Magnifying the Path to Residential Success
As the U.S. economy struggles amid the subprime mortgage debacle and a housing downturn, the residential security marketplace has been set adrift into uncertain times.
The once white-hot builders market has all but flamed out across most of the country, leaving security dealers and integrators scrambling to adjust their business models. Revenues, already under pressure from price wars in some regions and mass-marketed systems, are suffering further erosion as consumer pessimism continues to mount.
Moreover, a crush of economic statistical data released by the government and forecast projections by security industry experts suggest the precipitous fall may not abate until sometime in 2009.
Security Sales & Integration spoke with more than a dozen industry professionals from across the country to gauge the current pulse of the residential market and identify new trends and opportunities. SSI found an industry and its players hard at work strategizing how best to cope with adverse effects from the economic storm that has befallen the market. But there is more at play in the residential space than gloom and doom; there is justification to be bullish when looking forward as well.
For instance, new products and services, powered by broadband and network connectivity, promise to sate the appetites of new generations of tech-savvy end users, while creating new streams of recurring monthly revenue (RMR). The retrofit market is being looked to as greener pastures where many millions of single-family households and multiunit dwellings remain an untapped source in which to sell new security, fire/life-safety and home automation controls, as well as other interactive systems and services.
Significantly, several manufacturers have engineered their go-to-market strategies to include intensive interaction with dealers and end users in order to expeditiously provide the marketplace with sought-after products and services. Despite increased competition, price point pressure and other hurdles created by the current economic morass, SSI’s 2008 Residential Market Report shows there are profits to be made during these trying times.
Housing Slump Continues to Be Harbinger of Residential Woes
The latest housing market statistics released by the U.S. Commerce Department only provide insult to injury for security professionals positioned on the frontlines of the builder market.
The number of housing starts fell 3.7 percent in November from a month earlier, to a 1.19 million annual pace — marking a 24-percent slide from November 2006. Total housing starts are now 48.2 percent below their peak in January 2006.
In a troublesome sign for future activity, building permits dropped for the sixth straight month, shedding 1.5 percent to a seasonally adjusted annual rate of 1.15 million units, the slowest pace for building permits since June 1993.
“That is a scary thing. That means eight months from now there is not going to be that new inventory we need to sell into,” says Frank Benna, sales manager, Supreme Security Systems Inc. of Union, N.J. “Existing home sales continue to drop as well at a huge rate. That churn we need is not occurring.”
Also glaring, single-family home starts declined 5.4 percent from October to an annual pace of 829,000, the lowest level since 1991. Benna, who teaches economics at two New Jersey junior colleges, projects the situation could worsen.
“Credit is still tight even at the current low rates. If there is no credit that means there is no money to be had to buy new homes,” he says. “That is the engine that drives the housing starts and the building permits. But that engine is not in place and as a result, everything is stagnant.”
In fact, multifamily housing starts continue to hold firm, according to the U.S. Commerce Department. Groundbreakings for apartment buildings and condominiums ticked up in November, keeping pace with a 22-percent rise during the past 12 months. The report reflects a shift toward multifamily structures as builders forecast more families will have difficulty obtaining mortgages in the months ahead.
“About six months ago (the housing data) was showing that in the second half of 2008 there would be some improvement,” says Randy Marquardt, vice president, residential, Schlage, an Ingersoll Rand Security Technologies company. “But over the last three or four months that has eroded. So now the general consensus is that 2008 will be a difficult year for everybody all the way through. Certainly any recovery looks like it will be pushed out until 2009.”
Competition, Opportunity on the Rise in Retrofit Market
As the builder market boom began to plummet in early 2006, residential security contractors have been forced to transition to alternate revenue streams. One market sector in the crosshairs of many security professionals is retrofit projects. A stampede to the retrofit market can’t simply be explained by a mass exodus from the troubled housing market. Savvy companies have recognized that remodel and retrofit projects are a safe haven from razor-thin (or less) profit margins forced onto dealers by hardnosed builders.
Technology advances make retrofits more practical to a broader market as an ever-increasing number of homeowners upgrade their security, entertainment, home control and other systems, says Bill Ablondi, director of home systems research at Dallas-based Parks Associates.
Before the housing market began to slump, about 1.5 to 2 million new homes were built annually. “Now,” says Ablondi, “we are well down below the million mark. But the existing home stock is 100 times that.”
The promise of retrofit solutions nowadays, he says, centers on affordability and advancements in technology.
“The technology is well enough along that power line and wireless control and content distribution is a reality,” adds Ablondi. “There is opportunity for security dealers to go beyond their current offerings and look at retrofit solutions that fit the market they are serving.”
Parks Associates released a white paper in 2007 titled “Home Controls: Trends and Opportunities.” The research projected the widespread implementation of broadband Internet access and the consumption of digital media is creating a market environment that will stimulate adoption of home controls. “When consumers acquire one system in a home, whether a security system, home theater or multiroom audio installation, they are often prompted to install other systems as well,” the report states.
Parks Associates projected the market for home control hardware and software would climb from $3.5 billion in 2007 to $6 billion by 2012. Intelligent controls (excluding security controllers) was forecast to grow from just less than $600 million in 2007 to $1.5 billion by 2012 led by rapid growth of advanced entertainment controllers.
“When I think of security dealers, I think they are more likely to be involved in retrofit jobs than CEDIA-type (Custom Electronic Design & Installation Association) dealers,” Ablondi says. “They’ve got the knowledge of how to run a business and roll a truck; install the equipment and leave. The question is what skill sets they chose to develop and perhaps partner in some cases if it involves working with an electrical contractor.”
Industry Looks to Expanded RMR to Advance Market Penetration
The percentage of alarm system penetration in all U.S. homes is commonly thought to hover somewhere between the mid-20s to low-30s. The total monitored population is estimat
ed at 32.3 million, according to J.P. Freeman Co. Inc. Of that penetration, 23 percent of the homes in the U.S. are monitored, according to GE Security’s Kirk MacDowell, reside
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