The bigger they grow, more they seem to lose

How investments into Indian pest control industry have kept increasing the losses & what is the way out

Beginning with the early part of this century, we started seeing huge sums of money being invested in India to set up pest control companies or in buying existing players outright. In an industry where a crore of rupees was once considered an enormous sum, we have had investments of tens of crores and even hundreds of crores of rupees into PCO’s. Making us industry insiders wonder, is there something about our own business we don’t know?

The truth is, for all the significant investments we have seen in Indian pest control over the past two decades, the losses of bigger PCO’s and the industry as a whole have only mounted. There is no mystery why a PCO can’t be profitable, so the losses made and reported are not inexplicable. Here is my take on why investments into our industry have fuelled losses and what I think is a way out.

Any business runs by fundamental principles of offering products or services to customers at a price that helps to meet the cost of the offering. The company sustains itself over the long term by keeping customers happy and being able to manage the cost to be able to pay employees and vendors and return something to the investors too. One or more of these basics of running a PCO are missing in the industry today, perpetuating the losses of the more prominent players and giving the feeling that their turnaround is unlikely. My analysis of the issue has identified the following reasons why investments into PCO’s have led to losses.

Lack of knowledge and expertise: The investors pouring money into pest control as well as the senior management teams running the bigger PCO’s all have very little or no knowledge of pest control services or the Indian market for such segment. With such handicaps, they are easily ‘taken for a ride’ by their management teams who are from the pest control industry. Busy as they are with board room discussions and analyzing voluminous reports, the investors and senior management fail to visit the market or have a pulse of our industry is. No doubt, they continue to be optimistic about the Indian pest control market and bring fresh funding or continue to bear losses.

Weak pricing: If a big PCO cannot meet the costs of its services, then there is no way that it will be able to survive or to thrive. In a bid to show growth and business volume, when contracts are taken at an incorrect price, it shows sooner or later in the profit and loss statement. This single metric, if corrected, can set right the profitability of many PCO’s. Alas, in their quest for market share and topline, which they use to impress their investors with, they keep accepting poorly priced contracts and continue bleeding by funding even to retain their services afloat.

Applying wrong models: The lack of knowledge about our industry among senior management of companies has been compounded by their enthusiasm to apply wrong business models to traditional pest control. When you have people from FMCG, logistics, retailing, financial services, and other unrelated business segments switch to pest control, you can expect a lot of experimentation and, sadly, failures! Full-page newspaper ads for soliciting residential customers may look very impressive till you realize that recouping that cost may need the enterprise to operate at level 20X the current size of business. PCO’s with foreign funding thought they could replicate their overseas models here to realize soon that regulatory issues prevent using the same products used abroad.  Further, cultural aspects come in the way of adopting systems and processes that are working in another country. Of course, I am not saying we have nothing to learn from other industries or countries. It is just that any idea has to be thought out and adopted to the PCO that is taking it up and also localized so that implementation is successful.

Not focusing on the customer: The customers don’t care about the source of funding of their PCO or the management institute of the CEO of their PCO. They want efficient and effective services at a reasonable cost and quick responses when things go wrong. I have found that the top management of our larger PCOs is virtually unknown among customers. You don’t see them during tender bids or industry events, making you wonder how they run businesses without any customer or industry interaction. There is very little interaction among the management of bigger PCOs – so each PCO’s team is trying to manage issues by itself without the benefit of learning of the fellow PCO and the industry as a whole.

Absence of innovation: Of the investments made into the pest control industry, if a good portion were spent on innovation, maybe we would have seen our industry itself progress and the market size increase. Sadly, none of the new PCO’s, whether Indian or multi-national have brought any noteworthy innovation to the market. The same methods that were used historically are being adopted and are giving sub-par results. And the customers are getting to choose a PCO purely based on price and not on service features.

The way out: Shocking as it may be, my prediction is that the industry will improve and consolidate with the shutting of some or all of the leading loss-makers. In an industry starved of funding, we saw equity infusion in tens and hundreds of crores of rupees, all going to fuel losses that only seem to mount with each passing year. The investors require a sanity check on whether their investees have a business model that will ever generate profits.

The complicated organizational structures and expensive overheads (numerous functions that all are contributing little to revenue or profit but piling on the cost) have to be ruthlessly cut. Our services in the pest control industry cannot afford fancy functions and over-paid top management. The customer is unwilling to pay for excessive overhead a PCO carries, so there is no choice but to scale back the team size and costs.

The current mid-sized PCO’s can learn from the mistakes of the bigger PCOs and scale-up smartly. Indian pest control is still an industry with great potential, but customers will only be willing to pay a fair cost for hassle-free services. Loading on the cost structure by investing in expensive senior management or infrastructure cannot bring reasonable returns at the current size of the market.

Pest control is a low margin business, and only the high-volume X small margin operation managed efficiently will help generate returns for investors. The day of reckoning is already past for Indian PCO’s that have grown at any cost. Unless they scale back by shedding unprofitable contracts, they will continue to bleed and maybe to their death. The time for experimentation is also long over. It is better to run a pest control business by having management teams who know what this industry is and how to handle services. All the fancy management education from premier business schools are of no avail if one cannot run a PCO at scale profitably.

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