For the Security Guard industry, the world continues to get smaller and smaller. In the last 6 years, there has been more investment in guard companies, more mergers and acquisitions taking place than in the history of guarding. What are the market factors that are causing this movement, and what does it mean for the small to mid-sized guard firms looking to compete in an increasingly competitive market with rising labor costs, tightening employment laws and regulations creating pressure on margins and profits?
In this first of several articles, we will look at the current state of the market, and why there is a prime need for guard companies to understand the changing conditions of the market and where they fit in this landscape. In our next article, most importantly, we will illustrate the levels of business maturity that happens during each stage of a company’s growth, and what you can do to move up to the next level of growth and compete more effectively. We are also compiling all this information in an upcoming webinar on August 13, 2019.
The Market View: Top Heavy, or Bottom Rich?
The once highly fragmented U.S. guard industry has undergone substantial consolidation especially in the last 6 years as illustrated in the table below:
The big three industry leaders, Allied Universal (including its 2018 acquisition of US Security Associates), Securitas and G4S now comprise over 55% of this $25.5 billion market. The top 39 companies (with over $50 million in annual revenues) now represent almost 80% of the contract guard market – with revenue growth of $6.8 billion or 52% over this 6-year period! At the same time, the market share held by the remaining smaller guard companies (with under $50 million in annual revenues) shrank $1.3 billion or 20%. So, the U.S. market with an estimated 8,000 security guard companies, is top-heavy in terms of revenue consolidation but bottom-heavy with companies that are considered small to mid-size. Note also that nearly 87% of this entire market is made up of companies that employ under 250 guards.
What is causing this strong consolidation trend? Despite their national marketing advantages, the larger security companies still have difficulties with net revenue growth: new customer gains less customer losses (resulting from ‘churn’ or turnover due to inconsistent service performance and weaker customer relationships). Consequently, since the organic sales cycle takes longer to develop, these firms opt for acquisitions to augment soft net revenue growth – fueled by capital funding from a growing number of private equity firms attracted to this industry.
Market Conditions are Driving a need for Smart Growth
Up until now stronger local and regional security firms with quality, personalized services and strong customer relationships have prevailed against the major and national companies’ vulnerability. Going forward however, these advantages alone will not be sufficient to “Compete with the Big Boys” and drive enough value to grow their business while at the same time dealing with other inhibiting factors affecting market conditions in this shrinking landscape:
- Technology’s Impact on Operations: More and more security firms are having to offer a technology-based service with their operations. This is becoming a necessity for winning new contracts and, as companies try to grow, not having a technology component is a competitive disadvantage – especially those in that 87% group. Whether it’s the influence of consumer-driven security (e.g. Nest, Ring), crowd sharing tech (e.g. LiveSafe,) the advancement of tech in peripheral workforce markets ( e.g. McDonalds Kiosk, Home Depot self check out), or commercial security (e.g., Robots, Drones, Facial Recognition, Video monitoring) – the rising and recurring cost of labor vs the ever reducing fixed cost of technology as a service makes traditional guarding as a standalone service a less competitive value proposition.
- International and Global Players entering the market: Competition is no longer just in your backyard but now includes global companies expanding their operations in this market like GardaWorld (Canada) with their acquisitions of United American and Whelan Security and Prosegur (Spain) with its acquisition of Command Security. These competitors enter this market space with strong capabilities and financial resources.
- The “Amazon Effect” on Physical Security: With Amazon’s enormous online retail growth of and the shrinking of the brick-and-mortar stores (think Toys R Us, JC Penney, and Sears) – there is a smaller world from which to compete within. Less retail space means less clients to work with. This is also true on the commercial side – more and more online business, means less of a field requiring uniformed guard coverage.
- Labor Market Conditions – with 50-year record low unemployment (3.7% June), attracting and retaining quality employees remains the industry’s #1 challenge. Higher employee turnover creates hiring shortages resulting in costly non-billable overtime with adverse effects to client services and performance.
- Employment legislation and regulations – Even without the currently proposed ‘Raise the Wage Act’ to increase the federal minimum wage to $15.00 per hour, this year will see 19 states with minimum wage increases. While most security guard employers pay wages above the minimum levels, any such mandated increases usually result in some upward adjustment to other wages resulting in increased costs and lower margins unless offset with billing rate increases.
To survive and succeed against these inhibitors, smaller and mid-sized companies need to adopt smart strategies for growth – driving value with the same tactics and technologies as the national firms – for increasing market share, expanding footprint and ultimately, emerging as a strong, thriving, well branded enterprise primed for dominance and strategic options including acquisitions, merger or sale and exit at a premium enterprise value.
How are companies able to implement these smart strategies and drive their value, from “Startup to Sold”? Our next article in this series, “The Security Market Growth Curve: Understanding and benchmarking your Growth” addresses the need to understand where you are and what you need to do to grow and the steps to mature your business with people, processes and technology.
Principal Consultant at Whitehaven Advisors LLC
Jack Goldsborough has over 45+ years in the security services industry and is the principal consultant of Whitehaven Advisors, a specialized consulting, advisory and M&A firm serving security owner/operators where he brings extensive experience, thought leadership and industry-specific skills and capabilities for the benefit of its clients. Prior to founding Whitehaven Advisors, Jack was most recently CFO of a prominent NYC-based security and investigative firm, T&M Protection Resources, LLC. He began his career with Burns International Security Services (now part of Securitas), where he rose to the Office of the President. He also held various ownership and leadership positions with other regional and national security organizations. Jack’s corporate background spans a broad spectrum of disciplines including organizational, operational and financial management, with special focus on debt and equity financing, acquisitions, mergers and divestitures. He has been active in the investigative and security industry as a member of the American Society for Industrial Security (ASIS) and the Associated Licensed Detectives of New York State, Inc. (ALDONYS) where he served on the Board and was President from 1993-1994.