Look for Growth in Service Industry Consolidators

For the last few years, manufacturers have been expanding by buying or merging with their competitors, laying off workers and cutting costs and reaping profits in the process.

Now that same trend is moving to service industries. The benefits of consolidation in the service industry were made clear in the 1980s with WMX Technologies Inc. WMX essentially went around the country buying up mom and pop disposal companies, added technology, management expertise and cost controls and made a killing taking out the trash.

Well, the same type of consolidation is occurring in other sectors. Some analysts predict that a national service company can increase its earnings by 20 percent or more every year in boring, stable industries by buying out smaller competitors and enjoying economies of scale. While service consolidators do best in expanding industries, their ability to slash costs allow them to make money even in no-growth industries.

Service consolidators prey on highly fragmented and local markets. Here's how they do it: they approach smaller service businesses with a strong customer base. Then they either buy them outright, or come up with a profit-sharing arrangement with the current owners. The service consolidator has the resources to improve quality and lower costs because it can buy products and services in bulk. But because many services aren't capital intensive, the service consolidator doesn't have to spend a lot of money to get the new company up to snuff.

After taking over the company, the service consolidator can manipulate pricing and go after business aggressively, picking off smaller competitors at will.

Bottom line: Veterinary Care Centers of America (VCAI) is a good example of a service consolidator. Veterinary Care Centers owns rnd operates animal hospitals. Check out this company in trading floor!

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