[Special Report: Pest Control During the Downturn] Meltdown

What a year. In 2008, the housing market collapsed even further, credit contracted, Wall Street bled, and a looming recession contributed to a very shaky main street. Some say doing business is the most challenging it’s been in 40 years. So, how is the pest management industry faring? And, what do professionals foresee in 2009?

HOUSING CONCERNS CONTINUE. More of the same if your business is tied heavily to the new housing market, said professionals and economists.

The National Association of Realtors (NAR) and National Association of Home Builders (NAHB) expect new housing starts to bottom out in 2009 at 731,000 and 694,000 units, respectively. Based on these forecasts, “we project pre-construction termite treatments will likely fall to less than 200,000 units in 2009,” said Gary Curl, president of Specialty Products Consultants which annually surveys 800 pest management firms. He estimates 2008 pre-treats will range between 225,000 and 250,000 units. That’s a drop from the 372,050 pre-treats measured in 2007, and 462,000 in 2006, Curl said.

The decline will be most heavily felt in states like Florida, California, Nevada and Arizona where the building boom was strongest, said Curl. Not surprising, these four states have seen the greatest decline in housing prices, according to First American CoreLogic, a real estate data company.

Despite this, “termite work is on the rise” at Truly Nolen, said President Scott Nolen in Tucson. The firm mostly does post-construction work but has seen “a huge rise” in pre-treats — surprising since “we’re usually the most expensive pre-treaters out there.” Nolen believes some of the big pre-treaters have gone out of business, or raised prices to survive the soft market. The volatile Florida market accounts for 60 percent of the firm’s business.

The outlook for post-construction termite work is more optimistic. Curl estimated 4.8 million existing single-family homes will be sold in 2008, resulting in 768,000 to 816,000 post-construction termite treatments. That’s down from a high of 1,058,000 treatments measured in 2006 and 960,450 in 2007, he said. “I think 2008 will be the low point.” This year, Curl expects the number of existing single-family home sales will increase slightly to 5.1 million, closer to pre-bubble norms, with the number of post-construction termite treatments ranging between 816,000 and 867,000.

NAR forecasts existing single-family home sales in 2009 at 5,190,000. The NAHB projects a more conservative 4,475,000 units sold.

Although Terminix Senior Vice President of Business Development Steve Good saw “demand dip significantly” in areas most impacted by the real estate crises, Terminix had a “double-digit increase” in renewable termite units in 2007 and 2008. This mostly is due to the firm’s new Termite Inspection & Protection Plan unveiled in late 2006. For $339 a year, the plan offers “our ultimate protection guarantee on that property without treating it,” explained Good. As long as the home is free of an active subterranean termite infestation or damage, has a fully accessible crawl space foundation and no below-grade construction, Terminix will treat and repair the structure at no additional costs should it become infested. “In light of decreased demand, we have increased renewable units on the termite side of the business,” said Good. So far, more than 100,000 customers have signed on.

And, some figures show the housing market may finally be turning around. In hard-hit California, real estate transactions rose nearly 64 percent last October from October 2007 levels, according to MDA DataQuick, a San Diego-based real estate information service. That’s good news for firms providing termite inspections, said Lloyd Pest Control President Jamie Ogle in San Diego. Although not the bulk of his business, escrow inspections and the resulting termite work — “icing on the cake” — were cut in half for the better part of two years, he said.

During that time, “we’ve had to get smarter on how we generate termite inspection leads,” said Ogle. When the real estate market was booming it was easy to get sales, he said. Now leads are gold and “we do the best we can to present ourselves well to get the business.” Toward this end, employees completed an Integrity Selling program. Ogle believes “we’re on the other side” of the downward trend.

Foreclosures continue to impact the market. Of the California homes that resold last September, 51 percent were foreclosure sales, according to MDA Data Quick. That’s good news for firms like Clark Pest Control in Lodi, Calif., located near Stockton, one of the highest foreclosure markets in the country. “We’ve definitely been affected,” said Nicole Kirwan Keefe, marketing manager at Clark Pest Control. It pays to be diversified with “lots of services in our termite bag.”

Orkin President Glen Rollins agreed. “We have many ways to get new customers” through a diverse termite services offering. The new homeowner channel has diminished, but many businesses and existing homeowners have not been affected by the housing crises, he reminded.

CREDIT, WALL STREET QUESTIONS. Tightening credit has made some pest management professionals reevaluate banking relationships. Truly Nolen replaced its $3 million line of credit with mortgages on its buildings for greater stability, “just in case,” said Nolen. It’s a lesson the firm learned a few years back in Chile, where it has a $4 million operation. Overnight, the Chilean bank turned off the firm’s line of credit and stripped it of cash, recalled Nolen. “We got burned so bad.”

Luckily the firm transferred credit from the U.S. and was up and running in two days. “Line of credit is a great thing because the interest rate is low, but it’s not something we want to absolutely depend on in bad times.”

