American Home Shield 2015 Annual Report Download - page 24

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Pest infestations may damage a home or business while also carrying the risk of the spread of diseases. Moreover, for many
commercial facilities, pest control is essential to regular operations and regulatory compliance (e.g., hotels, restaurants and healthcare
facilities). As a result of these dynamics, the pest control industry experiences high rates of renewal for its pest inspection and
treatment contracts. Pest control services are often delivered on a contracted basis through regularly scheduled service visits, which
include an inspection of premises and application of pest control materials. According to the National Pest Management Association’s
2014 survey, approximately 35 percent of U.S. households currently use a professional pest exterminator.
Both termite and pest activity are affected by weather. Termite activity peaks during the springtime “swarm,” the timing and
intensity of which varies based on weather. Similarly, pest activity tends to accelerate in the spring months when warmer temperatures
arrive in many U.S. regions. However, the high proportion of termite and pest control services which are contracted and recurring, as
well as the high renewal rates for those services, limit the effect of weather anomalies on the termite and pest control industry in any
given year.
Home Warranty Industry
We estimate that the U.S. home warranty market was approximately $2 billion in 2015. The home warranty market is
characterized by low household penetration, which we estimate to be approximately four percent. The home warranty industry offers
plans that protect a homeowner against costly repairs or replacement of household systems and appliances. Typically having a
one-year term, coverage varies based on a menu of plan options. The most commonly covered items include electrical, plumbing,
central heating and air conditioning (HVAC) systems, water heaters, refrigerators, dishwashers and ovens/cook tops. The home
warranty industry is characterized by a high level of customer interaction and service requirements. This combination of a
high-touch/high-service business model and the peace of mind it delivers to the customer has led to high renewal rates in the home
warranty industry.
As consumer demand shifts towards more outsourced services, we believe that there is an opportunity for American Home
Shield, a reliable, scaled service provider with a national, pre-screened contractor network, to increase market share and household
penetration. Additionally, we believe that increasingly complex household systems and appliances may further highlight the value
proposition of professional repair services and, accordingly, the coverage offered by a home warranty.
One of the drivers of sales of new home warranties is the number of existing homes sold in the United States, since a home
warranty is often recommended by a real estate sales professional or offered by the seller of a home in conjunction with a real estate
resale transaction. According to the National Association of Realtors, existing home resales, as measured in units, increased by
approximately eight percent in 2015 compared to 2014. Approximately 20 percent of American Home Shield revenue for the year
ended December 31, 2015 was tied directly to existing home resale transactions.
Key Franchise Services Group Industries
Disaster Restoration (ServiceMaster Restore). We estimate that the U.S. disaster restoration market is approximately
$39 billion, approximately two-thirds of which is related to residential customers and the remainder related to commercial customers.
Most emergency response work results from emergency situations for residential and commercial customers, such as fires and
flooding. Extreme weather events and natural disasters also provide demand for emergency response work. Critical factors in the
selection of an emergency response firm are the firm’s reputation, relationships with insurers, available resources, proper insurance
and credentials, quality of service, timeliness and responsiveness. This market is highly fragmented, with two large players, including
ServiceMaster Restore, and we believe there are opportunities for growth for scaled service providers.
Janitorial (ServiceMaster Clean). We estimate that the U.S. janitorial services market was approximately $51 billion in 2015.
The market is highly fragmented with more than 800,000 companies competing in the janitorial space, a significant majority of which
have five or fewer employees.
Residential Cleaning (Merry Maids). We estimate that the U.S. residential professional cleaning services market was
approximately $3 billion in 2015. Competition in this market comes mainly from local, independently-owned firms, and from a few
national companies.
Our Competitive Strengths
#1 Market Positions in Large, Fragmented and Growing Markets. We are the leading provider of essential residential and
commercial services in the majority of markets in which we operate. Our markets are generally large, growing and highly fragmented,
and we believe we have significant advantages over smaller local and regional competitors. We have spent decades developing a
reputation built on reliability and superior quality and service. As a result, we enjoy high unaided brand awareness and a reputation for
high-quality customer service, which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows our
brands to effectively serve both local residential customers and large national commercial accounts and to capitalize on lead
generation sources that include large real estate agencies, financial institutions and insurance carriers. We believe our significant size
and scale also provide a competitive advantage in our purchasing power, route density, and marketing and operating efficiencies
compared to smaller local and regional competitors. Our scale also facilitates the standardization of processes, shared learning and
talent development across our entire organization.
Diverse Revenue Streams Across Customers and Geographies. ServiceMaster is diversified in terms of customers and
geographies. We operate in all 50 states and the District of Columbia. Our Terminix business, which accounted for 56 percent of our
22 2015 Annual Report