1999 :: Good Year, But Squeeze Continues Stronger
A strong U.S. economy, steady consumer confidence and strong consumer and business spending, coupled with fear of crime, helped the dealer, installer and monitoring sector of the private security industry hit strong revenue growth in 1998.
Revenue, more diversification, but profits under attack from consolidation and industry changes, says SDM Industry Forecast.a strong U.S. economy, steady consumer confidence and strong consumer and business spending, coupled with fear of crime, helped the dealer, installer and monitoring sector of the private security industry hit strong revenue growth in 1998.
Revenue growth more than doubled compared with 1997. Prices consumers paid for sales/installation and monitoring grew across the sector. But, a squeeze on profits continued, with increased competition, sale of more accounts to others and a labor shortage.
Competitor Sources ShiftRespondent firms to the SDM 1999 Industry Forecast found small alarm firms a greater competitive threat in 1998. Many believe competition from Regional Bells has diminished; and they don't take very seriously gas and electric utilities as well as install-it-yourself systems. The most threatening competitive challenge: the largest national and regional alarm firms.
The global trend--consolidation--continued in the security industry in 1998 but at a slightly slower rate than in the previous two years.
Total Industry Much BiggerAccording to the SDM Industry Forecast, an annual survey of dealer and installer firms, the sector reports an 8 percent revenue increase in 1998 compared with 1997. Last year revenue growth was 5.2 percent. Repeating a formula that accommodates respondents, revenue and growth across different sizes of business, the SDM 1999 Industry Forecast pegs total revenue in 1998 at $15.23 billion for the sector. In 1997 it was $14.1 billion. SDM's sister publication, SECURITY Magazine, views the total U.S. private security market, including corporate and government spending, at about $88 billion in 1998.
Specific to dealer and installer firms, this sector remains bullish on revenue growth this year. More than two-thirds of firms (68 percent) say their revenue will go up, and only 3 percent say they see a downturn.
The biggest factor driving dealer sales in 1998 was the strong economy, the same as 1997. Also repeating: crime as the second most impacting factor, and sales and marketing efforts in third place.
Employee SqueezeWhen asked to list top business challenges in 1998, the SDM Industry Forecast respondents showed a significant change of focus as they ranked the need to find and hold employees the top concern, with protecting profits and fighting competitors following.
Fighting competition was not among the top three challenges in 1997 or 1996. And the need to sell more systems appeared in the top three in both previous years but ranked lower in 1998.
The picture painted by the SDM Industry Forecast matches many overall U.S. economic indicators.
Construction StrongGrowth in spending on U.S. construction overall in 1998 was very powerful, with housing starts especially strong at the beginning and end of the year. Housing is about half of total U.S. construction, with starts and existing home sales--when strong--positively affecting home security sales, installation and monitoring.
Also strong: new construction and renovation of office and institutional buildings, and, surprisingly enough, new multi-family apartment houses. This translates to stronger security sales and installation, often with more sophisticated systems.
With a strong economy so important to a strong dealer sector, there's more good than bad indictors this year.
Many analysts see a slight slowdown in the first half of 1999 with a rebound in the second half.
Luxury housing slowed in the second half of 1998 due to stock market and global problems, but home networking breakthroughs promise to push home systems into more moderately priced housing. In 1999: There are indications that home tech pioneers will trade up to digital TV home theater, that vehicle security monitoring will emerge, and home medical monitoring will gain more steam.
In the longer term, dealers see economic conditions, crime, a firm's sales and marketing effort, the amount of disposable consumer income and capital spending by business as top factors driving sales.
The Challenge: Profit MarginsIn order of importance, protecting profit margins, finding and retaining employees, selling more systems and generating more recurring income are top challenges over the next three years.
Ironically, in this time of false alarm concern by municipalities, law enforcement and security, the need to reduce false alarms is ranked low. The inference: the problem will be solved.
According to the SDM Forecast, revenue distribution among types of systems and services doesn't show much difference from 1997 to 1998. Sale of home systems, excluding security and fire, gained in 1998. SDM researchers added "integrated systems" among system choices in 1998. In adding integrated systems to revenue distribution choices, the move also shifted some revenue from burglar and fire systems.
There's more change reported for growth by market segment. A slight dip in small commercial business was offset by growth in large commercial business, indicating some dealer firms moving into higher-end systems and integration.
Consumer Prices RiseWith less "no- and very-low cost" systems from mass market firms in 1998, the average price of a residential system shot up to $1,995 compared with $1,428 in 1997. Prices have been climbing, though more slowly, since 1995. Respondents participating in the SDM 1999 Industry Forecast peg average monthly monitoring at $31.99. An earlier national consumer home security study by SDM Magazine and Protection One found home alarm owners saying their average monitoring fee was $26. Last year's forecast pegged monthly monitoring fee at $24.40.
Splitting RevenueAn increase in recurring income, whatever the amount, no longer completely translates into more dealer revenue. The number of firms participating in dealer programs, selling accounts or using third-party monitoring is at its highest level. The sector continues its division into sales/installation and monitoring.
The average number of accounts monitored by surveyed firms decreased in 1998. In addition, the average number of accounts sold jumped.
Such a shift puts additional pressure on higher consumer prices, more complex residential systems sales and installation, and diversification to commercial, government and corporate customers.
There's another shift beyond typical residential and non-residential burglar and fire alarm systems.
CCTV system sales and installation continues its upward curve. The SECURITY Forecast, for example, shows security surveillance as a top purchase in 1998 and planned for 1999. There's also movement of dealer firms into home systems; these firms sold, on average, about 32 systems in 1998.
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