[2006 State of the Industry] Rising Revenues, Rising Costs

Weather concerns aside, in 2006 the pest control industry made another strong showing in business growth. Pests were present, PCOs displayed their marketing savvy and some segments of the business flourished. There were challenges too: Revenues increased, but so did expenses. And the task of recruiting employees took on new complexity for many business owners. (See related story on page 18.)

PCT’s annual independent survey of the industry depicted an optimistic market with new pest opportunities, definite growth areas, and, of course, some continuing challenges. This report looks at many of those survey results, along with comments from PCOs about what they experienced and how they attacked some of the most common challenges.

PCOs around the country described this year’s pest control season as generally solid although not outstanding, and they cited a number of factors. For one, weather patterns throughout the country have been less than ideal in terms of pest activity. For instance, some PCOs in the Southeast complained that inconsistent temperatures slowed pests down, while out West, hotter, drier weather had the same effect.

"I think general pest control has been OK, growing in a single-digit fashion," said Lon Records, president of Target Specialty Products, a distributor based in Santa Fe Springs, Calif. But, he added, "Fumigation and termite have been off in a double-digit fashion."

"Overall, it’s been a very strange year," said Richard Silvani, president, Environmental Pest Systems, which is based in Fort Lauderdale, Fla. Silvani said the mix of hot and cold temperatures in his area led to an erratic season. "If I had to sum it up in one word, I would say ‘inconsistent.’"

Rick Rogers, vice president, Myers Pest & Termite Services, Bedford, Texas, says while pest control business has been good for his company, the local market has been "bland," with weather likely playing some role in that. "We’re 22 inches behind in rainfall here," Rogers said. "That changes insect activity."

PCOs in the Midwest also attributed some business slowdowns to weather. "I don’t think the weather’s been overly friendly to us this year," said Mike Grace, president, TNT Exterminating Company, based in Akron, Ohio. "I think of other years as just incredibly good. It hasn’t hurt us, but it certainly has not been great." Grace cited a slower-than-usual April, and a lack of stinging insect activity in May. "Wasps have not been the same nuisance that they have in other years," Grace explained. "The frost that we had in April may have limited that."

BUSINESS SEGMENTS. PCT’s survey shows that pest control operators continue to offer a wide variety of services. The most commonly offered services continue to be ant control, rodent control, flea control and perimeter pest control. Termite control is another common offering, being provided by about 69 percent of companies.

Surprisingly, those PCOs stating they offer bed bug control services — the focus of a significant amount of consumer press coverage in 2006 — remained relatively flat this past year despite the high-profile nature of this resurgent pest problem. Fifty-seven percent of survey respondents indicated they offer bed bug control services, the exact same figure cited in PCT’s 2005 State of the Industry Report. The survey results likely reflect the specialized nature of these treatment programs, as well as the fact bed bug infestations appear to be impacting hotels, motels and multi-family housing most significantly, meaning PCOs specializing in commercial pest control services are taking on the bulk of this work.

When asked which one service represented their largest growth market in 2005, more PCOs named ant control than any other segment. About one-third of PCOs named ants, while 23 percent selected termites, and close to 13 percent cited perimeter pest control. In the previous survey, more PCOs selected termites as the largest growth market, with ants being a close second.

Silvani named the big headed ant and the Caribbean crazy ant as the two most problematic ant species he’s dealt with this season. "These two are beginning to literally dominate the scene down here," he said.

Meanwhile, Eric Melass, vice president, Killum Pest Control, Lake Jackson, Texas, said fire ants and wolf spiders have been his two biggest growth pests. "Fire ants have just continually been increasing," Melass said. Getting a permanent hold on their control will take much more work on the industry’s part, he noted. He attributes the increase in wolf spiders to increasing suburban sprawl in his area. And because spider bites are perceived to pose health risks, particularly for the very young, Melass said, more people are hiring PCOs to control them.

For Brett Duncan, partner of Duncan Exterminating, Dawsonville, Ga., stinging insects such as hornets have been notable. "There have been more stinging insects than I’ve seen in a long time," Duncan said.

MONTHLY VS. QUARTERLY. Most PCOs use either a monthly (37 percent) or quarterly (38 percent) service regimen for general insect control. However, with the growing sophistication of pest management tools available in the marketplace, more and more PCOs are offering a once or twice a year service regimen. Service frequency remains a topic that often highlights the differences in how PCOs operate.

Duncan says his company is unusual in that they’ve maintained a monthly program, whereas most other companies in the area use a quarterly schedule. Duncan said that the bulk of his customers are still serviced monthly. "We found that especially for spiders and wasp nests, you really can’t keep those things down with a quarterly or every-other-month treatment," he explained. "If you want to keep those things controlled, then monthly is your best treatment."

Meanwhile, Rick Rogers prefers a quarterly schedule for residential pest control accounts. "We have too much difficulty scheduling monthly service," Rogers said, explaining that in many households, no one is home during the day. Further, the company has found that monthly accounts tend to have higher cancellation rates. Rogers notes that with the quarterly program, as long as the technicians can treat inside the home at least once a year, pest problems are handled. "Most of what you get in this market is exterior pests coming inside," Rogers said. The quarterly frequency also allows the company to be more productive, said Rogers, "because we don’t have to be as tight on our schedules as we used to be."

