A Model for Affordable Clean Water and Sanitation in Rural Cambodia, July 2010

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GIFT designed and facilitated part of the 2010 Global Leaders Module (GLM), a component of the annual Senior Management Programme at the Lee Kuan Yew School of Public Policy. Participants worked with Hydrologic, a spin-off social enterprise set up by International Development Enterprises (IDE) to provide a rural Cambodians with a cheap low-tech device which provides a source of clean drinking water. The United Nations (UN) estimates that 1.8 million children around the world die each year as a result of diarrhoea, a disease partly caused by contaminated water. This issue is of utmost priority in poverty-stricken Cambodia, where years of civil war left much of the country’s infrastructure in ruins. The business plan proposed a revamp of the NGO-centric distribution system for the Hydrologic Ceramic Water Purifier into a for-profit model that stresses the education of rural Cambodians.

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A Model for Affordable Clean Water and Sanitation in Rural Cambodia, July 2010

  1. 1. Senior Management Program Safe Water Saves Lives A Model for Affordable Clean Water and Sanitation for Rural Cambodia 1
  2. 2. Table of Contents Executive summary………………………………………………………………..................... 5 Report objectives………………………………………………………………………………… 8 Background……………………………………………………………………………………….. 9 • Cambodia’s challenges…………………………………………………………………….. 11 • Current market opportunities and operating landscape………………………………… 13 Hydrologic: The Company and its Products….……………………………………………. 15 • Core mission of the company……………………………………………………………… 16 • Company background and history…………………………………….…………………… 17 • Social Enterprise model development……………………………………..……………… 19 • Current distribution reach and partner network………………………………………….. 21 • Existing products……………………………………………………………………………. 23 • Market penetration and opportunity…………………………………..…………………... 25 • SWOT Analysis (Hydrologic, Rabbit CWP, Aspiration CWP)………………………….. 26 Proposed Business Model: ……………………………………………………………………. 29 • Business Model……………………………………………………………………………… 30 • Buyer utility map……………………………………………………………………………… 31 • Target markets……………………………………………………………………………….. 32 • Distribution channel for Rabbit CWP……………………………………………………… 33 • Proposed sales and marketing channels………………………………………………… 34 • Education service…………………………………………………………………………… 35 2
  3. 3. Table of Contents • Expansion strategy…………………………………….…………………………………….. 38 • Geographic focus of sales activities……………………………………………………….. 40 • Distribution centers and sales analysis……………………………………………………. 41 • Proposed business model and quality control……………………………………………. 43 Value Proposition: Social and Economic Benefits………………………………………….. 47 Marketing and Sales plans………………………………………………………………………. 49 • Overview of sales and marketing plans……………………………………………………. 50 • Target market and sales projections……………………………………………………….. 51 • Branding and pricing of various products………………………………………………….. 53 • Marketing strategy…………………………………………………………………………….. 55 • Marketing and sales structure……………………………………………………………….. 59 • Training………………………………………………………………………………………… 60 • Customer service.……………………………………………………………………………. 61 Governance and Strategic Partners……………………………………………………………. 62 • Proposed structure and organisation………………………………………………………. 63 • Terms of reference and employment requirements……………………………………… 64 • Staffing plan…………………………………………………………………………………… 67 • Strategic plans for Hydrologic………………………………………………………………. 68 • Implementation timeline……………………………………………………………………… 69 3
  4. 4. Table of Contents Financials…………………………………………………………………………………………. • Social enterprise objectives……………………………………………………………….. • Financial data assumptions……………………………………………………………….. • Financial summary…………………………………………………………………………. • Financials: • Income statement…………………………………………………………………… • Cash flows…………………………………………………………………………… • Operating expenses………………………………………………………………... • Income statement…………………………………………………………………… • Cash flows…………………………………………………………………………… Risk assessment and mitigation……………………………………………………………… Implementation schedule………………………………………………………………………. Conclusion………………………………………………………………………………………... Appendices……………………………………………………………………………………….. 4 70 71 72 74 75 76 77 78 79 80-82 83-86 87-88 89-94
  5. 5. Executive Summary (1) LKY Senior Management Program (SMP) • LKY SMP is a unique leadership programme designed for senior executives in the government, non-profit and private sectors. The program explores global challenges, pertinent topics and fundamental issues that affect decision making and leadership. GIFT Global Leaders Module (GLM) • The GLM is a 7-day experiential learning module which includes an immersive site visit offering the participants an opportunity to apply their classroom learning, skills and experiences to a critical development challenge in Southeast Asia. It takes place in a real life setting requiring an innovative business-driven solution based on new thinking and ideas from participants. The SMP GIFT Program, 2010: • This year, participants from the SMP program supported Hydrologic, a social enterprise located in Cambodia in the process of re-working their business plan in order to more effectively deliver affordable water and sanitation products using a commercial approach to tackling a social health issue. 5
  6. 6. Executive Summary (2) • Hydrologic is a company currently in transition from an NGO to a social enterprise business model. The transition requires the company to realign its business and operations to facilitate its commercial viability. • Through the field trips and meetings with the various stakeholders, the SMP participants identified gaps to be closed, operational inefficiencies to be streamlined as well as new business opportunities for growth to be captured. • Participants identified a need for the organization to shift from reliance on grants towards a mindset of entrepreneurship and proper corporate governance. The SMP participants recommend that, upon incorporation as a private commercial entity, Hydrologic’s management and staff be issued equity shares to promote greater buyin and interest in the well-being of the new company. • More importantly, there is a need to incentivise the sales staff and the retailers to grow the market share for Hydrologic’s products. 6
