August 2001: Volume 43, Number 8
Two Sides of Culligan, Part 1: Northbrook & the Dealers
by Carlos David Mogollón, WC&P Executive Editor
As a special to this column, WC&P chose to include two views on the issue of Culligan International and the ongoing debate over a new franchise contract with its largest independent dealer group, the Culligan Dealer Association of North America (CDANA).
The following is an interview with Michael J. Reardon, president and COO, Culligan International, in late-May 2001, regarding dealer franchise agreement negotiations and the company's general focus on the future. At the bottom, you'll find a hyperlink to an interview with Peter Singler, legal representative for CDANA.
See WC&P's August 2001 issue for a related article -- "How Culligan’s Continuing Franchise Dispute Reflects on the Man and His Plan."
Here are Reardon's comments:
WC&P: Where are things now on the franchise negotiations? How have we worked out things or haven't we? What's still open for debate or not? A general focus is what I'm looking for from you on how Culligan is viewing the franchise agreement and how it's evolved.
Reardon: First off, our franchise agreement is really a private matter between Culligan and its individual dealers. And, so, certainly my preference is to limit the public communication on this. It's really a private matter.
WC&P: I can understand that but you likely understand that it's been made somewhat a public matter by the things that have been published.
Reardon: Yes, but I don't always agree with some of the things that have been published. They're not always accurate.
WC&P: The latest thing that I've heard is the discussion over whether this will be a 5-year or 10-year agreement has been scaled back and it will continue to be a 10-year agreement. But I don't know what your rationale was for having a 5-year agreement also.
Reardon: Every franchisee has to have an agreement. In 1991, a franchise agreement was drafted. It's referred to as the 1991 agreement. Most of the franchise agreements from 1991 begin to expire in 2001. Hence, the 10-year term. When we met with the dealers to seek their input into a new form of agreement -- and we did not come up with an agreement that both sides embraced -- we elected to continue on with essentially the 1991 form with two modifications. One being the term and another having to do with first right-of-refusal. And so, we have since elected to go with the 10-year term on that franchise agreement. We had proposed a 5-year and then after I got some very good input from many real good Culligan dealers, I reconsidered on the 5-years and offered the 10-year term, which had been consistent with some of the agreements that we have.
WC&P: The other issue as far as the first right-of-refusal, that was the bone of contention on the 24-month right-of-refusal?
Reardon: You know to get in and describe that I'm probably not the best person because there's a number of legal issues. The previous agreement had a first right-of-refusal.
WC&P: Why don't I just lay out how it's been mentioned to me. Previously, there was a 90-day right-of-refusal -- previously being prior to U.S. Filter buying Culligan…
Reardon: OK. That's not accurate, but go ahead. I can understand that some people believe that.
WC&P: Well, there was a shorter right-of-refusal period prior to Culligan being bought by USFilter. After USFilter bought Culligan, it acknowledged that it had used that as a loophole to acquire some of these franchises during the previous battle between the two companies for dominance in the industry. USFilter told its lawyers to close out that loophole in redrawing the contracts to prevent that from happening again. That's how it's been explained to me. Correct me if I'm wrong but there remains a little tension over the two-year first right-of-refusal.
Reardon: Most people don't understand it. As I've talked to a lot of dealers and explained how it works, most people understand that it is important to protect our system. There's always been a first right-of-refusal and even your comment that people were referring to it as a "90-day" one shows me that some of the dealers misunderstood it. The first right-of-refusal, just to summarize, has always been something that's been a part of our franchise agreement. It will continue to be. We just cleaned it up a bit.
WC&P: Which did what to it?
Reardon: Really nothing. We just made it part of the agreement as opposed to an addendum.
WC&P: The other thing is more of an overview and somewhat more telling of the industry as a whole, which is why I'm more interested in it.
