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October 2001: Volume 43, Number 10

Part 2, Chewing the Fat with Atlantic Filter’s Wakem
by Carlos David Mogollón, WC&P Executive Editor

The following is a continuation of our interview with Atlantic Filter president Jamie Wakem...

WC&P: We could probably bring up some fairly vivid examples of how that’s being reflected in the market right now. The Culligan debate with their dealers over a franchise agreement is somewhat interesting in that regard.

Wakem: That’s one. You’ve got the Culligan debate. You’ve got the fact that you have the big box stores that are selling branded products that compete with the dealer, for which they’ve always had that fear. Well, those products are being sold. That’s taking up part of the market or getting part of the market share. You’ve got a, I believe, concern and lack of vision on many dealers’ parts on where is the industry going. They’ve lost sight of where it’s going. It’s almost more of a survival instinct I’ve seen from many dealers. You know, earn a living and survive vs. grow quantumly and, hopefully, at some point, somebody will come in and buy you out -- based on what happened a few years ago.

WC&P: i.e., in the competition between USFilter and Culligan just before USFilter bought Culligan?

Wakem: I think that’s the message that’s being sent by this lack of commitment to dealers… Survive until they can be bought out, I mean sell out, or decide that it’s come time to retire and move on. Where, I believe, before, years ago, the philosophy was: “Hey, this is a great industry to be in. I’m in it. I’ve got a business. Each year, I’m watching x-amount, double-digit growth or whatever you want to call it. It’s growing. This is the industry to be in. Someday somebody’s going to come in and buy all these companies up. I’m building the business and I want to be able to sell and retire and be on easy street.” I think the light has gone out on that vision for a lot of dealers to where they say, “I’ve been putting years of sweat and toil into this business. What am I going to do with it now?”

WC&P: What’s the answer? WQA members have talked about this very question for several years now. You’ve been involved in some programs for dealers to try and show them how they can adjust and build and run a better, stronger dealership. What sort of solutions do you see out there?

Wakem: I think there are solutions. And I believe that who really has the answer -- while nobody has a crystal ball and knows exactly what’s going to happen -- is everyone is going to have to keep their eyes wide open, they’re going to have to listen and they’re going to have to pick a path. They’re going to have to make a choice. Or they’re just going to sit there and I think, over a period of time, they’re going to find their business just eroding away if they don’t make a choice and pick a direction and start to try to move their business forward. Now, what options do they have. There are a bunch of different options. Some of them can partner up with certain suppliers, certain manufacturers, maybe to help move product and gain market share in certain areas, but in a concerted effort with a partner. Others can say that they want to possibly position their business so that it can be sold, but they have to think differently than they have in the past.

WC&P: By that, you mean what?

Wakem: If you’re going to take a business and position it to be sold in five years, how do you make it attractive to the largest spectrum of potential buyers that would be out there. You’ve got to think through that. There are ways to do that. Now, one of the problems with a small water treatment company that has someone who’s built himself a nice little business with three, four or five employees, when it comes time to sell, really what has he got to sell. Most of the time, it’s a service business with a list of satisfied customers that, for whatever reason, have become comfortable with that entity. A lot of times, it’s because of the person or persons who have been running that business. When that person exits, the whole…

WC&P: Extra value involved…

Wakem: Everything changes. And it’s very difficult for whoever would come in to purchase that business to come in and maintain or grow that business -- unless they were just trying to purchase the business to eliminate it as a competitor or get it out of the way in their market or of their marketing plans. In that case, they’re not going to pay much for it. They’re not going to pay a premium. So, unfortunately, a lot of dealers -- as in any business, water treatment or otherwise -- they start a business and work it, they’ve basically created a job for themselves for 10, 20 or 30 years. And when it comes time to exit, there’s a huge question mark. What do you do now? You’ve really created a job and, a lot of times, somebody doesn’t want to come in and just take over the same job that you had.

WC&P: You mean how much of the business is based on the products it sells, the service it offers and the client base its built up vs. the personal value or reputation that the owner brings to it and the relationships that he’s developed.

Wakem: That’s right. And when you take that owner, the key mover and shaker in the business, out of it, what is the value of the business now. In many cases, it’s less than 50 or 25 percent of what it was when the person was there. So, that’s sad because these little going concerns that have been nice businesses and nice customers for the suppliers that were supplying them are gone also. The supplier loses a good account because the business goes south once the main driver of it exits because there’s nothing there to carry it on in many cases. Knowing that, and for people are forward thinking enough, how are you going to be able to sell your business when it comes time for people to get out of it or exit. If people think that way, then it does cause them to take a harder look at maybe some options that they may not be that excited about today because of their independent-ness and wanting to really be in control of everything themselves. But, when they take a look at where they need to be in maybe five years, they can look at it a little bit differently and see that this is maybe a better way for us to go.

