April 2001: Volume 43, Number 4
Assembling It All with Aqua Systems’ Bret Petty, Part 2
by Carlos David Mogollón, WC&P Executive Editor
The following is a continuation of our interview with the president of Indianapolis assembler Aqua Systems Inc...
WC&P: I've got some notes here where we were talking about consumer groups and end-users and bottled water. You're also doing bottled water, are you not?
Petty: Yes, we have a bottling plant that does the large packages that go on top of the coolers that we provide the home and office.
WC&P: How long have you been doing that?
Petty: Since '89.
WC&P: And what kind of growth have you seen with that?
Petty: It's grown to be a fair, decent size part of our business. It continues to add value every year. I'm glad I did it. It's a good fit with our business.
WC&P: How so? Talk to me about that. I mean, at one point, dealers viewed themselves as being in competition with bottled water.
Petty: Well, what got me into it was simply answering the phone too many times with people looking for it. And we were recognizing that our products were ones that had to be sold and here's one that people were clamoring for and we've got the technology to make it taste better. We also thought it was a great idea to put in an RO-based bottling system so that we could basically package samples of RO water to give people an easy way to taste it, try it in their homes and see the benefit of clean water. And it was just real simple to fit in as a complement. That's an easy decision for somebody vs. spending some money for an RO system or making a decision to rent a system that's going to have to be put in under their sink. It's an easy decision. There's people out looking for it. The change in pattern since then is there are now people out actively looking for RO systems and filters. Our position is we offer it any way you want it. If you want it in a bottle, if you want to later try it with a system -- we just help people get what they want.
WC&P: How do you have that bottled water market split between consumers and offices?
Petty: We are more concentrated on the consumer/domestic side. I don't really want to give you a split on it. But we really didn't pursue the commercial/office side of the business for a long time. There were a couple players here that were very good at it.
WC&P: Those being?
Petty: Cameron Springs and Hinckley Schmidt. Both of those companies have been acquired. Just with changes in their culture and what they're doing, we think maybe the opportunities have opened up there now. So, we're probably doing more work in that segment now than we ever have.
WC&P: Who picked up Cameron Springs?
Petty: Perrier Group.
WC&P: And Hinckley?
Petty: Suntory bought them.
WC&P: Those are some big players in a niche market to go up against. How do you approach that?
Petty: I've built this business and been up against big businesses all my life. Culligan, Sears, Perrier, Suntory -- I think all of them offer opportunities. They're all going to be there and do well. And through it, there are ways to find opportunities to acquire a niche and work it.
WC&P: Are you assuming that with consolidation following an acquisition there's a period where service may slip and customer dissatisfaction grow that you can take advantage of?
Petty: I believe it's something you can just about bank on every time it happens, from my experience in the past. That's not to say you ever rest on your laurels assuming the larger companies never get their things pulled together. But when it's happening, it provides an opportunity to get a decent market.
WC&P: Talk to me who some of your commercial/industrial customers may be either on the bottled water or wholesale side of things.
Petty: Well, bottled water, there are many. You're talking about a large base of small customers and I don't know if names do any good there.
WC&P: There are a number of prominent companies in Indianapolis though. You've got Eli Lilly. Allison just got bought I believe.
Petty: They're now Rolls Royce. We have both of those companies... Praxair, Cummins, IU Med Center...
WC&P: Methodist Hospital as well?
Petty: Methodist as well. They're tied together all under the Clarion Hospitals system.
WC&P: You've also got just in the general industrial area, some major manufacturers. You've got Borg Warner in Muncie, Delco-Remy in Anderson, Ford in Connersville and Indianapolis and General Motors plants as well -- it being a major center for the automotive industry and the home of the Indianapolis 500. Talk to me if you could a little about business you may do in that arena.
Petty: Well, just about every name you mentioned we know have services at and they range from water softening systems at various different levels to high purity DI systems, RODI combination systems. We approach it by creating a relationship, educating them on what the water treatment capabilities are and taking one project at a time, demonstrating our ability to execute them and earning more projects.
WC&P: Pharmaceuticals has been a growing thing in Indianapolis. Eli Lilly it's been said for years owns the state of Indiana, but there are other companies there also, correct?
Petty: There's some smaller pharmaceutical companies here as well. I'm not sure I could give you their names off the top of my head.
WC&P: Roche is one I know of.