WC&P: If it were simply Culligan, it wouldn't be as big a deal. But often where Culligan goes, the rest of the industry tends to follow. From that perspective, one of the things I did in trying to understand how things got to this point was to lay out a scenario that no one had given me and asked does this sound accurate. Where would it differ in your viewpoint? That scenario follows along these lines looking at the timeline and try and piece together the connecting dots to form an accurate picture. Culligan and USFilter were competing in the 1990s head to head as major rivals. In so doing, they acquired independent franchisees at a very rapid pace and rolling up some debt in the process. USFilter's program in its growth process had largely to do with floating stock to finance acquisitions -- or offering debt options to shareholders. When USFilter bought Culligan, there was some talk that now that it had swallowed the big fish it would have to spend some time reorganizing and improving efficiencies in order to digest that fish -- I recall analysts saying. Clean up the lines of supply, etc., and make sure you don't have a big deterioration in customer satisfaction. A year later, Vivendi comes into the picture and -- as a foreign company -- buys Culligan in an all-cash deal.
Reardon: They bought USFilter, by the way. They really didn't buy Culligan. It was USFilter.
WC&P: OK. Correct me at any time. The point being, though, that at that time, the debt pressure that was somewhat hanging over USFilter according to analysts was lifted off, i.e., here's Vivendi with big pockets, cash flow was no problem, USFilter was only a small portion within the structure of this megacorporation with interests in everything from entertainment media, publishing and water infrastructure… When Jean Marie Messier chose to acquire Universal by buying Seagrams, however, part of the method of doing that was in splitting off much of the debt that Vivendi had under Vivendi Environnement. In my mind, that brought back a lot of the cost pressures. That breathing space that USFilter had to streamline operations and get the bottom line more in order suddenly was gone because the debt was back over its head with pressure from Vivendi Environnement. And this is all coinciding with trends in the industry toward varying points of distribution to the end consumer. Vivendi passes the pressure down to USFilter, USFilter passes the pressure down to Culligan -- there's pressure to move units. You've got a traditional dealer base that you pretty much know what it will generate…
Reardon: Let me interrupt, if I could. You can certainly report it how you want, but up to that point I'm not sure that's really accurate or that there's really any correlation. USFilter bought Culligan. By the way, Culligan and USFilter -- I'm one of the founders of USFilter -- we didn’t really compete with Culligan much at all. Up until the point where we decided to get into the consumer industry, there was very little overlap at all.
WC&P: In the mid-'90s?
Reardon: 1997. And we bought them in 1998. From 1991-1995, I never viewed Culligan as much of a competitor. That's because USFilter up until 1997 was not really in the consumer side of the business.
WC&P: It was when you made the decision to buy U.S. Water that it began?
Reardon: That's correct. As far as USFilter passing pressure down or Vivendi passing pressure down, we acquired companies as USFilter with the vision of creating a one-stop shop in the water business. And that extended down to our desire to own one of the great brand names -- the greatest brand name in the consumer water business, Culligan. That strategy is still in place today to grow the business to make it easier for our customers. That was really it. Since we believe in the water business, there are certainly pressures to grow, but it's all part of a specific strategy to increase our share of the water business as opposed to something you'd referred to.
WC&P: I was trying to factor in financial pressures that might be involved in any business and try to tie those back to changes in the market that were going on as far as emerging different channels to market to move product. We've got the mass retailers become very pronounced in the last several years, the Internet has emerged -- although it's taken a beating in the past year -- as a force in distribution, marketing or other type of information that consumers may be seeking. In talking with the dealers, they've said we're not against Culligan selling product through mass retailers or in other channels. We just want to be a part of the process so that we can ensure that the investment that we've made in the company as determined through the advertising co-op program, etc., is leveraged to the best degree and one that doesn't necessarily hurt the dealer channel if it doesn't have to. Do you have a response to that or a comment that explains it from the view of Culligan Northbrook?
Reardon: Say that again. I just want to make sure that I understand you.
WC&P: The dealers that I've spoken to want to have more say. There's been a couple things where they feel there were glitches, such as the franchise agreement. But the franchise agreement negotiations are only a symptom of them wanting to have a better voice in the direction that Culligan is going. You know how many units you're going to move through your dealer network generally speaking. Where do you look for other margins or ways to bring in increased profits, which is what any company does? You look at some of those new channels that have evolved. One involves mass retail and the DIY retailers. Well, the dealers aren't necessarily opposed to that per se but they'd like to have some input into how that's done. My question to you is what's your perspective on that?
