Volume 43 Number 4
Assembling It All with Aqua Systems’ Bret Petty
Petty, who'd worked at the dealership since he was 14, became president after graduating from Indiana University in 1982 with a bachelor's degree in business. That was the same year the Marmon Group bought ServiSoft and the dealership chose to go independent again as Aqua Systems. A short while later, it began assembling its own softening, reverse osmosis (RO) and filtration systems, later contracting out for ROs with Water Factory Systems and Clack Corp. In 1989, it moved to nearby Avon into a new 25,000-square-foot building.
With offers from Culligan and USFilter in 1997, Petty opted to stay independent and brought in local investors to buy his father out of the business and secure his retirement. That year, he acquired three dealerships and consolidated them into a new northeast office in Fishers, Ind., and he built a new 25,600-square-foot manufacturing and distribution center in Avon. A southside retail store opened in Greenwood, Ind., in 1999-effectively splitting the Indianapolis market into thirds.
In the past three years, Aqua Systems also added a bottled water plant, a portable exchange DI regeneration operation and a commercial/industrial (C&I) division to broaden its clientele base and reinforce its "One Source" motto-"Everything You Need for Your Water." He brought on board Larry Owen and Nevin Rudy to spearhead the C&I effort. They do work for Eli Lilly, the IU Medical Center and a slew of automotive manufacturers that helped give Indianapolis-which also showcases the Indianapolis 500 auto race-its name as the "Crossroads of America."
While its OEM operation makes up only 20 percent of the $11 million business, it's growing rapidly. The company has doubled in size in the last four years and expects to break $12 million in revenue this year. Products are sold mostly in the Midwest, but are distributed as far as Pennsylvania, New Jersey and New York. New products in 2001 are expected to include high efficiency softeners.
Petty, 41 and a Water Quality Association board member, talks candidly about the competitive pressures facing both assemblers and dealers, including the squeeze on mid-level outfits from continuing consolidation in the manufacturing and dealer base, and new channels to market such as "big box" mass retailers, water utilities and the Internet. He also discusses the importance of the WQA's Water Quality Society, materials safety, certification and ethics.
Here's a few details before the interview, which follows below:
Aqua Systems/New Aqua LLC
Petty: The company was founded in 1959 by my father Lou Petty. He started the company and me in the same year. It's my birth year, so he got all this going at once.
WC&P: that's kind of funny because we did an interview with C.R. Hall, who's coming in as WQA president, and his dad bought his first dealership the same year he was born as well.
Petty: Must be a trend.
WC&P: Definitely. That makes you a second-generation operator too.
Petty: Yes. I had the very good fortune to grow up in a business and learn it. I learned it from the mechanical side. Actually, I was attracted to that side of the business in my younger years, installing, building, rebuilding water treatment equipment. So, I learned the business working in it.
WC&P: When did you start working for the company?
Petty: It was around '74 or '75.
WC&P: How old were you?
Petty: Fourteen or 15 years old.
WC&P: And how old are you now?
WC&P: When did you take over the company as president?
Petty: I finished school in '82 and made a decision to come in and help him with the business. We started working on it together.
WC&P: Where did you go to school?
Petty: IU, Indiana University in Bloomington -- formerly known as Bob Knight's home.
WC&P: I'm an '86 grad.
Petty: Are you? That's right. You grew up around here.
WC&P: I'm an Indianapolis native. Grew up on the eastside.
Petty: So anyway, we started working on this thing. He started out as an independent and then acquired a ServiSoft franchise in 1964, which was a brand name for the Water Refining Co. And then in the early '80s, that company was acquired by the Marmon Group, which became known as Eco Industrial. The ServiSoft name was dissolved. So, we decided to take on our own name at the time and took ServiSoft off of everything and created our own name, Aqua Systems, and got it federally registered and took the independent status that we were going to just search for the best products we could sell.
WC&P: This is about the same time you came on board?
