2004 STATE OF THE INDUSTRY REPORT: Regional Report: East/Midwest

East/Midwest contractors’ phones were a bit too quiet at the start of the 2004 season.

"Customers were a lot more reserved this year," explains Timothy Kilgallon, owner, CSI Landscaping, Scarsdale, N.Y., adding that his company received close to 50 percent fewer client calls this spring.

"This put us about one month behind," adds Joe Goetz, president, Goetz Landscape & Irrigation, Centerville, Minn.

Many attribute this shaky start to a cold and wet spring that didn’t give clients the inspiration to consider landscape projects during the peak season, but another reason could be the weak income growth experienced in some of this region’s states, making potential and current landscape clients feel like the economic rebound had yet to arrive. In fact, Economy.com estimates that household income for many of the states in this region remains below 2000 levels.

Despite these concerns, East/Midwest contractors’ customer renewal rates were on par with overall industry numbers and higher than those realized by West/Southwest companies in most categories. East/Midwest customer renewal rates were 79 percent for residential lawn maintenance clients, 72 percent for residential chemical clients, 74 percent for commercial lawn maintenance clients, 68 percent for commercial chemical clients, 61 percent for residential construction clients and 48 percent for commercial construction clients.

Also, while the highest number of companies in this region – 21.6 percent – said their end-of-year net profit would be between 4 and 5 percent vs. the other two regions, where more companies predicted closer to 10 to 15 percent, a healthy percentage of East/Midwest companies did project higher results. For instance, 20.1 percent of East/Midwest companies estimate their 2004 net profit will be between 10 and 15 percent and 14.7 percent said it will be between 16 and 20 percent and 12.8 percent said it will be more than 20 percent. Only 14.3 percent predicted it will be below 4 percent.

REGION PROFILE. The East/Midwest region contains smaller companies than the other two regions with the average 2004 business revenue being $595,617. The average company’s revenue in these states increased net 14.7 percent from 2003 to 2004, which is also lower than the other two regions, but is still at a historically successful business level for the landscape industry.

Concerning age, this region’s average company is nearest the national average of 13.6 years in business with a 14.6-year average.

While maintenance is still the most profitable service for East/Midwest companies, according to 42.3 percent of survey respondents, construction isn’t far behind, as pointed out by 33.6 percent of area contractors. This is positive for the region overall since a majority of area contractors offer design (61 percent), installation (67.6 percent), waterscapes (36.7 percent) and hardscapes (55.9 percent) services.

Compared to the Southeast and West/Southwest regions, East/Midwest contractors also are the most specialized in the services they offer with 19.7 percent revealing this, though nearly half of them (45.9 percent) say they have become more diverse in the last two years and now offer a wider variety of services. Services performed in this region more than in the other regions include fall cleanup (73.9 percent), snow removal (55.9 percent), and holiday lighting (19.2 percent). East/Midwest companies also offer more aeration, seeding, hydroseeding and lawn renovation services than the other two regions.

However, as East/Midwest contractors become more diverse, they are not performing all of these extra services in-house. The region subcontracts more services than the other two regions with the average company spending an average $31,058 annually on subcontractors.

In 2004, East/Midwest companies serviced fewer customers and acres in most categories compared to the other two regions except for residential pesticide applications, where East/Midwest businesses serviced the most customers and acres at 148 and 184.6 per company, respectively. This is on par with the fact that these are smaller companies with fewer clients.

East/Midwest companies also were able to raise prices this year on par with Southeast businesses but less than West/Southwest businesses (see chart on page S11 for regional hourly service charges).

The average East/Midwest company employs 5.7 year-round and 7 seasonal workers. This is fewer than companies in the West/Southwest and Southeast regions, which makes sense considering East/Midwest companies are smaller in terms of revenue. And the average East/Midwest company has 2.1 total employees who have been with the business more than 10 years – in line with the overall industry average.

One of the reasons for this could be because East/Midwest companies pay the highest wages in the industry on average (see chart on page S11 for regional hourly rates).

East/Midwest contractors also pay the highest annual salaries to mid- and high-level employees in most of the categories, except for account managers and owners/presidents, who make more money annually in the West/Southwest (see chart on page S11 for East/Midwest annual salary figures).

Though East/Midwest contractors pay more for their employees compared to the other two regions, they suffered slightly less of a net rise in 2004 operating cost increases than their counterparts in the Southeast with 17 percent. Nearly 90 percent of East/Midwest respondents reported operating cost increases.

CHALLENGES & SOLUTIONS. In terms of 2005 business-limiting issues, East/Midwest contractors said they were more overworked and stressed compared to their counterparts in other regions, and they also were more concerned with how weather problems would affect their business success in the coming year. Part of this reasoning is because this region experiences more seasonal weather changes that can delay and/or harm business.

Another reason for these concerns could be their revenue increases and decreases in certain seasonal services. For instance, though 75 percent of East/Midwest contractors who offer snow and ice control services report that this business area is up 26 percent, the remaining 25 percent say it’s down 23 percent – the largest service swing among any of the services offered in any region, proving that, while it can be profitable, snow is a challenging service.

Considering these figures, East/Midwest contractors naturally spent more money on snow and ice products than the other two regions at $5,093 on average annually. Contractors in this region also spent more money on equipment in the following categories: equipment parts, chemical/fertilizer products and construction hardscape materials. A greater percentage of contractors in this region also purchased trees/shrubs/plants, turf seed, skid-steer loaders and attachments, walk-behind blowers and hydroseeders in the past 12 months compared to companies in the other two regions.