SPECIAL REPORT Burglar and Fire Systems:
State of the Market
Although burglar and fire alarm systems traditionally have been security companiesâ€™ â€œbread and butter,â€ those markets are growing significantly more slowly than other segments within the security industry.
In the first three parts of this four-part series on the state of the security market, SDM noted growth rates as high as 15 percent to 20 percent or more in the video surveillance, access control and integrated systems markets. The burglar and fire alarm markets are not seeing such high growth, industry sources agree â€“ although they disagree on what that growth rate is.
â€œLast year at this time, the burglar alarm market was probably flat to 2 percent growth overall,â€ notes Gordon Hope, vice president of marketing for equipment manufacturer Honeywell Security, Syosset, N.Y., adding that Honeywellâ€™s growth outpaced the industry average. â€œThe market is still growing at the low single digits, but we believe itâ€™s growing a little better than 2004 or 2005 â€“ probably 3 to 31/2 percent.â€
The fire market also has experienced sluggish growth but is picking up a bit, notes John Weaver, director of marketing for fire equipment manufacturer Gamewell FCI, Greenwich, Conn. That market grew at only 3 percent to 4 percent per year between 2000 and 2004 as a result of a commercial construction slump, Weaver calculates.
However, he adds that the average annual growth rate between now and 2010 should be about 7 percent. â€œThereâ€™s a feeling among experts in building construction that there is pent-up demand for new construction, and this pent-up demand will take off in 2007,â€ he maintains.
Others have higher market growth estimates. Rick Falbo, national sales manager for fire equipment manufacturer Summit Systems, Vaughan, Ontario, estimates the fire market is growing at 5 percent to 10 percent annually.
Gary Kallman, vice president of sales and marketing for manufacturer Digital Monitoring Products (DMP), Springfield, Mo., says both the burglar and fire alarm markets are growing at about 5 percent to 8 percent annually. Both executives say their companies are growing at rates above the industry average.
The comparatively low growth rates for burglar and fire systems are not surprising, considering that those markets are significantly more mature than the video surveillance and access control markets.
According to SDM research, approximately 21 percent of U.S. homes have alarm systems. Although most industry sources agree that number has not yet peaked, it is becoming increasingly difficult to get anything more than incremental increases.
Growth in the fire market is driven primarily by new commercial construction and rises or falls accordingly, although stricter codes also are creating significant retrofit opportunities in some markets. According to Gamewellâ€™s Weaver, 55 percent of fire panels sold are for retrofit applications.
Security dealers who tap into opportunities such as those are finding they can achieve growth rates that outpace the industry average. One positive aspect of the maturing of the burglar and fire markets is that along with that maturity has come a higher level of price and margin stability.
Kirk MacDowell, residential marketing leader for manufacturer GE Security, Bradenton, Fla., believes the burglar alarm market in particular is healthier now than it was in the past.
â€œWhat weâ€™re finding is the further we get away from the time the industry went to $99-down burglar alarm systems, which was in the mid- to late-1990s, weâ€™re starting to see that the overall price the dealer charges for equipment and labor is increasing,â€ MacDowell declares. â€œDealers have told me theyâ€™re more profitable now and a lot busier.â€
Honeywellâ€™s Hope also has noted that trend, adding that the industry learned the hard way that rock-bottom pricing does not necessarily fuel growth.
The Bottom LineMost security dealers interviewed for this article say that both the selling price and cost of a typical burglar or fire alarm system has stayed about the same over the last year or so, and they expect that trend to continue, although some see continued price pressure.
â€œThe fire market is very competitive, with some contractors sacrificing margin on the up-front sale to get in the door for service,â€ notes Craig Summers, sales manager for security dealer Allied Fire and Security, Spokane, Wash. â€œOn the burglar alarm side, pricing is cyclical.â€ Some companies offer promotional discounts for six months at a time, he observes, but adds, â€œOverall, the pricing is similar to last year.â€
Dealers were more likely to note rising prices for fire systems than for burglar alarms. Steve Volk, president of Florida State Fire and Security, Davie, Fla., makes a point of maintaining the profit margins on the installations that his company does, which has required him to raise prices somewhat, he concedes.
â€œItâ€™s a bit the cost of materials, a bit an increase in the cost of getting around, and a bit of an increase in labor costs, as code requirements have gotten more stringent and require more work on a job,â€ he explains.
Another factor that can impact selling price is a change in the type of equipment that is used in a burglar or fire system. What goes into a typical burglar alarm system has not changed much, sources say. But fire systems increasingly rely on addressable and wireless devices, although some sources say that change has not had much impact on system cost.