Petty: Yes, that was in 1982. We changed the name in October 1982. And we sold different products from different vendors. It evolved into buying components from ANC Distributors in Plano, Ill., and we started building our own softeners. We learned how to do it and it was very economical. I struggled with this concept that no one knew who we were essentially. Our name was new even though we'd been in this business a long time. So, one of the ways we gained customer confidence is simply putting them out on rental service plans, assuring them we'd take care of the equipment: "We'll be responsible for it." Through that time, we built a substantial rental base, which is a big part of our business today. We worked the business together up through 1997 and that was at a time when the flurry of acquisitions and consolidation was going on.
WC&P: As Culligan and USFilter were battling it out for dominance of the industry?
Petty: Yes. We're not a large company as the industry goes. But as dealerships go, we're probably considered in the large group. I don't know if there's a lot of them doing what we're doing. In any event, consolidation offers were coming in pretty quick and heavy. I considered all of them, but chose to remain independent in the end. I brought in some outside partners in '97 and basically secured my dad's retirement and we just kept the ball moving every since. That's kind of the cycle we've been on.
WC&P: So, you've been president since 1997?
Petty: Acted more as president way back to '83.
WC&P: Now, was '83 when you started doing assembly of products?
Petty: We'd just started -- '83 to '84 -- somewhere in there.
WC&P: When you say that you, as far as dealers go, you're fairly significant in the region there -- how many dealers do you have?
Petty: I said if you looked at us as a dealership, we'd probably be considered large. If you looked at us as a supplier, because we do some wholesale business -- it's not a lot -- we're not that big a company. As a dealership, we are.
WC&P: Tell me about how that split falls in your company. As a dealership, you are how big? As a wholesaler?
Petty: Wholesale represents just under 20 percent of the total revenue, about 18 percent.
WC&P: What's your total revenue?
Petty: Last year was just under $11 million.
WC&P: What are you expecting this year?
Petty: I'm expecting to add 8-to-10 percent to that in existing operations. If we don't do anything different and just go with what's in place, that's what we're expecting.
WC&P: On the wholesale side, what type of products are you manufacturing today? You started out with softeners, but what's being put together now?
Petty: The equipment that we assemble is pretty much confined to point-of-entry softeners, filters, for both consumer and commercial/industrial use.
WC&P: Do you do any reverse osmosis?
Petty: We do RO, but we buy completed systems that we have private labeled for us, built to our specs and NSF certified.
WC&P: What's the split between the consumer and industrial in that?
Petty: Our industrial division is fairly new. It's roughly 10 percent of our business right now. It's an area we're spending a lot of time focusing on building at this point.
WC&P: By fairly new, you mean what?
Petty: Well, historically, we've always done it on an opportunistic basis where we've responded to inquiry. And this is our third year of actually developing a group that's proactively organized to go after a higher level of more sophisticated commercial/industrial work, including we added a portable exchange DI service in the plant -- a higher level of engineering sized jobs. But we went out and recruited some talent to build that side of the business.
WC&P: Such as?
Petty: Who? One of the fellows that joined us, Larry Owen, has a former background with BetzDearborn, Ion Pure and USFilter. He's a degreed industrial engineer with just an excellent knowledge level and track record. Nevin Rudy has joined us, formerly with Culligan and Eco Industrial. Those are two of the recent additions.
WC&P: I take it they have years of experience in the industry?
Petty: Yes. And then we've developed some of our own staff who've gone over into that division.
WC&P: It sounds like you're putting a lot of push into the C&I side of things.
Petty: We see a lot of opportunity there. And we also see it as a way to create another leg of stability as the consumer market continues to evolve with changes and so forth.
WC&P: What sort of changes?
Petty: The change in distribution cycle. I mean we identified many years ago that this is really a service business. The forefathers of the industry built this industry as a sales business, a sales industry, door-to-door, value-building demonstrations selling to consumers who didn't know what water softeners were, educating people that they had a need for this product. Today, people know they need it, they want it, they're out looking for it, they're looking for help with existing product and that's the market we focus on. But that whole market is also being affected with opportunities of equipment and services coming out of Big Box retail. And we still believe we can win that war and be good service providers -- provide very focused, expert service on water treatment equipment. I think that, unlike other appliances, water treatment will always provide that opportunity if you're good at it.
