Securitas Annual Report 2007

Continued Development and Stable Growth
The development of the market for security services has been beneficial for all parties. Customers now receive better service with more value-added, and companies have managed to grow and improve their businesses. Emerging markets with high growth and more specialized services in established markets provide for good future growth prospects.
Industry dynamics
Security services are generally sold on a one year contract basis. There are low entry barriers in the industry and thousands of new competitors emerge every year. Whenever a contract is up for tender or renewal, the competition is tough. Security companies within permanent guarding are also dependent on a large workforce and thereby sensitive to wage conditions and any changes in these. All of this puts constant pressure on margins, making profitability an industry-wide challenge. In response, Securitas has for some time been leading the industry in developing a more professional market. Consolidation and focusing on security were the first steps. Refined specialization within specialized guarding and providing security solutions is next.
Consolidation and focus
The security industry has been extremely fragmented and dominated by multi-service companies, conglomerates and a very large number of smaller local players. The four largest security companies in the European
market had a combined market share of 15 percent in 1990. Today the three largest companies have approximately 35 percent. In the USA the five largest security companies accounted for 33 percent of the total market in 1990, while today they have a market share of close to 50 percent. While the scope for economies of scale is limited, it is possible to leverage overhead and structural capital such as an understanding of how to optimize guarding work schedules by gaining size. Due to the low entry barriers, there will always be numerous smaller local alternatives for basic security services, although the major players have definitely consolidated the industry.
Today most successful companies in the industry have a clear focus on providing only security services. There are some, however, notably within facilities management, that are offering security and guarding services with other services. The emergence of a focused independent security services industry has lead to improved industry regulations and standards. While these may differ
significantly between countries, they are basically concerned with the rights or permits required to run security companies, employee background checks and training requirements. These standards are constantly being improved, which further enhances the level of quality and professionalism in the industry and is thereby also contributing to higher margins.
More customized services
As the next step in upgrading its offering, Securitas will gradually segment its services according to various customer sectors and characteristics. An increased focus on particular segments results in more specialized and deeper knowledge of customer requirements, and facilitates finding the right solutions for each customer. More tailored and optimized services means higher value-added for the customer and improved operating margins for Securitas. In addition, growth in specialized guarding, mobile and monitoring services is higher than in general permanent guarding.
Source: Securitas and Freedonia
Security Services Market (guarding)                
          2007     2015
Size 2007, BUSD Size 2007, BSEK % of total Long-term growth Securitas’ market share Size 2015, BUSD Size 2015, BSEK % of total
North America1 20 125 30% 4–6% 16% 26 168 26%
Europe 2 27 176 42% 4–6% 17% 33 209 32%
Japan 3 20 5% 6% 0% 5 33 5%
Rest of Asia 7 43 10% 10–11% 0% 16 101 16%
Africa/Middle East 3 21 5% 10–12% 0% 7 47 7%
Latin America 6 37 9% 10–12% 2% 14 89 14%
Total 66 422 100% 7% 12% 101 647 100%
                 
SEK/USD = 6.40 North America includes USA, Canada and Mexico.
2Europe includes Turkey.
               
A thorough comparison of margins indicates that security companies succeeded in raising the average margin in Europe from 4–6 percent in the late 1990s to 5–7 percent today. In the USA, margins have more or less doubled, to 4–6 percent in the same period. At the same time, the total cost for the individual customer of constantly improved security has fallen.
Trends and drivers
Demand for security services depends on multiple factors and it is hard to generalize about these. It is quite clear, however, that the security industry is positively correlated with most structural trends. Globalization, industrialization, deregulation and increased living standards are all drivers of demand for security services. It is less obvious how demand relates to the general economic climate and its indicators such as GDP growth in the short term. Security revenues are derived from diverse contract portfolios spanning most industries and public and governmental sectors. A reasonable composite assessment is that spending on security services acts as a lagging economic indicator and that the security industry is less cyclical than others.
Size and growth
The current estimated value of the total world security market is BUSD 139. Europe and North America account for 70 percent of the market and have annual growth averaging around 8 percent. In the rest of the world the market is growing at a double-digit rate and by 2015 will account for an estimated 35 percent of a total world market worth BUSD 230.
Guarding accounts for the largest share of the total worldwide security market with about 47 percent. Other major sub-markets are alarms (about 30 percent) and cash handling (about 9 percent). The guarding market is expected to achieve an average annual global growth rate of around 7 percent. However, the growth rate for guarding differs significantly between the mature markets of Europe, the USA and Japan, and the less developed markets in the rest of Asia and in Latin America. While the mature markets are expected to average longterm annual growth of around 4–6 percent, estimates point to figures of 10–12 percent in the rest of Asia and Latin America. The share of the worldwide guarding market represented by these growth markets will rise from some 25 percent today to 37 percent by 2015.
Emerging markets
Emerging market countries are rapidly becoming integral in an increasingly global economy. As multinational companies expand their business into these markets, they frequently prefer to work with their current security service providers. Consequently, Securitas’ strategy to increase its presence in Latin America and Asia is not only to take advantage of high growth opportunities, but also to meet the demand from global customers.
In emerging markets the industry is even more fragmented and there is less specialization. As Securitas and other major industry players grow their presence in these regions, the consolidation trend will rapidly pick up.
Continued Development and Stable Growth
 
The development of the market for security services has been beneficial for all parties. Customers now receive better service with more value-added, and companies have managed to grow and improve their businesses. Emerging markets with high growth and more specialized services in established markets provide for good future growth prospects.
 
