How is the landscape industry doing? Contractors polled in August by Lawn & Landscape say 2004 business revenue is up a net average of 17.4 percent, individual service sales have increased in all categories, and net profits are projected to rise. Contributing to the industry’s sound standing is an increase in consumer spending and a healthy housing market. Overall, the year represents encouraging economic times.
| 2004 REPORT: HOW WE DID IT |
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In August of this year, Lawn & Landscape magazine contracted ABR Research, an independent firm, to e-mail a State of the Industry survey to a random sampling of 10,272 readers. We received 742 responses to the survey. The margin of error based on these 742 returned surveys is calculated to be no greater than +/- 3.6 percentage points at a confidence level of 95 percent. The data was then analyzed and compared to the 1997 to 2003 surveys and used in this report. Unless otherwise noted, the charts used in this report were taken from Lawn & Landscape research. Regional reports were broken out by states that experienced similar agronomic, climatic and business challenges. Lawn & Landscape editors Jonathan Katz, Lauren Spiers, Leslie Stroope and Nicole Wisniewski also contacted readers from all of the U.S. regions to probe key research findings. |
ENTREPRENEURAL MAKE-UP. Landscape companies are younger today, with the average age being 13.6 years old vs. 17.7 years old in 1999.
In fact, a greater percentage of contractors – 28 percent – have been in business less than five years compared to only 13.7 percent in 1999, 11.6 percent in 2000, 14.6 percent in 2001 and 16.5 percent in 2003.
Landscape companies that have operated more than five years include 23 percent who have been in business five to nine years, 25 percent who have been in business 10 to 15 years and 24 percent who have been in business more than 20 years.
Despite the fact that these companies are younger, they are generating more revenue on average today at $732,353 compared to $694,300 in 2002.
In terms of growth, the number of contractors who said their total gross sales revenue would increase this year surpassed the number of contractors who felt this way in previous years. For instance, 84 percent of contractors said their 2004 revenue would increase compared to 57.4 percent in 2003 or 59 percent in 2002. In fact, going back to 1997, the percent of contractors predicting growth for a single year has never been higher than in 2004. The next closest percentage of contractors foreseeing growth was 72.3, reported in 1998.
Contractors predicted an increase of net 17.4 percent this year. This is up from last year’s 12.73 percent, but down when compared to the rates experienced five years ago. For instance, contractors averaged 24.1 percent growth in 1998 and 19.5 percent growth in 1999.
| THE HOUSING MARKET |
Analysts paint a bright long-term outlook for housing production, home prices, homeownership rates and mortgage finance. Demographic trends and per-capita income growth were identified as key drivers of the long-term forecasts, along with projections of homeownership gains by minority households and lower income groups, as well as trends in debt leverage by America’s homeowners. But higher mortgage rates, which are expected soon, will not crush housing demand, points out David Seiders, chief economist, The National Association of Home Builders. "Long-term interest rates have moved up substantially in 2004 and are expected to move up more in 2005, driven by indications of stronger job growth and higher core inflation," he says. However, the negative impact of higher rates on housing demand should be largely offset by the ongoing cyclical recovery in employment and personal income. Housing demand should also be supported by two structural factors: first, a strong underlying growth in labor productivity will support strong growth in real personal income and increase the appetite for housing. Second, persistently low inflation in the prices of goods and services will put a lid on long-term rates. NAHB also estimates that the rise in building materials prices will increase the cost of home building an average of $7,000 for the typical size house. This is 3 percent of the median selling price for a new home. Still, strong house price appreciation is enabling many homebuilders to cover at least some of the rising material costs. To some extent, the rapid pace of construction by builders and eagerness to build new by homeowners is creating a strong demand for building materials, hence increasing these costs. Despite these findings, the housing outlook for the next 10 years looks positive. "During the next decade, demand factors will support average production of about 2 million new housing units per year," Seiders says. "The national homeownership rate will continue to rise from today’s record level and will exceed 70 percent by 2013. Housing price appreciation will average about 5 percent per year on a national basis and exceed that pace in areas with severe land-use constraints. Mortgage organizations will average nearly $3 trillion per year and residential mortgage debt will more than double by 2013." |
Another positive survey finding was that net profits are also up. Approximately 24.3 percent of contractors estimated that their 2004 net profit would be 10 to 15 percent, 14.2 percent expect a 2004 net profit of 16 to 20 percent and 16 percent were confident they would garner a net profit increase of more than 20 percent. Only 17 percent of contractors said their net profit would be closer to 4 to 5 percent.
SERVICE DIVERSITY. Today’s average landscape contractor offers a wider array of services than in the past.
