21).

Production at company-owned plants

The company currently operates two of its own plants, the Fujiyoshida plant and the Asago plant, and is on schedule to add a new Gifu plant at the end of 2021. Capex amounted to JPY3.0–4.0bn (including renewal costs) for the Fujiyoshida plant and approximately JPY600mn (including the purchasing of land) for the Asago plant. For the latter, the company acquired an existing plant at a low cost and hired the staff who had been working there. The company funded these expenditures with bank loans. Repair and maintenance costs are approximately JPY200–300mn per year. The company plans capex for the establishment of the new Gifu plant to run JPY5.0–6.0bn.

The company has obtained business licenses from Yamanashi, Hyogo, and Gifu prefectures to produce water at its plants in those prefectures. It has also obtained permission to dig wells from the municipalities where its plants are located. The company manufactures its own one-way PET bottles from preforms (hard bottle forms that are inflated to become PET bottles). Producing bottles in-house (capex of JPY400mn) reduces the cost per bottle by JPY20. Therefore, if the company ships 10 million bottles per year, it will cut JPY200mn in costs, and be able to recover the investment in two years.

The Fujiyoshida plant

The Fujiyoshida plant, located in Fujiyoshida, Yamanashi Prefecture, has two production lines (for redundance in case of unforeseen circumstances) with a production capacity of approximately 1.3 million bottles per month. It acquired FSSC22000* certification in February 2016, which allows it to conduct unheated filling. The company uses unheated processing to ensure that it does not reduce the amount of dissolved oxygen (the amount of oxygen contained in water). The plant carries out integrated production of natural mineral water from water collection to bottling and packaging. Efficiency is improved by a system that does not require human intervention except for monitoring and replacement of consumables. The plant has a multi-level automated warehouse on the second floor of the building, which automates warehousing and shipping with stacker cranes, control devices, and inventory management devices. It employs AGV robots to transport bundles of cardboard boxes packed with products to the automated warehouse.

The process from water withdrawal to storage in an automated warehouse is as follows. First, every morning before water is withdrawn, a process called SIP flow is carried out, in which water heated to 93°C is circulated in the pipes for 30 minutes for the purpose of sterilization. Natural mineral water is then withdrawn from about 200m underground and heated from 9–10°C to approximately 20°C through a heat exchanger that removes sand while preventing condensation. Next, the water is filtered through three sizes of filters (1μm, 0.45μm, and 0.2μm) to remove bacteria and foreign substances.

The filtered natural mineral water is then automatically filled into sterilized bottles in a cleanroom. The 12L PET bottles used at the plant are manufactured in-house. Premium Water Holdings purchases the raw materials for the bottles, out of which it manufactures preforms. The preforms then go through a blow molding machine where they are heated to 120°C and placed in a mold before being rapidly inflated using heat and air to form the PET bottle. The company holds patents for the shape of the PET bottle, the mechanism that helps prevent air from entering the PET bottle, and the design that makes the bottle shrink as water is consumed (Patent No. 4681083 for the water dispenser; Patent No. 5253085 for the PET bottle).

After the bottle is filled, it is automatically topped with a cap that has been sterilized with ultraviolet (UV) light, and the manufacturing information is printed on the bottle. The bottle is automatically packed in a cardboard box assembled on a separate line using an automatic boxing machine, and the best-by date is printed on the side of the cardboard box. After being weighed, the boxes are wrapped with bands and tagged with cargo identifiers before being loaded on pallets by a palletizer and stored in the automated warehouse on the second floor of the building by an AGV robot. The multi-level automated warehouse controls all storage and shipment processes.

The company also owns a plant in Nishikatsura, not far from the Fujiyoshida plant.

The Asago plant

The Asago plant is located in Asago, Hyogo Prefecture in the eastern part of the Chugoku Mountains, which is surrounded by mountains around 1,000m in height. The plant’s production capacity is 300,000 bottles per month. PET bottles preforms are manufactured at the Nishikatsura facility and transported to Asago, where they are inflated by a blow molding machine.

The new Gifu plant

The company is constructing a new plant in Kitagata, which is located in the Motosu District of Gifu Prefecture. This plant is scheduled to come online by the end of 2021 following trial operations. The company originally had planned for capex for the new Gifu plant to run JPY5.0bn, but increased the target to JPY6.0bn since it now plans to increase production capacity to 1.5 million bottles per month. Of this JPY6.0bn, JPY1.5bn is for land and JPY4.5bn is for buildings and facilities. The natural mineral water filling machines, automated warehouse, and AGV robots are the most expensive parts of the facilities. The preform manufacturing machines are also a major expense, as are the blow molding machines that blow heated air in the preforms to shape them into PET bottles. The new Gifu plant offers the company huge logistical advantages in covering the densely populated areas of Tokyo, Nagoya, and Osaka. Its addition will be greatly significant to the company’s business.