  7. 7. Executive Summary (3) • Meanwhile, the establishment of the new production facility has created momentum toward streamlining the company’s production and operations. The SMP participants recommend that Hydrologic close the old plant and consolidates all operations and management activities at the new plant. • The move to launch an improved version of the ceramic water purifier (CWP) is timely. The true market potential and social impact of the product can be realized by revamping the marketing and sales approaches, such as having all-in-one outlets for sales, education and customer service. • The SMP participants have also identified that a structured and professional approach is needed to build and sustain awareness of safe water and sanitation practices among the rural community. This need presents a new opportunity for a commercially viable education service that can be provided by Hydrologic. Embarking on this new business will also reinforce Hydrologic’s social objectives and its relevance and role in the Cambodian community. 7
  8. 8. Report Objectives After onsite information gathering in Phnom Penh and surrounding rural areas, this report serves as a business plan for Hydrologic and potential investors highlighting: • • • • • • • • • • • The water challenge in Cambodia The current water purifier market Market opportunities and challenges Hydrologic’s current status Proposed business model Marketing and sales plans 8 Governance and strategic partners Financial analysis Risk assessment and mitigation Implementation timeline Conclusions
  9. 9. BACKGROUND 9
  10. 10. Country Background - Cambodia • • • • • • Located in the Greater Mekong Sub-Region, bordering Thailand, Vietnam and Laos Population - 14 million, mostly Khmer origin - 80% rural - 20% urban Landmass - 181,035 sq km, 24 provinces GDP per capital - USD 593 Poverty Ranking : 54 Main industries - garments, construction and tourism 10
  11. 11. Cambodia’s Challenges: Access to Safe Drinking Water Effects of a violent past… – Much of the country’s infrastructure was destroyed, including basic services such as those providing access to safe water – 9.4 million cases of diarrhoea per year, which leads to 10,000 deaths and USD 80m loss in productivity According to a report by the Ministry of Health… 60 people died of cholera and diarrhea among the 449 cases found this year. Currently, 11 provinces and cities are still suffering from cholera and diarrhea, including Phnom Penh, and there are about 4,000 suspected cases… [Source: 2005 Cambodia Demographic and health Survey] Source: Cambodia People’s Daily 5 Jul 2010 Lack of basic water infrastructure 11
  12. 12. Current Water Situation • Limited water access: – Access to piped water: urban (55%); rural (5%). – Most rural households depend on ponds, rivers or streams • Water Sources: Contamination Problems – Surface water. • Mekong River and Tonle Sap Lake account for 30-50% of primary drinking water in rural areas • Presence of microbes and contaminants causes diseases ranging from diarrhoea, Cholera to Hepatitis A. – Ground water • Protected and unprotected wells (60% in rural areas). • Presence of arsenic in deep wells. – Piped water. Mainly in urban areas. Generally safe for consumption • Poverty Level: 36.1% of total population (14 m) live below national poverty line (USD 0.75 per day). Key Water Challenges: Accessibility and Affordability 12
  13. 13. Household Water Treatment Market • Untapped markets for household water treatment solutions – 1.4 million rural households – 0.4 million urban households • Primary target market comprises families with incomes between USD 2-5 per day • Current treatment options at point-ofuse (POU). – Boiling – Filters (mineral and ceramic pots) – Fast Moving Consumer Goods (FMCGs) – Central water treatment systems (piped water) Ceramic filters (CWP) FMCGs Mineral filters Sizeable Market Opportunity: 1.4 million rural households 13
  14. 14. Competitive Landscape for Ceramic Water Purifier (CWP) • Hydrologic Ceramic Water Purifier (Rabbit CWP) – Low cost USD 12.50 (retailer) – Highly effective at removing various forms of contamination • “Mineral Pots” household filtration system – Local perception is of status symbol – Visible technology gives the image of superior technology – High retail penetration – Proven to be less effective than ceramic filters • Market distortions: CWP currently distributed by NGOs for free or at artificially low rates through subsidies – Adds to market distortions – Creates perception of a ‘Poor man’s product’ CWP must overcome mistaken perceptions & market distortions 14
  15. 15. Hydrologic: Company & Products 15
  16. 16. Vision To be a leading Cambodian social enterprise offering water filtration and sanitation products which will achieve financial success and sustainability and thereby also drive positive improvements in the overall health of the Cambodian people. Mission To gain and sustain a majority of the market share for scientifically proven water filtration and sanitation products and accessories in Cambodia by meeting and exceeding customer expectations and also providing affordable product solutions to the poor. 16
  17. 17. Company Background and History Since 1997, IDE Cambodia has been a leading international NGO working with the rural poor focusing on two key sectors; namely : Agriculture and Water & Sanitation. Products promoted under the Agriculture sector include the treadle pump, drip irrigation systems, rice weeders etc. In recent and current projects, IDE Cambodia has worked with rural enterprises and households to develop the following services : drip irrigation, vegetable transport and storage and cool storage. In the Water & Sanitation sector, since 2001, IDE Cambodia has been promoting the Ceramic Water-Purifier (CWP) as an affordable household water filtration option for rural Cambodia. Other products introduced in more recent years also include latrines and hand pumps. Hydrologic promotes Rabbit CWP in Cambodia through a social enterprise business model. After 8 years of extensive marketing and with the financial and strategic support from two leading organisations, WaterSHED and the Program for Appropriate Technologies in Health (PATH), IDE spun off Hydrologic as an independent entity in 2009. 17
