CONSOLIDATIONPRIZE The Coming Decade of

Consolidation in B2C Services

OPPORTUNITYKNOCKSB2C Services is big business – around £80bn in the UK alone – but in contrast to retail, mostB2C services markets are highly fragmented: the top players in aggregate often account forless than 20% of share, and independents thrive.

However, a number of recent developments – ranging from evolving consumer demand totechnological improvements and regulatory changes – mean it’s time to reconsider the casefor consolidation over the coming decade.

Even taking into account these recent developments, OC&C’s experience suggests only someB2C Services markets will consolidate profitably, and that others will remain fragmented.The determining factor is how the customer buys: are independents always going to beadvantaged because the customer values the personal relationship, or can an innovativescale player deliver a differentiated proposition that the customer prefers?

OC&C has a well-structured approach to drive value out of B2C Services markets, whetheryou are an incumbent, an entrant from an adjacent market, or a potential investor.

Consolidation Prize 02

B2C Services is diverse – from childcareto key cutting. As a sector, it is muchharder to pin down than retail, but it doeshave some universal characteristics.

We define B2C Services as any marketwhere labour is a core element of the“product” being bought. This includesmarkets where the consumer is makingthe purchase directly eg, dry cleaning, aswell as those where there are “insurer”intermediaries eg, breakdown recovery.Many of the insights also apply totaxpayer-funded services markets too,especially where the consumer has somechoice of provider eg, doctor’s surgeries(but not street cleaning).

So why should you be interested?

• Large: in total, the UK consumer spent£82bn on B2C Services in 2009, andseveral sub-markets are multi-billion

• Growing: at 3.1% CAGR, significantlyoutpacing spending on goods (1.5%CAGR) and with some sectors growingat double-digits

• Most importantly the ‘right’ level offragmentation: still significant share-driven growth opportunities, but manymarkets have a leader who couldprovide a platform for consolidation

What is more, activity in the market hasbeen hotting up in the last six months.For example:

• Group of solicitors’ firms attempting tocreate the first ‘household name legalbrand’, with a store on every highstreet

• Halfords acquisition of car bodyrepair market leader

• Private equity acquisition of leadingdentistry and funeral homesconsolidators

THE NEXT FRONTIER

14

13

9

4

8

HouseholdMaintenance

AutomotiveServices& Repair

HouseholdServices

Health& Beauty

Education

Other

82

33

• Accountants• Commodity Legal Services• Estate Agents

• Financial Advisors• Funeral Homes• Insurance Brokers

• Childcare• Private Schools

• Tutors

• Cosmetic Treatment• Dentistry• Doctors Surgeries• Domiciliary Care

• Gyms & Health Clubs• Hairdressing & Beauty• Opticians• Vets

• Garment Services(eg Dry Cleaning)• Home & Furniture Removals• In-home Domestic Service

• Shoe Repair /Key Cutting• Skip Hire /

Waste Disposal

• Breakdown Recovery• Car Body Repair• Hire Cars and Vans

• Motor Servicing• Taxis• Windscreen Repair

• Boiler Maintenance• Plumbers

• Electricians• Handymen

Key Categories of B2C Service Spend¹, 2009£bn

1. Excludes taxpayer-funded spendSource: Household Expenditure Survey

03 Consolidation Prize

THE TIMEIS RIPEOC&C’s work across B2CServices sectors has revealedcommon trends driving theirdevelopment. In aggregate,these trends are shaking upthe structure of the markets,changing the economics andopening up opportunities fornew entrants.

Supplier Trends Consumer Trends

Time to Reconsider

Consolidationin B2C Services

Transformation of Costs,Enabled by Technology• Workflow / scheduling systems and

wireless technology: PDAs, GPS, 3G• Increasingly flexible labour

(part-time, immigration)