Petty: Roche has a medical instrument division here that used to be known as Berringer Mannheim. It's a large concern here.
WC&P: There's a lot of diversity involved in this business that 15 or 30 years ago one might not have thought a dealership would be rising to the level of handling. What do you think has helped bring things to that point for you?
Petty: Let me make sure I understand your question. Rising to the level of handling a job?
WC&P: Yes, in the past, wouldn't a job of that high purity level be something that a customer went straight to a manufacturer for a solution -- a USFilter, Pentair, Osmonics, Ionics, Pall or BetzDearborn?
Petty: Oh, yes. For us, it's a combination of we have the talent onboard. We have a division dedicated to it. We either build, acquire or partner on the equipment side. But we will take it from that point and complete the process of speccing, delivering, installing and then do maintenance contracts on it. And with a very focused effort on the service quality -- delivering and meeting expectations, doing what we say, quality checks, quality controls -- we're earning repeat business.
WC&P: I take it in developing the talent a large part of that has been training. I believe you mentioned you have a large number of certified personnel in-house as well.
Petty: I can't give you an exact number, but I believe we have the largest group of certified individuals in the state. If not, we're one of the larger groups.
WC&P: How has that assisted in your ability to do this kind of work?
Petty: Well, we incentivize our staff and our players to get educated, get certified, elevate the levels of their certification.
WC&P: Are these just Water Quality Association certifications or more?
Petty: We have WQA, but our industrial engineer also is wastewater certified. He's certified on the municipal front for small systems. Several of our players have been through industrial electrical engineering training and their certification. One of our key players was involved with the David H. Paul organization and did some work with some of our people through there, which is a quality organization. Unfortunately, he passed away last year. But his efforts did a lot to get our staff educated and trained.
WC&P: Did you bring David Paul in?
Petty: Going out to training seminars his organization sponsored. Our guy participated on the advisory board for David H. Paul Inc.
WC&P: We've run articles on his training programs and others he's helped get going at various colleges out in this neck of the woods -- the West. I also had a note here to ask you about www.aquasystems.com and your efforts online. Do you see that as another channel to market?
Petty: It's currently a low-budget brochure type site, which is basically a Band-Aid until we can get back to it. But we envision the website can be very beneficial in allowing people to get online and place orders for their deliveries, check the status of their route service accounts, get information. We think it will be a great information tool.
WC&P: How far and wide, on the wholesale side, is your product being distributed?
Petty: The largest concentration is in Indiana and Ohio, but we actually have I believe 8 or 9 states that the equipment is going out to, including Michigan, Pennsylvania, New York.
WC&P: All the way to New York?
WC&P: Are these for commercial/industrial or... ?
Petty: Mostly consumer product softeners, ROs, filters.
WC&P: Are you working with other dealers in those areas?
Petty: Yes. We take a different approach. We really get involved in trying to teach the dealer how to grow their business, new ways of thinking about their business. We don't approach it as a catalog supplier. We get pretty involved with them. It's not a franchise situation. It's just a relationship. And the unique thing we can provide is unlike a standard assembler who is putting systems on the dock and shipping them, we're actually a training ground. We've got a very successful retail operation that they can get involved in to learn the business, elevate their business, learn new ideas.
WC&P: A full-service provider, in other words.
Petty: Yes, that's one thing we bring to the table to help the independent.
WC&P: Which helps your product as well.
WC&P: We were going to get back to the issue of Big Boxes. One of the things I recall us talking about in various meetings you and I may have attended at WQA has been how all the changes in the industry are going to affect the dealer. Go back and tell me what your perspective is toward the Big Box retailers in your area, please.
Petty: Well, we're going to be an interesting experiment, because I've been pretty firm on my theory of Big Boxes for quite some time and Lowes is building a brand new, 275,000-square-foot store on the adjacent property to us. It will be open in a couple of months. I think that they provide a great element to getting more product out in the market and more product awareness. I think that a lot of the product that's getting out on the market through that channel eventually is going to need service and it's going to need replaced and people may not replace it through the same channel. In other words, as the population gets older and people have more disposable income, I think there's going to be a greater opportunity to get the phone to ring and have people say, "Hey, come out here and take care of this for me."
WC&P: They can't figure out how to make it work effectively, so to speak?
WC&P: Are you guys working with GE or Sears as a service rep?