  18. 18. IDE Cambodia: Awards IDE Cambodia has won numerous international accolades for its contribution to various projects. Among others, in 2009, IDE Cambodia won the World Bank’s Development Marketplace Award for Micro Franchising Scheme for Agricultural Services. In 2010, IDE Cambodia also won the inaugural Nestle Prize for Creating Shared Value for their work in promoting private sector development in the agricultural sector of Cambodia and the prestigious Fast Company International Design Excellence Award for its easy latrine product. 18
  19. 19. IDE Cambodia & Hydrologic This chart illustrates the key areas of focus and products of IDE Cambodia which have led to the spin off of Hydrologic as a social enterprise. IDE Cambodia (1994) Water & Sanitation Agriculture 2009 Latrines 2001 - Treadle pumps - Drip irrigation systems - Improved fertilizer technology - Farm Business Advisors - Vegetable transport and storage - Rice weeders - Cool storage Hand Pump Ceramic Water Filter To Spin-off as Social Enterprise Hydrologic Hydrologic becomes a social enterprise in 2009 19
  20. 20. Hydrologic: Social Enterprise snapshot The Company Social Impact Production facilities Supply Chain •IDE is currently the sole owner of Hydrologic •WaterSHED (USAID) is main financing partner. PATH is 2nd partner •Provides access to and ensures proper use of health promoting products •Commercially viable business model creates jobs and expands local economy •Committed to the highest level of business ethics •One factory (Plant 1) in operation, S.O.P. procedures, optimisation, QA •2nd factory (Plant 2) currently at pilot production phase •Complete supply chain turnaround implemented •Shift from independent distributors to dedicated sales teams Strategic Partners •WaterSHED as principal business incubator •PATH supports direct sales pilot, product development and market study Products •Rabbit CWP: >150k units sold since 2002 •Crystal Pur – emergency relief product, also within portfolio •”Aspiration CWP” in product development (PATH funded) 20
  21. 21. Regional Sales Offices & Factories Regional Sales Office Factory Old Factory (Plant 1) New Factory (Plant 2) Growing market penetration / Streamlining distribution 21
  22. 22. Current Network of Partners Suppliers -Vietnam, China: plastic casing -Local clay and rice husk supplier Funding Partner -PATH -WaterSHED NGOs -UNICEF -World Vision -RedCross -Research Dev Institute of Cambodia Owner -IDE Retailers -380 retailer outlets Community Members -Farmer Association -Village Heads -Schools -Clinics -Health centres -Pharmacies 22 Sales Reps -Direct sales
  23. 23. Existing Products (1) Rabbit Ceramic Water Purifier Hydrologic’s main product is the IDE Rabbit Ceramic Water Purifier (CWP). It is based on a simple but proven technology which uses porous ceramic (fired clay) to filter microbes, bacteria and other contaminants from ground, surface or rain water. Field studies by UNICEF and IDE Cambodia have shown that the CWP reduces incidences of diarrhoea by 46 %. The CWP project won the International Water Association Project Innovation Award Grand Prize. Its ease of use, local production and low production cost, combined with proven effectiveness makes it possible to reach large numbers of people through a market-based approach. Rabbit CWP is flagship product of Hydrologic 23
  24. 24. Existing Products (2) Crystal Pur Siphon Filter The Crystal Pur Siphon Filter is a small and portable ceramic/cloth filter product imported from India. Its key attributes are its portability and fast flow rate compared to the Rabbit CWP. This product provides a complementary water filtration solution for rural or urban consumers who are in a higher income bracket than the main target audience for the Rabbit CWP. Good potential for product diversification and consumer segmentation 24
  25. 25. Market Penetration Research conducted in 2009 by PATH, the Programme for Appropriate Technology in Health, showed the following statistics: Location: RURAL URBAN Total House Hold (HH) 2.20 million 0.56 million Unaddressed Market HH 1.40 million 0.40 million Piped Water Surface/Ground Water 5% 95% 55% 45% Access to Alternatives Low High The unaddressed market potential for water filtration products in both the rural and urban areas stood at 1.4 million and 0.4 million respectively. Significant opportunity for further market penetration 25
  26. 26. SWOT Analysis-Hydrologic Strengths Weaknesses •Strong network among NGOs for technical assistance and distribution partnerships •Existing financial support from WaterSHED and PATH for essential company infrastructure development including construction of new production facility •Relatively young and inexperienced marketing and sales team •Insufficient detailed knowledge among staff of Rabbit CWP current usage and market penetration •Current lack of sufficient retail presence •Current lack of business management experience and commercial precedent Opportunities Threats •Significant market need for improved water quality and safety in Cambodia •Ongoing and future expected lack of water supply infrastructure in rural areas •Continued NGO mandate to provide safe water resulting in ample marketing partners •Low penetration of effective water treatment solutions •Significant room to expand existing product portfolio to meet demand •Population has poor knowledge on the assessment of and need for safe water •Popularity of alternative mineral filter pot •Low consumer awareness of the technological superiority of Hydrologic’s Rabbit CWP compared to competitors •Low awareness among users of need for proper maintenance of CWP Market opportunities & existing support outweigh pressures from competitive products 26
  27. 27. SWOT Analysis - Rabbit CWP Strengths Weaknesses •Affordability of CWP among rural consumers •Product materials are abundant in local areas and CWP can be produced at low cost •Proven to be highly effective in removing Pathogens and other water contaminants •Added advantage of discouraging boiling water as treatment solution thereby reducing energy consumption and threat of fire. •Currently perceived as “poor man’s” product •Slow filtration flow rate •Relatively heavy and difficult to transport •Users must be educated on proper cleaning of and maintain discipline to ensure durability •Currently unable to remove odour of water •Requires after sales support and consumer solutions in case of breakage Opportunities Threats •Simple but highly effective technology •Standard technology with new applications •Continued NGO mandate to provide safe water and distribute the CWP •Growing consumer awareness for the need for safe water •Large untapped market for household water treatment solutions •Poor knowledge on how to judge unsafe water •Popularity of alternative mineral pot filters •Users must clean CWP frequently for continued effectiveness •Through continued subsidies and free CWP distribution among the very poor by NGO, consumers maintain the perception of CWP as a free or ‘poor man’s’ product Rabbit CWP is simple technology at affordable price 27