• Commoditisation of professions, enabled by technology

• Accessibility of low-cost logistics

Changing Regulatory Landscape• Deregulation of ownership –

eg, legal services• Increased regulation –

eg, environmental, employment law

• Failure of state provision in public services and opening up to competition

Cash Rich, Time Poor• More outsourcing by consumers• Long-term fundamentals will sustain,

post-recession

Better-informed Purchases• Online access to free information and

customer feedback – eg, Google Local, Mumsnet

Evolution of Customer Proposition• Web, mobile and enhanced CRM allow

better service ‘wrap’• Expectations raised by innovation

elsewhere – eg, Amazon, Google

As well as long-run trends (eg, cash-rich, time-poor; the various impacts oftechnology), the changing regulatorylandscape in particular is introducingdiscontinuities into many B2C Servicesmarkets. In veterinary practices, thendentistry (in 2005) and from 2011

legal services, relaxation of ownershiprules means qualified professionalsare increasingly employees ratherthan owners. Conversely, in lowerlabour cost B2C Services markets,increasingly stringent employmentlegislation as well as Health & Safety

and environmental rules are raisingbarriers to the traditional family-runindependent.

As a result, the time is ripe toreconsider the opportunities toexpand into or invest in B2C Services.

Trends Creating Opportunity in B2C Services

Consolidation Prize 04

NOT JUST A COST GAMEPeople have been talking aboutconsolidation in some of these sectorsfor years, and consolidators have oftenhad their fingers burnt. So do the trendsdiscussed on the previous page makeenough of a difference? And how can youtell whether any given market is ripe forconsolidation?

In the past, the case for consolidationhas often been justified by cost-sideeconomies of scale. The trends we havediscussed will act to improve the costadvantage of scale players (eg, vialabour optimisation), but cost-sideeconomies alone are rarely enough tojustify a consolidation play.

This is partly because consolidationenthusiasts are systematically prone tounderestimate the cost-side dis-economies of scale: the need to fully cost

owner/family labour and the increase inunproductive overhead that is aninevitability of scale in all businesses.Dry cleaners and corner shops arestandard examples of this phenomenon.

There is a more important factorwhich influences consolidationpotential: how customers buy. In someB2C Services markets, customers stillbuy largely on the basis of personalrelationship – think hairdressers orchildcare – while in markets at the otherextreme, customers evaluate the overallservice proposition (eg, autobreakdown).

Where customers are buying on overallservice proposition, innovative scaleplayers can create a better propositionthat will beat independents, and thusdrive consolidation.

In many markets like this, leadingplayers have innovated their propositionand are winning share fast: for example,Addison Lee’s increasing encroachmentinto B2C taxis, enabled by its customer-friendly booking, notification andpayment mechanisms, and of course theavailability benefits conferred by its coreB2B business.

In other B2C Services markets,customers would happily buy on thebasis of an enhanced proposition, butno-one is yet offering it. A good exampleis dry cleaning, where the customerderives limited value from the personalrelationship with the dry cleaner, andmodels like San Francisco’s LaundryLocker should triumph. In fact, a start-upcalled Laundry Republic is trying to dojust that in London.

Consolidation Potential of B2C Services Markets

Full Proposition• Quality• Range• Convenience• Brand• Service Wrap

Price /Consistency

PersonalRelationship

Single Site Small Chain Large / National Chain

Minimum Scale to be Cost Efficient

HowCustomer

Buys

Scale enables customer benefit as well as cost-side economies

Scale does not deliver customer benefit, and unexpected cost diseconomies often outweigh economies�?

�

Economies of Scale (eg Buying, Middle/Back Office)

Diseconomies of Scale (eg Loss of Enterpreneurialism)

05 Consolidation Prize

REALITYCHECK

So, consolidation won’t work everywhere – there areseveral markets where neither consumer buying behaviournor cost economies support the existence of a scale player.

T he most interesting markets are those where there isconsolidation potential – where personal relationship isa less important purchase reason – but where aproposition with competitive advantage vsindependents has not yet emerged.

