Liquid highway

Entrepreneurs finding niche with beverage business

By David Dykes
Business Writer ddkes@greenvillenews.com

Steve Bailey and Steve Gilcrease travel on a liquid highway, despite an address that says their offices are on Garlington Road in Greenville.
   The two entrepreneurs, both in their 40s, have carved out a niche in the Upstate with their beverage services business, which supplies local companies and offices with coffee brewing equipment and filtered drinking water systems. It's an idea that has perked up sales and hooked consumers who can't live without their morning java and those who know the health benefits of drinking eight, 8-ounce servings of water every day.

   For the privately held company known as Merus Water Systems, founded in 1998, "Our strategy then and still is to attack the market as an office-beverage or office-refreshment services company that offers high-tech solutions and high-quality solutions to both office drinking water and office coffee," Bailey said. "The amount of money being spent on bottled water and that type of thing in some offices is astronomical."
   What they supply and maintain are compact systems that connect into existing tap water lines and then purify drinking water at the point-of-use.
   Other Merus systems brew regular or gourmet coffees. And if a customer needs them, the company will furnish break-room supplies, including cups, products such as toilet paper and paper towels and first-aid supplies.
   It's become a profitable business. And earlier this year Merus was named the Greenville Chamber of Commerce's Small Business of the Year.
   Not bad for a couple of guys who started the company with little more than an idea - no customers and no income. They had worked together for 15 years, both at Ikon Office Solutions, an office equipment company, and knew the leasing industry, had lots of contacts and good reputations.
   Armed with just that, they took the first step, moving into an office, receiving an initial shipment of equipment and getting an order for a water-system machine. They capitalized themselves by mortgaging their homes and then sweated out that first year, borrowing money to make the payroll and several times foregoing paychecks for themselves.
   "It was very difficult," Bailey said. "In fact, we had to sit down and look each other in the eye and say 'can we really make this thing a go, or have we made a mistake, gotten in over our heads?' It was very tough."
    I those early days, an employee drew up a sign that read "Will work for water." It still hangs in the Merus warehouse today.
    The mood at the time, "was one that you find in a typical small business," Bailey said. "Cash was tight. Payroll coming up. You're wondering whether you're going to have enough money in the bank to pay everybody and maybe have some left over to pay yourself a little bit. We had several of those times, like most small businesses do."
   Bailey and Gilcrease now have 15 employees working in Greenville and another office in Columbia.
   They won't disclose revenues or profits, but said they have grown from one water unit in one break room in 1998 to close to 2,000 leased units now. Portable coffee brewing equipment was added five years ago and now totals about 400 units, "a reasonably conservative number," Bailey said.
   Bailey, 44, had been Ikon's regional general sales manager and Gilcrease, 43, was its service manager for the Upstate region. Mergers and other changes at the company meant "it was no longer a fit for us," Bailey said, and they began looking at their options.
   The two men wanted to provide an innovative product that would have business-to-business applications and "employ technology that wasn't commonplace," Bailey said.
   Enter Tom Weekly, president of innowave, a Mutual of Omaha company. He had been in the office-products industry, knew Bailey and Gilcrease, and met with them at Greenville-Spartanburg International Airport to discuss their representing innowave water distillation and filtration equipment.
   The first meeting was "in the lobby of the airport on a cold rainy day, two guys looking for a new product and I think he thought we had the ability to develop a good distribution network in South Carolina so they gave us the rights to the product," Bailey said.
   "It was new technology, new features," he said. "It was a useful piece of office equipment and when we looked at it, that's what we saw."
   Weekly couldn't be reached for comment.
   According to the Beverage Marketing Corp., a trade group, U.S. residents now drink more bottled water annually (23.8 gallons per person in 2004) than any other beverage other than carbonated soft drinks. The category includes sparkling and non-sparkling water, domestic and imported brands, single-serve bottles as well as vended and direct delivered bottled water in jugs for watercooler use, but not filtration systems such as Merus' that take water from a local or municipal source, said Beverage Marketing spokesman Gary Hemphill.
   Telemarketing surveys told Bailey and Gilcrease that in the local marketplace "there was a need for new technology or a better mousetrap," Bailey said.
   "We viewed it a lot like we did the copier business years and years ago," he said.  
   With "a better mousetrap that nobody else has, that has inherent benefits to the customer," Bailey said, "then you've got a winner."
   The innowave systems include filters to trap contaminants such as lead and mercury and use ultra violet light to reduce coliform and heterotrophic bacteria.
   The machines are tested and certified by NSF International, an independent, nonprofit organization that certifies food, water, air and consumer goods for safety and sanitation.
   Rick Andrew, a technical manager with NSF's drinking water treatment unit certification program, said innowave's systems are certified for the reduction of arsenic, barium, copper, lead and mercury, among other metallic and nonmetallic elements, and "it involves quite a bit of testing, actually."
