Photo of Matt Sheehan by Blackhorse Photography
When Matt Sheehan joined Primo Water Corp. in December 2012, the Winston-Salem-based company had lost about $45 million in the previous five years, and its stock had slid from its initial public offering price of $12 in 2010 to about 70 cents. The company’s balance sheet was stressed, and so was founder Billy Prim, who had separately developed the Blue Rhino propane-tank exchange company before its $340 million sale in 2014.
Sheehan, who started at Primo as a consultant, says he wasn’t worried because of the underlying prospects for the bottled-water industry. Primo’s failed diversification into the flavored-drink business, dominated then and now by Israel-based SodaStream International Ltd., had unnerved the company’s investors. While the financials looked like a mess, Sheehan saw opportunity. His background in niche retailing — movie vendor Redbox grew from 100 kiosks to 35,000 during his six-and-a-half-year tenure — impressed Prim.
“I usually drive all of my investing decisions on two things: Does it have the right trends, and does it have the right people?” says Sheehan, 44. On the personnel side, “I saw that Billy had people who were very loyal during a couple of tough years.”
But the main, unmistakable attraction was Primo’s prime position in selling clean water. After all, “drink more water” has joined “eat more vegetables” and “get plenty of sleep” as a societal mandate for increasing numbers of health-minded consumers. Few, if any, enterprises are better poised to exploit that trend than Primo, Sheehan says.
His hunch is paying off. Primo’s annual revenue has tripled over the last four years to more than $300 million, bolstered by the 2016 acquisition of Vista, Calif.-based rival Glacier Water Services Inc. for about $273 million. Glacier has machines that refill 1-gallon water jugs in about 20,000 locations in all 50 states. Primo shares traded at $16 in mid-October, more than 20 times the price when Sheehan showed up nearly six years earlier.
Investors are lapping up Primo because better health is just one of the megatrends propelling the company’s growth. The biggest may be the “Flint effect,” referring to the lead-tainted water crisis in the depressed Michigan city that sparked a federal emergency declaration in 2016 urging residents to stop drinking tap water. While the Flint tragedy centered around terrible decision-making by local and state environmental officials, it signaled a much bigger, national concern about the quality of municipal water.
Water pipes in Boston, New York and many other cities are often 80 years old and soldered with lead, the same element that contributed to Flint’s unsafe water. A Reuters news service study last year identified more than 3,800 U.S. neighborhoods with higher childhood lead-poisoning rates than Flint. In Chicago, some estimates suggest a third of homes have excessive lead in their water.
“The [Environmental Protection Agency] has said it would take more than $300 billion to fix the problem in the U.S., and we don’t see any funding that is going to be even close to fixing it,” Sheehan says. “When a Flint-type situation happens in a Boston or Tampa or L.A., or anywhere else, I think the country is really going to change.”
While that sounds macabre, Sheehan says he sleeps well believing that Primo helps provide a solution for clean water through its ubiquitous water-exchange systems. He insists his three children avoid tap water when brushing their teeth, much less drink it.
Entrepreneurs have sought to profit from water for decades, of course, with mixed results. Primo is excelling because Blue Rhino’s experience selling gas containers is so similar to the water trade, Prim says. More than half of Primo’s sales come through big-box retail giants Walmart Inc., Lowe’s Cos. and The Home Depot Inc., which also worked closely with Prim in the gas business. In 2004, the two home-improvement chains asked Prim to build a Blue Rhino-like water exchange program because their customers were buying dispensers but struggling to get them refilled, he says. The request came amid Blue Rhino’s negotiations to sell to Overland Park, Kan.-based FerrellGas Partners LP, which was completed in April 2004.
“After the sale, I thought I was too young to retire, so I put the band back together and decided water was a big opportunity,” says Prim, who now controls almost 6% of Primo’s shares, a stake valued at more than $27 million in mid-October. Asked why the giant retailers don’t provide water themselves, he laughs. “My wife could cut my hair, but I’d rather go to a beautician. I knew the logistics and the customers, and it is a very similar business to what I had with Blue Rhino.”
It’s a similar business — and much more promising — than propane or DVDs, which aren’t life essentials. “Smarter people than me are looking at the water business and saying it’s going to grow 7% annually over the next decade,” Sheehan says, citing a report by Boston-based AMR Research Inc. “That means a $170 billion [industry] is going to be $350 billion in the next decade.”