  28. 28. SWOT Analysis - Aspiration CWP Strengths Weaknesses •Improved product capacity over Rabbit CWP •Consumer perception of it as a higher-tech product and improved performance •Combines effective technology with improved aesthetics, more modern appearance •Builds on existing CWP distribution with a premium product positioning •Higher price point than Rabbit CWP •Filter needs to be cleaned regularly •No increase in flow rate over CWP •Also unable to remove odour of water •Requires ongoing after sales support just as Rabbit CWP •No improvement in durability, still fragile despite more attractive appearance Opportunities Threats •Consumers prioritize the products with modern appearance and higher status symbol •Provides Hydrologic with product differentiation and market segmentation •Can be marketed in both rural and urban areas •Consumers may confuse with mineral pot filter – need to educate on differences •Users currently have low awareness of need of maintenance •Still difficult to transport and risk of breakage Aspiration CWP is optimised to meet the demand of the middle tier population segment 28
  29. 29. Proposed Business Model 29
  30. 30. Business Model •The proposed business model for Hydrologic describes how the company shall carry out the process of value creation, value delivery and value capture. •The business model defines the target markets and how Hydrologic shall organise itself in the areas of production, supply chain and logistics, distribution, sales and marketing, and after sales support in order to meet customer demand. It details key refinements to sales channels and an aggressive expansion of its direct sales force. •As the key business expansion strategy, Hydrologic shall diversify to enter both the more sophisticated household water treatment business and the sanitation markets. •In addition the company will launch a professional education delivery services which will drive demand for its products and also serve as an additional revenue stream. 30
  31. 31. Buyer Utility Map @Purchase Delivery Use Maintenance Image Safety Productivity Convenience Source: Based on SMP group market study of 5 representative families in Kampong Chhnang Key buyer utilities are image, productivity and convenience 31
  32. 32. Target Markets Products Household Income Aspiration CWP High >US$5 a day Middle US$2 to US$5 a day Aspiration CWP Rabbit CWP Poor (68%)* Target the right product to right household *Source: eStandardForum Country Report on Cambodia 32 <US$2 a day
  33. 33. Distribution Channel for Rabbit CWP Rabbit CWP NGOs Low Income Families 33
  34. 34. Proposed Sales and Marketing Channels Phase I Phase II Existing Products Diversified Products/Services + Puricom Water Purifier Aspiration CWP Retail Sales Middle income and above { Regional Offices Families Solar products Spare Filters + Liquid / Bar Soap Direct Sales Rabbit CWP 34 Education Service Low Income
  35. 35. Education Service - Overview Market research indicates there is an opportunity to provide educational services to the rural communities particularly around the importance of drinking safe water. Hydrologic can leverage its direct sales force in rural communities to support NGO’s and development agencies with a mandate to develop awareness around such critical health messages. This can be provided as a comprehensive service (cost estimated at $1.73 per household (HH)) bundled with the gathering of customer information and data. 100 HydroReps would be engaged to conduct about 5 house-to-house calls per day for a fee, to create greater awareness through distribution of printed materials and demonstration of how the Rabbit CWP is used to clean the water thereby also supporting Hydrologic’s sales efforts. I have no time to wash the CWP I do not know where to get CWP 35
  36. 36. Education Service - Delivery The following is the programme outline for sales reps to reach 144,000 rural households (HH) scattered throughout the country. Programme Outline -Safe water -The current water source -Health problems -What is safe water? -Benefits of safe water -Ways to get safe water -Importance of Sanitation -Related health problems -Benefits of proper sanitation -How to get it done HydroRep (HR) 5 HH/day 144K HH/year Billboard -Enhance consumer Face to Face Printed material Demonstration -Building personal relationship -Create awareness -Improve health awareness -Additional Outreach Helpline (e.g. 1800-Rabbit) -Personal touch -Answer doubts Remarks: HydroRep – Hydrologic professional trained educator cum sale advisor & customer service 36 Target Revenue US$250,000 yearly
  37. 37. Education Service – Cost Model 144,000 HH per year $1.73 per HH Cost breakdown Total 144,000 HH Printed material – design & marketing (free gift) $0.25 $36,000 HydroRep commision $0.50 $72,000 Marketing & training Profit $0.63 $90,720 $0.35 $50,400 Total $1.73 $249,120 Targeted Revenue US$250,000 Conservative estimate - Education service to generate US$250K / year 37
  38. 38. Expansion - Strategy (Market segmentation) Households New Product Existing Product Existing Market (<US$2) Rabbit CWP Solar Product Fast Moving Consumable Goods Fast Moving Consumable Goods New Market (>US$2) Aspiration CWP Solar lamps Sanitation Products 38 Existing Product will not be offered to the new market
  39. 39. Product Portfolio Expansion – Phased Launch (Diversified product Offering) Sanitation Products Fast Moving Consumable Goods Puricom Water Purifier (New CWP model) Rabbit CWP (Current Offering) Solar lamps Solar lamps Aspiration CWP Sequence of Launching New Products 39
  40. 40. Geographic Focus of Sales Activities Sales force to focus on regions with higher population density 40
  41. 41. 683 Distribution Centres & Sales Analysis 825 1410 400 2384 150 582 100 1672 1100 189 Distribution to be consolidated in areas of highest sales volume 31 41