â€œWeâ€™ve seen a trend toward wireless technology,â€ notes Richard Roberts, security product manager for fire equipment manufacturer System Sensor, St. Charles, Ill. â€œWireless sensors are much easier and more cost-effective to install. Wireless equipment cost is slightly more than hard-wired devices, but overall the installation cost is about the same or slightly less.â€
Other sources note that as fire alarm systems have become more complex, the average system price has been driven up somewhat. â€œThe cost of a fire system is rising because systems are more sophisticated,â€ notes Bill Nugent, director of engineering for security dealer Fire Systems Inc., Hawthorne, N.Y. â€œPeople are looking for graphics packages that show the building layout. And labor is going up because you need a more highly skilled labor force. Technicians need more training, and they have to carry a laptop.â€
Like dealer Volk, several other security dealers interviewed for this article report that their margins have remained stable, although Don Wennerholm, owner of Holmes Security, Fortuna, Calif., reports his margins have decreased a bit.
â€œTo use the equipment that we need to compete in the marketplace may cost a bit more, but I canâ€™t charge more,â€ Wennerholm declares. â€œItâ€™s a personal thing. I canâ€™t use poor equipment.â€
Merrick Murphy, vice president of security dealer Abco Fire Protection Inc., Cleveland, declares that his companyâ€™s margins have stayed the same, but only through careful balancing of bid and non-bid or private work. â€œThe market is very competitive these days,â€ he notes. â€œIn todayâ€™s economy, you have to be more aggressive. Weâ€™re holding our margins by doing more private work.â€
How to Better Your MarginsOnly two dealers we spoke with noted an increase in their average margin, and both achieved it through changes in their business mix. Bud Wulforst, president of A-1 Security, Las Vegas, attributes his margin increase to more higher-margin monitoring sales. â€œThe cost to monitor a system stays relatively flat,â€ he explains. â€œIf you double your accounts, it wouldnâ€™t double your costs, so your margin will increase.â€
S&A Fire and Safety, Farmers Branch, Texas, the other dealer that saw an increase in its average margin, achieved that goal by emphasizing its higher-margin and fast-growing inspection business. Texas authorities are keeping closer tabs on whether companies conduct mandatory annual or semi-annual fire system inspections, notes S&A sales manager Lisa Huffstuttler. This is a trend that sources in some other parts of the country also noted.
Conducting such inspections is an excellent opportunity for smaller independent companies such as S&A, Huffstuttler notes. â€œWe can increase our profitability a lot by doing inspections because we donâ€™t have high overhead,â€ she declares, adding that the company often is enlisted to install any equipment needed to ensure that a customer is compliant.
Growth FactorsFuture prospects in the burglar and fire alarm markets will depend on the industryâ€™s ability to maintain or improve the status quo. Sources point to a number of factors that could impact the market either positively or negatively. On the positive side is a general heightened interest in security overall as a result of recent world turmoil.
â€œCompanies are viewing fire as more of a life safety issue,â€ notes Nugent. â€œThe trend is to provide protection above and beyond the code. If theyâ€™re going to err, it will be on the side of caution. Companies recognize the importance of protecting computer networks that are essential to their business. Even a small company is spending a lot of money to protect its network.â€
Companies also are investing in new forms of protection. SAFE Fire Detection, Monroe, S.C., manufacturer of early warning systems, saw a sales increase of more than 40 percent last year, notes SAFE marketing sales manager, Marvin Spehar.
Another specialty product category that is becoming increasingly popular is audible devices, notes Summit Systemsâ€™ Falbo. â€œBefore, detectors and fire sufficed,â€ he remembers. â€œBut now many buildings are requiring audible devices or emergency evacuation systems.â€
Increasingly, technology enhancements are becoming part of fire codes. Coupled with new insurance discounts for beefed-up systems, such requirements are driving a strong retrofit market, particularly in areas of the country that experienced construction booms during the 1960s or 1970s.
Other retrofit opportunities are driven from outside the burglar and fire protection industry. For example, dealer Nugent notes more and more large corporations are selling their high-rise office buildings to real-estate developers. These developers then lease the space to other companies after first adding corridors and dividing larger areas into smaller spaces. Along with such renovations comes a need for new fire and intrusion systems.
In the burglar alarm market, heightened security awareness is not only driving system purchases, it also is driving more and more builders to pre-wire homes for security, making alarm systems easier to sell.
â€œPre-wiring enables security infrastructure to be put in for less money,â€ notes Jim Lowder, chief technology officer for manufacturer MDI Security Systems, San Antonio. â€œThat move will continue to grow.â€
Increasingly, homes also are being wired for home entertainment systems, creating new opportunities for alarm installers to sell more comprehensive and costly systems.
