Glacier Water Services, Inc. - Company Profile, Information, Business Description, History, Background Information on Glacier Water Services, Inc.

2651 La Mirada Drive, Suite 100
Vista, California 92083

Company Perspectives:

Our mission is to be a great company by forming strategic partnerships with retailers to provide consumers with the highest quality, value-priced water dispensed from machines that are consistently clean, attractive, and reliable; ensuring that our employees are focused on service, quality, integrity, and safety; and producing profitable growth at a level that consistently enhances shareholder value.

History of Glacier Water Services, Inc.

Located in Vista, California, Glacier Water Services, Inc. is the largest operator of self-service water vending machines in the United States, with more than 15,000 units located in 35 states. Most of the company's business is tied to supermarkets, especially in Sunbelt states, where its vending machines are located outdoors, but the development of an indoor unit has allowed Glacier Water to make inroads in northern states. The coin-operated machines rely on a combination of techniques, including micron filtration, reverse osmosis, carbon absorption, and ultraviolet sterilization, in order to remove impurities and "polish" the taste of water drawn directly from local municipal sources. Once a week each unit is tested and serviced, but aside from this maintenance, the system is self-sufficient. Customers provide their own containers, although in many cases the retail outlets where the units are located also sell plastic jugs. The price per gallon ranges from 15 cents to 50 cents, depending on local competition, making the company's water an inexpensive alternative to bottled water sold in stores or delivered to homes.

Early History of Water Vending Machines: 1900s-80s

The history of the vending water machine is tied to the Dixie Cup, invented by Lawrence Luellen in Boston in 1908. Luellen's original idea was to market a vending machine that could dispense a clean cup of cold water for a penny. He developed the porcelain "Luellen Cup & Water Vendor," which included a reservoir of water perched above an ice container along with a stack of nested paper cups. These one-piece pleated cups would become known as Dixie Cups. To exploit his device, Luellen recruited a number of investors and formed the American Water Supply Company of New England in April 1908. Because it cost too much to manufacture the machine, the directors of the new company elected instead to focus on marketing Luellen's paper cup, which could be sold next to a standard water fountain.

The first practical water vending machine was not developed until the mid-1970s and was intended to provide purified water in bulk rather than a cup of chilled, untreated water. Not only had water purification techniques been developed, but there was also a rising concern about the safety of drinking water that was pivotal to the creation of the water vending machine industry. Since the early 1960s, with the publication of Rachel Carson's seminal book Silent Spring, the public had become increasingly concerned about the level of contaminants found in the nation's water supply. A spate of environmental legislation resulted, including the Safe Drinking Water Act in 1974. Much of the early growth in water vending machines took place in California, which offered a favorable demographic. The state's large number of Latino and Asian immigrants came from countries where drinking water was unquestionably dangerous, and they were already in the habit of boiling water to remove impurities. Because water vending machines were both convenient and inexpensive, this lower-income immigrant population provided the bulk of customers in the formative years of the water vending machine industry. Middle- and upper-class consumers, for their part, were driving the quick rise in the bottled water market.

The founder of Glacier Water Services was Robert G. Miller, whose original business, Bottle Water Vending Inc., was established in 1983. It subsequently changed its name to GW Services, Inc. The company designed and built water vending machines, some of which it sold to others. It operated the remainder, placing the units outside supermarkets, which received a monthly share of revenues. While competitors developed units made out of steel, Miller opted for longer lasting fiberglass. GW Services soon began to expand beyond the California market, entering Arizona in 1984, then Nevada in 1986. By the following year, the company had nearly 900 units in operation, generating $5.6 million in revenues. In 1988, it moved into Texas and Florida, other Sunbelt states with a heavy Latin immigrant population.

Glacier Water Services: 1990s

In the spring of 1990, poor health forced Miller to relinquish day-to-day control of GW Services. In October 1991, he was replaced as chief executive officer by Jerry Welch, who had previously been the top executive at Stars to Go, a video rental business. A month later, on November 19, 1991, Glacier Water Services, Inc. was formed as a Delaware corporation to serve as a holding company for GW Services in preparation for making an initial public offering (IPO) of stock. The IPO was primarily arranged to allow Miller, whose health continued to deteriorate, to liquidate his 50 percent stake in the business and bring order to his estate. Two months before the IPO took place Miller resigned as chairman of the board, replaced by Welch in January 1992. On March 13, 1992 Glacier Water sold two million shares, netting $12 million and becoming the first publicly traded water vending machine company in the industry. By now the business was generating more than $23 million in annual revenues, with 3,300 units in operation. It was number one in the industry, its closest competitor, Aqua-Vend, boasting 2,900 vending machines.