WC&P: We'll probably come back to that later in the interview as far as Big Box retail and what you're situation is there operating out of the Indianapolis metro area. Tell me though first about your in-house assembly and wholesale side, who are some of your suppliers? Who are some of the people you're working with? You mentioned for instance that you're doing RO but purchasing whole systems for applications there.
Petty: Our big suppliers are Clack Corp., Pentair Water Group, Osmonics, Cargill...
WC&P: What does Cargill provide, just salt?
Petty: Private label salt, yes.
WC&P: And I assume the RO units are coming from Clack and then you're splitting your valve and assembly business between Pentair and Osmonics?
WC&P: We've spoken previously about some of the competitive business pressures on assembler/distributors in this day and age and your decision to stay independent kind of goes to the heart of that. Why don't you tell me about how you made that decision and how you see the market evolving for the similar businesses in the industry?
Petty: I believe that the OEM assembler/distributor has a huge challenge on their hands as the independent water dealers get fewer -- meaning the number of them get smaller; they're becoming larger organized groups who are going to channel they're buying through larger OEMs.
WC&P: They're own networks, in other words.
Petty: Yes, they're pulling together buying power and now you have a couple of consolidators such as the Marmon Group with the Alamo situation. You have USFilter with their Consumer Commercial Group out of Minnesota, which I believe they also refer to as the Water Group...
WC&P: You've got Aquion/RainSoft acquiring Erie and its valve business; you've got Sta-Rite buying Park International, the tank manufacturer...
Petty: Right, so you've got larger, well-organized businesses that are controlling the components and the assembly. Smaller assemblers are going to have their hands full. And then the number of dealers buying this product is shrinking. The large number of small dealers are becoming a small number of large dealers. You put all those together and the smaller-sized OEMS, I'm not going to say they're in trouble, but they're certainly going to be challenged. They're going to have to think outside of the box for how they carry their business forward.
WC&P: How do you think outside of the box?
Petty: We're slightly different. Although we're an assembler and we have good economies as far as we buy enough to make it work, most of our product is sold directly to the end-user through our retail operation.
WC&P: I know that you also used to assemble filters and ROs previously and then you did a switch when you went to Clack, correct? How long ago was that?
Petty: Yes, well we haven't assembled ROs for quite some time other than for industrial purposes. We assemble small to medium ROs for industrial work. For the drinking water market, we quit a long time ago assembling and began buying from Water Factory Systems. We were with them for a long time and made the decision to switch to Clack just because there were some elements we felt were better for us. We had some advantages in that choice. Water Factory is a quality company. It just had to do with some issues of aligning with Clack and getting our own name on the product.
WC&P: So, they offered you a proprietary product. Do you still buy from Water Factory or are you exclusively with Clack?
Petty: We have both, but most of the volume is with Clack. But we haven't assembled ROs since the mid-'80s. We realized pretty quick that the economies of scale there just didn't make sense for the amount of equipment we were moving. This later proved to be validated as certification issues came in that required a lot of economies of scale to make certification reasonable.
WC&P: i.e., the cost of certification and the amount of time and effort required. If you go through Water Factory or Cuno, effectively, they've already gone through that process and you've eliminated a step in your ability to market a certified product.
Petty: Right. And then we stay focused on things we're good at, which is getting product into the marketplace and taking care of it.
WC&P: Certification is a big issue for the small OEM as well, costs shifting, standards shifting, the issue going on currently in California over chlorine reduction and whether that's a health claim or an aesthetic claim with the new Disinfectants/Disinfection By-Products Rule. How are some of those bigger issues affecting you, if they do?
Petty: They're certainly on the radar that we're paying attention to. And it's one reason why I participated on the Materials Safety Task Force with NSF. As materials safety issues -- as they relate to requirements of plumbing codes and standards that are being set -- elevate, it may force more standardization of products that get pushed through the certification cycle. It's a really tough situation that a lot of primarily point-of-entry systems are built to be job-specific. That's the way this industry has been for a long time.
WC&P: Can you elaborate on what you mean by "job specific"?
Petty: Systems built to treat a specific water problem at a specific location that has unique features.
WC&P: Say arsenic or iron...