   One of the tests, he said, is for material safety, and "it's what we call an extraction test that will expose the units to water that has a specific chemistry associated with it."
   Officials at Omaha, Neb-based innowave also say that their machines meet Environmental Protection Agency standards for the reduction of almost all parasites, viruses and bacteria.
   Bailey and Gilcrease started Merus as a water company with two other partners. They bought out the other interests after about two years, continued working hard and eked out a profit after the company's second year.
   They said they recorded "real profits" after the third year.
   Their biggest break, Bailey said, came from "sticking through it and pushing through the difficult times."
   "New units weren't going out the door enough," he said. "Our sales strategy was wrong in that we weren't capitalizing on any after-market support. We weren't pushing enough sales. We weren't charging customers to service the machines; we were doing it for free. Why, I don't know. We still ask ourselves that question."
   They changed their strategy to generate more revenues by adding coffee, service agreements and sale of products like drinking water cups.
   "That helped us start to move in the right direction," Bailey said. "Then, of course, when your customer base gets big enough and your cash flow becomes positive, keep it growing positive, then you're in pretty good shape. But, yeah, oh yeah, it was really fuzzy there for a while."
   "Probably the biggest mistake we made was not seeing the potential for the reoccurring revenue," like coffee, Gilcrease said.
   The company is divided into two divisions- the innowave drinking water systems, which don't use bottled water, and the office coffee services.
   The coffee systems include newer, single-cup machines that brew Columbian, Guatemalan and other types of coffees, including national brands such as Starbucks, as well as cappuccino, double-shot espresso and cocoa.
   Merus' own private-label products account for about 60 percent of the coffee it sells, Bailey said.
   The company provides brewing equipment for offices, manufacturing companies and distribution centers. Then its customer service representatives every two weeks rotate the coffee inventory, clean the brewing equipment and coffee carafes and replenish the supply of coffee, creamers, sugars and Sweet'N Lows.
   "In our business, it's mainly about building a relationship with a prospective customer," Bailey said. "What we've found is that we're not the only coffee company out there, we're not the only water company out there. But what we have the opportunity to do is to bring a unique value, proposition, to the customers, which are products or services that not every company has out there."
   "Our job is to deliver what the customer wants, what the customer needs," he said.
   After Bailey and Gilcrease started the coffee division in 2000, they stored all their coffee consumable products, including coffee creamers and sugars, on one storage skid "because we only had one customer," Bailey said.
   Now, they lease 5,000 square feet in Greenville, including warehouse space, and 1,500 square feet in Columbia.
   Among the first coffee customers was Coldwell Banker Caine real estate.
   "In fact, they kind of encouraged us to get into the business," Bailey said. "They had our water systems in there and they liked the service and they actually came to us and said, 'If we got as good a service from our coffee vendor as we get from you guys with the water systems, that would be great.' And that's one of the reasons we got into it."
   Judy Porter, administrative assistant to the chairman of Coldwell Banker Commercial Caine in Greenville, has long known Bailey and Gilcrease and said, "I have always had a lot of faith in them. They were my copier company for years and years and we sort of took our first steps with them. It's been a win-win the whole time."
   What makes them successful, she said, is "they are so customer oriented."
   "It's been ingrained in them, plus they are both very ethical people and very interested in their customers," Porter said.
   She remembers Bailey once getting into his car "and dragging a case of cups over to our office because we ran out. There wasn't any 'well our guy'll be there in two weeks. He said, OK' They're just very customer oriented."
   "They started out right; they didn't try to get too big too fast," Porter said. "They're very wise and have grown just the right way."
   These days, Bailey and Gilcrease pay cash for and own most of the equipment they have.
   "In the early days, we had a credit line and got in a little trouble with that credit line," Bailey said. "I say 'trouble' - it's a whole lot easier to borrow than it is to pay back."
   But in 2000, he and his partner "drove a stake in the ground" and said they weren't going to borrow any more money.
   Their profits the past few years "have been pretty good," allowing them to put money in reserve with the hope of buying their own building, perhaps this fall, Bailey said.
   His advice to other entrepreneurs interested in small business start-ups is "test your idea because it's got to be acceptable for the marketplace, not just to you."
   "Put a good business plan together, or put a good plan together even if you don't know how to write a business plan, and get plugged into the business community," Bailey said.
   "Seek the advice of people who have done it, exactly what you're trying to do, which is what we did," he said. "We asked a lot of questions and listened a lot."
   And it's OK at first, Bailey said, to count the exact numbers of customers you have.
   "We used to count every 100 (systems) that came through," he said. "I could tell you just about to the number how many customers we used to have because it meant a lot to me.
   "What means a lot to me now is that the customers I have are happy, not necessarily how many I've got."