SDM 2009 INDUSTRY FORECAST: A Good Place To Be
First, respondents to the survey â€” which was conducted in October 2008 â€” revealed that for the first time in the study’s recent history, security dealers and systems integrators predict total industry revenue will turn down. They are expecting a 7.8 percent decline in total industry revenue, from $48.45 billion in 2008 to $44.67 billion in 2009.
Second, for the first time in five years, respondents indicated that their greatest challenge in 2009 would not be finding and retaining employees â€” as it had been since 2004 â€” but increasing sales, selected by a wide margin of survey respondents.
These findings are astonishing not because they are unexpected in light of the state of the economy, but because the security industry had heretofore been considered somewhat recession-proof.
That’s what the nearly 600 dealers and integrators who participated in SDM’s annual Industry Forecast Study indicted anonymously. But based on personal interviews with dealers and integrators of all types and sizes, the security industry barometer is a bit more optimistic.
Q4 IS ON THE BOOKS“Our sales are up this year compared with last quarter 2007, probably between 15 and 20 percent,” says Ronnie Beck, president of A-Com Protection Services in Columbus, Ga. “We put some things in place to make that happen.’
When A-Com noticed that fourth-quarter 2007 sales “were going to falter some,” the company immediately took action by hiring a chief operating officer whose main objective was to increase sales. “We’ve brought on a lot of sales staff, so we feel it is going to take the year 2009 to start reaping some of the rewards from that. We’re looking at increasing sales at least 20 to 30 percent,” Beck says.
SDM’s 2008 Dealer of the Year, Beltsville, Md.-based ASG Security, also had a great fourth quarter 2008. “We did not see a softening of sales during the fourth quarter of 2008 versus 2007,” states Bob Ryan, senior vice president, sales and marketing. “In fact, we achieved 21 percent sales growth in RMR and 24 percent in installation revenue when comparing the two periods.
“I can tell you that the business climate is tougher this year than in 2007 due to the economy. In other words, we’ve had to be more disciplined than ever and fight very hard for the business,” Ryan says.
However, Atlanta-based Ackerman Security Systems, SDM’s 2007 Dealer of the Year, experienced a downturn, which it hopes will be short-lived.
“While sales revenues were down in the fourth quarter over the prior year, we continue to be optimistic going into 2009,” notes Jim Callahan, Ackerman Security’s chief operating officer.
“We do feel that if economic news continues to be negative, there could be a more severe pullback in spending by both consumers and business prospects. Factors such as lack of credit or funding, increased foreclosures and increased job loss would impact sales growth negatively moving forward into 2009,” Callahan believes.
At Richmond Alarm in Richmond, Va., president Wayne Boggs reports that total revenue for last three months is off 8 percent over same period last year, and sales of new systems are down 25 percent.
“The overall economic slowdown has people frightened, so that even if they have disposable income, their investments are down, their retirement funds are in the tank, and they are concerned about the future. They are holding onto their money, and not spending it on anything, least of all security systems. Other businesses are experiencing the same thing we are, and simply don’t have the funds available for security,” Boggs says.
The current market climate may best be described as belt-tightening, thinks Rob L. Kimmons, CPP, CFE, CHS III, president of Kimmons Security Services Inc., Houston, Texas, which specializes in security for the water and wastewater industries.
“We have noticed a softening in sales for last quarter 2008 versus 2007. Not so much in loss of jobs awarded, but in clients exhibiting a more conservative and cost-awareness approach,” Kimmons relates. “An example would be where we would provide a proposal to an established client for a 32-camera system, and the client would cut the size of the system to 24 or even 16 cameras at a facility.” He says that in the past, these clients would have followed the company’s suggestions in their entirety, but now seem to be paring down to meet budget constraints. “This seems to be a trend, not just an isolated case or two,” Kimmons says.
Amidst the flux of this uncertainly, security firms can be dramatically affected as a result of either booking â€” or not booking â€” large commercial projects, says Dave Hood, vice president and general manager at First Alarm, Aptos, Calif.
“In October and November of 2007 we booked 356 new contracts, $1,261,000 in new installation, and $16,900 in new RMR,” Hood says. “Those same months this year have rendered 260 contracts, $588,000 in new installation, and $12,500 in new RMR” â€” a number that is still above-average for First Alarm, but noticeably below the prior year.
More alarming to Hood, however, is what he sees happening with First Alarm’s attrition and accounts receivable.
“Attrition is about the same as last year, but we’ve seen a reduction in attrition in the category ‘moved’ and a sizable increase in the category ‘bad debt.’ I spoke to other dealers who are experiencing the same activity. I guess the movers aren’t moving but are just being foreclosed upon,” Hood says.
“Our accounts receivable 60-days-and-over jumped up in November â€” we had terrible cash flow. When I ran the numbers, there was no pattern. The typical past due account was ‘typical,’ which actually caused me more concern than a scenario where a few large customers were driving up my AR. We received 550 fewer payments in November than we did in November of last year, with the same number of mail days and with more accounts online,” Hood explains.