Fundraising

In March 2021, the company raised funds by issuing JPY5.0bn in a second series of unsecured bonds (with a limited inter-bond pari passu clause) for capex and the repayment of loans. The interest rate is 1.23%. The issue price and redemption price are both 100% of face value. The redemption date is December 11, 2025 (four years and nine months). Interest payments are due twice a year on March 11 and September 11. Rating and Investment Information, Inc. has assigned the bonds a BBB- rating.

In March 2021, the company entered into an agreement with a financial institution to secure working capital in the form of a commitment line of JPY3.0bn (for one year from March 31, 2021; with an option to renew the agreement to extend to March 29, 2024) and a term loan of JPY1.8bn (for seven years from March 31, 2021). In addition, to fund new capex, the company entered into an agreement with a financial institution for term loan JPY5.0bn with a commitment period (for five years from March 31, 2021).

The company’s plants are located in areas with abundant water supply

Japan’s top five prefectures in terms of mineral water production volume are: (1) Yamanashi Prefecture, with 1,551,605kl (40.4% of total); (2) Shizuoka Prefecture, with 559,664kl (14.6%); (3) Tottori Prefecture, with 352,368kl (9.2%); (4) Gifu Prefecture, with 286,688kl (7.5%); and (5) Hyogo Prefecture, with 133,020kl (3.5%) as of 2020 (source: The Mineral Water Association of Japan). The company’s production plants are located in these prefectures. The production volume of Gifu Prefecture, where the company is building a new plant, has been growing year by year (grew 2.2x in the four years through 2020, increasing from 4.1% of the total in 2016 to 7.5% in 2020).

The one-way bottle system

Companies in the industry either design their delivery systems as “one way,” in which bottles are disposed of by the subscriber, or “returnable,” in which the bottles are sent back to the plant to be reused. The company utilizes the former for purposes of hygiene and convenience. After consuming all of the contents of a delivered bottle, the subscriber put the bottle out with the regular recycling. The one-way system has the advantage of carrying almost no risk of air getting into the bottle and causing the water to oxidize or develop mold. On the other hand, the one-way system has some disadvantages such as the hassle of disposing of the cardboard boxes in which the bottles are packed. Returnable systems employ hard bottles that can be used over and over again. However, these are shaped in such a way that air can flow into the bottle when it is installed in the water dispenser, and the subscriber has to store emptied bottles until they are retrieved.

The “one-way” system offers the following advantages for the company:

More efficient: No need to retrieve, clean, or store empty bottles

Improved profitability: No need for extra logistics personnel or equipment

Sales

Price

For customers on a three-year contract, a set of two bottles (12L each) is priced at JPY3,680 (JPY77/500ml; very close to the JPY78 average for the three competitors who deliver natural mineral water, but higher than the average of JPY52 for the three competitors who deliver RO water (produced by reverse osmosis); see below for definition of types). There is typically no charge for the water dispenser (except in around 5% of cases).

Sales channels

There are three main sales channels: direct sales, agency sales, and OEM supply to other companies under their brands. Agency sales break down into two types: arrangements under which salespeople act as agents for the company and those under which agents receive products wholesale from the company and sell them to their customers. Direct sales and agency sales account for about 90% of the company’s natural mineral water revenue. The remaining 10% comes from wholesaling to distributors and OEM supply for other companies.

Direct sales

A sales staff of 600, or about 70% of the company’s employees (as of FY03/21), conduct demonstrative marketing (booth sales) and call-center telemarketing in which they directly communicate with subscribers to promote the company’s products and win contracts.

Agency (distributor) sales

The company also uses 400 sales agents (as of FY03/21) who sell its products through demonstrations and telemarketing. The company has about 1,000 registered sales agents, but only about 100 are active. The company pays these agents commissions for the contracts they acquire. The company also wholesales some of its inventory to two distributors who sell it to their own customers. The company does not currently have any exclusive distributors.

OEM supply

The company wholesales its products under OEM supply agreements to companies who sell them under their own brands, including JR East Cross Station (formerly known as JR East Water Business; the JR East Group’s retail and beverage business) and NTT Resonant. In February 2020, Premium Water Holdings’ subsidiary Premium Water Inc. entered into a business alliance with JR East Cross Station, which was trying to expand its water delivery business. In March 2021, Premium Water Inc. also entered into a business alliance with NTT Resonant concerning water delivery for members of NTT Resonant’s portal site “goo.”