Petty: ...or low water pressure or water that has a lot of turbulent matter such as sand in it. You may have to build a special configuration to deal with that before you can soften or filter the water.
WC&P: This goes back to the whole reason why people feel that the Big Boxes may take a piece of the action, but they're never going to take over the industry because it requires a lot of hands-on expertise and knowledge.
Petty: Right. There are a lot of players in the market that have a vision of creating a plug-and-play water system they can fit in a box and consumers can pull it out without a lot of wisdom and just plug it in and it will just work. That's the unique feature about this equipment. When you get on a large city water markets, that as close as they're going to get to that. But you take the problem water areas, well waters, rural markets with insufficient water supply and pressure... you have to be able to have some flexibility to go in there and provide a solution. Certification rules make that really complicated because if they go through some of the envisioned ideas that some of the larger players would like to see -- plug-and-play -- so they can go into high production, you could not afford to certify custom-built equipment that provide site-specific solutions. So, one of the answers is to make sure the materials are safe and build systems from proven safe components to retain the flexibility to put them together to fit a particular situation's needs. With certification, even softeners at some point, we may decide at some point that it's better to buy them completed rather than to put them together. I don't see that on a near-term horizon, but I see it as something we always have to pay attention to.
WC&P: One of the future benefits may be some of the work being done through the Environmental Technology Verification program run jointly by the USEPA and NSF [see www.epa.gov/etv/] which is working at ways to take technology from the point-of-use/point-of-entry water treatment industry and be able to transfer it more easily reducing the testing parameters that may be required for individual systems. After being received rather lukewarmly initially, that program seems to have been fairly successful in doing a lot of projects. I don't know how well that's translated down to your level as an assembler or the dealer level. Any comment on that?
Petty: As far as what their doing in lining up the equipment to the dealer level?
WC&P: Well, as you know, the Safe Drinking Water Act Reauthorization in 1996 for the first time determined that POU/POE water treatment technology should be designated as "best available technology" for certain projects, particularly to enhance the ability of small systems to comply with USEPA Primary National Drinking Water Standards. Therefore, they created the ETV program to streamline the approval process on a state level to get some of the technology in our industry approved for small systems, which may in addition come back and transfer to rural networks.
Petty: Well, as it relates to benefiting the small dealer and the whole program itself, there are issues with that program I just have to look at and question. If a rural water system is out of compliance with the EPA and they decide that one solution is to use POU equipment to reach compliance levels -- once that whole concept comes into consideration, you have to start asking about the discipline in testing, service, maintenance and then the liability. Whose going to carry it?
WC&P: Particularly for a dealer and a small OEM, that's a big liability potentially?
Petty: I'm not sure it ever fits in their realm. I think it would be a very volatile situation for a small dealer/business. I just think there are big questions to be answered. It sounds relatively simple on the surface. But when you really start getting into compliance issues and trying to assure the public -- or having to assure the public -- that this device is going to render your water in compliance with EPA standards, then you have to answer the question: When that person goes to the faucet on a daily basis, how are you going to assure them that it's in compliance. What's the maintenance schedule? In the event of a failure, how's it identified? How do you monitor a diversified base of equipment vs. central distribution where you can monitor what's leaving the plant and establish some sort of criteria that can be charted and plotted and graphed and say, "Over a period of time, we know this is what left our plant." It helps you nail down problems. But when you have all this decentralized equipment out there, I think there are a lot of questions to be asked and answered. I'm not so sure anybody should get too overzealous about the opportunities to go out and try to get a piece of that market.
WC&P: Effectively, because it'll be a long time before we get to that case where there's a practical, affordable system out there that could be a one-box unit that could monitor for and adjust for different water conditions, etc. Until then the dealers remain somewhat at the frontline of water treatment. Talk to me if you could about your dealership because you've kind of got a triangulation so to speak on the Indianapolis market. You've got three offices, correct?
WC&P: Where are they?
Petty: We are due west in Avon, northeast in Fishers and due south in Greenwood.
WC&P: And the original one is?
Petty: The Avon location.
WC&P: When did the other ones open?
Petty: Fishers opened in August of '98. Greenwood opened in November of '99.
WC&P: And how many customer accounts do you have through that?