Overall sales are up at Pittsburgh-based Guardian Protection Services, the ninth largest security provider on the SDM 100. However, attributable to that are Guardian Protection’s acquisitions of Ranger American’s Florida operations in October 2007, and its Texas operations in May 2008.
Specifically, the company’s residential retrofit sales are up. “Revenue from our commercial and national accounts divisions is also up,” said Bill Graham, senior vice-president, sales and marketing.
But Guardian’s Home Technologies business had relied on residential new construction. “We’ve seen a dramatic decrease in business from new construction. In fact, the bottom fell out due to the decline in the housing market,” he said.
“If there is any area where there is a sign of apprehension it is the lower end residential because of the economy. People aren’t spending the money. They are a little reluctant. They want to do the do-it-yourself type systems,” says Douglas Macauley, chief technology officer at Blue Hawk Security, Germantown, Md. “We don’t want to focus in that area.”
While sales fell short for some in the fourth quarter, most dealers and integrators felt that profits held steady. The exceptions were, obviously, in residential new construction.
“Our profit margins in the commercial and national accounts divisions are strong and are expected to remain strong. We see no change in our residential retrofit division,” relates Joe Colosimo, president at Guardian Protection. “In new construction, the margins have been soft and we would expect them to remain relatively soft until we see an up-turn in the economy, particularly the housing market. Until the housing crisis passes, people won’t be inclined to spend the extra money on big-screen TVs and home entertainment systems. People are buying less so it’s more difficult to upsell.”
Much of the gross profit of First Alarm’s installation business is attributable to the 40 to 50 largest projects the firm does each year, and Hood describes 2008 profit margins as being “pretty good.” But his larger concern is not margins.
“The difference is that our backlog of large system work has been reduced quite a bit,” Hood relates. “I’m more concerned with volume than margins. But I do expect to encounter more price shopping in 2009 which could squeeze margins.”
At Dakota Security Systems Inc., Sioux Falls, S.D., profit margins have been steady, “and we believe that they will hold steady in comparison to years past [because of] our systems integration business,” states Scott Swansen, regional vice president. Its systems integration business handles clients in the manufacturing industry, state agencies, prisons, universities, healthcare, “and everything in between,” he describes.
“We have a large service customer base that will still need service in 2009, somewhat regardless of the economy,” Swansen says.
“It certainly is going to be tighter in 2009 versus 2008. It’s going to be a tough and challenging year. There are still opportunities, and you have to be in the right place and prepared to handle those opportunities,” Swansen believes.
Working harder and watching their costs will be the tune most security companies will sing in 2009. That work primarily will consist of closely monitoring trends in the market, as well as hammering the value of security to corporate, commercial, industrial, institutional, and government markets.
“We expect to achieve modest but consistent sales growth in 2009,” says ASG’s Ryan. “I expect that the segments that can effectively show a measurable ROI or solutions that increase operational effectiveness will be the ones that will perform well in 2009 â€” specifically, CCTV and access control. Businesses will need to demonstrate greater justifications for expenditures for the foreseeable future and the ability to show a return will be very important.”
Kimmons echoes that statement. “I believe we will have to work harder to convince clients that security should remain a priority. Our firm will continue to stress the fact that proper security measures can actually add to their bottom lines in reducing theft, pilferage, employee accidents, etc.,” he stresses.
First Alarm’s Hood expects the small business and custom residential markets to be strong in 2009. “We think there will still be demand for high-end service, and much of our client base is in areas (such as Santa Cruz and Monterey, Calif.) that have been historically resilient to recessions.”
However, weaker markets for First Alarm may be large offices and industrial facilities, “as both large business and government grapple with cost cutting,” Hood describes.
Every cloud has a silver lining, they say, and that’s how Callahan at Ackerman Security sees it.
“We are planning double digit sales growth in 2009. While economic conditions remain a factor, the increase in crime and the related news coverage associated with the more violent nature of some of this crime has led to increased awareness of security needs in both the residential and commercial markets,” he thinks.
“On the negative side, the lack of churn in home sales (new and existing) and small- to medium-sized business closures could create challenges to expected growth levels moving further into 2009,” he predicts.
The same problems that affect new construction sales also affect residential retrofit sales, says Graham at Guardian Protection. “On the residential side, we see some softening because a large percentage of our residential retrofit sales are based on new movers. If homeowners can’t sell their existing home, they can’t buy a new one. Consumer confidence, mortgage and lending concerns, as well as unemployment play a part,” he explains.
“Having worked through recessions in the early ‘80s and again in the early ‘90s, we’ve seen that, typically, low consumer confidence and high unemployment rates are offset by an increase in crime,” Graham says, echoing Callahan’s belief.
But most feel, well, secure about operating in the security industry in 2009.
“We feel very secure with our industry,” Swansen at Dakota Security says. “It’s obviously going to be a tough and challenging year, but our thoughts are if you’re going to be going through these times, the security market is a good place to be.