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Morningstar | Rising Fresh Water Costs Should Drive Profit Growth For Ecolab's Industrial Water Management Systems

As the global leader in the cleaning and sanitation industry, Ecolab provides products that help its hospitality, food-service, and healthcare customers do laundry, wash dishes, and fix appliances when they break. With unmatched scale and a solid razor-and-blade business model Ecolab's competitive advantages are firmly in place.The company's cleaning and sanitation scale dwarfs the competition. Ecolab generates over twice the revenue of Diversey, its largest rival. The industry is very fragmented, with much of the market made up of regional and local companies. Ecolab controls roughly 11% of the $125 billion-plus global market. With its unrivaled scale and breadth of product offerings, the company is an attractive partner to global hospitality and food-service firms. We think it will continue to gain share from smaller players.The firm uses a razor-and-blade business model by leasing cleaning equipment to customers and contractually obligating those customers to solely use Ecolab's proprietary consumables. This model creates a steady stream of consumables revenue. The installed base and consumables model also leads to high customer switching costs, as clients are generally reluctant to switch out equipment and retrain staff. The company sells directly to customers in most cases and focuses on improving cost efficiencies for its clients in areas such as water, energy, labor, and turnaround time. This strategy provides Ecolab with pricing power and builds customer loyalty.Ecolab’s water treatment business also benefits from switching costs. We expect fresh water costs to double in the U.S. by 2030 and increase around the world. This will make Ecolab’s water management systems that reduce a customer’s water usage more valuable, as the systems will reduce customer operating expenses. Therefore, we expect the industrial water business to generate the majority of incremental profit growth for Ecolab.Ecolab plans to spin off its upstream energy business as a separate company in 2020. The upstream business includes oil field chemicals and well chemical drilling and generated roughly $2.4 billion in sales in 2018, which was roughly two thirds of energy segment sales.