â€œWhen customers elect to put in a whole home system using Category 5 wiring, security becomes an add-on rather than security being the main reason people call the dealer,â€ notes GE Securityâ€™s MacDowell. â€œOnce the can is in the wall, the acceptance rate on security is much higher, and instead of a $1,500 sale, dealers can be very successful at making a $3,000 or $4,000 sale with security as an add-on.â€
Societal forces also will continue to drive the demand for alarm systems, some sources believe. Lack of criminal convictions or jail time drives consumer fears, notes dealer Wennerholm, who adds, â€œWhatever affects peoplesâ€™ fears has a tremendous impact on the industry.â€
Aside from a construction slump, sources note few factors that could negatively impact fire system sales, although Huffstuttler thinks the fire market would be stronger if requirements were mandated on a state-wide basis rather than at the local level, as they are currently handled in Texas.
In the burglar alarm market, the risk factor that sources mentioned most often was the growing tendency for municipalities to refuse to respond to a burglar alarm unless an intrusion has been verified. Although this development will likely have the greatest impact on the monitoring market (see sidebar on page 71), some fear it could drive down system sales as well.
On the other hand, this development also opens up new opportunities. For example, Huffstuttler notes that S&A is looking seriously at providing private guards to respond to alarms in areas where police are unwilling to do so.
Side bar:The burglar and fire alarm monitoring market traditionally has grown at the same pace new systems are installed. But some industry stakeholders are beginning to question how long that will continue. Their concerns have a regulatory and a technological component.
How Will Verification and VoIP Affect the Monitoring Market?
On the regulatory side, more and more municipalities are passing false alarm ordinances to stop law enforcement from responding to a burglar alarm unless an intrusion has been verified. That trend â€œcould take a toll on the number of accounts monitored,â€ notes Tom Few Jr., vice president of sales and marketing for wholesale central station Criticom International, Irvine, Calif.
However, some municipalities will dispatch if an intrusion is verified through a video link to the site, which creates new monitoring opportunities. American Sentry Guard, Greenwood, Ind., a wholesale central station, has seen growth of more than 300 percent in its video verification business over the last year, notes Sayeed Ziman, director of product development for the company.
The non-response trend also has boosted sales of remote access options that enable home or business owners to use a computer to see what is happening at the site, Ziman notes. However, he adds that traditional alarm monitoring still comprises almost 90 percent of the companyâ€™s business.
As a result of the increase in local false alarm ordinances, some central stations have begun to increase the number of calls they make to try to confirm that an alarm is not a false one before dispatching police. That procedure initially might seem to increase the central stationâ€™s operating costs.
But, notes Jim German, senior vice president for wholesale central station Security Associates International, Arlington Heights, Ill., â€œWe may see that the advent of the secondary call could reduce costs.â€ The reason, he says, is â€œif you make a second call and during that call, the alarm is cancelled, youâ€™re not having to call police.â€
On the technology side, a new trend that threatens monitoring revenues is customersâ€™ growing use of non-traditional telephone service, including cellular and Voice over Internet Protocol (VoIP). Some customers make that switch so they can save money by canceling their traditional phone service, but in doing so, they may lose a means of monitoring their alarm system.
Approximately 8 percent of phone service customers no longer have a wired connection but are relying only on a cell phone, notes Tom Mechler, product marketing manager for Bosch Security Systems, Fairport, N.Y.
He estimates 47 million customers now have broadband connections, such as DSL or cable modems, which are capable of supporting VoIP. Mechler sees the increased use of broadband as an opportunity to sell more IP-based alarm systems that can co-exist with VoIP.
â€œItâ€™s an opportunity for us to go in and say, â€˜Hereâ€™s an alternative, and itâ€™s a higher security way to monitor your system,â€™â€ he notes.
More and more central stations, including Nationwide Digital Monitoring, Staten Island, N.Y., have made the investment to upgrade monitoring equipment to support IP-based systems. â€œThe new trend is VoIP, but that will have no effect on us,â€ notes Nationwide president Peter Deck. â€œWeâ€™re prepared. We have Internet monitoring equipment in place.â€
However, some dealers say they are reluctant to shift toward IP-based monitoring because of cost. â€œIP is still fairly expensive,â€ notes Craig Summers, sales manager for security dealer Allied Fire and Security, Spokane, Wash. â€œCellular alarm transmission came down, and we hope IP comes down, too.â€
With traditional alarm monitoring revenues threatened, some central stations are branching out into other types of monitoring. â€œSecurity doesnâ€™t have to be just intrusion and fire,â€ notes German.
Pointing to water detection as an opportunity, he adds, â€œInsurance companies are trying to see how technology can help reduce claims. If they can find a way to reduce water damage and incentivize home owners to use it, itâ€™s to their benefit.â€
Personal emergency response systems are another opportunity, German points out, adding that it should be â€œa very up-and-coming form of monitoring, as baby boomers reach retirement years.â€