Petty: We are an official GE service center and do work for them and their customers. We work on Sears systems, but anybody can. If you need parts, you just go to Sears to get them. But, Sears, oftentimes you may call them and they may be out 7 or 8 days to get to you. We get there same day or next when you call.
WC&P: You also have a prominent building plan that you've developed to attract attention, speaking of storefront competition, correct?
Petty: Yes, our facilities are all modern, they're new and in high profile locations on major thoroughfares. There's no question about the entity when someone pulls up in front of our place. It reinforces the stability and quality we provide.
WC&P: I noticed that when I went to your website to look at what you have to offer and saw photos of the buildings. On a separate note, with respect to the WQA, there are two things we should probably cover: 1) How do you see the WQA fitting in with where your business is going and how that impacts on both your dealership and manufacturing sides, and 2) you had some fairly pointed comments to make at the WQA Mid-Year Leadership Conference in Breckenridge last fall. Let's start with the first.
Petty: I recognize and believe that WQA has a big challenge looking forward, doing long term planning. When you look at the fragmented dealer base, there's fewer dealers and the remaining ones are getting bigger. The suppliers are consolidating. WQA historically was made up of this large number of small businesses, who all shared the burden of supporting it. Well, when you reduce the number of interested persons supporting it, obviously, the support is going to become a bigger burden to those who are left. I'm not so sure at what level all of them are going to be interested in supporting it. You take companies that are in several different industries, like bottled water, industrial, medical, consumer... I mean there are so many trade organizations you have to be associated with and participate in, it's hard to really choose one over another -- or overwhelmingly one over another. Thus, they've got a challenge. They also serve a great need. So, the question is how do you secure the growth and quality of the WQA. I'm a firm believer that the Society idea is a great idea. I think there's a need for it. I think there's a very large group of people who would be interested in it and would benefit from it.
WC&P: People that you would recommend that are your customers as well as far as end-users and operators of this equipment?
Petty: Yes, especially on the commercial/industrial side and the engineering side, the mechanical contractors, educators... The fee is low. There's a lot available to those willing to do that.
WC&P: Well the Water Quality Society has had sort of a slow start as an entity up to now.
Petty: It has. Like all new things, I think it will find it's way.
WC&P: Let's dovetail into the PR campaign and your comments at the last WQA event in Colorado were rather pointed to the issue of being careful about the kind of information that we put out there and it's spin. The PR campaign launched with last year's Safe Drinking Water Awareness Week is a great idea, but we have to be careful because of the liabilities and the competitive nature that still exists to some degree with various disciplines within the water treatment industry, i.e., the American Water Works Association and the International Bottled Water Association. You want to take it from there?
Petty: I first of all think the program was put together with nothing but the best of intent. The goals were all correct. My concern came from the ethics and quality standpoint. For a long time, the WQA has refined a position that I believe in that's consistent with advertising guidelines and the code of ethics. Basically, our products -- for the most part -- take safe water and make it much more desirable and clean. There's a lot to sell in that element alone that we don't have to go out and tap into this element of raising a question about water quality in order to sell equipment.
WC&P: Do you mean scare tactics or those based on health risks and motivating the sale based on the fear behind those?
Petty: Yes, and I'm not so sure this went over the line as far as scare tactics, but it was getting close to the line of playing on the fear factor. There were issues of: "Is your water safe? Get this test kit." That's what I was focusing on.
WC&P: To be fair, I believe you even acknowledged to Ned Jones, the past WQA president who was making the presentation, that yes indeed a lot of the issues being raised that were somewhat questionable in that regard were ones that were being introduced by the interviewers rather than Bob Greene, who is the WQA spokesman last year and this year.
Petty: That was a part of it. When you look at the media lead-ins and they would come out and say: "What's in your water? Is it safe to drink? Tune in at 5 and we're going to tell you how to get a free test kit." I understand you can't really control the media, but the more educated we are and to let them know that that's not the real purpose here. That's why I was really glad to hear that Bob Greene had renewed as spokesman because we have a much better chance to get his knowledge level and ability to respond and better direct this to a higher level than starting over with somebody else. I think I heard that everyone agreed with that. But I felt it was important to get it out of this whole realm -- at least it was my opinion -- about talking about water and safety, playing on the fear of the consumer so that they'll pay attention to the news story. Make sure we're clear about this. These are good quality products. They're tested and certified to the performance standards. There's an abundant supply of good water and this makes it better. It makes safe water better, more attractive. If we're to live by our own advertising guidelines and code of ethics, I think that there really needs to be a focus on that.
