Stretched Thin

When talk focuses on the large operators in the North American shredding business, the names Iron Mountain, Recall and Shred-It come to mind. Cintas, a company that traditionally has been known for providing uniforms, has also been generating a fair amount of interest as of late as it has attempted to leverage its operations in other areas to the shredding business.

A number of other companies have been putting together plans and agreements to give them the size and scale of many of these national operations.

With all the activity taking place, many smaller, established shredding companies are wondering what impact these moves will have on the industry.

David Lane, president of Lane-Link Group Inc., a Texas-based company involved in the mergers and acquisitions business for the document destruction business, says the shredding industry is growing by around 35 percent per year.

Most industry watchers agree that the industry is growing, as reflected in the deluge of new entrants into the market.

While larger shredding operations have shown growth, the document destruction business also continues to see a surge in the number of new, locally owned and operated shredding companies. "It is a very sexy industry," one shredding executive says.

With a combination of greater attention to security, identity theft issues and other shredding-related interests, is there a move toward greater consolidation?

"Absolutely," says Jack DiPiazza, general manager for InfoShred, a Connecticut-based document destruction firm. "The national players are acquiring the regional players. Meanwhile, the regional players are getting the smaller guys."

Lane notes that the trend in the shredding business toward consolidation began around 2000 and really accelerated last year. Further, he speculates that the consolidation trend should continue for the next 12 months before it begins to cool off.

The result has been the development of a market whereby a handful of large companies are seeking to capitalize on the growth in the number of national accounts, while smaller companies, often with only one or two trucks, seek to carve out their niche servicing locally owned businesses.

In the parlance of one industry vet, smaller guys are "buying a job." Essentially, if an entrepreneur can make a small down payment on a shredding truck, he or she can enter the market. Often, these new competitors will match the national firms’ pricing, further driving down overall service prices.

The result of these twin moves, consolidators using their size and small operators using their minimal overhead, has been to drive down prices for everyone, making the shredding business even more challenging.

This has created an interesting dynamic: The industry is expanding with new participants, while also consolidating, with some larger companies acquiring small and mid-sized shredding operations.

Overall, the industry growth is expected to continue as a raft of new legislation and regulations is introduced, encouraging more businesses to address the daunting task of ensuring the confidentiality of information.

Tom Thompson, president of Information Protection Solutions of America (IPSA), a Chicago-based marketing management firm that has put together a national shredding network, sees the consolidation being driven by the number of national accounts now in existence.

IPSA’s network consists of close to 40 independent companies in around 54 different locations throughout the country. This has given IPSA’s individual member companies the ability to use some of the advantages enjoyed by the consolidators in terms of national reach and bidding on national accounts.

Thompson speculates that as much as 75 percent of industry volume within the next several years will stem from national accounts. "It is very tough for independents to compete with this trend," he says.

While competing with companies such as Iron Mountain and Recall can be a difficult endeavor, the step that IPSA has taken is to develop a loose confederation of independent shredding companies that can now bid effectively with companies that have a much larger coverage area.

Mike Tingle, a Denver-based entrepreneur who has been in the shredding business for many years, concurs that a significant consolidation trend is taking place because of the growth in the number of national accounts being made available. While some long-time shredding companies express some concern with the rapid pace of the consolidation, Tingle says that the move toward bigger, better-financed companies is a trend that mirrors dozens of other industries. "When you have success, you attract other companies," he says, naming Cintas and Brinks as examples of companies that appear to be focusing on establishing a larger role in this industry.

Addittionally, Tingle says, shredding companies’ productivity has skyrocketed. This means that trucks and plants can shred much more material now than they could just a few years ago. This has caused some companies to lower prices, seeking volume as a means to generate success. "There is greater productivity. Bigger operators have more scale," he says.

While Thompson and others say that they feel the potential for national accounts is driving the consolidation trend, not everyone sees this as the main reason behind the trend. Lane says he feels that the move toward greater consolidation is being driven by the need for greater routing density. Lane theorizes that as more companies look to have shredding services, many shredding companies understand the importance of bringing in more business in certain geographic areas. Instead of servicing two or three contracts in one particular area, a company could service seven or eight.

While Lane sees national accounts as one driver for the consolidation, the area he says he feels lends more credence to consolidation is the need for companies to maximize their operations by blanketing a geographical area as a way to improve operations. "Profitability of national accounts is questionable," he adds. Some of the larger companies may cut prices just to land an account, he says.

What many of the consolidators are seeking to do is increase the number of stops that their trucks can make in a particular area. By increasing the route density, and with the efficiency of newer equipment, some of the consolidators are finding that increasing the volume of the material they handle is the fastest way to profitability.