By Carlos David Mogollón
WC&P Executive Editor
Several months after negotiations on a new franchise agreement between Culligan International and its largest dealer franchise group broke down in a rare display of public dissension, the dispute—which some felt had moderated in the Spring—is still a sensitive topic.
Water Quality Association (WQA) executive director Peter Censky is one who thought cooler heads had prevailed by June because he hadn’t heard much on the issue for a few months. But he acknowledges he pulled back because of a potential conflict of interest since—among other reasons—a Culligan dealer, C.R. Hall, is the current president of the association. Hall owns eight dealerships in Kansas, Missouri and Ohio, and is current president of the Culligan Dealer Association of North America (CDANA) as well. As a result, Censky and Hall have avoided the topic, the former said.
As for public comment, Censky fell back on what he said earlier in the year on the subject: “I’d rather not get in the middle of that. It’s a shame and it can’t go on. They’ve got to get together on it and get it resolved… I think they’ve both gotten to the brink and are going to work their way back from it… I’m absolutely certain this is going to happen.” Keep in mind, this quote came just after Culligan’s refusal to attend the CDANA dealer convention in mid-February and CDANA’s invitation of four core product providers to the event. But it was before USFilter’s elimination of the “Culligan” logo from its booth at the WQA trade show in Orlando, an April announcement by CDANA that it would be joining an independent commodities purchasing cooperative and a noticeable decline in dealer participation at Culligan’s annual corporate convention in early May.
The stakes are high.
At issue for the dealers in all of this is adoption of a new franchise contract to protect equity they have in their businesses and position the company for the future, taking into account growing pressures on the point-of-use/point-of-entry (POU/POE) water treatment industry and how those affect dealers. These include competition from Big Box and do-it-yourself (DIY) mass retailers, Internet marketing, and third party private-label contracts with home appliance companies, not to mention increased activity in the POU/POE field by municipal water utilities. They’re not against Northbrook, Ill.-based Culligan pursuing these other marketing channels. A number of companies in the industry have chased them to varying degrees for several years. They just want to be included in the decision-making process and the future business model for it.
“We can all see that if they go to the Big Boxes, it’s going to fill the pipeline at the factory for six months to a year,” said Henry Strait, CDANA past president, chairman of the CDANA Franchise Negotiating Committee and a Beaumont, Texas, dealer, in early March. “But what happens later to the name’s reputation when you get some black eyes that are going to happen due to misapplication after a consumer tries to just plug in one of these and let it be. We’re not saying they shouldn’t go to the Big Box, but they should ask for input from the dealer to assure it’s done successfully and with minimal problems. We need to be intimately involved and we have not been. We need to be involved in the entire process from concept to pilot tests. It’s our name on the line, too.”
For the company, the same issues and objectives apply—only from a different point of view. But also of concern is control of the company and how much Culligan can afford to allow its primary channel of moving product to market—the dealers—dictate terms of the relationship. With the confrontation mostly at a draw since February, this stalemate also serves to underscore Culligan’s position as a much smaller sliver of a larger pie than was the case prior to 1998. Culligan—only seven years after emerging again as an independent company—was acquired in January of that year by rival USFilter; and, in March 1999, it became part of Vivendi, when the French conglomerate with divergent interests in water and entertainment bought its new parent company. Last year, both were spun off as part of Vivendi Environnement so that Vivendi could jettison part of its debt load in order to acquire Seagram and its Universal subsidiaries. That debt load puts pressure down the line to move product any way Culligan can, some agree. Culligan—which raised product prices to dealers earlier this year—denies any such connection, saying it’s just focusing on good business practices and future needs of the company.
A private matter
In late May, Culligan president and chief operating officer Michael Reardon—a co-founder of USFilter in 1990—carefully responded to questions on dealer relations, at first avoiding certain subjects then embracing them in his own fashion.
Reardon, Greg Norgaard and Jason Raash transferred from USFilter to Culligan as the new management team in late summer 1999, when USFilter chairman Dick Heckmann (now chairman of Vivendi Water) fired the top three Culligan executives saying they’d lost sight of who the owner was and failed to adapt to a new focus of dealer as customer.
“First off, our franchise agreement is really a private matter between Culligan and its individual dealers,” Reardon said. “Our relationship with our dealers is good. There are always dealers who would like certain things to change… I think we’ve demonstrated as a management team that we’re making improvements in the business and that’s what’s most important.”
