Recent Industry Trends Leading to Changes in Textile Rental Mergers and Acquisitions
Mergers and acquisitions happen on a regular basis in the textile rental services industry. There is a slight lull in activity at the moment as the economy and difficult credit markets have temporarily suspended many M&A activities. Owners are now getting offers lower than they had previously been offered and the big companies in our industry can afford to wait until the economic tides change for the better. Make no mistake however, the time for more M&A activity is coming, and this time, there are some changes to how and why things will be different.
Trend #1: New Investors Coming to the Table
The top four players in the textile rental field currently control approximately 70% of the garment/ancillary rental market and the consolidation will continue to increase. The scale of the national companies enables larger players to cover fixed and increasing operating costs while investing in more efficient and technologically advanced equipment.
Prior to the recession, a shift was beginning to occur: private equity companies began investigating our industry. Several independent textile rental companies have been purchased in the last few years not by competitors, but by private equity companies who see the potential in investing in textile rentals. That said, private equity firms aren’t in the business of investing millions in companies just to explore a new industry. Their focus is in making money and eventually, these smaller companies will either be merged together or, more likely, be sold to the nationals at a higher price.
Trend #2: Troubled Economy with Uncertain Future
The economic downturn has caused major financial havoc in our industry. Since textile rentals are dependent on the state of other industries, higher unemployment is causing rental attrition for uniforms and lower revenue per account. Employment trends are also causing deterioration in add-quit metrics. Finally, the economic instability is causing owner/manager “paralysis” or knee-jerk reactions.
Textile rental companies are feeling the economic pressure, and most companies are focusing on quick ways to improve their top and bottom line without considering the long-term consequences. For example, many sales teams are offering lower unit rental rates and expanding garment offerings, which may not be sustainable, especially with merchandise costs expected to rise. From a service team perspective, prowling competitors are causing route reps to offer substantial concessions such as rate reductions, reductions/removal of ancillary fees and wholesale revamping of garments causing higher than necessary merchandise costs.
Trend #3: Profit Margin Compression
Fierce price wars with rivals due to a “shrinking pie” mean that our industry is seeing their margins squeezed. Most textile rental companies don’t successfully help their customers understand the value they bring, so customers and prospects tend to view competitors as being all the same. With limited switching costs and a perceived lack of product/service differentiation, we force our customers to choose a vendor based primarily on price. Competing primarily on price negatively impacts our profit margins, particularly as labor costs continue to increase and our industry growth is slowing.
How to Plan for Upcoming Changes
To date, many leaders in textile rental companies have made shortsighted decisions in an effort to keep their companies financially viable. Instead of taking the time to truly understand their company’s value, these leaders focus on price wars and delay critical re-investment into their companies. As an industry, we tend to be reactive, not proactive. We need to reverse our mindset and begin turning our attention to making long-term growth-focused decisions.
It is time to stop focusing on short-term patches such as participating in price wars and delaying reinvestments, and instead readjust our mind-sets to long-term solutions. The first step is to understand your company’s current value. (For more information on why it is important to understand the value, click here to read the summer 2010 Performance Matters newsletter article.) Once the company’s value is understood, you can begin looking at how to drive additional revenue and responsibly expand your offerings. Other long-term decisions could include a renewed focus on customer service or finding ways to further compress costs. Your company may be interested in growth through acquisitions or looking at new investments to accomplish your strategic goals.
As the economy continues to improve, our industry will never be the same. The number of mergers and acquisitions will grow from both the national companies and private equity firms. The key is in planning and securing your company’s future growth.
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