WC&P: It doesn’t seem as if one can say that without mentioning that there’s also been a lot of consolidation not just among big corporate players in the industry, but also among some of those mid-level distributor/assembler/suppliers -- people who maybe assembled units and marketed those either as a brand or private label product. That puts pressure on the dealer as well. If they’re going to go out and make a go of it and build up this thing and suddenly they’re product supply chain has been affected to the point where they feel they have to switch suppliers, that affects things as well doesn’t it as far as the dealer’s position and future prospects?

Wakem: Well, if I hear you right, the fact that there are so many changes going on out there and people who historically have been comfortable with a particular supplier -- ABC is supplying you with controls and valves and that company’s been sold out or merged and consolidated with a company that competes with you -- now all of a sudden you’re taking a different look at it. “Is this the supplier I want to really be working with and am I really in a partnership with him or not?”

WC&P: Yes. And, at the same time, you have other things happening such as some suppliers introducing their own product lines or changing the terms of transactions. For instance, Osmonics has introduced the AventaPure line. You’ve also got the shift Clack on Park International tanks and Alamo being bought by EcoWater’s parent company. There’s some fairly significant moves happening. The most recent, from a supplier pespective, would be where Watts Industries has bought Premier up here in Phoenix this summer.

Wakem: I didn’t know that.

WC&P: Taken as a whole, these are not small things occurring in the industry. These are things that actually affect a larger group of people and businesses. Even, for instance in your case, you’re moving more into retail stores. You say you’ve done that well and with sensitivity toward how it might affect your dealer base, but how do they respond to that? Isn’t that competition for them?

Wakem: Is it a competition to the dealer at a local level, yes. I mean, without question, at a local level or in the areas where we open up a water center, we are competition. One of the advantages, though, that we bring to the table is, when we open a water center, we advertise. We spend money on building the market. We spend money on educating the marketplace. We do that in a multitude of ways.

WC&P: Whereas some of the dealers may just have a yellow pages ad and a flyer here and there?

Wakem: Right. And, what happens is we drive the market through our advertising and everybody’s sales increase.

WC&P: The pie gets bigger?

Wakem: The pie gets bigger. So, we’re able to coexist because, in many instances or historically I’ll say again, we have driven the market when we’ve been in retail. Now, when we pulled out of retail, which we did at one time for a period of eight years, we saw our wholesale business drop.

WC&P: When was this period?

Wakem: This was about ’80 to ’88.

WC&P: Why did you pull out?

Wakem: We pulled out for a number of reasons. When my brother and I split up, Peter was running the retail side and it was growing. When he left, let me put it this way, our retail business had evolved from basically nothing in the ‘50s to where when we shut it down it was not able to deliver and live up to the standards that we demanded of it. What we decided was that we had a retail business that, through the years, we provided the answer to anybody that had a problem. Any consumer that needed help came to us and we were expected to take care of it, because we always took care of it. We didn’t know how to say no. We took care of everybody. And what happened is we created some bad habits and we wound up with some problems because we were expected to be able to do more than we could deliver.

WC&P: When was this?

Wakem: In the late ‘70s.

WC&P: And so?

Wakem: We said the best thing for us to do and what’s in the best interests of our customers is to shut the retail business down, service the existing customers we had through our sales and with our local dealer base, and support our dealer base in that effort. Give 100 percent commitment to our local dealer base to support those customers.

WC&P: So, why did you decide to get back into this in the late-‘80s?

Wakem: Because our dealer base did not support our customers. We felt that if we gave a very substantial volume of retail business to our local dealers, and then supported them wholeheartedly in that effort, that our customers and our dealers would benefit. What we found out the hard way was that did not work. The customers were not given the service necessarily that they would be given through us. They complained to us about it, the dealers were unresponsive in addressing those issues and we were forced to go back into the retail arena.

WC&P: Now, I want to make sure we touch on a few things here in the interview. One of those is going to be we’ve talked previously about Atlantic Filter being involved in some interesting projects outside of this area internationally where you’ve supplied product. I want to talk about if you can give me some breakdowns in terms of percentages of your business in the retail arena and what’s the percentage in manufacturing wholesale. We always provide some numbers as far as revenues go in general, so I’d like to know how you refer to that. Lastly, I’d like to know how some of the issues we’ve discussed have been reflected in efforts and changes of the Water Quality Association, of which you’re a past president.