WC&P: How many employees do you have?
WC&P: And how is that split roughly?
Petty: There's seven in the C&I group, which oftentimes draws from other parts of the company as well. There's three in the wholesale dealer group. And the rest of it is production and retail.
WC&P: How many trucks do you have and send out on the road for route deliveries, service and installations?
Petty: Oh, you had to ask me a vehicle count question. We have approximately 26 vehicles. I take it back, it's 34 if we count the sales vehicles.
WC&P: What sort of growth have you seen in that in recent years?
Petty: The vehicle count has been just one decision at a time and if we need to add to it, whether that be service, installation, delivery, sales or miscellaneous.
WC&P: Five years ago, you had how many?
Petty: Probably half that amount, just guessing.
WC&P: What about employees?
Petty: In '97, when I brought the new partners in, we were at about 44.
WC&P: So double as well?
Petty: Yes, we've doubled the size of the business.
WC&P: The new partners, can you discuss them? Who are they and what type of a relationship have you got?
Petty: I'm four years into a business relationship with them. It's a private equity group out of Indianapolis who entered it from an investment standpoint. In other words, they're not involved in operating or running it. They are involved in strategic thinking and 30,000-foot strategy. It's a great relationship. It was timely. And they've done a lot of good things for the company and have been there to help us double the size of the company in four years.
WC&P: That's pretty impressive.
Petty: We're still looking at other opportunities. The group is called Cardinal Ventures.
WC&P: It sounds like you negotiated this at a good time for the company. How did you come across them? Are you familiar with others doing the same thing?
Petty: Networking and relationships. No, not really. I was talking with a financial advisor at one time about the industry I was in and all the consolidation effort and all the people knocking at the door that were wanting to do something with us and how I really didn't want to get involved in those larger organizations. We still needed to search for that ultimate answer to, you know, make a good transition, make sure my father's retirement was secure so I wasn't out rolling the dice every day with him nearing retirement age. This person introduced me to this group and we all liked each other and put something together and it's worked out well.
WC&P: You're second generation. Is there a third your doing all this for?
Petty: They're awfully young right now. We've got a 5-year-old and a 10-year-old, so there's not much thinking about that now. The succession plan now is to continue to operate this company and continue to create opportunities for those that are working in it and helping us do it and provide a future for them. That's where the focus is at.
WC&P: What kind of challenges do you see for the company? Do you plan on pushing the envelope as far as the assembly/OEM side?
Petty: Oh, no. I think that our big challenge is to take what we've made work so well in this market and go to new territory and make it work as well, either in partnership with independent operators or doing it ourselves. You know, there's a lot of territory that we don't have a dealer relationship that could present some interesting opportunity. The challenge is maintaining margin in order to run the company the way we want to run it and keep the quality in place. Margin erosion is a huge issue. There's a very strong focus on product and making sure we're getting the best product we can and the best pricing we can to remain competitive.
WC&P: What sort of factors affect that?
Petty: Mass retail, the Internet, the exposure of everything today.
WC&P: We haven't even mentioned utilities.
Petty: You know, utilities is a whole new element that lies out there that is just fascinating to think where that might go.
WC&P: What are your thoughts?
Petty: Here in Indianapolis, the water company is currently for sale. The city is trying to buy it. There are other independent operators bidding for it. I don't know where it's at.
WC&P: Sort of a reverse privatization effort?
Petty: No. It's a shareholder owned utility that's a part of NiSource [formerly NIPSCO or Northern Indiana Power Service Company]. They're making a bigger play in natural gas and, in order to make an acquisition, they had to divest themselves of the water company to meet regulatory requirements. So they're being forced into the move.
WC&P: Otherwise, they probably wouldn't be doing it.
Petty: Probably not. I'm not convinced that municipally operated, on-a-grand-scale systems are going to go into offering -- put in POU/POE. They might in partnership with shareholder-owned companies. But I think the shareholder-owned utilities are absolutely going to something in some manner. And that certainly might be a challenge. There also might be an opportunity to partner with somebody.
