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Deal Radar 2010: WaterFilters.NET, Minneapolis, Minnesota

Posted on Monday, Apr 19th 2010

It’s safe to assume that for decades, many Americans did not give much thought to safe drinking water. Access to clean water was a given in a wealthy, developed country. But the nation’s water treatment systems often fail to adhere to provisions of the Safe Drinking Water Act, according to the New York Times’s Toxic Waters series. People are growing increasingly concerned about the water they use for drinking and washing and are turning to filter systems as they lose trust in municipal water supplies. WaterFilters.NET is one company that has benefited both from this trend and the move toward Web 3.0. WaterFilters.NET makes it easy to research, find, and purchase all types of water filters. The company provides a broad selection of of water filter types (reverse osmosis, water softeners, refrigerator filters, undersink water filters, shower filters, commercial water filters, and so forth) and sells all major water filter brands.

The company was founded in 2002 by Jamin Arvig, who owned and operated various small businesses and real estate companies prior to running WaterFilters.NET. His education includes a computer engineering degree and a law degree. The company began in Arvig’s 650-square foot Minneapolis condo. The warehouse was the space behind the couch. It then expanded to a van and later a basement. Finally, in 2008, WaterFilters.NET built its own 20,000 square foot distribution center after Zumbrota, south of Minneapolis, brought WaterFilters.NET to the town under its Jobz initiative (the city and state were impressed by the company’s potential to add jobs, so they extended exemptions from Minnesota state income tax, sales tax, and property tax).

WaterFilters.NET seemed to be a promising business opportunity because it incorporated the growing industries of water, health/fitness, e-commerce, and green supplies and building. Since then, people have started to become more educated about contaminants in water, e-commerce retail has grown consistently and significantly, and filtered tap water is taking market share from bottled water because of the green movement and the recession.

According to the Wall Street Journal, sales of home water-filtration products are forecast to grow about 18% in the next three years, to $2.91 billion from $2.47 billion. U.S. consumers spent $16.8 billion on bottled water in 2007, up 12% from the year before, according to Beverage Digest, a trade publication. But growth slowed, and per capita bottled water consumption dropped 3.5% in 2009 from 2008. As it continues to fall, this market share is moving to the home water-filtration product industry. In terms of general online sales, Forrester reports that online sales represented 3.2% of retail sales in 2007, 6% in 2009, and 8% in 2010 estimates. Eight percent of the $3 billion in home water-filtration product sales comes to $240 million.

In 2008, WaterFilters.NET had close to $4 million in revenue, in 2009 $5.4 million, and Arvig expects the figure to surpass $10 million for 2010. The company sells water filters made by recognized brands such as Culligan, Pentek, General Electric, and Maytag through its website.

Arvig said that when the company began, there was not much online competition. However, WaterFilters.NET grew very slowly at first so that it could test the market and not become overwhelmed with debt. This conservative approach allowed for organic growth. WaterFilters.NET is entirely self-funded.

There is much more competition now, including Green Depot, which sells various faucet, shower, and standalone filters; Design Within Reach, which has water pitchers designed for the table, Atmospheric Water Systems, which sells Dewpointe atmospheric water generators for businesses or homes, Sun Water Systems, which specializes in high-end filtration products ranging from pitchers to whole-house systems; and ZeroWater, which sells bottles and pitchers that use ion exchange and not carbon filtration technology. Major players PUR (Procter & Gamble) and Brita (owned by Clorox) are also expanding their product lines. WaterFilters.NET believes that it stands out because it is truly a water company and focuses solely on selling filters. It also employs water specialists certified by the Water Quality Association; this a voluntary certification.

WaterFilters.NET also believes that its paperless, Web-based model makes it more efficient than peers and better able to connect with customers. Buyers can search for filters based on brand, contaminants in their water, technology used, or type of system. There is also a search function by picture. The Water University provides materials to educate buyers about water-related problems. In 2009, the company waded into social media and developed a following on YouTube (more than 55,000 views), Twitter (more than 25,000 followers), Facebook (more than 750 fans), and on its own forum. WaterFilters.NET has over 100,000 customers. The growth strategy is to continue to expand the product range and distribution channels through increased marketing efforts. Partnernships are another part of the strategy. For example, WaterFilters.NET partnered with ServiceMagic last month to launch an installation service that is now available to customers throughout the country.

The company has been approached about a takeover and by VCs but has not seriously considered offers, Arvig said. He is not actively looking for investors or M&A opportunities at the moment, but he remains open to the possibility. Joint ventures or strategic partnerships should be synergistic and could be in the United States as well as overseas. As the market for eco-friendly products and the e-commerce space continue to grow, so will the water treatment business. Arvig said that water treatment is at least a $6 billion industry. But it is highly fragmented, and Arvig would like to take part in consolidating the market.

Recommended Readings
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Deal Radar 2008: Creative Water Solutions

This segment is a part in the series : Deal Radar 2010

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Good post. I blogged about it here with my comments:

The gist of my comments (on my blog) is this:

The business model is interesting, and the post says that they have revenues and are growing. I think there could be many more such startups on roughly similar lines, whose business model involves something in the physical world, and not the usual me-too wannabe-Facebook social-networking kind of startup.

– Vasudev

Vasudev Ram Friday, April 23, 2010 at 1:39 PM PT

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