Support services and facilities management companies are facing stagnating profitability next year amid increased competition from SMEs, rising cost inflation from the National Living Wage and Brexit according to an EY report out today.
A review of the available accounts for 22 facilities management firms with operations in the UK, revealed that the average (EBITDA) margins has remained stagnant at around seven per cent during the last three years. In comparison, revenues grew at an average of 14 per cent from last year.
Tim Wainwright, Industrial Products Sector Leader at EY commented: “The facilities management sector has experienced low margins for some time, with no sign of picking up. As we look into 2018, the wider economic and geo-political environment will conspire, alongside competition and cost inflation, to pile the pressure on FM providers.
“Our analysis indicates that facilities management providers have not been able to take advantage of scale whilst growing and so we are likely to see new approaches to corporate strategy in the sector.”
According to the report, pressure will be put on profitability from Brexit which will deter workers from EU markets. It says although the FM sector is not as heavily dependent on material imports, compared to the construction sector, for example, the lower value of Sterling following the EU referendum can make the UK market less attractive for labour force from the EU. The FM sector also employs a number of workers from the European Union (EU) and changes to immigration policies resulting from Brexit could impact labour availability from EU countries.
A survey by the Social Market Foundation suggests that as much as 14 per cent of labour in accommodation and food services and nine per cent in admin and support services were born in the EEA. Depending on the terms of the UK’s withdrawal from the EU, FM firms could face increased costs to hire labour.
Wainwright commenetd: “The current uncertainty around labour rights is threatening to place an additional burden on a sector which is more reliant than others on EU labour.”
“We expect the industry to be joining other labour-intensive industries for special visas or deals for EU workers in facilities management in order to mitigate this.”
Competition and cost inflation are also squeezing margins. The introduction of the National Living Wage (NLM) in April 2016 resulted in a cost increase for FM companies since labour is a significant proportion of their overall cost structure. Data from the Office of National Statistics shows that Cleaning and Hospitality were the two service sectors most impacted by the National Living Wage prior to its introduction with 41.9 per cent and 33.2 per cent of the workforce affected.
In addition, the facilities management sector, by its nature, is extremely fragmented due to the variety of services offered such as security, building and grounds maintenance and cleaning. We are seeing a high number of recent SMEs entrants, particularly focused on cleaning, which has created even further pricing pressure.
Wainwright added: “Adapting to regulatory changes on labour including the NLM, apprenticeships levy and auto-enrolment will add additional pressure on the cost base of facilities providers.
“For an industry so fragmented and reliant on labour, new entrants will have a disproportionate impact on profit margins for FM firms.”