Ogle postponed buying a new office building for a branch. “The tightening of the credit markets has made lending for real estate loans very challenging,” he said. He plans to wait until “the real estate market has settled itself out” before proceeding.

And, Nolen’s bank didn’t want to lend him money to lease vehicles in the third quarter of 2008. Truly Nolen has a 1,000-vehicle fleet and most lease contracts come up in spring. “We were absolutely surprised,” said Nolen. “They’re apparently out of money to be lent.” Instead, he’s paying cash for vehicles.

Orkin’s strong balance sheet provided leverage to renew its lease agreement on 5,000 vehicles at better terms than those received three years ago, said Rollins. A strong financial position allows firms “to think long-term, to invest and to be opportunistic,” he explained. “That won’t make us immune from the economic downturn, it will just allow us to deal with it better.”

Wall Street’s wild ride so far hasn’t rattled publicly traded pest management firms. Stock of J.C. Ehrlich parent company Rentokil Initial in the United Kingdom “is certainly being impacted like everybody else’s, but at this point that has not had a significant effect on us,” said Victor Hammel, CEO of Rentokil Pest Control North America, and president of J.C. Ehrlich Co., Inc. in Reading, Pa.

“We have historically had patient, long-term focused shareholders,” said Orkin’s Rollins. “We see that as an advantage in this environment.” About 70 percent of Rollins employees own shares in the company, he said.

RECESSION & RISING COSTS. Wall Street’s wild ride and last year’s sky-high fuel costs affected the consumer psyche. Watching gas pump prices hit the stratosphere took its toll. “I think that had an actual impact and a very deep psychological impact,” said Hammel. “I think people are fearful for what might be coming.”

The economy contracted in the third quarter of 2008 with real gross domestic product dropping 0.5 percent and consumer spending falling 3.7 percent, according to the U.S. Bureau of Economic Analysis. The U.S. Department of Labor reported unemployment at a 15-year high of 6.7 percent in November, and core inflation at 2 percent for the year ended in November. The Institute for Supply Management’s manufacturing index fell to 36.2 in November, its lowest level in 26 years. Any reading below 50 signals a contraction.

According to Moody’s Economy.com, 33 states are in recession, with 17 at risk. Most affected are states in the Northeast, Southeast, West and Midwest.

“Customers are a little more wobbly,” said Nolen. Business is growing at 5 percent, down from 8 or 9 percent, and the cancellation rate is up two-tenths of a percent a month, “which isn’t huge but it’s enough to watch.”

According to Ogle, write-offs for bad debt are similar to last year, “but we’re watching it because we’re curious and concerned if people are still going to pay their bills. So far, they still are.”

In the Midwest, Russ Ives, president of Rose Pest Solutions in Troy, Mich., said residential accounts are more sensitive to economic downturns as pest management often is a discretionary purchase. “We do see people cut back if their employment situation is uncertain or is changing significantly.”

At J.C. Ehrlich, customers “are more reluctant to agree to long-term service agreements,” said Hammel. “Not in a massive way, not in a way that’s made a tremendous impact, but in a sufficient number that we’re seeing it.” Conversion ratios from one-time to ongoing customers also are trending downward. “We’re concerned what this might mean, so we’re being very cautious with all of our costs,” said Hammel. He said the firm is working to “separate our wants from our needs.”

Fuel remains a necessary evil. Despite a dramatic decline in gas prices in the fourth quarter, last year it was professionals’ biggest expense: Truly Nolen racked up $250,000 a month, “$2 million more than we normally pay,” said Nolen. J.C. Ehrlich spent over $1 million more in gasoline last year, said Hammel. “That has certainly made an impact on us and our profitability.”

Even more so for smaller firms, whose technicians often drive more “miles per customer,” said Nolen. “Smaller guys are really panicking.” Analysts expect oil and fuel prices to return to higher levels in the next three years since the U.S. remains dependent on foreign oil.

Despite the cost, Orkin did not add a gas surcharge. “We want to look at the lifetime value of our customers and treat them in such a way that we’ll earn their loyalty for the long run,” said Rollins.

To make it easier for customers to pay, Terminix now offers various payment options, said Good. “To say that our customers have not been impacted by this would be crazy.”

Commercial pest management is “less economy elastic,” but relationships are only as strong as a client’s financial health, said Ives. “Companies can go out of business.” And, they’re beginning to look at all their costs, including pest control, said Hammel. “We think it will make price increases more challenging in 2009.”

Customers are still buying, reminded Nolen. “They’re just looking for a sweeter deal.”

A TIME TO GROW. Economic pressures are causing some professionals to accelerate their exit plans. “We definitely have more activity and more purchases,” said Orkin’s Rollins. As of last October, the firm bought nine firms, including HomeTeam Pest Defense for $137 million last April.

Terminix also continued to acquire firms “at a fairly rapid pace,” but “tightened our models” to ensure they’re a good fit, said Good. Terminix acquired 28 pest control companies through last October.