Full Proposition• Quality

• Range

• Convenience

• Brand

• Service Wrap

Price /Consistency

PersonalRelationship

How

Cus

tom

er B

uys

Single Site Small Chain Large / National ChainMinimum Scale to be Cost Efficient

Auto Breakdown Recovery• National coverage delivers

convenience and range authority• Trusted brand• Network-effect and purchase scale

effectiveness

Laundry• Opportunity to exploit unmet

customer buying criteria• Cost economies limited by labour

dis-economies

Non-emergency In-homeMaintenance• Consumer buys on price

transparency and reliability• On-site work means limited cost

economies

Hairdressers• Personal relationship important for

most segments• Some optimisation of specialist vs

clerical labour

Opticians• Step-change in in-

store range• Optimisation of

specialist vsclerical labour

Commodity Legal Services• Consumers trade personal

relationship for price transparency• Middle-office sharing

Childcare• Best practice sharing on

revenue and costs

Selected Example MarketsConsolidation Potential: Case Study Markets

Even when a consolidated, vertically integrated play does not work, there may be an opportunity to participate at scaleusing a different business model eg, as a franchisor. As before, the potential of these alternative business models canbe inferred from consumer purchase reasons and from the degree of cost-side economies.

Single Site Small Chain Large / National ChainMinimum Scale to be Cost Efficient

Simplified

Platform Provider

• Limited cost economies

• Consumer demands difficult to meet but can be enabled by industry-wide platform

Vertically-integrated

• Significant proposition advantages of scale – eg coverage, brand authority, trust

• Significant cost economies available

‘Factory’

• Consumer demands personal relationship…

• …but sharing an execution back-end can deliver cost advantages

Agency

• Enables some elements of price transparency / consistency, but makes no attempt to control other proposition elements

• Few economies of scale

Franchisor

• Value in a consistentconsumer proposition…

• …and some scale economies…

• …but cost dis-economies mean franchisingpreferred to ownership

Full Proposition• Quality

• Range

• Convenience

• Brand

• Service Wrap

Price /Consistency

PersonalRelationship

How

Cus

tom

er B

uys

Alternative Models

Consolidation Prize 06

MAKING IT HAPPENOC&C’s analysis of the B2C Services universe highlights a number of opportunities over the coming decade, as well as somepitfalls to avoid. Whether you are an incumbent, are considering entry or are a potential investor, now is the right time toask yourself some critical questions.

Best Opportunities in B2C Services

• Dentistry (eg, Oasis)

• Opticians (eg, Specsavers)

• Taxis (eg, Addison Lee)

• Motor Servicing (eg, Kwik Fit)

• Domestic Emergency(eg, Homeserve)

Accelerate Existing Consolidation through Proposition Development

• Car Body Repair

• Commodity Legal Services

• Garment Services (eg, Dry Cleaning)

• Home and Furniture Removals

• Skip Hire / Waste Disposal / House Clearance

Drive Consolidation through Proposition Development

Franchise• Childcare

Agency

• In-home Cleaning

• In-home Maintenance

‘Factory’

• Commodity Legal Services

Consider Alternative Models

It’s an exciting time to be involved in B2C Services, and an opportunity for significant value creation. If you are already aparticipant or are thinking about entering, get in touch on B2CServices@occstrategy.com

QUESTIONS FOR...

...INCUMBENTS

1. How do your customers buy? Ispersonal relationship important, orcan they be swayed by competitiveadvantage in other areas of theproposition?

2. Have you actively designed everyelement of your proposition to takeadvantage of scale?

3. Have you kept pace with recentConsumer trends, in particular withthe service standards and use oftechnology that consumers havecome to expect from the likes ofAmazon and Google?

4. Are you fully exploiting the new costeconomies of scale? Is thereanything you can do to revolutioniseyour cost base?

5. Are there new entrants withdisruptive business models (start-ups, supermarkets, etc.) who areabout to transform the competitivelandscape?

...ENTRANTS FROM ADJACENT MARKETS

1. How can your assets (eg, brands) andcapabilities (eg, workforcemanagement) enhance the customerproposition in the market(s) you areconsidering?

2. Will entry benefit your corebusiness? If not, is the prize bigenough to warrant the inevitabledistraction?

3. How can you manage any conflictswith existing customers/suppliers?

4. What is the right model for entry toachieve your objectives?

...INVESTORS

1. Which markets have unexploitedconsolidation potential?

2. Will consolidation occur over asensible investment horizon?

3. How ‘do-able’ is consolidation? Isthere a target you can build on, withthe right capabilities to consolidateaggressively?

4. Is the market safe from otherentrants, in particular supermarkets?

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