Faster growth likely in the security market

By Frank Proud

Security Market Growth

The outsourced security guarding services market is approaching £5bn in size, having grown in recent years despite a hesitant economic recovery.

The industry is being affected by series of important trends, some of which are important across business services markets with others with an even more fundamental impact on the overall economy. These include the growth of integrated facilities management contracts, the application of new technology and consequent reengineering of services, government spending cuts and outsourcing of services with the aim of achieving savings, the increase in levels of security in airports and other sensitive locations and the growth of internet retailing.

Retail, airports and government security contracts are the main growth segments in the market.

Retail locations have seen the deployment of security guards increase. This has largely resulted from the changes in the sector: smaller, independent stores and high street locations – which are less likely to have guards – decrease in share while larger outlets of national chains and shopping centre locations – more likely to have guards – increase. However, this has been partly offset by the growth of internet shopping, which has had a negative influence on the security requirements of the sector.

Airport security has continued to grow in the post-9/11 world with increased spending on both technology, such as body scanners, and the labour required to operate them. The security requirement is driven in part by the number of passengers passing through UK airports. But there has also been a significant increase in the intensity of airport security in recent years, in response to higher perceived risks of attacks on planes, with more people required to operate x-ray scanners and carry out increased passenger and baggage checks. With pressure to reduce queuing times at airports, security areas have been expanded and equipped with new passport scanners, metal detectors and conveyer-belt-like baggage control areas. These developments have increased security spend per passenger and the need for more security staff.

Prisons is also a key segment given the long-term growth that has occurred in prison populations combined with government desire to use outsourcing to achieve cost savings. The growth of prison outsourcing has faltered in the last couple of years, largely as a consequence of the service failures and overcharging scandals associated with G4S and Serco. However, it has recently received fresh impetus from a wave of probation service contracts announced at the end of 2014. In total 21 criminal probation service contracts worth a total of around £450-£500m per year (depending on success in areas such as reducing the rate of re-offending) were outsourced to Sodexo, Interserve and GEOAmey and other smaller suppliers in consortia, and are due to start in April 2015.

While crime rates have fallen (see chart above), public perception and fear of crime have not. As a result, demands for tougher sentences are widespread and prison populations have increased, with the UK locking up a higher proportion of its population than in most other European countries, but only one fifth of the level seen in the US (see chart below).

Across the market, technology, such as CCTV and remote monitoring, continues to be deployed extensively, both as a complement to, and in some cases, a substitute for, human guards. In most other segments, such as offices, public buildings, factories and warehouses, we believe it is likely that this trend has led to a reduction in overall market revenues – although the margin impact may well be positive given the lower costs associated with newer technologies.

Competitive landscape

The industry accreditation body, the Security Industry Association, has close to 800 members. But while the market remains relatively fragmented, it is consolidating.

In our 2015 UK security industry report, we analysed the performance of 15 leading UK security service providers, which account for over 75% of the market between them. This set of leading operators has grown faster than the market as a whole. A key reason for this is that they have greater exposure to the growth segments in the market, and are more likely to win government outsourcing contracts, than smaller providers.

Convergence between security and facilities management is also continuing. Several of the leading players, such as G4S, MITIE, Vision/Compass, Serco and Sodexo provide security as part of a much broader range of services with some having made acquisitions to enter the segment. However, some leading providers, such as Securitas – which has led a campaigned to its customers to ‘keep security separate’ – and Corps, continue to emphasise the benefits of providing security as a standalone specialist service.

Industry margins have increased slightly, with the average of the group of leading players having risen above 5% in the last couple of years. Price increases have been achieved despite the relatively weak economy and wage inflation has been modest. While most companies have seen margins increase, it appears that the most profitable companies have had the greatest exposure to government contracts and the retail segment.

Future prospects for the security market

We forecast growth to be faster than historical rates. The key reasons for this are the resumption of prison and probation services outsourcing which is due to start in April 2015, and the positive impact of a recovering economy on the other two key segments: retail and airports, with increased prosperity likely to feed through to both growth in high-street retail sales and in numbers of air passengers.

Increased market consolidation is also likely with a small number of very large companies becoming increasingly dominant. The nature of market growth, with many of the more attractive opportunities arising in areas where there are large contracts, supports this view.

The market is not without risk. The most obvious is the potential for a change in government policy towards the outsourcing of prison and probation services. In the retail sector, if changes in store formats, such as the decline of the large supermarkets, were to occur more quickly than expected, the overall requirement for security could be lower. However, we note that there is also potential upside for the security industry. If the outsourcing of a range of policing activities, which now appears to be on hold, was to return to the agenda, we believe it could increase market revenues by up to 30%.