Primo is growing faster as it gets larger as a result of better marketing and wider distribution. After 25 straight quarters of at least 6% growth in same-store sales, the pace accelerated to 10% after the company’s Black Friday promotion last year cutting the price of its standard 5-gallon dispenser from $99 to $74 only at Walmart stores. A similar deal was offered at Lowe’s stores over Memorial Day weekend.
Taking a small loss through those promotions, Sheehan says, makes good business sense: Primo sells dispensers at more than 7,500 locations with an average gross margin of 10%. Then, it exchanges 5-gallon jugs of water at 13,500 sites at a typical cost of $2, earning a profit margin of about 30%. Finally, its Glacier brand has more than 20,000 locations for consumers to refill smaller quantities of water. To be sure, that’s too many numbers to keep track of, but here’s an essential one: Primo’s market share in each of those businesses ranges from 70% to 90%.
One limiting factor is the declining number of U.S. retail stores. The company had a net loss of 750 locations over the last year, mostly because of shuttered Kmarts, Office Depots and other struggling brick-and-mortar retailers, Chief Financial Officer David Mills said in an August conference call with analysts.
Sheehan says the trend doesn’t worry him. “I’ve said from Day 1 that people who say physical retail is dead are wrong. People still want to touch the product, be it bananas or whatever, and the Amazon factor is making retailers better. The Walmarts, Home Depots and Lowe’s are doing really well.”
At most of Primo’s exchange sites, municipal water is directed through filters, which remove sediment and chemicals. Then, the water goes through reverse osmosis, a filtration technology dating to the 1950s that is best known for converting salty sea water into fresh water. At the stores, pressure forces water through tiny pores in a membrane to remove more than 85% of dissolved contaminants. The clean water is then piped to Primo’s vending machines, while the balance flows to a drain for disposal. Primo or the retailer pays for installing the equipment, depending on contract terms.
Perhaps it’s fitting that one of America’s most important bottled-water enterprises is based only blocks away from the iconic former headquarters of R.J. Reynolds Tobacco Co. Primo’s profitability may never match the stunning returns enjoyed by cigarette manufacturers for decades. But Sheehan says it’s nice to be peddling a product that helps, not harms.
“I don’t know what I could do that is more important for my friends and my family than convince them to drink more water,” Sheehan says. “We’re not a preachy company, but when I hear about levels of arsenic, mercury, lead and chromium, there’s a reason I don’t let my kids use tap water.”
The 5% of American households with in-home dispensers drink 25% to 30% more water than other families, industry surveys show. Pushing in-home dispensers into the 7% to 10% range should propel Primo’s growth for many years. “We’re not going to be the water source of all Americans, but we can be much bigger than we are today.”
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Living in the South was never Matt Sheehan’s plan. He grew up in Saugus, Mass., a working-class Boston suburb, and attended Bentley University in nearby Waltham, where he was co-captain of the hockey team. After working for several years at supply-chain consulting companies, he returned to school at Penn State University, earning an MBA and meeting his wife, Tricia. He joined Redbox in 2005, as director of business development, reporting to the CEO. Over the next few years, the suburban Chicago-based company grew into the largest renter of DVDs, surpassing Blockbuster, Movie Gallery and other chains that operated their own stores. “Our focus was on the front wall of stores, so there’s a lot of similarities with Primo,” he says. He also concluded that Redbox’s long-term potential was limited as more consumers rented movies from Netflix or cable TV providers.
“I’d been looking for someone to take over my role,” Prim says. A friend suggested he talk with Sheehan, creating a match that remains tight six years later. “He was obviously young and energetic but also really smart and organized and passionate about water.”
After a year consulting, Sheehan was named president in 2013. In May 2017, Prim stepped aside and handed off the CEO title. “The most important thing was that [Sheehan] represented my values to people. He really fit the mold,” Prim says. For his work, Sheehan received total compensation of $1.4 million last year. He’s accumulated nearly $10 million worth of Primo shares.
Prim, 63, is a Yadkin County native who has recruited many executives to Winston-Salem over the years, Like some others, Sheehan showed an initial reluctance after working in much bigger markets. “Once he got his wife here to see the area and what it’s like to raise a family here, they love it,” Prim says.
Sheehan, whose children are 6, 8 and 10, counts himself as a big Triad booster. “We love it. Winston-Salem is a great Southern city with charm and opportunity. I get really excited about us being part of the city’s development.”