Coen Welsh | Nov 14, 2017 | 0
The austerity of water
Namibia’s manufacturing sector is small. Local mother brands haven’t developed large bodies of product extensions. In fact the only locally manufactured brands with a wide spread of product extensions appear to be beverages, paints and dairy.
All three of these categories are heavily reliant on water, and all are obviously under threat from the drought. Some announcements have been made, and more will inevitably follow.
The only tactic is to reduce water-dependent production. This shrinks profits. At the same time, investments in production technology that reduces water usage will have to be implemented. It is also very likely that technology to claim water that has been used in the process will have to be reclaimed and recycled.
This has multiple implications. Firstly, manufacturing costs will rise. Secondly that rise in cost will have to be absorbed by consumers. Faced with increasing costs all round, either from local production or imported and opportunistic substitute brands, consumers will have less to spend and will be less inclined to spend on luxury purchases.
There are other muddy ripples to the matter of diminishing water.
The likelihood of retrenchments and complete closure of some operations, will place an additional strain on consumers, as transfers to extended families, particularly in drought-affected rural areas, are likely to grow, at the expense of luxury and impulse purchases.
If construction and mining are reduced or halted, the situation is likely to become far worse. The same applies for agriculture. And a wide-scale reduction of sectoral activity will reduce the activity of SMEs, as well as larger enterprises, that supply the inputs to those that are directly affected.
The logical step is for manufacturers to begin concentrating productive resources for best effect by reducing product lines to those products which sell optimally in terms of price and volume, and reduce production of products which are in niches or are not particularly profitable.
The key word here is ‘optimally’. Maximising prices will reduce volumes more than necessary. The situation that remains to be foreseen is the lower limit of pricing as the costs mount. Will it be break-even? And what will the impact be on growth, and returns to shareholders?
The question of recovery of the water resource is also worth considering. According to a recent report, the availability of water in Windhoek is unlikely to rise much in the foreseeable future, unless infrastructure can address the situation.
This implies that manufacturers will have to continue the tactic of highly focused lines, and the shrinking inventory of brands will also stay fairly static once all the less successful products have been winnowed out of the mix. And if the availability of water does not improve it is unlikely that manufacturers will feel the confidence to reintroduce old products, or experiment with new ones.
At the same time due to the substitution of imported brands, it is quite likely that the competitive marketing resources to relaunch legacy brands from before the water crisis will be prohibitive. In short, Namibia’s inventory of brands will be reduced.
There is a further aspect, the consumer perspective of water usage, which is interesting. The current trend on social media is to demand accountability for water usage. Car washes are in question. And people washing pavements or buildings with hoses are instantly photographed, identified and made known.
Similar pressure is likely to be exerted on industries that are perceived to waste water. However given the escalation of costs for supply of water, it is likely that manufacturers will have to find ways to reduce usage, or they will price themselves out of the market as their production costs escalate.
There is one final piece of irony though. The industry that is most likely to thrive, is the suppliers of bottled water, as people stock up for the longer drought ahead.