Historically, lawn maintenance has represented the greatest total revenue for landscape businesses, and that’s no different this year. However, more contractors – 43.9 percent compared to 31.3 percent in 1997 and 23.7 percent in 1998 – reported that this is the case.
Almost 33 percent of contractors said construction generated their greatest total revenue in 2004. This was fairly consistent but slightly higher than in previous years. In 1997, 30.2 percent of contractors claimed construction generated more revenue and, in 1998, 26.5 percent said it was their top revenue source.
In contrast, fewer contractors claim that chemical lawn care or arbor services generate a majority of their sales than in years past. This year, 9.8 percent of contractors said chemical lawn care was their most profitable service, while 11.2 and 14.5 percent of contractors reported this in 1997 and 1998, respectively. Only 2.4 percent of contractors said arbor services represented their greatest revenue source, compared to 7.8 percent in 1997 and 6.7 percent in 1998.
Nearly half of landscape businesses – 48.7 percent – said they have become more diverse in the past two years, offering a greater number of services, while 16.3 percent said they have become more specialized. Thirty-five percent of contractors reported no change in their service structure.
Considering the two primary services for a landscape business – lawn maintenance and construction – Lawn & Landscape broke down the research to find out what other services typical mowing and design/build companies offer. For instance, 58.8 percent of the companies who primarily mow also offer construction services, 24.3 percent also offer chemical lawn care, and 52.9 percent also offer arbor services.
Among firms identifying themselves as primarily construction companies, 62.8 percent also offer lawn maintenance, 22.9 percent offer chemical lawn care services and 70.6 percent offer arbor services.
In terms of 2004 service growth, all areas are in the black. Lawn maintenance is up a net 14.8 percent, construction is up a net 11 percent, chemical/fertilizer services are up a net 8.9 percent, irrigation is up a net 5.3 percent, snow and ice control services are up a net 3.3 percent, arbor services are up a net 1.9 percent and nursery/retail services are up a net 0.7 percent.
CUSTOMER CONCERNS. In 2003, contractors reported that 66.9 percent of their clients renewed their maintenance contracts – 21.8 percent of residential clients, 29.2 percent of commercial clients and 15.9 percent of other clients. In 2004, this increased to 74 and 81 percent, respectively, for commercial and residential maintenance clients.
Average company renewal rates for other services in 2004 include 73 percent for residential chemical services, 67 percent for commercial chemical services, 61 percent for residential construction and 49 percent for commercial construction.
Consumer confidence could be the reason for these increased renewal rates in 2004. From the middle of 2003 through the first quarter of 2004, consumers spent with abandon, according to Economy.com. Then in the second quarter, spending growth dropped about 3 percent from an average 4.25 percent annual rate. Energy and gasoline prices remain at near-record levels, which is one explanation for the slowdown because it forced people to redirect some of their spending dollars to fuel. Also, wage growth has been more sluggish than expected.
| FUEL FEES ESCALATE |
For contractors from coast to coast, the "pinch" felt at the gasoline pump felt more like a punch as high gasoline prices impacted the bottom lines of many businesses this year. In fact, rising fuel costs was listed as contractors’ No. 1 growth-limiting challenge with the average contractor ranking this concern a 7.7 on a scale from one to 10 with 10 being the maximum level of concern. And when looking at the numbers, it’s understandable why contractors are feeling this way. Bob Grover, president of Pacific Landscape Management, Hillsboro, Ore., has spent 30 percent more on gasoline this year than he did in 2003, while Timothy Kilgallon, president of CSI Landscaping, Scarsdale, N.Y., estimates his company has spent about 20 percent over what they spent on gasoline last year. Some contractors have struggled with whether or not to raise prices to lessen some of the blow. For instance, Kilgallon says he assessed all his maintenance account clients a monthly fuel service charge that ranged from $10 to $15 depending on the size of the property. Extra services that required a visit to the client’s property were assessed a flat $20 fee. Contractors don’t seem to be optimistic that fuel prices will return to the lows enjoyed in previous years, and they are adjusting their 2005 pricing accordingly. "I don’t believe they’ll ever go back down to where they were," Grover says. As a result, contractors like Kilgallon will be raising prices on maintenance contracts that are coming up this year. Bruce Bachand’s company is also forecasting fuel increases and is planning to adjust his prices accordingly. The president of Carol King Landscape Maintenance says, "Our country pays less for gas than most other countries in the world and I think that is going to start to catch up with us." |
Contractors may also be surprised that these renewal rates came in spite of the fact that most respondents reported increased pricing in 2004 (see chart on page S3 for specific hourly service charges).
Overall, typical landscape companies today are made up of more employees and more customers per employee compared to two years ago. Also, an average of only 2.1 employees have been with their employers more than 10 years, 4.8 have been their for three to nine years and the majority – 10.1 – have worked at their companies less than three years.