Industry dynamics
Security services are generally sold on a one year contract basis. There are low entry barriers in the industry and thousands of new competitors emerge every year. Whenever a contract is up for tender or renewal, the competition is tough. Security companies within permanent guarding are also dependent on a large workforce and thereby sensitive to wage conditions and any changes in these. All of this puts constant pressure on margins, making profitability an industry-wide challenge. In response, Securitas has for some time been leading the industry in developing a more professional market. Consolidation and focusing on security were the first steps. Refined specialization within specialized guarding and providing security solutions is next.
 
Consolidation and focus
The security industry has been extremely fragmented and dominated by multi-service companies, conglomerates and a very large number of smaller local players. The four largest security companies in the European
 
market had a combined market share of 15 percent in 1990. Today the three largest companies have approximately 35 percent. In the USA the five largest security companies accounted for 33 percent of the total market in 1990, while today they have a market share of close to 50 percent. While the scope for economies of scale is limited, it is possible to leverage overhead and structural capital such as an understanding of how to optimize guarding work schedules by gaining size. Due to the low entry barriers, there will always be numerous smaller local alternatives for basic security services, although the major players have definitely consolidated the industry.
 
Today most successful companies in the industry have a clear focus on providing only security services. There are some, however, notably within facilities management, that are offering security and guarding services with other services. The emergence of a focused independent security services industry has lead to improved industry regulations and standards. While these may differ
 
significantly between countries, they are basically concerned with the rights or permits required to run security companies, employee background checks and training requirements. These standards are constantly being improved, which further enhances the level of quality and professionalism in the industry and is thereby also contributing to higher margins.
 
More customized services
As the next step in upgrading its offering, Securitas will gradually segment its services according to various customer sectors and characteristics. An increased focus on particular segments results in more specialized and deeper knowledge of customer requirements, and facilitates finding the right solutions for each customer. More tailored and optimized services means higher value-added for the customer and improved operating margins for Securitas. In addition, growth in specialized guarding, mobile and monitoring services is higher than in general permanent guarding.
 
Source: Securitas and Freedonia
 

Security Services Market (guarding)                
          2007     2015
Size 2007, BUSD Size 2007, BSEK % of total Long-term growth Securitas’ market share Size 2015, BUSD Size 2015, BSEK % of total
North America1 20 125 30% 4–6% 16% 26 168 26%
Europe 2 27 176 42% 4–6% 17% 33 209 32%
Japan 3 20 5% 6% 0% 5 33 5%
Rest of Asia 7 43 10% 10–11% 0% 16 101 16%
Africa/Middle East 3 21 5% 10–12% 0% 7 47 7%
Latin America 6 37 9% 10–12% 2% 14 89 14%
Total 66 422 100% 7% 12% 101 647 100%
                 
SEK/USD = 6.40 North America includes USA, Canada and Mexico.
2Europe includes Turkey.
               

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A thorough comparison of margins indicates that security companies succeeded in raising the average margin in Europe from 4–6 percent in the late 1990s to 5–7 percent today. In the USA, margins have more or less doubled, to 4–6 percent in the same period. At the same time, the total cost for the individual customer of constantly improved security has fallen.
 
Trends and drivers
Demand for security services depends on multiple factors and it is hard to generalize about these. It is quite clear, however, that the security industry is positively correlated with most structural trends. Globalization, industrialization, deregulation and increased living standards are all drivers of demand for security services. It is less obvious how demand relates to the general economic climate and its indicators such as GDP growth in the short term. Security revenues are derived from diverse contract portfolios spanning most industries and public and governmental sectors. A reasonable composite assessment is that spending on security services acts as a lagging economic indicator and that the security industry is less cyclical than others.
 
Size and growth
The current estimated value of the total world security market is BUSD 139. Europe and North America account for 70 percent of the market and have annual growth averaging around 8 percent. In the rest of the world the market is growing at a double-digit rate and by 2015 will account for an estimated 35 percent of a total world market worth BUSD 230.
 
Guarding accounts for the largest share of the total worldwide security market with about 47 percent. Other major sub-markets are alarms (about 30 percent) and cash handling (about 9 percent). The guarding market is expected to achieve an average annual global growth rate of around 7 percent. However, the growth rate for guarding differs significantly between the mature markets of Europe, the USA and Japan, and the less developed markets in the rest of Asia and in Latin America. While the mature markets are expected to average longterm annual growth of around 4–6 percent, estimates point to figures of 10–12 percent in the rest of Asia and Latin America. The share of the worldwide guarding market represented by these growth markets will rise from some 25 percent today to 37 percent by 2015.
 
Emerging markets
Emerging market countries are rapidly becoming integral in an increasingly global economy. As multinational companies expand their business into these markets, they frequently prefer to work with their current security service providers. Consequently, Securitas’ strategy to increase its presence in Latin America and Asia is not only to take advantage of high growth opportunities, but also to meet the demand from global customers.
 
In emerging markets the industry is even more fragmented and there is less specialization. As Securitas and other major industry players grow their presence in these regions, the consolidation trend will rapidly pick up.