Reardon was reluctant to discuss CDANA—the largest independent Culligan dealer group representing some 425 dealerships (compared to about 750 domestic dealerships overall, of which 100 are company owned stores). CDANA’s franchise negotiating team includes Hall, Strait and:
- Buzz Cooksey, chairman of the Culligan Dealer Advisory Council—or DAC—(a Culligan-dealer liaison committee mandated by the original 1957 franchise contract) and a Youngstown, Ohio, dealer;
- Mike Hebert, DAC past chairman and a Salinas, Calif., dealer;
- John Packard, a past WQA president, UNCO Data Systems owner and the largest independent Culligan dealer with some 20 dealerships from Minnesota to Arizona, and
- Dennis Rupert, CDANA past president, DAC past chairman and a Hillsdale, Mich., dealer.
In December, negotiations on a new contract—1991 agreements began to expire earlier this year—with the CDANA negotiating team disintegrated over the above issues, an attempt to shorten the contract to five years and inclusion of a two-year “right-of-first-refusal” clause in the contract rather than attached as an amendment. Culligan chose to stay with the 1991 agreement with those two modifications, but decided in April to adhere to the 10-year term in part because of the perception of dealer financing issues. It also announced a new six-member Additional Sales Channel Task Force approved by Culligan that met in May and July. Asked to characterize discussions with the negotiating team, Reardon said he wouldn’t since they’re private.
Later, he said: “I talk to dealers every day, so I seek input from dealers on a regular basis. We just came from our convention in Las Vegas and that was very successful… Some dealers that you mentioned earlier were there. There were some dealers that were not. 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 dealers? I would say we’re having ongoing dialogue and that should always continue.”
Pressed to speak directly to the topic of CDANA, Reardon said, “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… We always are having discussions about franchise issues.”
In general, Reardon was more comfortable speaking to broader industry issues and long-term goals of the company (see Executive Q&A: Two Sides of Culligan—Northbrook).
On the other hand, CDANA governing members are happy to go into intimate detail. Referring to the company alternately as “Northbrook” or “the factory,” they contend their members are the top independent Culligan dealers moving the bulk of the company’s products from the factory to the end-users—consumers. They also point out much of the investment in the “Hey, Culligan Man!” theme that made the company a household name was through the dealers via a co-op advertising program that spans multiple generations. This gives them a strong hand, but they recognize it’s not the only hand on the table.
Cooksey, who is a third generation Culligan dealer, said CDANA feels obliged to stand up for smaller dealers who might not be heard otherwise and whose allegiance to the Culligan name is stronger than oak. None of them really wish to part company, but are beginning to feel they need to look at that possibility.
“I’ve met very few dealers that desire to be independent,” Cooksey said. “The best way I can say it, and it’s not the most eloquent, is being a Culligan dealer is sort of like belonging to a church. For most of us, it’s all we’ve ever done is be a Culligan man. We were raised with it. If you were to walk into my shop… it used to be joked I had it tatooed on my butt… there’s a picture of me when I was five years old when I was at the Culligan fair. It’s not a job—it’s a way of life.”
Nodding toward the complexity and tension of the issue, Packard said having an agreement that recognized dealers’ interests more would make everyone feel more comfortable.
“I’m sure [Culligan] wants to increase market share. At least, that’s what they’re saying and I don’t doubt it. That’s one of my issues. We all have to maintain profits,” he said. “If they had an agreement that dealers felt was better than the 1991, let’s call it, then the environment might be better. Dealers might feel better investing in their dealerships and thereby increasing market share…”
Still, all were puzzled by Reardon’s comments about CDANA—but not surprised considering efforts by the company to approach dealers outside the CDANA franchise team that it might sway for better leverage with the overall group.
“I think their point is CDANA doesn’t represent all of the dealers; and our position is we represent almost all the purchases and darn near all the dealers,” said Hall. “Their plan is to come back and try to find another group to negotiate with. Our comment is we’re not letting you choose who you negotiate with as far as the individuals.”
Strait said CDANA simply wants to keep the door open on negotiations. “It hasn’t really been open for quite some time… We’ve been at this for the better part of a year and just kept reaching impasse after impasse… At this point, we’re still trying to get them back to the table. By the same token, we also are trying to prepare our dealers who are faced with a business decision on whether to sign this new document and right-of-first-refusal… CDANA is trying to build a safety net so, if they decide it’s not in their best interests to remain a Culligan franchise and sign that agreement, they will have some advantages with a group as large as ours on purchasing equipment at a reasonable price. That’s where we are right now since we’re not seeing any progress from Northbrook or any effort to come back to the table.”
That’s not to say CDANA is endorsing anyone to reject a franchise renewal. Quite the contrary is true, Strait, Hall, Packard and Cooksey agree. Rather, they were asked at CDANA’s convention in Austin, Texas, in February—which drew a record 120 franchisees representing 230 dealerships—to pursue other avenues to make sure members had additional options. This ties into three points of an agreement in principle not included in the final draft that was set aside in negotiations last year:
- Creation of a franchise advisory committee for approving standards and enforcement changes;
- Compensation to dealers in territories where Culligan markets products by alternate distribution channels, and
- Permission for dealers to buy outside products, contingent on prices and subject to a reasonable royalty fee.
