Scott Woods company visits – Service Master
World in Motion – Global equities blog

Scott Woods company visits – Service Master

Pest control is a rational market. Businesses do not tend to undercut others on price. Scale is also important because it not only gives a company purchasing power, but it means you can be the top search in Google in a particular region when people search for pest control. The latter is important because, with pests, people are usually desperate to get rid of their problem quickly. This also makes pest control a price-insensitive industry.

To see a lot of these factors in action, I headed to Pittsburgh one afternoon last year to visit a local Terminix, the pest service brand Service Master operates under in the US. Service Master has quite a rational oligopoly, with a strong national brand that people recognise and trust.

The first house was owned by an existing customer who had called Service Master because she had a previous problem with mice. When you call for a single problem, Terminix will usually offer you a deal where you can pay the normal price upfront for a single visit or you can pay less upfront by taking out a contract that allows you to call Terminix year after year. By committing to a three-year deal, each visit is cheaper as there is no longer a call-out fee to pay.

Termites, for example, are a huge problem in the US. To deal with them, you have to build a chemical barrier around the house which needs to be replenished every year – which means a decent recurring revenue fee. So they tend to get recurring contracts where people stay with the firm for peace of mind.

At the next house there was another mouse problem. The Terminix pest control guy was in a jumpsuit while I was in a suit and tie. Still, I went into the attic and could see mice running through the insulation. I was asked to grab one of the traps and, of course, it had a dead mouse in. We laid new traps and then did an outside walk, through the snow in my smart shoes, which obviously got ruined. He was an excellent salesman, very clever at figuring out where the mice had got in.

Back at HQ they explained how the company had grown in recent years, as well as some of the mistakes the previous management had made. For example, they had tried to control costs by decentralising the telephone customer service operatives, but in doing so had lost a lot of the personal touch from some of the older staff, nicknamed “Marys”. Removing the Marys didn’t work because customers like speaking to people they know from their own community, rather than someone in a call centre thousands of miles away.

The new management has been pivoting away from that strategy of cost-cutting and reinvesting instead. The lesson is that there is a point where you can cut too much back from a business.

6 July 2020
Scott Woods
Scott Woods
Portfolio Manager
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July 2020
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