Business Services www.pwc.co.uk April 2014 Euan Cameron Partner - Business Services Strategy +44 (0)20 780 43554 [email protected] Jeremy Webb Partner +44 (0)20 7804 9302 [email protected] The waste sector is just one of the industries within the business services sector that has been facing challenges over the past 18 months. We have seen an increase in the number of similar businesses, particularly those with distribution and logistics characteristics, whose performances have suffered despite the signs of the recovery in the UK economy. The drivers of this underperformance can be numerous: the nature of some of these businesses means that they may face challenges towards the end, of or subsequent, to a recession (‘late cycle’ pressures); some will suffer as a result of third parties continuing to exert financial pressures onto these businesses; and others may face a fundamental structural change to their industry. Structural decline in end-user market has also had an impact – stationery businesses are a prime example of a sector whose overall market is changing considerably, the impact of which just exacerbates all of the other issues we have referenced above. This article provides an overview on the types of businesses exposed to some of these pressures, as well as some insight into the challenges faced, which could result in this significant underperformance. Late cycle pressures Low cost items – companies providing relatively low cost items or services such as water coolers or waste collection can face price pressure at this time late in the cycle; once their customers have already achieved cost savings from suppliers providing more material expenditure and any ‘low-hanging fruit’. Long running contracts – similarly, any companies which had previously benefited from long term supplier contracts, where customers had locked in for three to five years, may now be looking to renegotiate contracts and face the likely scenario where customers will want to negotiate prices downwards. Some companies with high value local government contracts are likely to face considerable price pressure here. Customers requiring further cost savings – businesses whose customers have back-end loaded some of their cost cutting plans towards the end of or subsequent to a recession, or who are continuing to face budget pressures (such as local government budgets) may continue to seek price reductions on contracts. Insolvency of a customer – the impact of customers’ overtrading as the economy recovers can result in customers entering into insolvency whilst owing significant back payments. Managing customer payment terms and monitoring older debts is critical to minimising this risk. Competition Price competition – businesses may continue to face margin pressures caused by a recessionary focus on prices as opposed to ‘value add’ services in sectors such as facilities management. Routes and densities – again, this recessionary pressure has resulted in a hollowing out of competitors’ routes and densities in some cases, with companies who have been struggling for growth (or even just keeping revenues flat) pitching for work with less conveniently located clients, which would have historically be considered marginal. Waste collection and workplace service providers are prime examples; the ‘price per drop’ cost curve achieved by these businesses is a key KPI to monitor.