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Q&A: Industry Consolidation Impact (Part 1)

Discussion begins with effect on operations, quality

CHICAGO — Consolidation.

It’s not a new phenomenon in the laundry/linen services industry, but it seems to be occurring more frequently. 

For example, in just the past couple years, Cintas acquired G&K Services, and AmeriPride Services merged with Aramark.

And it’s not just happening with laundry operations. Entities in markets that facilities service, such as hospitals and hotels, are merging and being acquired.

What is the effect of this consolidation, and what does it mean for the laundry/linen services industry?

American Laundry News contacted Bob Corfield, founder of the consulting firm Laundry Design Group; Linda Fairbanks, executive director of the Association for Linen Management (ALM); and Joseph Ricci, president and CEO of TRSA, the association for linen, uniform and facility services.

Q. What has been the impact on the laundry/linen services industry as operations consolidate?

CORFIELD: Consolidation is occurring on both sides. Hospitals are consolidating across markets, which drives volume to multimarket laundry operators. Hotel groups continue to consolidate with hotel GPO (group purchasing organizations) driving volume to larger plants. 

While the purchasers of laundry/linen services are driving toward lower cost by driving volume to single companies, laundry and linen service is still a very local service. In response, national and regional companies in both healthcare and hospitality are making acquisitions across markets in response.

FAIRBANKS: Fear of the unknown. Change, even when positive can be frightening. Advance preparation always helps. The duality of managing new and current customers can be a challenge, but management also must deal with their team’s challenges with the new situation.  

RICCI: Consolidation, particularly among large, national companies such as Cintas’s acquisition of G&K Services and Aramark’s acquisition of AmeriPride Services, creates opportunities for regional companies to grow. During the past two decades, consolidation has mostly impacted the uniform rental market. 

However, the recent influx of outsider investment such as private equity (PE) into the market has been focused on hospitality, or laundries providing services to hotels such as PureStar, and bulk healthcare, such as Emerald. TRSA estimates there are less than 400 substantive laundry companies in North America, or organizations with revenues exceeding $1 million with most of these companies in linen supply, a sector that has had the least amount of consolidation. 

With the exiting of the baby boomers from business, we are seeing younger, next generation leaders at both laundries and suppliers who are investing in technology and growth.

According to the Census Bureau’s Statistics of U.S. Businesses (SUSB) annual survey, the impact has been relatively level over roughly the past decade. The SUSB figures for 2016, released in December 2018, show 963 firms in linen and uniform supply, down from 1,105 (13%) in 2011. That 2011 total was a 12% drop from 2006. This represents more of a small-business entrepreneurial churn than one involving the typical large-scale operations that characterize the long-term players in our market. 

More than 70% of the companies that dropped in each of these time frames had 20 employees or less. The decrease in companies with 20 to 99 employees was much less, just 10% of them from 2005 to 2011 and 13% from 2011 to 2016. 

In that most recent time frame, the 100- to 499-employee sector grew (122 to 126 companies) and the 500-plus sector was level at 46 companies. This suggests that some companies’ growth has prompted them to add employees, moving their companies into the next employment category, replacing the relatively few in these upper categories that ceased operating.

Q. With larger operations buying smaller ones, is quality and service affected? Is less competition raising prices?

CORFIELD: Quality and service are subjective, and the size of a plant does not assure either element. Quality and service are management driven regardless of size. Pricing is another thing, and we are seeing a trend that these consolidations should see prices begin to rise. 

There is a case to be made that linen service pricing has been greatly depressed and is at the core of recent closings and group sales. Larger linen service companies are failing due to lack of internal investment and poor decisions made to retain customers. The current profit and revenue in most markets are not sustainable in the face of rising labor, and plant costs and company or plant size is no longer a guarantee of operational security for customers.

FAIRBANKS: Just because a laundry operation becomes larger doesn’t mean that service and quality will be impacted negatively. But this is a concern that needs to be addressed between the laundry and its customer—and here, actions speak louder than words. So, if those concerns do surface, laundries must be attentive.

ALM has both laundry processors and their customers, the hospital linen managers, in our membership. We do continue to hear of quality concerns frequently from the customer, and often their dismay that they truly no longer have a choice in providers due to the consolidations and/or closings.

RICCI: Often quality and service depend on local management, regardless of the size of the organization. People continue to buy from people, and while price continues to be a factor, we are seeing renewed focus on customer service. 

In the industrial sector, the most recent quarterly survey from industry investment analyst Robert W. Baird & Co. shows new business pricing remains competitive, but improved from the previous quarter, the strongest in four years. However, Baird still describes such pricing as holding negative, reflecting an inherent negative bias that has been consistent for years. 

Existing accounts trend positively in base pricing. They moved higher in the first quarter of the year, with around 60% of survey respondents reporting 2% to 4% growth. On the linen side, it was roughly a 20%/50%/20% split between improved, no change and lower. For existing accounts, more than nine in 10 reported increases or no change (47%/46%) while the remaining 7% indicated they’d made concessions. 

I don’t think we can cite consolidation as the reason for these nominal pricing gains. Competition still abounds and necessitates improved service that customers believe is worth paying for.

Q. With private firms involved in some purchases, have you seen any effect on the industry, in particular with firms that have no laundry/linen experience? 

CORFIELD: We continue to see a strategic focus from these firms that look at market opportunity and processing capacity to meet that focus. Some appear to understand the capital required, while others clearly have not. 

This is a business of managing details to create success in both quality and profits. PE firms that fail to understand that will not be successful in our industry, as recent events demonstrate.

FAIRBANKS: Every situation has its own unique path and that is typically dependent on the goals of the private firm. Is the goal buying to sell over a short-term, say three-year, investment for a 25% a year return then sell, or is their plan for an investment strategy with an initial 20% a year return for the first three years, with a continued moderate return of 10-12% a year thereafter?  

There are pros and cons to private firm investments and time will tell the impact of their efforts to improve the profitability or making these companies a healthier business. Hopefully they will learn about the industry, but the practices of other industries have brought positive change to the way laundries operate. Look at what the just-in-time and other Six Sigma concepts from the auto industry have done for improved laundry efficiencies.

RICCI: The recent increase in equity firms’ involvement, especially in the healthcare and hospitality/hotel sectors, have generally retained plant and senior management. They have recognized the importance of having experienced, professional management that understand the business. While laundry may not be complicated, it is complex. 

Many of these investors also understand the value of participation in TRSA, recognizing the value of industry advocacy and collaboration between competitors to improve best practices. In previous consolidation cycles, especially with non-laundry investors, membership has shrunk, and renewals dipped. This is not happening. TRSA recently earned its highest North American operator renewal rate in nearly 20 years with 94% of members renewing for 2019, and despite consolidation, we continue to grow by more than 10% annually. 

We believe outside investors will continue to look to the linen, uniform and facility services industry’s ability to outperform the economy (GDP) and potential to experience substantial ROI from automation, more will become involved. 

Check back Thursday for Part 2 on the effect on vendors/suppliers and consolidation in markets served.

People who appeared in this article

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Bob Corfield

Bob
Corfield

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Linda Fairbanks

Linda Fairbanks

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Joseph Ricci

Joseph
Ricci