  42. 42. Proposed Operational Improvements • Recommendations for Streamlining Production / Distribution: – Close Plant 1 and consolidate all operations and production of both Rabbit CWP & Aspiration CWP at the newly opened Plant 2 – Close store/office in Phnom Penh and set up a new showroom at more advantageous location (e.g. near Central Market and on the same street that sells water and sanitation products) – Shift management team’s office and warehouse to Plant 2 in order to consolidate all aspects of management on site and immediately address and resolve any critical problems in operations. Plant 1 at Kampong Chhnang Build efficiency by maximizing existing plant resources 42
  43. 43. Proposed Operational Improvements Advantages – Estimated savings of USD0.75/unit USD2,250 per month approx – Overall redundancy up to 2 staff only – Optimizes Plant 2 for production, warehousing and retail opportunities – Better working environment in Plant 2 as compared to Plant 1 provides worker benefits – Eliminates transportation of CWPs from plant to end users via city store/office thereby reducing breakages and product loss Plant 2 at Udon Clear benefits to consolidating operations in Plant 2 43
  44. 44. Quality Control Ceramic filters are fragile and tend to crack easily. Currently the cumulative rejection rate during the process of pressing, drying and firing is unnecessarily high at 30%. By consolidating production in Plant 2, Hydrologic can set up an R&D unit to optimize on Quality Control (QC) processes and use of facilities and equipment. Preliminary enhancements to improve upon the following processes include: a) Pressing • Increase physical checks to detect faulty ceramic filters at the onset to reduce production costs. • Explore various membrane materials to eliminate adhesion of clay to press mould (instead of using disposable plastic bags) 44
  45. 45. Quality Control b) Drying • Create a temperature controlled enclosed area for drying of ceramic filters to reduce cracks • Conduct physical checks prior to firing to conserve resources c) Firing • Explore the use of other fuel materials (instead of firewood) to create a more even burn temperature to 831°C and reduce firing costs. • Consider the use of rice husks, coconut husks, gas, etc. which will reduce the environmental impact viz deforestation Quality Control reduces costs and enhances company image 45
  46. 46. Value Proposition: Social Benefits • Hydrologic will drive the provision of safe water, especially to rural population (reaching about 108,000 households over 2 years) • Subsequent improvement in public health of Cambodians, especially in the rural areas • Establishment of a financially sustainable social enterprise (estimated in 2 years time) which can also serve as a model for others • Increased availability of other socially useful products to improve livelihoods (solar power lamp, bar soap, liquid soap, Puricom). • Enhanced awareness among rural population about issues related to water, sanitation and hygiene (about 288,000 households in 2 years). Provision of safe water in rural areas improves health and productivity 46
  47. 47. Value Proposition: Economic Benefits • Enhanced investment in water awareness programmes (USD 250,000 /year) will boost productivity and drive economic improvement • Provision of employment for recommended sales expansion within the company (from 38 to 82 staff, plus 100 HydroReps within first 2 years). • Provision of business activities related to the marketing and sale of associated products (10 sales offices and 100 HydroReps). • Delivery of educational service through HydroReps frees up NGO charitable resources for other social requirements (estimated at USD 500,000 per year). Enhanced investment in water awareness, employment and business opportunities. 47
  48. 48. MARKETING AND SALES PLANS 48
  49. 49. Overview of Marketing and Sales Plans HYDROLOGIC HQ Marketing Strategy - Branding - Education - Strategic Marketing Channels - Hydrologic Outlets Hydrologic Outlets Retail Network HydroReps Target Market 49 Sales Strategy - Strategic pricing structure - Strengthening and expanding sales network - HydroReps - Training - Customer Service
  50. 50. Target Markets Urban Areas Populated Rural Areas Less Populated Rural Areas Households 560,000 1,400,000 800,000 <$2 Rabbit / NGOs $2 – 5 Aspiration / Retail Rabbit / NGOs Cambodia Overall >$5 Aspiration / Retail Rural Area Some Treatment 35% Some Treatment 29% No Treatment 65% No Treatment 71% Note - About 0.4 million urban households and 1.4 million rural households lack access to improved water. Rabbit CWP will be distributed through NGOs. Aspiration CWP will be distributed through Retail and Direct Sales. 50
  51. 51. Sales Projections 2-Year Sale Projection by Quarter Rabbit Key Assumptions Aspiration 12000 10629 10000 8785 7986 8000 No. of Sale - As strong demand for Rabbit CWP currently exists in commercially isolated populations, one additional sales staff will enhance sales through NGOs. A 7% quarterly growth will enable the sales to achieve 2,000 sales/ month by July 2012. 9663 7260 7216 6600 6000 6000 5000 4494 4200 4809 5891 5505 5145 6744 6303 4000 NGO 2000 1800 Retail 0 Current / Qtr - Aspiration CWP to be launched by January 2011. Qtr 1 / 2011 Qtr 2 / 2011 Qtr 3 / 2011 Qtr 4 / 2011 Qtr 1 / 2012 Qtr 2 / 2012 Qtr 3 / 2012 Qtr 4 / 2012 Quarter / Year 5-Year Projection Rabbit Aspiration 64045 60000 53371 50000 No. of Sale - Given the enhanced marketing and sales strategy, the sales of the Aspiration CWP has potential to increase significantly to 5,000 units for the 1st quarter, 20% increase for the 2nd quarter, and 10% per quarter thereafter. 70000 44476 37063 40000 34811 31646 28769 30000 24860 26154 19953 20000 16800 NG 10000 7200 Reta 0 Current Sale 2011 2012 2013 Year Strong sales growth projected for both Rabbit and Aspiration CWP models 51 2014 2015
  52. 52. Product Branding The Aspiration CWP will be branded with Five S’s: • Super-Effective - Highly effective in filtering pathogens - Extensively & internationally tested • Smart - Immense positive impact on health • Simple - Stylish product is easy to use & maintain • Socially Responsible - Affordable - Responsible for water purification & sanitation - Made of environmental friendly natural material • Service and customer oriented Made in Cambodia with Hope for Cambodia 52
  53. 53. Product Pricing Rabbit CWP Aspiration CWP Cost U S$6.10 Wholesale U S$9.50 U S$7.60 U S$15.50 - Out of Factory - Operation Retail U S$19.50 - Affordable - Marketing & Prom otion - Im age Perception - Potential Profit The Rabbit CWP is sold wholesale to NGOs only. The pricing structure of Aspiration CWP takes into account: • affordability for target households. • pricing to reflect the ‘new look and sophisticated’ model. • a realistic profit margin which includes: - incentives for retailers and HydroReps. - flexibility for seasonal discounts. 53 - Realistic profit m argin
