The takeover of three independent cleaning companies has prompted pundits to predict that consolidation in the sector will leave mid-sized companies the most vulnerable to takeover.
In just three weeks this summer, three well known independent cleaning companies were snapped up in the latest wave of acquisition and merger activity in the support services sector.

Pall Mall was bought by John Mowlem for £42.3m, followed by Ramoneur, the UK's oldest cleaning company, which was swallowed up by the MacLellan Group for £6m. Meanwhile Lawrence & Tester, established in 1912, merged with Emprise Services.

As the market polarises further into a clutch of dominant national and international firms and a mass of small, local operators, industry experts argue that cleaning companies in the mid-market sector are going to find themselves in an increasingly precarious position.

Norman Rose, director general of the Business Services Association said changes in the sector, exaggerated by the recent wave of acquisitions in the £4bn per annum market, are putting the squeeze on medium-sized businesses in particular.

According to Rose, larger providers will dominate the market, laying claim to all the nationwide contracts, while small firms will look to occupy niche areas in the sector and continue to service local markets.

Where does this leave the medium-sized cleaning companies and their clients? Struggling to make it in the big league, unable to offer the economies of scale that make big companies an attractive prospect? Or battling it out against niche players for lower value contracts, which may not meet running costs?

Rose believes that mid-market firms with an annual turnover of between £1m and £5m are most at risk, because of tight margins and increasing overheads, despite the fact that the overall market remains strong. 'A £5-6m turnover sounds a lot but overheads and other expenses make them pretty precarious,' said Rose.

Mid-market firms with an annual turnover of between £1m and £5m are most at risk

Norman Rose

Michael Bisley, Cleaning Support Services Association head, shares the same view but sets the turnover for companies most likely to feel the impact of consolidation at around £15m per annum. 'The bigger companies are getting bigger, while there is a lot of squeeze on medium and smaller companies,' he said. 'One has to be concerned here.'

A key factor driving consolidation is a rationalisation among major clients of the number of contractors they use.

Bisley cites government departments who at one time contracted up to 100 regional companies for a job. Now they are using as few as one or two national providers. Inevitably smaller companies are losing out.

Even retail customers such as Tesco are only using six or so companies UK-wide, he said.

Fortunately for smaller contractors the market is still growing. 'The really good local companies will always survive, but they will find it difficult to grow out of that market,' he predicts.

There are 7,500 cleaning companies in the UK, 80 per cent of which have an annual turnover of less than £250,000. Only 100 cleaning firms have a turnover of more than £5m - and just six providers dominate the market, with an estimated market share of 55 per cent.

[Merged] companies sometimes fail to ensure that there is a constant customer interface

Derek Paxman

While much of the consolidation has been driven by changing client requirements, not all are happy about the move. Medium sized facilities management operators, for example, who have traditionally subcontracted mid-range cleaning firms, are concerned about a reduction in their number.

'It worries me that they are consolidating. As cleaning companies get bigger you have less control over them,' said Graham Moreton, facilities management director at Opus 4.

'Cleaning is generally done out of hours, which means there is very little actual management control,' he added.

On the other hand small cleaning companies for Moreton 'are just too small.'

When working for a multinational company, Moreton said he might consider appointing a large provider, but that he would remain reluctant.

Meanwhile as companies increase in size, customers fear a decrease in personal contact. 'Bigger companies starve customers of management support - they don't get the immediate response,' said independent consultant, Derek Paxman of the Centre for Facilities Consultancy.

Another concern is that companies undergoing mergers sometimes fail to ensure that there is a constant customer interface. 'It happens because there has been little or no investment in integrating the two companies,' said Paxman.

Contract caterers follow same recipe for market control

Change is not just hitting the cleaning industry. In the contract catering sector, mass consolidation which saw Compass and Granada merge last year, has led to just two companies controlling an estimated 75 per cent of the market in the UK - Compass and Sodexho. The former’s acquisition of Granada in July 2000 took the sector’s leading player out of the market, robbing clients of the choice they had enjoyed for more than 10 years. In the past three years, both Granada and Sodexho have ‘mopped up’ a number of small and medium-sized catering companies, said Miles Quest from the British Hospitality Association. Earlier in the year French-based Sodexho took over the remaining 52 per cent of US-based Mariott food services that it did not already own. US company Aramark and France’s Elior are the next biggest players in the UK. Both firms are expanding and buying UK firms, said Quest. Initial is the fifth largest provider. The rest of the industry is made up of firms with a £20-40m turnover, and a ‘huge number’ of local contractors with two or three contracts. The market has doubled in the past 10 years, and is still growing according to Quest, but some of the contracts offered are so large that only the big players can take them on. Even school catering contracts are commonly offered in county-lots, with up to 100 schools needing to be serviced, he said. Quest said he believed the industry would follow the model of larger, dominant companies for some time, until smaller players could grow. In the British Hospitality Association Contract Catering Survey 2001 it is noted that it is getting harder for smaller independent contractors to compete because they lack the purchasing power of worldwide companies. Smaller contract catering companies also often find it difficult to provide a competitive service in terms of cost, standards and service, the report says. In a bid to alleviate this problem many small companies set up purchasing consortiums to help keep costs down.

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The Facilities Business