Because there are pros and cons of both quarterly and monthly programs, most pest management professionals say they are willing to offer whatever schedule their customers want. Of course, that comes at a price. Myers, for instance, offers an annual program that costs nearly 50 percent more than its quarterly program. However, this program involves a labor-intensive initial service call requiring two technicians and heavy equipment, such as ladders. A six-month follow-up treatment is also included. "Probably about 10 percent of our customers are on that," Rogers said. "It may take us a half-day or longer to do the house."

PRICING AND COSTS. On average, PCOs are charging $93 for a residential service call (across all service frequencies), and about $912 for a residential termite treatment. But the prices can vary widely: About one-fourth of PCOs charge less than $50 for a residential service call, while a similar percentage charge less than $700 for a termite treatment.

Jim Dye, president, Border Pest Control, based in Deming, N.M., says his company’s pricing is on the low side, nationally. However, he adds, "we have to be competitive in the local market." The availability of cheaper labor in his area is a contributing factor, he said, however in some cases the service provided is also cheap. "We try to provide quality service and a low price," said Dye, "so profits aren’t what they are in other areas around the country."

Meanwhile, Duncan says his company is "one of the more expensive ones" in his area. He explains that his company’s prices are based on using the best products and having the best labor. "I want the best for my customers," he said. "We think they deserve it."

The cost of labor, particularly in those markets where competition for quality employees is stiff, has added significantly to the cost of doing business, making it difficult for PCOs to protect their bottom line. Nonetheless, the industry is making the best of a difficult situation by reigning in other costs in order to continue to field a quality work force.

RISING COSTS. About 64 percent of respondents said their 2005 service revenues increased over 2004. However, an even greater number, 75 percent, said their expenses increased during that same period. Of those that sustained expense increases, gas was cited by 69 percent as the primary cause of that increase. (See related story on page 10.) Twelve percent cited labor, and 8 percent cited liability insurance as the primary cause of the increase. Chemical costs were cited by 6 percent.

Although high gas prices have stabilized recently, the rising cost of fuel continues to worry many pest management professionals, who often have limited ways to deal with it. And raising prices to cover increased costs is easier said than done. "Right now gas is affecting every single segment of what we do," Grace said. "Even personally, people need more money to take home. It’s going to affect everything." His company doesn’t raise prices annually, at least not yet. So far, he says, "We’ve kind of towed the line. You try to pass on what you can, and hold back on customers you don’t want to risk losing." However, he fears price increases might be inevitable. "It’ll be a test of how good our service is," Grace said. "Will our customers value us enough to keep us as well as pay more?" Rogers notes that his company’s fuel costs have nearly tripled in the last 16 months. Even more concerning is that those increases can’t be fully passed on to customers, Rogers has found. "We put a small surcharge on, an extra two or three dollars a trip," he said. "It comes nowhere near where it costs to do it." And for many commercial customers with contracted service, cost increases can’t be passed along, he says.

There are things companies can do, he says, most notably, taking a closer look at routing. "We grid tighter now so the technician is not driving as far," said Rogers. And by treating the exterior only on most residential stops, the company doesn’t have as many scheduling problems.

For Eric Melass, tighter routing sometimes requires flexibility on the part of customers. "If we can save ourselves costs," he said, "we can pass that along to the customer."

Duncan, meanwhile, added a 10 percent price increase this year to help cover increasing product and fuel costs. "We might have lost a few customers," he said, "but not very many."

And Silvani has taken the approach of adding smaller increases more frequently. "I have increased prices the last couple of years, small increments right across the board," he said. This year his prices went up by about 5 percent. "They don’t receive big increases but it’s enough to help compensate us for our increasing costs," Silvani explained.

A BRIGHT FUTURE. It’s clear pest management professionals remain optimistic about the future of the industry, even if that optimism has been tempered somewhat from previous years. Close to 64 percent of respondents expect an increase in sales for 2006. However, that’s down from the previous survey, when 76 percent expected an increase. Close to 89 percent of the respondents said they are very or somewhat optimistic about the future of the pest control industry, compared to 93 percent last year.

Bob Caine, president, Pest Control Specialists in Sunrise, Fla., says the business of pest control has changed over the years. "It’s not as much fun as it used to be," Caine said. He attributes this to many factors, including changing customer attitudes and having less interaction with the customer.

There are many reasons, however, for pest management professionals to remain optimistic about the industry. Louis Taranto, who owns Tonto Pest Control in Brooklyn, N.Y., specializes in serving high-end condominiums and luxury rentals. He sees explosive growth in this type of housing in his market, with two-family houses being replaced with 12-family dwellings. "Everyone is buying apartments now instead of buying houses," he observes. "There’s not enough land to go around."

And Rick Rogers observes in his 37 years in the industry, each year has gotten better than the last. "I could not imagine doing anything else and I could not imagine this industry failing people that want to succeed in it."