Pest Control Services: A Growing Market

Tuesday, March 27, 2018

The U.S. pest control market is growing 4%-5% annually and is less cyclical due to a high recurring revenue stream (80%-plus for large players) secured by long-term contracts, the high cost of failure (e.g., bed bugs, termite damage), and the nondiscretionary nature of the service. Global services analyst Tim Mulrooney expects pest activity to continue to increase with rising global temperatures and denser populations. About half of the $18 billion global pest control m­­arket is in the United States, where the vast majority of the roughly 20,000 pest control operators are small, local providers, representing a large pool of potential targets. M&A activity (and valuation multiples) has increased considerably over the last five years, in part driven by foreign investment.

Providers of pest control services are typically engaged in three primary activities: identifying and addressing conditions that invite pests, eliminating current infestations, and ending the life cycle to prevent future infestations. Common pests include bed bugs, cockroaches, termites, ants, spiders, flies, bees, mosquitoes, rodents, and other wildlife. Large providers such as Terminix and Orkin serve both residential and commercial customers across the United States, as well as many international markets.

Mulrooney defines the pest control industry by the following favorable characteristics:

  • High recurring revenue. Pests commonly invade homes and businesses seeking food, water, and shelter on a continuous basis. For this reason, the majority of pest control services are not one-time events, but are rather provided on a periodic basis—typically monthly, bimonthly, or quarterly—which creates a high stream of recurring revenue. For commercial customers, the revenue stream is typically secured by a multiyear contract. Residential customers generally agree to a one-year contract that automatically renews at the end of each period.
  • Commercial customers: a nondiscretionary service. For many commercial customers, particularly in the hospitality, food and beverage, and foodservice industries, having a regularly scheduled pest control service has become a normal cost of doing business. Mulrooney stated, “The cost of a pest control service is significantly lower than the cost of failure, helping create sticky customer relationships.” “Furthermore,” he continued, “the cost of failure can be catastrophic to a local hotel or restaurant, particularly in the age of social media.” Property owners are also at risk, as new municipal laws are being passed across the country that require the disclosure of a bed bug infestation history to current and potential tenants.
  • Residential customers: low price elasticity. According to the Insurance Information Institute, the standard homeowners’ insurance policy does not cover damage caused by termites, rats, or other pest infestations. Costs associated with pest damage and removal are considered part of home maintenance. Because these costs are borne by the homeowner, some pests such as termites and bed bugs are often perceived to be significant issues that must be dealt with immediately. As a result, residential customers are often less concerned with price and “just want the problem taken care of.”

    “Termites, for example,” Mulrooney noted, “cost U.S. property owners more than $5 billion each year, and the average cost to repair termite damage is between $3,000 and $4,000.” Similarly, a bed bug infestation can become costly, particularly if the issue is not addressed immediately and the bugs proliferate throughout the home.

  • Attractive market growth. The U.S. pest control industry is growing at a midsingle-digit rate organically, driven by low penetration rates and increasing pest activity as global temperatures and population density continue to rise. The pest control market is generally considered to be less cyclical and less susceptible to downturns in macroeconomic activity due to the favorable characteristics listed above.
  • Low capital requirements. Pest control operators have capital-light business models. Capital expenditures are typically only 1%-3% of total sales, and include land, buildings, operating equipment, and technology. In addition, working capital is never a major drain on cash (even during periods of accelerating growth), because many customers pay for their service before receiving it.

The size of the U.S. pest control market is about $8.2 billion today (according to Specialty Consultants), which represents approximately half of the global pest market. By segment, Mulrooney estimates that the market size of U.S. residential pest control is about $4.5 billion, commercial pest control is about $3 billion, and termite control is about $1.5 billion. With 76 million single-family owner-occupied homes in the United States, he estimates the total untapped residential market is between $30 billion and $40 billion, which assumes an average annual household expenditure of $500-$600.

Mulrooney estimates the top 100 pest control providers represent about three-fourths of total U.S. market share. There are another 20,000 pest control companies in the Unites States, the vast majority of which are small, local, niche players with fewer than 100 employees and annual revenue of less than $1 million. Barriers to entry are low, and include start-up costs (equipment, inventory, insurance, and marketing), regulatory compliance, and employee training.

Projected growth in the pest control market is based on many factors, including an increase in population and economic activity, rising global temperatures, rising urbanization, growing regulatory requirements, media coverage of insect-borne diseases, and rising expectations of consumers for a pest-free environment. For example, insects are cold-blooded animals, and as a result temperature is an important environmental factor influencing insect behavior, development, survival, and reproduction. Scientific research suggests that higher temperatures can accelerate development and activity among insect populations. In addition, warmer weather and more moderate winters are correlated with extended life cycles and lower mortality rates.

This report initiated coverage of Rollins, Inc. and ServiceMaster Global Holdings, Inc. For more information on these or other companies from Tim Mulrooney’s coverage list, please contact your William Blair sales rep.

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