Reardon: I welcome input from our dealers on how to grow the total business. Our dealer organization is very important to us. Culligan has a competitive advantage in the vast dealer network that exists around the world and also the fabulous brand name that's recognized around the world. We intend to grow the business and leverage our dealer system and our brand name. Customers want it to be easy and we need to work together to find ways that we can grow the business. Culligan has had a lot of owners over the years, but USFilter and now Vivendi is really the first period of ownership in a long time where the owners are focused and dedicated to the water business. So, I think we certainly want the same thing.
WC&P: How would you characterize the negotiations earlier this year as opposed to now? Or the relationship, let's say?
Reardon: Our relationship with our dealers is good. There are always dealers who would always like certain things to change. Our relationship with the dealers is evolving but we have very many very good dealers and I think we have demonstrated as a management team that we are making improvements in the business and that's what's most important.
WC&P: How would you characterize the negotiations with the franchise team earlier this year vs. now?
Reardon: I wouldn't characterize the discussions we had in the negotiations. Really, this gets into the area where it's more a private discussion.
WC&P: I'm asking moreso where things were then vs. where they are now? I've gotten the feeling that in the last two or three months, things have somewhat moderated to a degree. And cooler heads may be prevailing at this point?
Reardon: We're having some discussions with selected dealers about how to proceed with the franchise agreement and how to address franchise concerns. So, we're having some good dialogue. I talk to dealers every day, so I seek the input from dealers on a regular basis. We just came from our convention in Las Vegas and that was very successful. It was a week before last. Some dealers that you mentioned earlier were there. There were some dealers that were not there. But overall, we had a very good turnout. I've received a lot of calls from dealers that are very supportive of the changes and what we're trying to do. So, how would I characterize the conversations with the dealers, I would say we're having ongoing dialogue and that should always continue.
WC&P: How many dealers have we re-signed so far this year?
Reardon: Franchise agreements come up for renewal all the time. As the contracts come up for renewal, we address the specific issues and work through them. I don't have a number for you.
WC&P: The big question obviously is have you had any where the dealers refused to sign?
Reardon: Every franchise operator has to have an agreement to operate under. And there's always a few that are in transition, but virtually all of our dealers are operating under franchise agreements. We don't allow dealers to operate without a franchise agreement.
WC&P: Have some dealers opted to leave the franchise?
Reardon: No, none that I'm aware of.
WC&P: In February, I guess it was, it looked as if there were some problems, i.e., with the CDANA organization, over outside core vendors being invited in and Culligan chose not to exhibit there or attend. At that point, I talked to other people in the industry to see what the general reaction was. Some chose not to speak on the record because they didn't want to appear opportunistic. But generally they felt that this was a shame because this is the biggest organization in the industry and it would seem as if people look to the Culligan dealers to point the way for the rest of the industry. At that point, Culligan seemed to have said that they were done negotiating on the franchise agreement and the document at that point -- other than the subsequent modification to a 10-year period instead of five-years -- was the one that was going to be put out. Are there any negotiations currently going on over the agreement?
Reardon: We always are having discussions about franchise issues.
WC&P: I mean with the franchise negotiating team for CDANA?
Reardon: You say franchise negotiating team… I wouldn't characterize our discussions as negotiations. There are a lot of dealers. Who's a member of CDANA and who's not? I talk to a lot of dealers.
WC&P: How many dealers do you have overall anyway?
Reardon: There's approximately 750 overall domestically. Approximately.
WC&P: And roughly two-thirds of those are CDANA members?
Reardon: I'm not sure.
WC&P: You probably did not react well to some of the things you read on this topic, I assume. I imagine, in your shoes, I might not be too thrilled with it myself. That's particularly because in February and March it sounded like a number of the dealers -- not necessarily that they were advocating it -- felt as if they might be forced into not being able to agree with the new agreement. They've also been setting up through CDANA an alternative supply network, although it doesn't have to do with water treatment products so much as a pooling of interests to buy general products whether those were office supplies or tires. Still, that's something that in the future if conflict continues could potentially offer an alternative. They've said that it's our responsibility as representatives of this network of franchisees -- who aren't the entire Culligan network but make up the core of Culligan's best sales franchises -- to investigate this. What was your reaction to that?
WC&P: Tough questions, but I've got to ask them…
Reardon: No, it's just that I'm still trying to gather information on that. When I understand what it really is then I can have a comment. We have significant amount of buying power, not only as Culligan but as USFilter/Vivendi. We've offered most of that to our dealers. If a small group of dealers can get together and get a better price than a multi-billion dollar company on commodities, great. Our combined buying power should even be better. But I haven't yet seen anything, so I don't know how to respond.