Petty: We estimate -- you know, this business has been here for a long time -- that we have 60,000 sites that we have equipment in out in the general marketplace in this particular region.
WC&P: Sounds like a lot of opportunity for word-of-mouth advertising.
Petty: That's what drives a lot of our business. We have a relatively low advertising budget. We really work hard to win our customers over as friends and confidants so they feel comfortable with us and send their friends to us. We think it's pretty critical.
WC&P: In what other ways are you attracting customers? Are you doing telemarketing, direct mail, yellow pages, radio...
Petty: We absolutely do no telemarketing and we do some sort of a mix of just about everything else you've mentioned.
WC&P: Why no telemarketing?
Petty: It turns me off. I just don't like it. Never have. I really always have looked at my businesses and how I would like to conduct it I suppose in ways that I find attractive. One of the things that I resent is going home at the end of a long hard day and somebody calling. I interrupt my dinner, reading or whatever it is and go to the phone and there's somebody wanting to sell something. I don't like it and I don't want to do it to people.
WC&P: I think if recent handling of that with respect to privacy issues and litigation have anything to say, it's probably agreeing with you on that as far as limits being put on telemarketing.
Petty: You're right. In Indiana, they're actually trying. There's a major movement to ban it here. And if you realize that the market's that opposed to it, why do something that flies in the face of it? So, we just don't do it. I'm not saying it's not right for somebody else. It's just not a part of our culture.
WC&P: And your revenues in that area are -- I assume since you said roughly 80 percent -- about $8-9 million?
Petty: Correct, in the retail revenue.
WC&P: That's fairly sizable. How big an area are you working in primarily?
Petty: Indianapolis and contiguous counties. That's roughly a five county area.
WC&P: What's the growth been like there? What's influencing your growth?
Petty: Growth of our market area or of our business?
Petty: Well we happen to be very fortunate in that our market area is very healthy. Housing's healthy. Population's growing. Indianapolis is a vibrant, thriving community that has a lot of good elements to it. The values of the work base, it's a fairly stable economy that's growing. It's an exciting place.
WC&P: Having grown up there myself, I notice every time I go back to visit that there are a lot of stark differences -- particularly in the downtown area. You've got Circle Centre Mall, the new NCAA headquarters, beautification along the White River canal, the zoo and botanical gardens, the Pacer's Conseco Fieldhouse, Victory Field for baseball and other efforts to make it the "Amateur Sports Capital."
Petty: Yes, it's an exciting city. I think it's often overlooked as a dull Midwestern city, but it isn't. It's a good place to be. There's a lot of hard water, and I think the growth of our business just comes from a very core discipline in trying to execute this operation in a quality manner and a way that earns the respect of customers and keeps them coming back and new people coming in the door.
WC&P: Are there other water quality issues? I recall that Indianapolis was built on an area that 200 years ago used to be a swamp. And you're in a fairly industrial area with it historically being the "Crossroads of America," as its motto proclaims.
Petty: The greatest opportunities are on the simplest problems such as all the calcium in the water here from our wonderful limestone base. You know the Empire State Building in New York is made out of Indiana limestone. The Biltmore Mansion in North Carolina is made out of Indiana limestone. Well that wonderful limestone makes you're water hard. You went down to IU and you know about the rock quarries and all the big buildings on campus made out of limestone. That's what makes hard water.
WC&P: Oh yeah, you can see those quarries in the movie, "Breaking Away."
Petty: Yeah, well the simple things like hard water and high TDS, it just makes wonderful opportunities without having to deviate into issues like arsenic and so forth that can be more alarming to customers. We've been involved in situations that have addressed those. There's a lot of issues with it. There's a lot of opportunities with it. But we concentrate on the big market and that's simply hard, bad-tasting water.
WC&P: Do you have any new products that you're looking to market?
Petty: We are responding with some new softener configurations, high-efficiency units engineered for some unique space requirements to fit into spaces easier. I'm really one that believes high-efficiency softeners really only belong on iron-free municipal water. That's where we intend to market them. We still believe some of the conventional configurations work better on the hard well waters. For the most part, that pretty much covers the realm of new products.
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