Wakem: Here’s how I’d like to say it. Through the years, as this industry has evolved, we’ve embraced the new technologies, most of the new technologies that have come down the path. We were aggressive in building the reverse osmosis product line when that looked as if it was going to be the technology of choice. We manufactured and started distributing systems that we manufactured both nationally and internationally.

WC&P: What’s the brand name you use on your products? HeRO is the RO line.

Wakem: The water conditioning/filtration/softening line is Gulfstream, ClearGuard and Atlantic Filter, mainly. When the drinking water market took off, where we historically were softeners and filters whole house, we embraced that. With small filters and a lot of the multilevel and network marketing groups started selling products back in the ‘80s, we manufactured products for those companies on a small scale, but again got pulled into the drinking water, countertop-type product. Again, everyone had high hopes. We did. So did the large manufacturers. A lot of that never really got going. Every company had a consumer products division and the turnover in those departments seemed to be just a consistent revolving door in everybody’s business. Small systems, we went after that business 20 years ago, which looked as if it was right around the corner; and, 20 years later, it’s still lethargic. It’s coming around, but it’s very slow. So, through the years, we’ve gone in many directions. We’ve chased so-called opportunities that we’ve seen, but we’ve really decided that our focus is going to be going directly to the consumer with our product lines along with other brands. That is really where the future of the industry is. I don’t know how else to state it, but that’s where I believe it’s at.

WC&P: How do you market this idea?

Wakem: To the consumer, you mean? We market it by making financial commitments in areas to open up large showrooms and water centers to give the consumer a place to go to get answers to questions and concerns that they would have.

WC&P: I recall about three years ago when we spoke that you mentioned the Internet as a big, big tool.

Wakem: I said the Internet is going to be a big thing and I still think it’s going to be a big thing. It’s not there yet. I don’t think the consumer has the confidence yet to go on the Internet and buy a water treatment product to address a health concern he has comfortably.

WC&P: Not sure he’s getting a valid product or unsure about giving credit card numbers out online?

Wakem: I don’t think they enough to ask the right questions yet. It’s something that’s going to evolve, but it’s not there yet. And whether consumers will start buying products over the Internet in a year, in five years or in 10 years, I don’t know. But, it’s just like again, the small systems example. The commitment and the financial commitment and the companies that ramped up to address that opportunity 10 and 15 years ago, it still isn’t there yet. So, I think we become -- some of the older more seasoned executives in the industry who’ve been in the industry -- a lot more cautious and are really evaluating and reevaluating market opportunities before we move forward.

WC&P: American Water Works seemed to throw a new curve at the industry with its announcement at the Orlando convention in March that it was marketing softeners and ROs through its utility customer base?

Wakem: The fact that the municipal supply would offer point-of-entry/point-of-use systems has been something we’ve known for years would be a factor. It was just a matter of when, so I didn’t find it at all a surprise. My response was, well, it’s about time. Let’s see what happens. We’ve had a lot of talk and rhetoric. Now, somebody’s doing it. Let’s see what happens. The dealers have been concerned about that for years and we’ve always said that. In fact, I’m a retailer myself. I’ve looked at it and, again, if they do become involved, I really do not think it’s as much as a threat as some might. There’s a certain segment of the market that they are going to be able to appeal to in which they will be able to be semi-successful at marketing the product. But I do not feel that it is a threat in general to our dealer base and that it is all of a sudden going to take all of their customers away from them because their local utility decided to get in the business. No, the local utility is going to market in the same manner or the manner that it needs to be marketed.

WC&P: I want to be sure to get some basic profile information. Tell me, if you could, what are some of the percentage splits in your business currently between say manufacturing and retail.

Wakem: You mean wholesale and retail? Manufacturing, we manufacture products that we sell wholesale and retail. Wholesale, our business historically has been about 90 percent wholesale and 10 percent retail. Today, it is probably 60 percent of wholesale, 40 percent retail. And I will assume that it will probably be 80 percent retail, 20 percent wholesale within five years. Now, some of our wholesale volume will be our water centers, because we manufacture products and sell them into the water centers where they will be resold. So, if they’re individual and dealer-owned or investor-owned water centers, that’s our wholesale business, but it’s more of a captive market.

WC&P: What about on the commercial/industrial side?

