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The state of security.

THE SECURITY MARKET IN THE United States has been a hotbed of change for the past 20 years, with major shifts in both the service and supply sides of the business occurring almost daily. Many of those changes could have been predicted, as markets reflected a tremendous acceleration of the worldwide love affair with technology experienced by all industries since the 60s. Despite recent problems in the US economy, the security market inexorably grinds ahead at a steady, if somewhat slowed, pace. From 1983 to 1987 its growth rate averaged 9 percent annually. In 1988 and 1989 it tapered to about 6 percent. During the first half of 1990 the rate remained somewhat steady, then dropped slightly at the start of 1991 to roughly 4 to 5 percent. Noting where inflation comes into this equation is important. In most industries analysts are prone to looking at total growth, then deducting inflation to arrive at some type of " real growth " figure. That method is used because with most goods and services, prices are increased on an annual or periodic basis strictly because of inflationary pressures. What takes place in the security business is a variation of that basic premise.

On the hardware side, a gradual but steady drop in prices has been apparent over the past 10 years. In many ways the trend has mirrored the consumer electronics and personal computer markets. Instead of prices going up each year, prices of new models go down, even though the capabilities of newer, lower-priced devices are greater than those of the higher-priced models they replace. The net result is a gradual reduction in expenditures for hardware, with no corresponding reduction in performance or quality.

Inflationary effects are therefore thwarted. From the perspective of the manufacturer, lower selling prices per unit mean that to demonstrate sales dollar increases each year, ever greater numbers of units must be sold. At the same time, while the profit margin percentage on the units might have remained relatively constant, the profit dollars associated with each unit have certainly declined. In fact, in many cases the profit margin percentage has also declined, another victim of the competitive spiral. Security dealers should therefore be experiencing some type of windfall, since their hardware costs have been declining over time. Unfortunately, countering this beneficial pickup in hardware costs has been a corresponding increase in labor costs. Most analysts would project that the increase in labor costs will be just about evenly offset by the decrease in hardware costs, leaving the overall profit picture of the security dealer even. While the first two parts of this argument in and of themselves are correct, ignored is the third critical factor in that profit equation-selling price.

Security dealers therefore continue to find themselves in a squeeze. In the midst of the constant change of the past several years, they have also had to face one other business challenge: increased competition-competition that has frequently translated into intense price pressure. So while the dealer's cost position has somewhat balanced itself to a workable net position, declining selling prices have frequently manifested themselves as slowly declining profits.

Good news, however, can be found at the end-user level. That is where all the following factors come together in a favorable mosaic:

n more hardware models at lower cost and greater performance ratios

n lower overall system prices

n a competitive environment that is prompting security dealers to be ever more responsive to user needs

Of course, most of those factors influence installation of security systems. Many of the recurring costs, particularly for such items as telephone line charges, have continued to grow annually, and security dealers have little

control over them.

These factors essentially form a supply chain with overcapacity at every tier except at the end-user level. In addition to all other effects, this condition has prompted accelerated consolidation and mergers among security suppliers, with manufacturers, distributors, and dealers universally affected. In many cases, offshore corporations-generally European, mostly British-looking to establish a beachhead in the United States have been acquiring companies, at least while currency exchange rates still favor their incursion into this market. Clearly, the security market has been anything but stable during the past five years. Those with long experience in the industry state that they have been unable to comfortably gauge the market's direction for some time. More importantly, however, the same individuals express universal discomfort when trying to predict the industry's direction for the next five years.

A number of key indicators, however, provide valuable clues-at least to those able to dig deeply enough to find them. To begin with, several quantifiable external factors provide insight.

While little publicly acknowledged success has occurred in correlating specific economic indicators with activity in the security industry, analysts generally agree on broad influences overall and some specific links in niche or specialty areas.

For instance, one widely held view is that the alarm business is practically recession proof. Parts of it would certainly seem to be so, but alarm company managers make it clear that a compression effect is evident in their operations during times of economic downturn. Looking deeper, however, one finds historically that the alarm business has experienced a measurable delay in this impact. Significantly, as well, the business has rebounded as soon as any sign of a recovery appears, much more rapidly than many other markets.

The fire alarm business certainly depends strongly on the pulse of the new construction market. Dodge Building Costs Services estimates that the construction of new commercial space will not rebound until 1992 or 1993, which suggests some portions of that marketplace will be correspondingly slow.

Overall, we have seen measurable shifts in the makeup of the market during the past five years. In 1990, the total sales revenues for security alarm systems and services in the United States were approximately $8.9 billion. Of this, 70 percent was derived from commercial business activity, with the remaining 30 percent from residential activity. That is a change from 75 percent and 25 percent respectively in 1986. (See Exhibit 1.)

Yet even though revenues for commercial activity dropped as a percentage of total revenues from 1986 to 1990, the total level of commercial activity grew more than 20 percent during that period. Looking only at commercial activity for a moment, new systems installations and upgrades account for a declining percentage of the total over that period, with recurring revenues such as monitoring fees and leases showing a marked increase. (See Exhibit 2.)

Independent of this type of hard data, many other key trends are worth noting in 1991. For one thing, technology could not be more exciting. Again, for many years suppliers seemed to be treating microprocessors and other high-tech componentry like this month's Nintendo game. Everyone appeared interested only in manipulating the greatest number of mind-boggling features out of their products, often giving inadequate consideration to how the systems would be used in the everyday world.

Recently, more consideration has been given to how new products must integrate with their users, their environment, and other systems surrounding them. Again, a more enlightened approach is being taken to the execution of many of these new products.

The market clearly is becoming more sophisticated in its willingness to deliver attractive services, from the manufacturer down to the dealer. Much of this change parallels the evolution from a technology-driven to a marketing-driven mentality. Whether end users depend on contract services or manage their own proprietary security operations, they can expect increasing attention to their service needs as well as their product requirements.

The bottom line for end users should therefore be reduced costs together with greater product selection and better overall performance. Security dealers are getting more creative, offering much broader ranges of services, and providing better support. If you are a user or purchaser of security systems right now, the climate could not be better. n About the Author . . . Albert S. Janjigian is vice president and general manager of STAT Resources Inc. in Brookline, MA. He is a member of ASIS, the Associated Locksmiths of America, and the board of the Security Industry Association.
COPYRIGHT 1991 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:security services in the United States
Author:Janjigian, Albert S.
Publication:Security Management
Date:Mar 1, 1991
Words:1352
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