  54. 54. Marketing Strategy Short Term - Within 1 year: • Position Aspiration CWP as the most effective brand with important health benefits. • Strengthen and stabilise the sales network under 10 existing sales offices. • Begin conversion of sales offices to Hydrologic Outlets incorporating customer service. • Drive further market penetration within desired coverage areas. • Introduce Education Service initiatives in marketing (see next page). • Support marketing through strategic channels (see next page). Mid/Long Term - After 2nd year: • Widen the sales network from existing sales offices to other provinces. • Introduce sales of sanitation and diversified products. • Explore international market opportunities beginning with neighbouring countries. Education goes hand-in-hand with product marketing 54
  55. 55. Marketing Strategy Education & Increasing Awareness is Key. Educational Initiatives • Engage schools, clinics, health promotion centres, pharmacies, farmers’ association, village heads. • Engage Educational Community Service. • Education talks/ seminars. • Picture/ Cartoon education leaflets. Strategic Marketing Channels • People: Retailers, direct sales through HydroReps (commission-based), educational and promotional road shows with visual aids. • Media: TV, Radio, Print Advertisement, Advertisement on Bus, Banner, Billboard and Poster 55
  56. 56. Marketing Strategy Hydrologic Outlets • Convert existing 10 sales offices to “All in One” outlets. Each outlet will be staffed by 2 trained representatives. • Incorporate provincial sales office, show room, education, sales and customer service. • Establish contact point for retailers and HydroReps. • Positive image building. • Exhibition of future products, such as FmCGs, sanitation products and solar lights. Retail outlets are central to all marketing and sales efforts 56
  57. 57. Sales Strategy • Monthly commissions for sales staff - proportionate to the sales turnover. - incremental to motivate sales growth. • Energizing retail network - Incentives : increasing profit margin from currently about $2 to $4. - Engage credible retailing outlets, e.g. pharmacies and health centres. - Display of Aspiration CWP by retailers as a policy. - Delivery service may be considered at a fee. • Direct Sales Scheme - Recruit local people to be HydroReps on commune basis. - Self-employed. - Education and Customer Service point for communes / villages. - Incentives : profit margin - same as retailers. - Subject to subsidies, HydroReps may be paid for educating households. • Other Ad-hoc Initiatives - Seasonal discounts. - Providing discount coupons for other commercial items. (e.g. mobile phone). - Road show combining with education and giving out discount coupons. Aggressive sales expansion driven by positive incentives 57
  58. 58. Marketing and Sales Structure Structure Manpower HYDROLOGIC Marketing and Sales Provincial Sales Office Retailers Retailers Retailers HydroRep HydroRep p HydroRep p Marketing / Education Team Responsibility 1 Marketing Mgr TV Radio Print Ad. Partnership Banner 1 Sales Mgr 1 dedicated to NGO Sales 20 Sales Rep. (2 per Sales Office) Billboard Wall banner Bus Ad R&D Training Hydrologic Outlets Recruitment of HydroReps Engage schools, clinics and health centres Recruit pharmacies as retailers Commission Scheme Display of Aspiration CWP Accept discount coupon Seasonal discount 400+ Retailers 100+ HydroReps (10+ per Province) 2 staff 58 Extra rebate Accept discount coupon Seasonal discount Education and customer service Road show Education talk
  59. 59. Staff and Sales Training Education, sales and customer service, and technical training. • Training upon recruiting new retailers and HydroReps in water filtering and sanitation. • Coaching HydroReps after recruitment for one month. • Regular workshops and seminars. • Sales manual to incorporate education information, sales skill do’s and don’ts. Training One, Gaining Everyone 59
  60. 60. Customer Service Customer Service • Run by Sales Offices with support from Headquarters • Continued support (education and technical) and After Sales • Data-base to be built up • Availability of Customer Service Hotline & Website (email contact) affixed to the product for easy reference. Making Customer Loyalty a Priority 60
  61. 61. Governance and Strategic Partners 61
  62. 62. Proposed Structure and Organisation Board of Directors Board of Directors BOD BOD Chief Executive Officer Chief Executive Officer (CEO) (CEO) Composition of BOD Chairman/IDE CEO PATH Rep WaterSHED Rep Chief Operations Officer Chief Operations Officer (COO)* (COO)* Operations & Operations & Production Production Finance Finance Sales Sales Marketing Marketing Human Resource* Human Resource* (HR) (HR) * Denotes new capacity to be created 1st year into operation *# An MBA intern on secondment from PATH for free for 12 mths 62 Business Business Development*# Development*#
  63. 63. Terms of Reference and Employment Requirements • Chief Executive Officer (CEO) – Member of the Board of Directors (BOD), also represents the management team – Execute directions decided by BOD – Key focus on Strategy, Finance and Business Development – Lead the management team – Work closely with strategic partners, potential investors and relevant agencies – Supervise overall corporate functioning and processes – Remuneration tied to performance – Preferably bilingual in Khmer and English • Chief Operations Officer (COO) – Take charge of day-to-day operations – Key focus on Operations & Production, Marketing & Sales, HR and Admin – Act on behalf of CEO in the absence of the latter – Remuneration tied to performance – Must speak Khmer 63
  64. 64. Terms of Reference and Employment Requirements • Operations & Production Manager – Timely production of products which meet stipulated quality and safety standards – Product research and development – Logistics and distribution management • Financial Manager – Budget forecast – Financial management – Cash flow management • Marketing & Education Manager – Marketing strategy and initiatives for current and future products – Customer relations management – Marketing survey and research – Drive education services for water, sanitation and hygiene – Remuneration tied to sales performance 64