WC&P: Let's shift gears. What's your general impression of where the industry is going, not necessarily discussing the franchise issue with your dealers? In general, what's your outlook?
Reardon: The opportunity for Culligan is unique because we're not only a supplier of consumer water treatment solutions, but also commercial... I'm very excited about the industry. There's great opportunity as more people around the world are becoming concerned about the water they drink everyday and they're looking for ways to make it easier for them to buy alternatives. I think Culligan dealers have a great opportunity to be a solution for customers, whether it's bottled water, whether it's point-of-use owning the equipment, whether it's renting the equipment -- point-of-entry for entire household. Culligan provides all those solutions.
Reardon: Not industrial. That's USFilter. The 100 Culligan company-owned stores are in commercial only. Actually, some independent Culligan dealers are in the industrial business, but the primary focus of Culligan is the commercial and consumer water treatment needs. I think there's a great opportunity and we only see opportunity for growth.
WC&P: How do you look at some of the other opportunities that are out there, i.e., the mass retail and the DIY channels?
Reardon: Customers want it to be easy for them, but there's a service element that's important to the customer that Culligan has that's unique. My view is that, in the future, the customers will always need that service, which is much different than you're going to require from other appliances in your home. Service for your washing machine or garbage disposal or television set is not as critical. But to have a local, knowledgeable person who understands the local water and is there when you need them -- that's the example of the Culligan man.
WC&P: How does that tie back into mass retail and DIY?
Reardon: That's one of the things we're trying to understand better. We are working with our dealers to figure out how to make it easier for our customers to buy. That's the solution I see in the future.
WC&P: Their concern probably is going to be who gets the sale. In another company's approach to the issue, what came about as a resolution was product differentiation between what was sold in those channels.
Reardon: A lot of people make the mistake of thinking that the channel is the competitor. The channel is where the customers go to buy.
WC&P: And thus?
Reardon: Our Culligan dealers recognize that there are many customers out there that are buying water treatment equipment every day and we need to figure out a way to work together to access those customers.
WC&P: How about the big news announced at the WQA show about American Water Works and their endeavor to get into POU/POE by selling softeners and ROs to their customer base with a test market in Indianapolis. How does Culligan view that venue?
Reardon: I think it's great for our industry. Vivendi is one of the world's largest utility operators. We're working with them jointly, Culligan and Vivendi, in Europe. And we've always believed that there are opportunities to work with the local water utilities in the United States. What has to be worked out there is the model of where the profits will be. A utility mindset is different from a local entrepreneurial dealer mindset. But when a water utility says, "I want you to have water the way you want it, to the right quality that you want, so it will make it easier for you." I think that validates the water softening and the point-of-use/point-of-entry industry and gives us a great opportunity to provide solutions to those customers who otherwise didn't make it a priority.
WC&P: By that you mean American Water Works selling POU/POE equipment is a good endorsement?
Reardon: Sure. When the local water utility says it's OK to have one in your home, I think it opens up an opportunity for everyone else in town, not just the company they're using but all water treatment dealers.
WC&P: Are you working with anybody, any utilities, along those lines?
Reardon: Not at this time. There's nothing public that we're working on right now.
WC&P: Although you may be discussing it behind the scenes?
Reardon: We're following what's going on and…
WC&P: Positioning yourselves?
WC&P: In looking a bit about what some of your competitors in the industry, it was interesting seeing in January, February and March when some of the comments were rather pointed about what were options for dealers who might not have been as happy as others. Part of that was speculation on what would happen if there was a realignment of dealer allegiances. It was generally agreed that there were somewhat limited options there as well. You can go to a RainSoft where there's a harder sell environment. You can go to a Kinetico and have a softer sell environment. You can go to EcoWater and run into the perspective where they're already selling thorugh GE, Sears, some of the other channels and now American Water Works. The options are closing in for the old traditional dealer and some of that mindset have shifted. Of the dealers out there that are most successful, what kind are they? What's made them successful?
Reardon: They provide what the customer wants. The customer wants rentals. The customer wants service. They're the people who've figured out how to make it easy for the customer and to give them what the want on a consistent basis so they don't need to look anywhere else.
