Water & Gas: An American pricing paradox

During the summer, convenience-store owners in southern Maine live by one rule: Liquids reign.

To understand why, look no farther than the corner of Maine Street and Spring Water Road, where dust-covered SUVs and minivans roll into the parking lot of the Village Kitchen. Here, fathers pump gasoline outside while mothers and children duck into the store and emerge minutes later with arms full of bottled beverages, often water.

Water is particularly popular in this town, since it's home to Poland Spring, the best-selling bottled spring water in the United States.

But customers who take a close look at their receipts may note a curious fact: The water costs more than the gasoline.

At the Village Kitchen, just a few miles from the water's source, a gallon of Poland Spring sells for $1.61 including taxes; one gallon of regular unleaded gasoline costs $1.39, with taxes.

Nationwide, the numbers vary depending on sales taxes, the type of retail outlet involved, and the brand purchased.

On average, however, the pricing relationship is the same. In this regard, it makes the US a global paradox. Most nations pay far more for gasoline than bottled water, even though it is often their only source of drinking water.

How can a nonrenewable product that must be refined from its crude form, and often shipped on ocean tankers for more than two weeks, cost less than a renewable resource that comes in similar form out of the kitchen faucet?

The answer, experts say, is tied to the evolving behavior of American consumers.

"People have gotten into the habit of rationalizing small indulgences more than ever," says George Belch, marketing professor at San Diego State University.

A 'bottled culture'

The price of bottled water varies depending on the brand and outlet, but a liter (a bit more than a quart, and a more common purchase than a one-gallon jug) is often priced at well over a dollar.

Americans are willing to pay so much because they prize convenience, experts say. When consumers spend $1.60 on a liter of bottled water, they are paying for a lifestyle as much as for the water itself.

"We're a bottled culture," says Robin Kaminsky, director of water for Pepsi, which markets the Aquafina brand.

Mr. Belch witnessed the appeal of portability firsthand when his wife brought home a case of bottled water, despite the fact that they had a water purifier installed in their home. "She said the point was to get the kids drinking water instead of Gatorade," says Belch.

Giant beveragemakers Pepsi and Coke – the latter of which sells Dasani bottled water – entered the bottled-water market, experts say, because they realized they could make huge profits on a product that most consumers bought in single servings.

Indeed, because many Americans buy bottled water in amounts of one liter or less, a gallon of the product can ultimately cost consumers' more than $6.

Water appeals to consumers now partly because many care more about nutrition and hydration and living a healthy lifestyle.

But marketers have also fueled the trend. To some degree, water bottlers have created demand where there was none.

"Bottled water has gotten people to drink more water," says Ms. Kaminsky.

Overall, sales of bottled water grew 30 percent last year, while carbonated beverage sales grew only 0.6 percent.

The utility of having water in a portable container obviously appeals to consumers. But by giving the bottles an identifiable brand, and pouring into millions of advertising ($85 million in 2001), marketers have turned a home utility into an appendage of daily life.

"A product that was once a commodity is now moving in the direction of being a serious branded consumer product," says John Sicher, editor of Beverage Digest.

Indeed, product loyalty among bottled-water drinkers is very high. About 65 percent have a brand preference. In contrast, "nobody knows what gasoline they put in their car," says Kaminsky. "Gas is gas."

Gasoline's generic appeal

Consumers' allegiance to specific brands of gasoline began to fade during the mid-1970s, when retailers started cutting services in the wake of the nation's energy crisis.

Over time, gasoline vendors struggled to persuade consumers that their brand was any better than – or different from – other retailers' brands.

The upshot: Gasoline retailers can rarely get away with charging high prices.

Regardless of the downshift in service, the market for gasoline was likely to evolve toward flat pricing, experts say. Consumers become savvier about products over time. Gasoline, which Americans have consistently bought for more than a half century, is no different.

New products have the opposite effect. As the market for a new product emerges, people have little knowledge of the relative quality of one brand compared with another. When in doubt, they tend to equate quality with price.

"If consumers have no other way to determine differences in a product, they rely on price for a signal of quality," says Gerry Smith, a marketing professor at Boston College.

Water bottlers are currently reaping the benefits. Because bottled-water drinkers are more sensitive to quality and more affluent than most consumers, they are less likely to flinch at high prices, experts say.

Taxing petrol

Consumers grouse when overall gasoline prices rise. But they have had little reason to complain in the long term. Adjusted for inflation, a gallon of gasoline cost an average of $1.55 in 1949.

Gasoline sold in the US costs about the same to extract and process as gasoline sold around the world. Because of lower taxes, Americans continue to pay far less.

Federal and state taxes account for about 30 percent of the cost of gasoline. Cities with stiff environmental controls often tack on additional levies. But the chunk that goes to the government is much smaller than in most countries. In Britain, for example, taxes account for about 75 percent of the cost of gasoline. The Mexican government traditionally adds 20 cents to the cost of a gallon each year.

Many of these countries use gasoline taxes to pay for state-run social programs. And their populations, industry officials point out, are generally far less dependent on automobiles to get around.

Americans, meanwhile, continue to pay low prices for gasoline, even as demand increases.

Demand for gasoline in the US has grown 2 to 5 percent each year for the past five years, says Amy Jaffe, an energy analyst at Rice University. The number of cars on the road – including a great many behemoths – continues to grow, and drivers have steadily increased the number of miles they travel.

But US politicians fear drawing Americans' ire by raising gasoline taxes.

"The American public thinks they have a God-given right to drive SUVs, and a God-given right to fill them up at a reasonable price," says John Tobin, executive director of the Energy Literacy Project, an Evergreen, Colo.-based company that attempts to improve the energy industry's public image.

Consumers' defense of the culture of driving in America has kept prices level over the long run.

So has competition. Major franchises, off-brand stores, and large discount retailers such as Kmart and Wal-Mart all compete for drivers' business.

Ralph Ferguson, owner of the Village Market, says he makes ends meet not from gasoline sales, but by selling beverages and snacks in his adjacent convenience store.

"I'm lucky if I make three cents' profit on every gallon," says Mr. Ferguson.

Behind the costs of two vital fluids

The core ingredients of gasoline and bottled water are priced about as differently as two products can be. The cost of crude oil makes up about 42 percent of what consumers pay at the pump. Because crude is a commodity – bought and sold in the world market – global politics often dictate price.

Between 1978 and 1981, for example, falling production resulting from the Iran-Iraq war caused the average price of crude to jump from $21 per barrel to $35.

Experts say the current price of crude – about $25 a barrel – is artificially high, because of concern about future conflict in the Middle East.

"Geopolitical forces need to calm down a bit for buyers to have confidence," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

The cost of water, alternatively, is primarily fixed, determined by local officials rather than a global market. In the case of purified (as opposed to spring) bottled-water brands such as Pepsi's Aquafina and Coke's Dasani, the water is not traded among private water brokers, but comes straight from municipal water authorities.

For customers who use large amounts of water, rates are set between $2 and $3 per thousand gallons, only slightly different from rates set for regular consumers.

Spring water has higher upfront costs. An evaluation of potential spring-water sites for its Ozarka brand cost Nestlé several hundred thousand dollars. The cost of buying the properties was in the millions, according to Nestlé staff geologist Dave Feckley.

"The actual cost of the water in the bottle purchased off a store shelf is generally just a fraction of a cent to a few cents," according to a report sponsored by the World Wide Fund, a Switzerland-based nature-conservancy group.

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