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Independent Shred Companies Face Major Issues This Year

Higher fuel prices, coupled with lower prices for recycled paper and stiff competition from large nationwide companies offering their services at bargain-basement prices to gain market share are major issues facing the document destruction industry in 2012, according to a recently released industry survey.

Those are some of the major findings from the annual survey of independent document destruction companies conducted by Shotgun Capital Advisors, a Texas-based merger and acquisition advisory firm. The industry survey has been conducted since 2008.

Eighty-nine companies responded to the latest survey, which questioned them on everything from their growth rates and margins in 2011 to projections for the current year. A majority of those responding reported total 2011 revenues anywhere from less than $250,000 up to $1 million; three respondents reported revenues of more than $5 million.

By far, the biggest issues cited in 2012 were higher fuel prices, competition — “pricing each other out of business” and document destruction simply becoming a “commodity,” according to many respondents — and lower paper prices. Several also mentioned higher employee and labor costs.

“The shredding industry should quit cannibalizing itself,” one respondent said. “Shredding prices should be going up, as there is greater demand for our services. The cost of most goods and services has gone up over time.

“There is all this lip service about security, safety and how valuable our services are and then we create an environment where cheap is all that matters,” the respondent said. “It was not too many years ago that we had to convince prospects that they needed to spend a little money and shred their things instead of throwing them away. We had to convince them that recycling alone was not secure.

“So what happens now that the general public is aware that things need to be shredded? We have fools out there all but giving it away — commodity brokers with shredders, basically.”

Other companies generally agreed, with large national companies being singled out for their pricing policies.

“Big Shred is allowed to do predatory pricing, thus creating an atmosphere of secure shredding being a commodity,” said one respondent. “The general public is used to making three calls and going with the cheapest.”

“Under-pricing by competitors,” another respondent lamented, adding, “It will destroy the industry . . .”

Another respondent contended that the large national document destruction companies were devaluing the industry.

“When different companies are essentially equal in security and monthly service, then the customer is usually going to contract with the cheapest rate,” the respondent said.

One respondent put it even more succinctly, complaining that increased competition “has killed the profit margin in the industry.

“The new competitors have lowered their prices in order to compete and it’s had a very negative impact on everybody,” he wrote. “You must operate very efficiently to even have a chance at these pricing levels.”

According to one respondent, companies were essentially “pricing each other out of business.”

The competitive nature of the business was also evident with about 20 percent of respondents reporting they had lost a top-20 customer to a competitor in the last 12 months. Fifty percent of respondents, however, said they hadn’t lost a top- 20 client.

One respondent blamed the client loss on national competitors who offered extremely low pricing.

“How funny that they claim to be leaders in the industry but really are just market-share mongers that devalue our industry,” he said.

Despite the concerns, a majority of respondents said they were “confident” of their ability to maintain growth rates and profit margins over the next 12 months. However, they expressed slightly less confidence in that ability over the next three years, with that level dipping a little further when looking five years ahead.

“I expect to see an increase across the board due to an increase in sales,” wrote one respondent when asked how margins in 2012 would compare to the previous year, echoing the responses of several others. “However, we may suffer as the market for recycled paper has lost a considerable amount per ton recycled.”

“Although we expect an increase in business, price pressure has continued to be the proverbial ‘thorn in our flesh,’” another added.

Respondents said they experienced a growth rate of approximately 10 percent in 2011 in each of the areas of recurring and purge services and recycling sales compared to a year earlier.

A majority said they expected revenues to increase nearly 10 percent this year for recurring and purge services. Recycling sales were expected to remain the same as last year, according to the survey.

“Because of a continued growth in sales, regular and purge, I would expect to see somewhere between an 8 percent to 11 percent increase in revenue,” one person wrote.

However, another noted, “with the large national shredding companies moving into areas and cutting prices to extreme lows — essentially devaluing our industry — the cash-strapped businesses are going to respond by moving their business over to the cheapest service provider. In my opinion, recycling sales will not recover to the highs of 2011 during this year.”

Companies said their profit margins before taxes in 2011 ranged anywhere from a loss to more than 40 percent. A profit margin of 16 percent to 20 percent drew the most responses (12.3 percent), with margins of 1 percent to 10 percent and 11 percent to 15 percent each receiving identical 11.2 percent responses. Those numbers were nearly identical to 2010, according to the survey.

Margins this year were expected to increase less than 5 percent over 2011, respondents predicted. “Our diversified service offerings position us well in the market and we are expanding operations due to that demand,” commented one respondent. “As the 2012 elections conclude, the economy will skyrocket.”

A majority of respondents said on-site shredding accounted for 60 percent of their revenue, followed by off-site shredding, which represented about 35 percent of revenues. Other revenue streams included records storage, document imaging, product destruction/electronic media destruction and recycling (other than paper sales from shredding).

“Along with having a security shredding business, we store many thousands of records,” one respondent said. “We have invested in digitizing equipment to scan files to pdf. And with our present clientele we can offer this service. We have had many outside enquiries from both legal and medical and accountants. We are also investing in our staff with ongoing training in both records management and scanning. We are also updating our websites and targeting our marketing to lawyers, medical and accountants.”

As far as marketing, a large majority of respondents (51.6 percent) indicated that their top priority this year would be their company’s website and SEO (search engine optimization). That was followed by online advertising with Google Adwords (26.6 percent) and social networking, such as Twitter, Facebook and Linkedin (18.3 percent).

Companies reported that telemarketing was the most effective marketing method to generate new customers, closely followed by social networking, Yellow Page ads and direct mail.

“Seems that our best form of advertising comes from television ads,” one company said. “It gets our name out in the territories we cover. It is also a media that people can see what we are talking about and not have to try and figure it out by themselves.”

“Word-of-mouth is huge,” another respondent added. Yet another insisted that networking was the most effective marketing tool. Along with all those efforts, companies indicated that they expected to be making additional investments this year in areas including sales and marketing, employees, new business lines and on-site shredding trucks. Fifty-nine percent of respondents said they expected to add shredding trucks or equipment this year; a majority also said that on-site shredding would be the service of choice for customers in the future.

Despite economic uncertainties, a majority of respondents said they had no plans to either sell their business or sell a portion of it to a private equity or venture capital firm.

“Can never say never to selling a business,” one respondent noted. Added another: “We have considered [selling]. As always if the price is right.”

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