WC&P: They've also positioned themselves to be able to work on any type of equipment and any kind of a problem too.
Reardon: Well, I'm referring to Culligan dealers. Most of the Culligan dealers wouldn't be doing that. Most of the good Culligan dealers wouldn't be doing that.
WC&P: What I meant is they may encounter an alternative piece of equipment and be asked to service it -- say an abandoned unit or something like that. I don't mean to go down that line, though, so much as to stress they're able to offer solutions rather than simply selling equipment.
Reardon: Absolutely. I think that's the essence -- and what I was referring to -- of what the Culligan man is all about. It's not just an equipment sale. There's a significant amount of rentals that Culligan dealers have.
WC&P: They're also diversified as well. What is it? Fifty percent of the dealers are now into bottled water too in one form or another -- 5-gallon jugs and coolers, residential and office.
Reardon: Well, it's all really part of the theme of "Culligan is water."
WC&P: What's your vision of where Culligan will be in five or 10 years?
Reardon: My vision is that Culligan as the greatest name in water with a fabulous dealer system is constantly improving. We're constantly finding new ways that we can make the business better not only for ourselves, but for our dealers and for our customers. And as customers are increasingly looking for a way to solve their water problems on an easy, consistent, reliable way -- they're going to look to Culligan and the Culligan system to provide them. Culligan will be even more prominent than it is, with many opportunities for customers to access the Culligan man service.
WC&P: I was just in a Home Depot this week and noticed the Culligan name on refrigerators. You see GE on RO and filter units in Home Depot. Do you see more visibility for Culligan in those areas and that tying back into opportunities for dealers elsewhere?
Reardon: I'd like every person in the country when they first want to drink a small bottle of water to drink a bottle of Culligan. If they decide that when they're in college they need a pitcher, I'd like them to use a Culligan pitcher. That first apartment they're looking to rent and they're looking for a low-cost solution, I want them to think of Culligan. If we can make it easy for them, they'll use the faucet-mounted water filter. But then as they go out and buy their first home, they begin to raise a family, I want them to know Culligan will be there to bring that particular solution they want for whatever problem they have. The Culligan man will be there to solve it. That's kind of my vision.
WC&P: You left out when they buy a business and have a cooler installed.
Reardon: Sure. So much of our business is going to the consumer side that that's really the vision as it relates to the consumer. From the commercial standpoint, it's really the same thing. The Culligan man is there to treat the working water or the drinking water in that restaurant, hotel or laundry. It's easy. It's the same service they've grown to know at home and that same quality and local friendly service will be available to them for their business. They're kind of mirror images of each other.
WC&P: How is Culligan feeling the effects of the economic slowdown?
Reardon: Culligan is growing. It experiences the same effects as most consumer products companies. When there's a slowdown in purchases by retailers, dealers and retail customers slow down their purchases. As that cycle improves, it picks up. So, we're still very strong. Business is good. It could always be better.
WC&P: How pronounced has any dip been?
Reardon: Not significant.
WC&P: Have you seen any trough in the outlook? If there was a dip, has it turned back up? Where are we?
Reardon: Consistent with a lot of the other reports, we saw a slowing at the end of the year and the first part of the year. Things have picked up a bit here in the spring. I wouldn't necessarily say anything's over. I don't know what the future holds, but business has picked up from the first of the year.
WC&P: That's good to hear. I'm about out of questions. Is there anything you'd like to comment on that we haven't discussed?
Reardon: No. I'm really at a disadvantage because I didn't read your piece before.
WC&P: The last thing I wrote was in coverage of the WQA, noticing that the Culligan name was absent from the USFilter booth but that you and C.R. Hall had a brief makeup conversation just before the final board meeting. It was my impression that the tone seemed to be moderating at that point.
Reardon: I think so. There's been a lot of misinformation out there. As we've had an opportunity to talk to more dealers, I think that's been minimized… There's a lot of information people just haven't understood. As I talk to more dealers, they see our passion and commitment to the business, the Culligan business and the Culligan dealer system. Ultimately, you're judged by your results and not by what you promise. We've delivered some pretty good results for the dealers and I think the franchise issue will sort itself out over time.
Click here to view a followup article:
Two Sides of Culligan, Part 2: The Dealers & Northbrook