Wakem: It’s held it’s own throughout the years. I would say our commercial/industrial business is level and the reason it is sort of maintained at the same level. There are some opportunities out there but, again, we are not aggressively pursuing them.

WC&P: What percentage of your business is in that arena?

Wakem: Oh, I’d say probably 15 percent.

WC&P: What sort of growth have you seen in recent years at, let’s say, the retail level?

Wakem: Let me start with wholesale. The wholesale side has been growing but in single-digit growth, which is acceptable because based on the nature of the industry here in Florida. With the fact that we’re here in the Florida marketplace, where everybody is chewing on everybody. Every time you turn around, there are new OEMs; so, though the pie is growing, it’s getting split up more and more and more every year by new, so-called OEM/assemblers and wholesalers. For us to have single-digit growth in that area, I’m comfortable with that. It’s just a part of the business that’s just a constant, over-the-shoulder-type marketing philosophy. Who’s chewing on you this week? That’s about it. You can quote me like that -- over the shoulder. You come in Monday and look over your shoulder to see who it is. That’s it. The retail side is a business that as consumers interest and demand for the products increase through our marketing efforts, the more momentum is built.

WC&P: You launched the first store when?

Wakem: Of the two we have, one’s 2-1/2 and one’s 3-1/2 years old. The other one, the independent one that’s north is a little over two years.

WC&P: What’s the growth been?

Wakem: I don’t want to say what it is, but we’re very pleased.

WC&P: How about a percentage?

Wakem: Double-digit.

WC&P: What’s your overall revenue?

Wakem: $5 million-plus.

WC&P: And the growth overall in the business has been roughly what last year?

Wakem: Let’s see, last year, we were in the 10 percent range. We’re right at 10 percent, which I’m happy with, again, because you take the wholesale, then you take the consolidations… We’ve lost some key dealers to that and, in turn, you losing a $200,000 or a $300,000 account, when you’re making a little over $5 million bucks, that can be significant. But you make it up elsewhere.

WC&P: Are you competing mostly with the Culligan’s, EcoWater’s, RainSofts and Kinetico’s or what?

Wakem: I see our biggest competitor and Atlantic Filter’s competitors in the future to be the Lowe’s and Sam’s and Home Depots. That’s who I see. I don’t see them as the Culligan’s.

WC&P: Where do you see your business going? You mentioned an 80/20 percent split. What sort of growth rate do you see as feasible as you evolve toward that more retail centered approach to marketing your products? Do you see it expanding or, because of the competitive nature of the Florida market, staying in a standard range?

Wakem: No, basically what I see is our growth for gross revenue will probably be in the 10-15 percent range per year. I see the shift from wholesale to retail to where our volume will increase. It won’t skyrocket, but will be in the 8, 10 to 12 percent per year range. But instead of growing at wholesale margins, we’ll be growing at retail margins, which makes a substantial difference. We’ve improved our financial position well over the last few years because of the shift to a retail focus.

WC&P: To recap, what’s your outlook for the POU/POE water treatment industry?

Wakem: For small assembler/OEMs, I find that it will be extremely difficult to survive over the next three to five years if that’s all you’re doing. I find it very disconcerting. It’ll be a difficult time. The industry will explode, but it’ll have a very different face on it in five to 10 years. The future is very uncertain as to where the loyalty will lie with many of the large manufacturers and suppliers. If you don’t know where the industry is going and you’re a small distributor supplier, it will be difficult for them to survive. You’re not quite sure where Fleck’s loyalty or where Osmonics’ loyalty is going to be. I could go on and mention a number of other manufacturers where that may be a question mark. It’s going to be a determining factor not just for the distributor but his customers as well. That small distributor/supplier is who supplies the dealership. They’ve been supporting them and what happens below them after that happens. That’s a good question.

WC&P: Would you like to add anything else as we close?

Wakem: Through the year, we’ve been extremely active at the state and national levels with industry associations, particularly the Florida Water Quality Association. There have been a lot of important issues, both regulatory as well as education and professional ethics, where input is needed. I’ve always encouraged employees to get involved and it’s been reflected by, for instance, the fact that Mark Kuyawa is the current president. Other names from Atlantic Filter in the past include Joe Aponte, Greg West and Phil Fralix -- a lot of guys here have gotten involved and continued to be involved after they left. Many have been president of FWQA. My philosophy has always been that if you’re going to be in the industry, you need to make a commitment to support it. We do believe these associations are paramount to the success of our business and any other in this industry.

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Next month in this column, read our interview with David Kratzer, who is president of Superior Water Systems of Gardena, Calif.