J.C. Ehrlich also is “looking more carefully about what we can anticipate” from acquisitions, said Hammel. “This might be a good time to position ourselves for being even stronger when we come out of the bad economy.”

“There’s always a ton of opportunity in every market,” reminded Scott Nolen of Truly Nolen. “We’re able to recruit like never before.” It’s also a buyer’s market, said Rollins. “We’re trying to get as much value as we can” when purchasing goods and services.

PLANNING FOR WORSE. Professionals don’t expect economic miracles any time soon. “We see the economy softening and things getting worse and probably staying tough for a number of years,” said Orkin’s Rollins. “It’s certainly the prudent thing to prepare for.”

By “managing what we can control,” Terminix will perform well at the profit line whatever decrease in demand hits, said Good. From a cash-flow perspective, “we’re very healthy.”

Firms that provide recurring services, convey value and develop long-term client relationships are better poised to ride out a recession, said Rose Pest Solutions’ Ives. “People are a little slower to fire their friends.”

Overall, professionals seem cautious but optimistic for 2009. As long as the banking industry doesn’t completely tank, “we’re looking fairly positively” at the year ahead, said Nolen. The firm had one of its best lawn sales years in 2008.

“I remain bullish on bugs,” added Lloyd Pest Control’s Ogle. “While times are tough, our businesses for the most part are in pretty good shape and able to hold their own.”

“We’re a need-driven business,” said Good. When your major investment is under attack by termites, “you’re going to take care of that.”

But recession-proof? “Nobody can completely withstand a recession,” said J.C. Ehrlich’s Hammel, who has experienced downturns in each of his four decades in the business. “We in the pest control industry are more fortunate than many other businesses. We probably won’t get pneumonia even in this significant recession, but to avoid a cold completely will be impossible.”

The author is a frequent contributor to PCT magazine.

Been There, Done That

It’s not nice to say you’ve been around, but when it comes to surviving tough economic times, the more experience the better.

Rose Pest Solutions in Michigan was started in 1932 by current president Russ Ives’ grandfather. “So that tells you something,” Ives said. An out-of-work Chicago steel salesman, he opened Rose in Detroit after learning about pest control opportunities from Norman Dold of Chicago. The fledgling firm survived the Great Depression and WWII, when pest control was “declared an essential industry, which got us off gas rationing.”

Jamie Ogle’s grandfather bought Lloyd Pest Control in 1936 in the middle of the Great Depression and “was able to make the business go.” Ogle, who’s now president, asked his father how he steered the business through bad times. Dad’s advice: Although it’s harder to grow, the business typically has done fine “as long as you keep your eye on cash flow and profitability,” reported Ogle.

Scott Nolen’s grandfather had seven businesses going into the Great Depression. He exited with one, said the president of Truly Nolen. “In our observation, people care about their personal lifestyle and pest control is tied very closely to that.”

Said Ives, “We don’t benefit nearly as much from boom times and we don’t suffer quite as much in challenging times.”  — Anne Nagro

Marketing During a Recession: Think Long Term

When money’s tight, it seems counterintuitive to invest in marketing and employee training but they help bring business in the door, said Lloyd Pest Control President Jamie Ogle.

Showing customers the value of your service has never been more important, he said. Russ Ives, president of Rose Pest Solutions, agreed. “If we are not delivering value, then we are vulnerable.”

Customers “want that little extra hug,” said Clark Pest Control Marketing Manager Nicole Kirwan Keefe. She’s developing customer service training that stresses the value of being conscientious, like pulling up customers’ garbage cans, picking up the paper, having a smile on your face, and refilling the dog’s water bowl. “It’s those little things that I think really play to homeowners and make them feel good about spending the money,” said Kirwan Keefe. “We want customers to know we’re the people who take care of those extra steps.”

“When dollars are tight, it does come down to priorities,” agreed Ives. The efforts of the Professional Pest Management Alliance are helping people view our services as a higher priority, he said. Pests also are helping…bed bugs probably assume a higher priority than ants in the kitchen, Ives noted.

As firms compete for fewer customers, “the marketing noise is going to be louder,” said Kirwan Keefe. “You just have to get creative and navigate it” to get the biggest return. “This is when the strong can really become stronger.”

Communicating to internal audiences is just as important. “We’ve had to spend a great deal on positive messages to keep attitudes up,” said Scott Nolen, president of Truly Nolen. “If our employees’ attitudes go to hell, then things do start going bad.”

Ogle recently gave employees a state-of-the-company address. “Hopefully that gives them some peace of mind and stability that they’re working for a company that will be here next year.”

In October, Orkin President Glen Rollins held three satellite broadcasts with field employees. “We talked about the strength of our company and ways that we can improve customer service and fair well in this economic climate.” The importance of teamwork, avoiding waste and earning customer loyalty were major topics. — Anne Nagro