By sales method

By sales method, 60% of customers were acquired through demonstrative marketing, just under 40% through telemarketing, and the few remaining percent through online channels. A total of 1,000 salespeople, including 600 in-house salespeople (about 70% of the company’s workforce) and 400 external sales agents, use their accumulated experience and know-how to conduct sales demonstrations (about 60% of revenue in FY03/21) and telemarketing (just under 40% in FY03/21). Personnel expenses and agency commissions amount to roughly 15% of revenue. Dividing the sum of personnel expenses (JPY6.4bn) and agency commissions (JPY4.8bn in amortization of contract costs and JPY3.2bn in sales commissions), JPY14.4bn, by the number of new subscribers (400,000), yields a customer acquisition cost of JPY36,000 (FY03/20). Both of the main sales methods involve directly communicating with potential subscribers to promote products and acquire contracts.

Demonstration sales

Demonstrations are held at booths in consumer electronics retail stores, shopping malls, supermarkets, and other large commercial facilities where visitors are invited to sample the company’s drinking water from a water dispenser so that they may directly experience the convenience and taste. The company has an employee evaluation system in place, and has also established a salesperson training system to improve sales performance. It has established a sales compliance department and introduced a sales licensing system to improve the quality of sales and strengthen sales monitoring.

Telemarketing

The company also focuses on telemarketing. It operates its own call centers in addition to outsourcing to external call centers. It has tie-ups with a variety of companies, such as real estate agents, moving companies, and consumer electronics retail stores, and introduces its products over the phone to the customers of each partner.

Online

The company also acquires customers through online affiliate ads. The company has aired a total of 12 commercials (seven 15-second commercials and five six-second commercials) featuring Kazuya Kojima of the comedy duo Anjassh on TV and online under the theme “The Kojima family gets a water dispenser.” These commercials depict a variety of scenes, including one in which Kojima orders a water dispenser online, another in which a server arrives, and another in which the family drinks and evaluates the water. The company aims to expand awareness of its natural water dispensers, in particular, of the convenience with which they allow subscribers access to natural drinking water.

Measures to suppress churn

As its number of subscribers grows, the company will be able to propose secondary products such as tea and coffee to subscribers at shopping malls. The company will also focus on using its salespeople to cross-sell products such as electricity and gas. However, as the company’s mainstay business is selling natural mineral water, and its primary purpose is to secure revenue and profit from its mainstay business, the cross-selling of secondary products is aimed at increasing the usage of the company’s water delivery services and deterring cancellations. When customers decide to cancel the service, the company asks them the reasons why and follows up appropriately to fix the issue if possible. For example, if the customer is considering cancelling because they do not like their particular water dispenser, the company offers to replace it with another type.

Comparison with alternatives

The benefits and costs of water delivery services

Having access to a water dispenser provides convenience and the peace of mind that comes from drinking safe, high-quality water. However, the price of this kind of water is higher than alternatives. For example, the price per 500ml when buying drinking water in cases of 2L bottles is about half the price of the Premium Water Holdings’ water (JPY31.25 per 500ml for a major Japanese brand of mineral water, which is available only on Amazon, versus JPY77 per 500ml for Premium Water Holdings’ water; see below). Meanwhile, tap water costs JPY1–2 per month. Using water dispensers also requires electricity, which typically amounts to JPY500–1,100 per month.

Actual usage by consumers

According to an online survey conducted by MyVoice Communications, Inc. in July 2019 (results cited below; 10,246 respondents), 54.6% of consumers drink tap water, 30.1% drink store-bought mineral water, and 19.2% drink tap water that has been filtered through a tap-mounted water purifier. The percentage of the respondents who said they drink tap water in the Hokkaido, Tohoku, and Hokuriku regions was higher than in other areas at 70%. In addition, 11.3% of respondents had experienced using a water dispenser, including 4.3% who said they currently use a household water dispenser, and 7.0% who said they have used one before but are not currently doing so. The recognition rate rises over 90% when including the 80.4% of respondents who said they know about water dispensers but have never used one.

According to the survey, the top three reasons given by current water delivery subscribers for why they started using the services were: “I came across a sales campaign or demonstration in a store or on the street,” “I wanted to drink good-tasting water,” and “I wanted to have access to safe water.” Meanwhile, the top five reasons given by consumers for not using water dispensers (with multiple responses allowed) were: “Maintenance costs for electricity and rental fees” (34.5%), “The water dispenser takes up space” (33.7%), “I am satisfied with tap water” (26.4%), and “I am satisfied with the water I currently drink, such as mineral water and tap water filtered through a water purifier” (25.5%). Among women in their 40s and older, the most common answer was “The water dispenser takes up space.”