The final point relates to CDANA’s new agreement with Allied Purchasing Co.—an Iowa-based cooperative to pool independent dealer resources for better deals on general business merchandise. On that, Reardon said, “We have a significant amount of buying power, not only as Culligan but as USFilter/Vivendi. We’ve offered a lot 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.”
CDANA counsel Peter Singler, a California attorney who specializes in franchise law, noted that while the deal with Allied Purchasing—whose cooperative includes dairy, soft drink, brewery and bottled water groups—could lead later to pooling interests for core product buying, that’s not its intention (see Executive Q&A: Two Sides of Culligan—The Dealers). It’s simply to provide an outside outlet for buying commodities such as office supplies, tires, 5-gallon water bottles, etc.
Hall said dealers don’t know if Culligan offers a better deal on such products because it doesn’t always know Culligan’s costs: “We know Allied’s (cost) burden is 1 or 1-½ points. We sometimes don’t know what Northbrook’s burden is, i.e., in order to charge or bill us as to the cost of taking in that commodity and store it and ship it. Allied is a non-profit and we’re a shareholder and we have a flat fee.”
Checks & balances
CDANA negotiating team members reference contract versions by year, highlight differences and note each has become more “onerous” than their predecessors. There are roughly 30 versions of the contract in existence. Currently, two versions account for about half those in effect, the 1991 contract and the original 1957 agreement, which is effective in perpetuity for holders and their descendants and grants more extensive say in how the business is run. Singler said litigation 40 years ago over conflicts raised from that agreement between dealers and Culligan, for instance, resulted in a consent decree with the Federal Trade Commission that added amendments creating the DAC.
“Out of that,” Singler said, “what happened is Northbrook can’t contractually authorize another dealership or another dealer to sell or service Culligan products in what’s called a PAR or ‘primary area of responsibility’—at that time, an authorized territory—without going through a process. One is doing all the market studies, showing a need to explore this additional dealer or additional channel of distribution, bringing it to the DAC and the DAC then renders an opinion. Presumably, it’s got to be consistent with those findings.”
Singler adds, this effectively gives limited veto power to the dealers on non-dealer sales channels by Culligan and even applies to the 1991 agreement by virtue of the company’s written “capping” policies that mirror it. Still, Culligan has its own checks and balances it can exercise on what the dealer sells as well, he noted.
“Under the 1991 (franchise) version, Culligan then has the contractual ability to reasonably disapprove of products sold from the dealership… (but) it has to be exercised reasonably… The only thing Culligan has the absolute right to do is to control what has the Culligan name affixed to it,” Singler said.
Not many other companies in the industry were willing to comment on the record about turmoil within the Culligan family. Some offered background only or declined. Others simply didn’t return phone calls.
One that did was RainSoft/Aquion Partners’ Bob Ruhstorfer, who felt the conflict hurts the entire industry. “They’ve been the flagship company for many years and my own perspective is it’s good for the industry to have healthy players. To the extent Culligan, Ecowater, Kinetico and Rainsoft are healthy players, it does the industry as a whole well. I don’t think it does any good for one of its largest players to have all this turmoil… Sure, their management team is dedicated to making this business work as much as anyone else. But it’s a new team and I imagine you have kind of a culture clash going on… A lot of these dealers are second- and third-generation and are steeped in tradition.”
Sid Fly, of Alamo Water Refiners, was one of the four outside core providers at CDANA’s February convention—the others being IWW Inc., Trusco and R&M Manufacturing. Fly said they’ve been offering non-core products to Culligan dealers for years: “Obviously, a lot of us in the industry are trying to play this politically correct. I certainly don’t want to influence the situation. What I told guys there that we’ve dealt with before is we truly wish them the best from this impasse. We don’t wish anything for our benefit simply to take advantage of the situation. We were there to assure them that if things do fall apart, we’re there to help them pick up the pieces.”
In the end, it’s results that count in business—the bottom line. That’s what Culligan is counting on, hoping it helps clarify “misinformation” in the interim. Reardon notes that while USFilter and Vivendi are outside owners, they’re the first in some time that have actually been in the water treatment industry.
“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,” he said.
Still, CDANA’s dealer convention drew a record number, Culligan’s corporate convention attendance was down and neither side sounds willing to compromise. To date, no one hasn’t renewed their franchise voluntarily or been refused renewal. It’s just stalemate. How that reflects on the future of Culligan is anybody’s guess. On one thing, all agree—it doesn’t bode well in the short term.