In addition to allowing Miller to clean up his estate, the IPO helped to fund the expansion of Glacier Water, not only to northern states but also within existing territories. In August 1992, the company announced that it had signed a deal to place its machines in front of 250 Wal-Mart Stores in Glacier Water's five-state territory. It was the first time that a water vending machine company entered the mass merchant retail section. In support of its plan to expand into northern states, where year-round outdoor vending was not practical, the company also introduced its Model 1W, an indoor unit that could be mounted directly on a wall. Despite these promising developments, Welch suddenly announced his resignation, maintaining that the company did not need as many full-time executives as it currently had. Although he remained as a consultant and a board member, he was replaced as CEO by the company's president, Duke Bushong, and chairman by Peter T. Dixon, a senior executive vice-president of Loeb Partners Corp., one of the company's major investors. Several months later, in April 1993, however, Welch was again elected chairman of Glacier Water, and when Bushong resigned in September 1994 Welch also reassumed his role as chief executive officer.

No matter who was leading the company, the goal of Glacier Water was clear: solidifying its grip on the top position in the water vending machine industry. To support this end, management focused on bolstering four areas: operations, finance, marketing, and human resources. More marketing people were especially needed to expand into new territories, and additional staff would be needed to work in the field servicing the units. The customer base for vending machine water was also growing, as more middle-class consumers opted for the service rather than spend money on more expensive bottled water. Moreover, the market for purified water in general continued to grow at a significant pace, prompting the company to seek new geographical territories as well as to broaden the range of retail establishments where water vending machines could be placed. Supermarkets (in particular the Vons California chain, which accounted for as much as 13 percent of total revenues) would continue to provide the most suitable locations, but drugstores, convenience stores, and other establishments would also be targeted. The major source of customers, however, would remain in the company's home state of California: with just 12 percent of the country's population, California accounted for 30 percent of all purified water sales.

In 1993, Glacier Water paid $450,000 to acquire Vend Pure H2O Associates of Lubbock, Texas, adding 75 water vending machines. In general, however, the plan at this stage was to grow internally rather than pursue acquisitions or joint ventures. In 1993, Glacier Water entered the New Mexico market and that year deployed 1,114 new units systemwide. The company also initiated a pilot program in Taiwan, ultimately concluding, however, that it was not yet ready to commit to an international program. In 1994, Glacier Water added 1,945 machines and entered Louisiana and Mississippi. The following year Georgia was included and the total number of machines increased by 1,793. In 1996, Glacier Water grew beyond the Sunbelt, adding Illinois to its base of operations and overall increasing the number of vending machines systemwide by 646. At the end of 1996, the company also signed an important agreement with Ralph's Grocery Company, a major California supermarket chain, to place water vending machines at their locations. As of December 31, 1996, the company had a total 9,164 units deployed, placing it well ahead of its closest rival Aqua-Vend, which had only a third as many. Annual revenues grew from $30.6 million in 1993 to more than $46 million in 1996. Net income during this period grew from $2 million in 1993 to $3.3 million in 1996.

In March 1997, Glacier Water grew by external means, paying approximately $9 million to acquire its closest rival, Aqua-Vend, part of San Francisco-based McKesson Corporation's McKesson Water Products Company. For McKesson, selling Aqua-Vend provided funding that allowed it to expand upon direct delivery and grocery sales of its bottled water products. For its part, Glacier Water in a single stroke added 3,000 water vending machines located in California, Texas, Nevada, Florida, Louisiana, Alabama, and Mississippi. Approximately 600 of the units, however, would be removed as part of an integration plan that laid out balanced territories for the overall system. The increased number of vending machines added significantly to revenues of Glacier Water, exceeding $57 million for 1997. Although the company had many rivals in the water vending machine sector, some 40 small companies across the country, none boasted more than a 5 percent market share. Glacier Water now estimated that it accounted for three-quarters of all water sold through vending machines.