According to the same survey, the reasons respondents cited for discontinuing the use of water dispensers (multiple responses allowed) were: “Maintenance costs for electricity and rental fees” and “The water dispenser takes up space” at 30–40% of respondents each, and “I am satisfied with tap water,” “I am satisfied with the water I currently drink, such as mineral water and tap water filtered through a water purifier,” “It is troublesome to replace and return bottles,” and “I can’t afford it” at 20% each. “I am satisfied with tap water” was cited more often by men, while “The water dispenser takes up space” was cited more often by women.

An accident occurred in the past where the child-lock function failed to prevent a toddler from operating the hot water lever on one of the company’s water dispensers (model WFD-1050 and WFD-1070; manufactured between 2011 and 2013), causing hot water to flow out and scald the child. In response, the company replaced parts on 27,137 water dispensers.

Alternative products

Tap water

It is safe to drink tap water in Japan. According to Japan Water Works Association, the water service business depends on groundwater for roughly one-third of its annual water withdrawal needs. Also, according to the Tokyo Metropolitan Government’s Bureau of Waterworks, in the case of Tokyo, bathing (40% of the total), toilets (21%), and laundry (5%) together account for around 70% of household water use, while cooking accounts for 18%, and face washing and other uses only 6%. The average water consumption of a household with four members is 25.1m³, which costs around JPY1,500 for the basic water service fee. Assuming that same household consumes 25L of drinking water per month (the average amount of Premium Water Holdings’ customers), the amount would only account for 0.1% of tap water consumption, and cost as little as JPY1–2.
Japan’s standard for trihalomethanes (a group of carcinogenic chemicals) in tap water is 0.1mg/L or less, which is almost the same as the EPA’s standard in the US and the standard in the EU. However, Japan’s standard for chloroform, a type of trihalomethane, is 0.06mg/L or less, which is 20% of the WHO’s drinking water guidelines.

Delivery of bottled mineral water through Amazon

Bottled mineral water, such as Coca-Cola’s I LOHAS (available only on Amazon.co.jp) and Kirin’s Amazon-exclusive brand LAKURASHI Alkaline Ionized Water, both cost JPY125 per 2L PET bottle (JPY31.25 per 500ml, with free regular domestic delivery for orders over JPY2,000). Meanwhile, Suntory’s Tennensui costs JPY133 per 2L bottle (JPY33.25mn per 500ml).

Water dispenser rentals and sales

In FY03/21, water dispenser-related revenue was JPY13.2bn (18.4% of revenue). The company provides these servers to subscribers free of charge (less than 5% pay fees), but considers a percentage of the revenue it generates from the products it sells as water dispenser-related revenue. That is, since the water dispenser rental counts as a lease under IFRS 16, the company records dispenser rental fees for accounting purposes. Rentals account for about 55% of water dispenser-related revenue, while revenue for wholesaling water dispensers only accounts for around 2% (JPY241mn). The other 45% of water dispenser-related revenue is generated by fees for entering contracts, suspending service, or other purposes.

Water dispenser manufacture and sourcing

The company designs water dispensers and outsources their manufacture to Korean, Chinese, and Japanese manufacturers. Sourcing water dispensers in this way costs JPY15,000–30,000 per server (Chinese manufacturers are the least expensive, followed by Korean manufacturers, and then Japanese manufacturers).

Rentals and sales

The company rents water dispensers to subscribers free of charge in the majority of cases. It does, however, collect rental fees from subscribers using high-end water dispensers, though less than 5% of subscribers rent such dispensers.

The company sells its water dispensers directly in addition to renting them to sales agents’ subscribers (customers). Distributors rent water dispensers to their customers after purchasing them wholesale from Premium Water Holdings. The company also sells water dispensers with different brand names to its partners as an OEM supplier. The company usually rents water dispensers to subscribers, but it also sells some water dispensers developed jointly with consumer electronics manufacturers.

When set to eco mode, the electricity costs of using a water dispenser range from JPY17/day to JPY22/day. Water dispensers without eco mode typically use JPY35/day. Monthly electricity costs are typically JPY500–1,100.

Other

Other income includes the sale of mobile phones.

System

The company uses a customer management system to manage deliveries to subscribers, and adds new customers to the system when they sign up for the service. Before the merger that created Premium Water Holdings, its two predecessors used different management systems, and the company is working to integrate these into one. However, since it cannot suspend delivery to existing customers, it is carrying out the integration while operating both systems, which means that when the company wants to offer new products or services, it must carry out all associated tasks twice. Therefore, it is a priority for the company to complete the system integration. The company invests about 1% of its annual revenue in software and related items.