  65. 65. Terms of Reference and Employment Requirements • Sales Manager – Sales forecast – Sale management – After sales service – Direct sales – Sales to NGOs and retailers – Remuneration tied to sales performance • HR/Admin Manager – HR management – Administration support – HR development • Business Development Manager – Long term strategic planning – New business opportunities and initiatives – Remuneration tied to performance 65
  66. 66. Staffing Plan Transition (asap) Proposed CEO 1 COO* - 1 Ops/Production 20 48 Finance 3 3 Marketing 3 3 Sales 22 Improved 22 Sales/Prod to Mgmt ratio HR/Admin* 1 2 Business Dvp*# 1 1 Total Current MP = 38/76 pers 1 51 81 * Denotes new capacity *#An MBA intern on secondment from PATH for free for 12 mths 66
  67. 67. Timeline - Overview Short term plan – – – – The company will be financially independent by January 2012 IDE will retain at least partial ownership of the company for strategic influence WaterSHED and PATH continue to provide support on ad hoc or project basis Hydrologic registered as a new company by Jan 2011 Long term plan – Equity Holding (balance of IDE’s ownership) Top Management 40% Managers 30% Employees – 30% (Actual terms and conditions of equity holding will be worked out separately) – Control to remain with Management and Board of Directors (strategic planning, accountability, etc) Employee-Owned & Financially Independent: A New Model for Cambodia 67
  68. 68. Implementation Jan 2010 COO HR Biz Dev Break even point Jan 2011 1 Jan 2012 Jan 2013 Jan 2014 WaterSHED Grant Ceases Ownership Transfer 1 1 20 25 Ops/Prod Sales/Mkt 48 25 Short Term USD 1,023,000 BOD USD 1,297,000 68 USD 1,470,000 USD 1,674,000
  69. 69. FINANCIALS 69
  70. 70. Social Objectives Financially Sustainable Business Venture 1. Gleaning reasonable returns within an acceptable payback period 2. 3. Driving revenue from a large untapped market, with growing demand from population and economic growth Employee owned with culture of entrepreneurship Responsibility Embedded in Core Business 1. Allowing poor rural communities of Cambodia to gain access to safe 2. 3. drinking water by selling them affordable household water filtration and sanitation products Through the use of these products, achieving better health impact by reducing incidences of water borne diseases Profits reinvested in expanding the business and positive social impacts Responsible use of capital for social good 70
  71. 71. Financial Data Assumptions • Merger of Plants - Plant 1 and 2 merged by Dec 2010, Achieve 8% cost reduction on Rabbit CWP • No grant income from WaterSHED from Year 2 onwards • • Education Service Income starts in Year 2 Inventories holding period: one month • No change in applicable tax rates • Cash flow analysis does not include float in working capital apart from inventory movement 71
  72. 72. Financial Data Assumptions • Sales price and Unit cost Rabbit CWP: $9.50 and $6.10 respectively throughout Aspiration CWP: $15.50 and $7.60 respectively throughout Other products: 30% to 40% mark-up on cost • Sales volume Rabbit CWP: Y1 & Y2: 7% quarterly increase in sales Y3 to Y5: 10% annual increase Aspiration CWP: Y1: Q1 - 5,000 units Q2 – 6000 units Y1 Q3, Q4 and Y2: 10% quarterly increase Y3 to Y5: 20% annual increase • General and admin overheads 3% increase yearly 72
  73. 73. Financial Summary • Profitable from Year 1, financially independent from Year 2 • Positive cash flow from Year 1 • Debt free • Internal Rate of Return: 27% • Significant financial resources allocated to achieve sales targets A Social, Environmental and Economical investment 73
  74. 74. Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 SALES 773 1,047 1,220 1,424 1,667 VAT (70) (95) (111) (129) (152) NET SALES 703 952 1109 1295 1515 (450) (598) (693) (805) (937) GROSS PROFIT 253 353 416 490 578 GP MARGIN 33% 34% 34% 34% 35% GRANT INCOME 278 - - - - - 250 250 250 250 (427) (541) (571) (606) (644) PROFIT BEFORE TAX 103 63 94 134 184 TAXATION (21) (13) COGS SERVICE INCOME G&A EXPENSES PROFIT AFTER TAX 83 (19) (27) (37) A Social, Environmental and 50 76 107 Economical investment 147 74
  75. 75. Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 PROFIT BEFORE TAX 103 63 94 134 184 7 10 11 13 15 10 11 7 8 6 (21) (13) (19) (27) (37) CAPITAL EXPENDITURE (8) (4) - - - NET CASH INFLOWS 92 67 94 128 168 ADD DEPRECIATION INVENTORY MOVEMENT LESS INCOME TAX 75
  76. 76. Operating Expenses Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 PAYROLL & BENEFITS 178 183 189 194 200 SALES & MARKETING 131 114 132 153 178 - 121 125 128 132 DISTRIBUTION COSTS 55 57 59 60 62 OTHER ADMIN. COSTS 28 29 30 31 32 PROFESSIONAL FEES 15 16 16 17 17 TRAVEL & TRANSPORTATIONS 13 13 14 14 14 4 4 4 4 4 427 541 571 606 644 EDUCATION INCENTIVES MISC. COSTS Total 76
  77. 77. Income Statement USD('000) 2000 1500 1000 500 0 2011 SA LE S COG 2012 2013 GROSS P ROFI T 77 2014 G&A E x pens es 2015 EBIT A
  78. 78. Cash Flows and Profit USD('000) 200 150 100 50 2011 2012 2013 CA SH FLOWS 78 P ROFI T S 2014 2015
  79. 79. Risk Assessment & Mitigation (1) Description Competition from new mineral pots which are cheaper and more attractive Category Consequence Risk Mitigation Measures Finance & Marketing Sales volume adversely affected Medium Reduce production costs and sale price but maintain profit margin Discrepancies and distortion along raw material supply chain Finance Production costs would be increased Medium Put in audit systems & monitor closely the management and purchasing section to prevent loss Political unrest and economic recession Finance Demand for water filters would be reduced Low 79 Reduce production of water filters and diversify to other product offerings
  80. 80. Risk Assessment & Mitigation (2) Description Category Consequence Risk Mitigation Measures Loss of public confidence Governance & Strategic Partners (external) Reduction in sales Low Maintain public relations and timely feedback Staff Malpractice Governance & Strategic Partners (internal) Demoralised staff and management Withdrawal of investors High Enforcement of transparent accounting procedures and reporting Loss of capable management or staff to other companies Governance & Strategic Partners (internal) Reduced management effectiveness Low demand for selected products for diversification Business Model Low revenue – unable to recover cost 80 Medium Ensure competitive wage rate; focus on vision sharing, promote company ownership among members of management team Low -Extensive customer survey on new product. -Indent sale of new product (NGO sale).