WC&P: What happens in the case of something like, for instance, there was a big fish kill in the White River that runs from west of Muncie down through Indianapolis and which was a model of river rehabilitation in the '80s and '90s. That's a big client base for your Fishers office. Is there not a case where maybe a utility has to contract with a local company to provide services in such instances?
Petty: Well, they did it in a manner that was kind of independent. They basically endorsed that people go out and buy bottled water and they did -- in droves like armies.
WC&P: You may want to explain what happened there as well.
Petty: There was a situation in Anderson allegedly that a company's wastewater treatment system failed and dumped a chemical into the river which supplies Indianapolis Water with most of its water. Not all, but a significant portion. The company pointed at was the Guide Corp., but they're defending that it wasn't them. That's a whole other issue that's not in our realm. But it was one of the largest fish kills in state history and it was a pretty ugly situation. A lot of people just went out to find an alternative water source. Never at any point in time during that did the water company say that this affected the drinking water supply. They had a lot of reasons for saying that. They had specifics of the chemical and, in the processing through their system, they didn't believe it was getting into the water supply. But a lot of people just went and bought bottled water. The biggest issue this summer was the reservoirs had a huge algae problem. Because of the drought last year, the reservoirs dropped significantly and then all that organic material dried in the sun and, when the reservoir filled back up, we had a really bad problem with taste and odor.
WC&P: I heard about that at Eagle Creek but did that also happen at Geist and Morse reservoirs?
Petty: Eagle Creek was the worst. It was somewhat around the city, but that was the one people were talking about.
WC&P: It's kind of odd because, in this industry, we're somewhat in a position to where, regardless of what happens, our business does better. When somebody complains about bottled water, our industry does better. When somebody complains about city water, our people tend to do better. When groundwater or surface water quality reports or contaminant issues are written about in general, the same thing occurs. There are lots of ethical tricks and traps in that. How do you view it?
Petty: You always have to support the water company and their efforts. The water company here does a fine job. They provide a safe water supply and that's what everybody in the population needs. The real issue is that people have the option to take that to another level and that's where we need to focus. We don't need to get involved in bashing competitors or stirring up anxiety. We simply need to present our products as an option to make your water better.
WC&P: Where do you see Aqua Systems going in the next five years in terms of growth, new products and services, positioning relative to assembly and distribution? Will you be becoming a major player in the market?
Petty: When you look at the size that our company is at with 88 employees-and I hope to push $12 million this year, when you look at that in terms of the industry its considered large, that is if you look at us compared to a water dealer. That's obviously not large at all compared to an Ecowater, Pentair, Culligan, etc. But we're very focused on the markets we target. We intend to be dominant in those markets but right now it's still on a local basis. I've explored many options and will continue to explore options and opportunities to allow us to expand on a larger geographic scale, but that's not at the forefront of where our energy is being pressed now. Most of my energy is focused on making this happen and remaining dominant in the markets we serve. I'm not say we're going to be the next big player in the broader market, as you mentioned. I'm saying we're going to dominate the markets where our efforts are.
WC&P: What about new products and services?
Petty: We're go to develop our softener line to include more high efficiency units. As we continue to get more business in city water markets, we want to focus on that. In the industrial sector, we continue to add sophistication to the level of jobs that we are doing. And we also are putting a lot of effort to expanding the services and knowledge in C&I to be able to work in customers with existing systems and get them added to our customer base.
WC&P: As far as manufacturing and assembly, where are you going? What new ideas come up for you?
Petty: I am continuingly intrigued with the idea of a low-cost, one-way package that can service the bottled water market... a recyclable but not reusable bottle in other words. This involves packaging for 5 gallons of water that could be used in a water cooler... By that, I mean so it's not a closed loop system of bottles go out and bottles coming back to be cleaned and sent out again. At this point, we've come close but haven't been able to work out the economics. Ideally, it would be something that would be similar to the sports bottle channel...
WC&P: You might get complaints from waste processors or environmental groups on this one...
Petty: Like I said, it's just an off-the-wall thought I'm just intrigued with. Consumers would return them to us for regrind and reprocessing into new bottles. All bottles going out would be virgin bottles from that perspective. There's possible ways of doing that such as using liners. PET seems to be getting in the range. Polycarbonate doesn't work because of cost.
Next month, we'll interview Scott Brane, president of Flowmatic of Dunellon, Fla., which has doubled in size in the past four years.