This lack of employee longevity in the industry could be one reason that the average revenue earned per employee has decreased from $49,619 in 2000 (considering 12.1 average total employees and $600,390 average revenue per company) to $45,980 in 2002 (considering 15.1 average total employees and $694,300 average revenue per company) to $43,080 in 2004 (considering 17 average total employees and $732,353 average revenue per company).
A figure that contradicts the fact that each employee is generating less revenue is the fact that in all service categories (residential mowing, commercial mowing, residential lawn care and commercial lawn care), each employee is taking care of slightly more customers compared to 2002. For instance, the average employee today manages 3.24 residential mowing customers compared to 2.98 in 2002, 1.07 commercial mowing customers compared to 1.06 in 2002, 8.66 residential lawn care customers compared to 5.23 in 2002 and 1.65 commercial lawn care customers compared to one in 2002.
This could explain the need for increased efficiency mentioned by many contractors.
In addition to consistent employee training, an efficiency-boosting strategy contractors are practicing in 2004 and into 2005 is smarter equipment purchasing. "We’re going to try to become more efficient and profitable by stretching and diluting our overhead over a bigger base," shares Dan Foley, president, D. Foley Landscape Co., Walpole, Mass. "We’ve also made some substantial investments in more efficient equipment to reduce our costs."
RISING EXPENSES. Rising business and operating costs have not dissuaded contractors from buying new equipment this year, according to the research.
"We’ve got to deal with weather and employees at all pay scale ranges," says Joe Markell, president, Sunrise Lawn & Landscape Services, Herndon, Va. "Then you throw in fuel charges, rising insurance costs, and the only thing that balances it all out is more efficient equipment."
Though most of the annual expenditures in each of the product categories were down compared to last year, a greater percentage of contractors purchased equipment in most of the categories this year. Some of the greatest increases were in fertilizer/pesticide combination products, sprayers and computers/software – more than 20 percent more contractors in 2004 reported that they purchased items in each of these product categories compared to last year. For instance, 21.2 percent of respondents said they purchased fertilizer/pesticide combination products in 2003 vs. 42.7 percent in 2004. Similarly, 20.4 percent of respondents said they purchased sprayers in 2003 vs. 42 percent in 2004 and 36.6 percent of respondents said they purchased computers/software in 2003 vs. 62.4 percent in 2004.
| TOP 5 COMPANY CONCERNS |
Contractors concerns have changed. In 1997, labor was the No. 1 concern according to 50.1 percent of contractors. In 1998, labor remained the No. 1 concern and the percent of contractors who reported this rose to 56.4. But in 2004, on a scale of one to 10, labor shortage was only ranked an average of 4.8 per company, dropping it down to the average company’s No. 10 concern. Competing against lowball contractors remains the No. 3 concern from 1997 to 2004. And insurance increased from No. 8 in 1997 to Nos. 2 and 4 in 2004 (workers compensation and health insurance, respectively). In 1997, only 3.9 percent of contractors were concerned about rising insurance costs limiting their growth. Following are the top five business-limiting factors contractors expect to battle in 2005. 1. Fuel Prices 2. Workers’ Compensation Costs 3. Lowball Competitors 4. Health Insurance Costs 5. Overworked/Stress |
Those products with 15 percent or more contractors having purchased them this year over last year are postemergent herbicides, fungicides and uniforms, with 59.2, 38.7 and 50.6 percent reporting, respectively.
The only categories in which fewer landscape contractors purchased products were walk-behind mowers, skid-steer loaders and snowplows. However, the differences in the percent of contractors reporting were less than 5 percent in all of these categories.
Despite the fact that more contractors purchased more equipment this year, total average expenditures in some categories were down. For instance, contractors spent an average $28,067 on trucks this year vs. $39,210 in 2003. They also spent less on nursery stock than they ever have in the past – $55,277 this year vs. $91,025 in 1997 and $104,027 in 1999. Pesticide expenditures, however, increased from $9,099 per company in 1997 to $11,346 in 1998 to $13,045 in 1999 to $16,059 in 2004.
In addition to equipment expenditures, contractors also experienced overall operating cost increases, with the average net percent rise being 16.8 percent.
Despite changing business challenges, contractors seem to be adapting well to the economic roller coasters they face. Most agree that costs will continue to increase and there will be a cap at which customers won’t be able to pay more to cover these costs. Hence, the key to profitability in 2005 will be boosting efficiency. "I think overall the industry is strong and I think people have a pent up need to grow and build," explains David Snodgrass, president, Dennis’ Seven Dees Landscaping, Portland, Ore. "Doing this the right way will have a significant impact on moving the industry forward."
Explore the October 2004 Issue
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