  81. 81. Risk Assessment & Mitigation (3) Description Category Consequence Risk Mitigation Measures Poor uptake of Aspiration CWP model by the community Marketing & Sales Financial Loss Medium -Aggressive marketing, education initiatives and after sales service -Continued & Increased sales of Rabbit via NGOs -Sale of diverse products Poor engagement of retailers/ direct salesman Marketing & Sales Poor penetration of market Medium -Bigger sales margin (double) -Commission-based arrangements with HydroReps Production targets will not be met Medium Implement regular maintenance regime to reduce incidents of breakdown Breakdown of critical component of production (eg Kiln) Operations & Distribution 81
  82. 82. Implementation Schedule – Short Term (1) 3 6 Governance/ HR Commence recruitment of COO, HR, BD, Ops & Prod, and Sales & Marketing personnel Complete recruitment of COO, HR and BD personnel Operations/ Distribution – Close Plant 1 & consolidate ops in Plant 2 – Initiate QC processes & facilities – Close store/office in Phnom Penh – Set up a new ‘Rabbit’ showroom in more strategic location (e.g. near Central Market – Set up R&D unit Month 9 12 Issues 82 Complete recruitment of Ops & Prod, Sales & Marketing personnel (Transition Establishment) Review potential need to increase additional kilns Monitoring & review of QC processes
  83. 83. Implementation Schedule – Short Term (2) 3 6 9 12 Month Issues Sales & Marketing Business Model Begin development of Educational offering to include: •Design of services and materials to distribute •Build distribution networks •Present opportunity to NGOs for contract Launch of the Aspiration CWP Introduction of customer service and database Converting sales offices into Hydrologic outlets Move to secure NGO contract for Educational service delivery Further penetration within coverage areas Begin to see impact on sales as driven by Education initiative Recruitment of Education/Sale Staff Begin diversification of products to include: •Soap / Liquid soap •Solar Lamps •Puricom Additional organizational preparation for launch of education service Begin to deliver Education through HydroReps Additional marketing support for Aspiration CWP 83
  84. 84. Implementation Schedule – Mid to Long Term (1) Year 2 3 Issues Governance/ HR Complete recruitment of Ops & Prod, Sales & Marketing personnel (final phase) Complete full establishment of Hydrologic as independent company Operations/ Distribution Review expansion plans in line with Sales & Marketing efforts Development of water filtration products Build 2 additional kilns to expand operations 84 4 5
  85. 85. Implementation Schedule – Mid to Long Term (2) Year 2 3 4 Issues Business Model Begin promoting sanitation products Expansion of sales of Diversified Products Expand educational service and sales of Rabbit / Aspiration CWP Sales & Marketing Widen domestic sales network Consider adding NGO clients for educational service delivery 85 Move to explore and enter international markets 5
  86. 86. Conclusions With a population of 18 million of which more than 60% currently lack access to safe potable water, there is a clear opportunity to serve this critical social need. Despite having the highest ratio of NGO’s and development agencies per capita in Asia, many problems such as the provision of safe water have not been solved using the charitable model and therefore, a for-profit social enterprise called HYDROLOGIC is being created in order to meet this need through a commercial vehicle. HYDROLOGIC’s vision is to be the leading Cambodian social enterprise offering water filtration and sanitation products by meeting customer expectations through providing superior product solutions and also being affordable to the poor. In addition to its flagship product the “Rabbit” Ceramic Water Purifier which has a strong track record and broad acceptance by the technical community, HYDROLOGIC is launching an upgraded version of its CWP as well as diversifying into a range of other product lines with strong potential to generate profit while meeting social needs. Furthermore, HYDROLOGIC has a unique opportunity to leverage its expanding direct sales force among the rural communities in Cambodia to deliver an educational information and household data collection service. This service will both generate additional revenue for the company and also support the increased marketing efforts for its water purification products. 86
  87. 87. Conclusions (2) The business plan as recommended by the SMP group points to a few key financial outcomes in addition to the clear social benefits of substantially improving public health through the provision of safe water to rural households: • The business is profitable from Year 1 with positive cash flow. Hydrologic is debt free despite significant financial resources allocated to achieve sales targets. The company will be financially independent in Year 2, 2011 at which time it will no longer require funding from the existing donors. • With the enhanced marketing and sales strategy which drives up sales figures of the Rabbit and Aspiration CWP models as well as the launch of the new education delivery service, the revenue of the company will increase significantly yielding net profit after tax of $147,000 by Year 5. • Based on the existing resources and organizational structure as proposed by the group, HYDROLOGIC has the opportunity to be entirely employee owned, providing also strong financial incentives to management and its sales force to drive continued profitability over the medium and long term time horizon for the company. 87
  88. 88. Appendices 88
  89. 89. Appendix A – Financial Sensitivity Analysis Scenario A: Meet 80% of sales targets Scenario B : Margin decreases by USD 1 Scenario C : 10% increase in G&A Expenses 89
  90. 90. Appendix A – Financial Sensitivity Analysis SCENARIO A: VOLUME UNDERPERFORMANCE (Sales Meets 80% of Target, G&A Expenses Remain Status Quo) Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 SALES 619 837 976 1,139 1,333 VAT (56) (76) (89) (104) (121) NET SALES 562 761 887 1036 1212 (360) (479) (554) (644) (750) GROSS PROFIT 202 283 333 392 463 GP MARGIN 33% 34% 34% 34% 35% GRANT INCOME 278 - 250 250 250 250 (427) (541) (571) (606) (644) PROFIT BEFORE TAX 53 (8) 11 36 68 TAXATION (6) (8) (10) (11) (13) PROFIT AFTER TAX 46 (16) 2 25 55 COGS SERVICE INCOME G&A EXPENSES 90
  91. 91. Appendix A – Financial Sensitivity Analysis SCENARIO B: MARGINS COMPRESSION (Margin Reduced by $1, Volume and G&A Status Quo) Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 SALES 749 1,010 1,175 1,371 1,603 VAT (68) (92) (107) (125) (146) NET SALES 680 918 1068 1246 1457 (450) (598) (693) (805) (937) GROSS PROFIT 230 320 375 441 520 GP MARGIN 31% 32% 32% 32% 32% GRANT INCOME 278 - 250 250 250 250 (427) (541) (571) (606) (644) 81 29 54 86 126 (16) (6) (11) (17) (25) 64 23 43 69 101 COGS SERVICE INCOME G&A EXPENSES PROFIT BEFORE TAX TAXATION PROFIT AFTER TAX 91
  92. 92. Appendix A – Financial Sensitivity Analysis SCENARIO C: COST WORST CASE (10% Increase in G&A Expenses) Year 1 Year 2 Year 3 Year 4 Year 5 2011 2012 2013 2014 2015 USD'000 SALES 773 1,047 1,220 1,424 1,667 VAT (70) (95) (111) (129) (152) NET SALES 703 952 1109 1295 1515 (450) (598) (693) (805) (937) GROSS PROFIT 253 353 416 490 578 GP MARGIN 33% 34% 34% 34% 35% GRANT INCOME 278 - 250 250 250 250 (427) (561) (624) (694) (774) PROFIT BEFORE TAX 103 42 42 45 55 TAXATION (21) (8) (8) (9) (11) 83 34 33 36 44 COGS SERVICE INCOME G&A EXPENSES PROFIT AFTER TAX 92
  93. 93. Appendix B - Research References • Understanding Consumers and the Market for Household Water Treatment Products in Cambodia, PATH Dec 2009 • Royal Government of Cambodia, “ Progress in Achieving Cambodia’s Millennium Development Goals: Challenges and Opportunities 2007 • WSP and UNICEF, “ Use of Ceramic Water Filters in Cambodia”, 2007 • IDE Cambodia Clean Water in Every Home Report April 2007 • United Nations, Human Development Report 2006 • Webpage resources – http://www.un.org/milleniumgoals/global.shtml – http://www.wpro.who.int/NR/rdonlyres/1AB59A47-F2EC-47EC-99117EABC501DEEF/0/Cambodia.pdf 93

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