Tessaline Water Systems: Market Entry Case Study with Answer

I would answer two questions: should Tessaline enter at all, and if so, how. The first depends on market size, competition and whether one account makes money. The second compares building, partnering and buying against the board's three-year payback bar.

Because the product replaces water jugs, I would size the market by what target restaurants spend on water today, not by how many filtration units are sold.

• Market: number of target restaurants (40+ seats) by metro, what they spend on water today, and growth of filtration versus jugs.
• Competition: jug delivery firms, small filtration installers and the largest filtration provider; their prices, coverage and service quality.
• Ability to win: Tessaline's price versus jugs, service capability, certification and brand.
• Economics: contribution per account, fixed costs in Mexico, break-even accounts and payback versus the three-year bar.
• Entry mode: build a subsidiary, partner with a local distributor or acquire a local installer; compare capital, speed, control and risk.

What the interviewer is looking for

• Good: covers market, competition, economics and entry mode, not a generic four Cs list.
• Strong: ties the economics bucket to the board's three-year payback test and the entry mode bucket to build, partner or buy.
• Excellent: notices that jugs, not other filtration firms, are the main alternative, so the market should be sized by current water spend.

Push-back: Why size the market by water spend instead of counting filtration units sold today?

There are 60,000 target restaurants: 36,000 in Mexico City (30% of 120,000), 10,000 in Guadalajara and 14,000 in Monterrey. Mexico City alone is 60% of the target.

They spend about $78 million a year on water today. Jugs are 70% of restaurants (42,000) and $63 million of that spend; filtration covers only 26%, or 15,600 restaurants. At $900 a year, Tessaline would save a jug customer $600, or 40%, so the switching story is strong. If every target restaurant used Tessaline's price, the market would be $54 million a year.

The real competitor is the jug. Among filtration players, Claramonte Agua has about 4,800 accounts at $900 a year and the rest is split among small installers, so there is no dominant incumbent to dislodge.

What the interviewer is looking for

• Good: gets 60,000 target restaurants and about $78 million of annual spend.
• Strong: separates the 42,000 jug users as the switching pool and quantifies the 40% saving.
• Excellent: says the jug, not Claramonte Agua, is the competitor that matters, and that a fragmented filtration market means no entrenched incumbent.

Push-back: Claramonte Agua charges the same $900. Why would a restaurant pick Tessaline over them?

Each account pays $900 a year ($75 x 12). After cartridges ($240), service visits ($100) and unit depreciation ($140, which is $700 over five years), Tessaline keeps $420 per account per year.

Fixed costs of $1.68 million divided by $420 gives a break-even of 4,000 accounts. That is only 6.7% of target restaurants, but it is 83% of the base Claramonte Agua has built, the largest filtration provider in the market.

At 1,000 new accounts a year, the subsidiary only reaches break-even in year 4. It is not unrealistic over the long run, but it is far too slow for a three-year payback.

What the interviewer is looking for

• Good: gets $420 contribution per account and 4,000 break-even accounts.
• Strong: puts 4,000 in context against both the 60,000 target and Claramonte Agua's 4,800 accounts, and links it to the sales ramp.
• Excellent: tests price risk: at $65 a month contribution falls to $300 and break-even rises to 5,600 accounts.

Push-back: What if Claramonte Agua responds by cutting its price and Tessaline has to charge $65 a month?

I would partner with Ruta Azul. Under the partnership Tessaline keeps $160 per account ($900 minus $240 cartridges, $140 depreciation and $360 paid to Ruta Azul), so it breaks even at about 1,900 accounts, less than half the 4,000 needed to build. With Ruta Azul signing 1,200 accounts a year, the $0.2 million setup is paid back by the end of year 3 with about $0.05 million to spare. Building loses about $3.7 million over the same three years.

Buying Filtros Brisa fails the board test: $5.0 million (about $2,000 per account) buys a business that loses about $0.05 million a year today, has no Mexico City presence, and even at 5,000 accounts would take five years of full profits to repay the price.

The partner's incentive is the main risk. Ruta Azul nets $260 per filtration account ($360 minus $100 of service) versus $300 on a jug customer, so each customer it switches costs it $40. The argument for Ruta Azul is that filtration is taking share from jugs anyway (19% to 26% in three years), so it is better to switch its own customers than lose them to Claramonte Agua. The contract should still set minimum signing targets.

• Build: full control and $420 per account, but break-even only in year 4 and three years of losses.
• Partner: fast, low capital, pays back within three years; gives up $260 per account of contribution and some control of service quality.
• Acquire: instant base of 2,500 accounts but a high price, no Mexico City and no payback within three years.
• Long run: owning earns more once the base passes about 5,300 accounts, so the partnership should include an option to take over the accounts at that point.

What the interviewer is looking for

• Good: compares the three options on break-even and payback and picks one with a reason.
• Strong: shows the partnership is the only option that pays back within three years, and why the acquisition price is too high.
• Excellent: spots that Ruta Azul loses $40 on every jug customer it switches, explains why it may still agree, and designs the contract around it (targets plus a takeover option near 5,300 accounts).

Push-back: If Ruta Azul makes more money on jugs, why would it ever push filtration hard?

Tessaline should enter Mexico through a partnership with Ruta Azul. The 60,000 target restaurants spend about $78 million a year on water, 70% of them on jugs that cost $1,500 a year, and Tessaline's $900 price saves them 40%.

Building our own subsidiary needs 4,000 accounts to break even and loses about $3.7 million in three years. The partnership breaks even at about 1,900 accounts, pays back its $0.2 million setup within three years and earns about $0.66 million a year by year 5. Buying Filtros Brisa costs $5.0 million for a business that roughly breaks even today.

The main risk is that Ruta Azul earns $40 less on each jug customer it switches, so the contract needs minimum signing targets and an option for us to take over the accounts once the base passes about 5,300, when owning becomes more profitable.

What the interviewer is looking for

• Good: gives a clear enter-and-how answer with the market size.
• Strong: backs the entry mode with break-even and three-year payback numbers for each option.
• Excellent: names the partner incentive risk and turns it into specific contract terms and a path to owning the business later.

Enter Mexico's restaurant market, through a partnership with Ruta Azul rather than building a subsidiary or buying Filtros Brisa.

The opportunity is real: 60,000 target restaurants spend about $78 million a year on water, 42,000 of them on jugs at $1,500 a year, and Tessaline's $900 price is 40% cheaper.

The partnership breaks even at about 1,900 accounts, pays back its $0.2 million setup within three years and earns about $0.66 million a year by year 5; building needs 4,000 accounts and loses about $3.7 million in three years, and Filtros Brisa costs $5.0 million for a business that roughly breaks even.

Next steps: negotiate minimum signing targets and an option to take over the accounts once they pass about 5,300, start certification now, and pilot with 300 of Ruta Azul's Monterrey customers for six months.