Like the rest of the economy, the security industry is facing down a number of challenges during the second quarter of 2023. High inflation, a tight labor market and the fallout from the collapse of two regional U.S. banks are among a few of the challenges. Many of these issues carried over from 2022. But despite these challenges, the industry reported continued growth in revenues. We expect this to continue during 2023.
Inflation was down from its peak of 9.1 percent in June 2022 to 6 percent in February, according to the Bureau of Labor Statistics. That is still considerably higher than the 2 percent to 3 percent range experienced most years from 2000 to 2020. Many security industry companies combatted inflationary pressure associated with higher labor and inventory costs with significant installation, service and monitoring rate increases during 2022, and many are evaluating similar revenue increases during 2023. While some conducted recurring monthly revenue (RMR) increases on an annual basis, we saw virtually unanimous rate increases among our clients during 2022. RMR increases will continue to be part of the industry landscape during 2023, and will contribute to growth among SDM 100 firms.
Mergers and acquisitions continue to be strong drivers of growth among SDM 100 companies. Private equity-backed companies such as Zeus Security, Pavion, and Pye-Barker Fire & Security have a multiyear rollup strategy and are continuing with a number of acquisitions during the first quarter of 2023. We see a strong pipeline of small and medium-sized transactions driven by the waning pandemic, high interest rates and retirements. Many of these small to medium-sized transactions fly under the radar of large transactions and are completed under terms favorable for both buyer and seller. Fortunately, many buyers find themselves on the backside of the pandemic with lower leverage and strong balance sheets, partly due to strong expense reduction during the pandemic.
Many security companies also report robust installation pipelines. The strong sales pipeline is partly driven by a favorable economy, and partly due to labor scarcity. After reaching a 20-year low of 3.4 percent in January, the unemployment rate increased slightly to 3.6 percent during February. Anecdotally, our clients report better hiring conditions, including finding multiple candidates for open positions and less interview “ghosting.”
Inventory availability also plays a role in the installation pipeline. Our clients report that inventory is more readily available than last year, but there are still equipment types where availability is tighter than companies would like. As a result, we’ve seen clients defensively carry significantly larger amounts of inventory than in years past. Some clients report that new service vehicles are still hard to find. Many have to rely on high mileage trucks that carry high maintenance costs.
Despite the economic headwinds in the economy, the security industry is in a good position for growth during 2023. Fortunately for the industry, the essential need for security, the enduring value of recurring monthly revenue, and the solid financial condition of most industry competitors will help the industry thrive during 2023.
Mark Melendes is managing director and commercial regional manager, Security Industry Group at CIBC, U.S., a North American bank that provides tailored commercial, wealth management, personal and small-business financial solutions, as well as cross-border banking services, to clients. Contact him at email@example.com or you can call (312) 564-1346.
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