Entering the Mexican Market: 1998

In 1998, Glacier Water opted to enter the Mexico market, creating Glacier de Mexico. By the end of the year it had placed 144 vending machines in Mexico City (adding another 434 machines the following year). Prospects for the company appeared bright in 1998, a fact that was reflected by the price of its stock, which peaked at $32 per share in April 1998. A few months later, however, it would face the challenge of adverse publicity. In September 1998, a yearlong study on the quality of vending machine water (sold by Glacier Water and two dozen other companies) was released by the Environmental Toxicology Bureau of Los Angeles County. It found that 93 percent of all vending machines contained 163 times more bacteria than tap water, and that many units were poorly maintained. Some had dirty spigots or filters so old that they were incapable of removing contaminants. In defense of its operations, Glacier Water maintained that it inspected and maintained its units once a week. Management also pointed out that in order to lower bacterial levels, chlorine would have to be reintroduced to the water, while noting that a major reason consumers opted for its water was because of their dissatisfaction with the taste of chlorine. The fact that the report "found no clear evidence of danger for consumers" was overshadowed by the allusion to bacterial levels. Because consumer confidence in the product was paramount, Glacier Water was quick to call for a mandatory state inspection program, which it suggested could be funded by charging the owners $20 to $40 per machine. Although California had licensed and regulated water vending machines since 1989, it had relied on a self-inspection system that only required the reporting of results every six months. With the most machines deployed, Glacier Water had the most at stake if the industry lost credibility, but with the greater resources the company was also better able to afford the fee-based inspection program it promoted. In fact, it stood to benefit, since the expense added another barrier for companies attempting to rival its supremacy.

Glacier Water spent $125,000 in public relations fees combating the negative publicity that resulted from the county study. It faced other unforeseen charges as well in 1998, which was clearly a disappointing year for the company. It was accused of patent infringement and paid $675,000 in legal expenses. It spent $800,000 in an unsuccessful test of the efficacy of media advertising, performed in San Diego and Phoenix during the summer months. Moreover, the company took a one-time charge of nearly $1 million related to the removal of 1,450 underperforming machines, to be relocated over the ensuing months. As a result of these difficulties, revenues fell slightly and the company posted a loss of $3.3 million.

Over the next two years, Glacier Water continued to struggle. In 1999, it reported more disappointing results. Although revenues showed a modest improvement, increasing to $56.7 million, the company net loss grew to $7.2 million. In September 1999, Welch resigned, replaced as CEO by Chief Operating Officer Jerry Gordon, who had started in the company as a salesman, and as chairman by Richard Kayne. Under their management in 2000, the company would have to make a tough decision on its Mexican operation, which was not performing up to expectations. In the first half of the year, it generated just $246,000 in revenues, resulting in a net loss of $558,000 for the period. By August, the decision was made to terminate the operation, take a $1.4 million restructuring charge, and return the vending machines to the United States for redeployment. Weeks before Glacier Water reported a loss of $6 million for fiscal 2000, Gordon resigned "to pursue other opportunities for personal reasons," according to a statement released by Chairman Kayne.

In May 2001, Glacier Water hired a new chief executive, Brian McInerney, a former executive of Honeywell International. A month later the company had a new chairman when the board elected Charles A. Norris. He was familiar with the industry, having served as president of McKesson Water Products and overall having spent 20 years in the bottled water industry. He had also served as chairman and director of the International Bottled Water Association. The company's new management team elected to pay off long-term debt and concentrate on internal growth, adding machines to current territories. By early 2002, however, Glacier Water Services announced a major acquisition, picking up Pure Fill Corp. and its subsidiaries. Pure Fill had been in the water vending machine industry for more than 15 years and operated 1,625 units in 13 states. Because the Pure Fill assets complemented Glacier Water's other assets, McInerney expressed optimism that the acquisition would help to accelerate the company's return to profitability. In any case, Glacier Water was even more of a dominant player in the water vending machine industry, now boasting more than 15,000 units under its control. It was also clear that the demand for its product--inexpensive, clean drinking water--would only grow in the years to come.

Principal Subsidiaries: GW Services, Inc.; Glacier Water Trust I; GW Services International, Inc.

Principal Competitors: The Coca-Cola Company; Culligan Water Technologies, Inc.; Danone; Nestlé S.A.; Water Island.


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