Security Shredding and Storage - a shredding industry publication
By P.J. Heller

Despite the economic crisis, document destruction companies nationwide predict increased revenue growth for 2009 but many expect to see their margins decline or remain flat from the previous year, according to a recently released survey of the industry.

The survey, conducted in March by Shotgun Capital Advisors, a merger and acquisition advisory firm based in
Southlake, Texas, was sent to 1,142 independently owned document destruction firms. A total of 242 surveys were returned, a 21 percent participation rate. It was the second year Shotgun Capital conducted the survey and it was conducted as the industry coped with “challenging times,” said Jim McGuire, president of Shotgun Capital.

“What’s surprising about it compared to last year is how fast the industry continues to grow despite the economic climate and the free-fall in paper prices as of last October,” he said. “It still is experiencing double-digit growth.”

McGuire said the industry was proving to be recession resistant in difficult economic times.
In the introduction to the survey findings, McGuire noted that “the rapid collapse of paper prices, paralyzed credit markets and a focus on cost reductions are testing our industry's ‘recession resistance’ all at once.”
The online Document Destruction Industry Benchmark Study consisted of 55 questions dealing with such topics as marketing, sales, customer satisfaction and financial performance.

Growing competition and pricing pressure — notably price-cutting by new entrants to the industry — topped industry concerns for 2009, the survey reported.

“Most respondents pointed first to increasing competition and pricing pressures,” it noted. “Over and over again respondents identify ‘low-balling’ by new competitors as the biggest issue facing the industry. Concerns about paper prices ranked second, followed by general concerns about the recession.”

“Too many competitors,” wrote one company when asked about the biggest issues facing the industry. “Some are good but most are just undercutting in price with less than adequate service. Some companies come into your market area and low ball pricing, then they do a terrible job in servicing, which then gives the document destruction industry a bad name in general.”

“Too many companies, especially big companies, have priced their services too cheap, this devalues our industry and is not necessary,” wrote another. “It is short-range thinking. If customers are concerned only with price I don't want them! Many players in business today have a short-term vision — if you gain a customer only because ‘you were the cheapest’ you sold them on the idea that cheap is important — it is only a matter of time until ‘cheaper’ comes along. Don't count on paper prices either.”

Increased competition/pricing was cited by 43 percent of the respondents, followed by paper prices (31 percent), the recession (21 percent) and security (14 percent). Other issues included national competitors and fuel prices, each cited by 11 percent of the respondents, followed by tightening budgets (8 percent) and the paperless office (5 percent). Participants were allowed to select from more than one category.

Despite those and other concerns, the report noted that the industry was doing exceptionally well. “Other industries would kill for these numbers” said McGuire.

“The document destruction industry continues to grow at an impressive pace despite challenging economic conditions,” it reported. “The industry appears to be validating its claim of recession resistance with the winning mixture of service necessity, customer diversity, and ‘lost in the rounding’ cost exposure.”

McGuire explained that “lost in the rounding” referred to the fact that shredding services are typically a small expense for clients and traditionally those costs do not appear as an individual line item on a P&L statement. Therefore, they are not high-focus during cost cutting initiatives.

On average, revenue growth estimates for 2009 came in at about 7.5 percent, which the report said was “in line with 2008 growth when you factor in filling the hole left behind by the fall in paper prices.”

Of 184 responses to the question about predicted revenue growth, approximately 68 percent said they expected increases over prior year— with 23 percent of those expecting increases of more than 20 percent — while some 31 percent of respondents said they expected growth to be flat or decline.

“Shredding revenue will be up approximately 15 percent, but the decrease is totally due to the decline in recycling market. Currently recycling revenue is only 30 percent of what it was in the same time in 2008 and there is more paper being recycled in 2009,” one respondent wrote.

“Demand remains up, but some competitors are trying to buy business with low prices, a game we won't play,” said another. “But the biggest impact is recycling prices off 80 percent from this time last year.”

As to margins, the survey found that slightly more than half of 181 respondents expected them to remain flat or decline while the remainder expected them to improve by 5 percent or more.

“We have nowhere to go but up,” said one respondent.

Asked where they would focus their marketing during the current year, a majority pointed to the Internet, with nearly 31 percent pointing to their company’s Web site and 19 percent each citing search engine optimization and Google ad words or pay-per-click.

As for the effectiveness of marketing efforts to bring in new customers, respondents listed such things as company Web sites, customer referrals, Yellow Page advertisements, community shredding events, truck graphics and paid searches such as GoogleAdWords and Yahoo.

The dramatic drop in paper prices, along with equally dramatic increases in fuel and energy prices, during the fourth quarter of 2008 were noted in the report.

“The fall in paper prices is forcing the industry to take a hard look at service pricing and serves as a wake-up call to those that discounted based on volume,” it said.

The drop in paper prices hit the industry particularly hard, with a reported 66.1 percent drop in paper prices during 2008. Among the hardest hit were companies who do not operate their own baling facilities, who saw paper prices plummet nearly 79 percent, from an average high of $160.65 per ton to $34.38 per ton. Those who operate their own baling facilities saw prices fall nearly about 62 percent, from an average high of $217.57 per ton to a low of $81.79.

The report also noted that in the wake of rising fuel and energy prices, more companies were passing along those costs to customers in the form of surcharges.

“The industry as a whole has historically resisted or feared implementing fuel/energy surcharges as a means of passing on cost increases to customers,” it said. “It is encouraging to find more industry participants implementing regular rate increases or fuel surcharges when necessary.”
In addition to the trends mentioned in this article, Shotgun Capital Advisors’ survey provides specific metrics on sales, profit margin, paper tonnage, console and tote counts, fleet size, customer retention, and employees. The complete report is available through their website at www.shotguncapital.com.

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