II Update

November 11, 2005

The industr bounces back from a difficult year.

No matter what's going on with the economy, consumers are eating out more than ever before, according to industry observers. And that's great news for marketers of cleaning products for the food service segment.

Slowly but surely the industrial and institutional cleaning market is returning to normalcy after a difficult 2001. Prior to the Sept. 11 attacks in the U.S., the global economic slowdown was already having an impact on nearly every sector of the economy, and the I&I segment was no exception. But following 9-11, air travel came to screeching halt, hotel occupancy rates plummeted and the already anemic U.S. economy took a turn for the worse.

All of these factors took at toll on the industrial and institutional cleaning market, according to a recent study by Kline & Co., Little Falls, NJ. Kline puts the U.S. I&I market at $7.6 billion in 2001, with zero growth. The good news is that sales are expected to rise this year to nearly $8 billion.

"The events of Sept. 11 had a definite impact on our business," noted Tammy Westerman, vice president of research and development, State Chemical. "It wasn't just within the hospitality segment either. But the good news is that business seems to be turning around now."

"There was a general slowdown in orders immediately after 9-11, particularly from the east, but it seemed to be due to the logistics of communications, people not being in their offices, etc.," said Rosemarie Cabrera, national sales manager, Chase Products. "After a few weeks, there was little perceptible difference. You have to remember, though, that we're in a business that grows when there is an increased need for cleaning products and disinfectants, especially easy-to-use items that are fast and effective."

By segment, Kline estimates that in 2002 food processing and industrial cleaning are expected to reach $3 billion in sales, while janitorial and housekeeping sales are expected to top $2.85 billion. Food service is expected to climb to $1.5 billion and laundry is a $600 million market. On a global level, Kline estimates I&I sales of $18.5 billion at the end-user level. Ecolab is the market leader with 20%, followed by JohnsonDiversey with 17%.

The Kline & Co. report, entitled "Janitorial and Housekeeping Cleaning Products USA 2002," is hot off the presses. Although 9-11 capped the end to a traumatic year, Bruce Boynick, a senior associate with Kline, noted that a slowdown was already underway in the I&I sector prior to the terrorist attacks. "Through 2002 the market was growing 3-4%," he recalled. "Yet, in the first three quarters of 2001, there was a noticeable slowdown. After Sept. 11, the market was hit hard, especially the lodging industry."

Looking ahead, most observers agree that the industry is poised for a rebound. "During the next 12 months I&I will have a slight recovery, with sales growing a couple of percent points above GDP," said Ross Harding, executive vice president of marketing and strategic accounts for Acuity Brands (formerly NSI). "We're starting to see a return to more normal inventory levels."

The Growth of BSCs
While the industry reported a definite slowdown, the expansion of the building service contractor (BSC) segment continued unabated. According to Mr. Boynick, BSCs continue to grow twice as fast as the overall I&I industry. "Building managers continue to outsource the cleaning function, so BSCs should continue to grow," he noted. "Any chemical suppler who wants to remain competitive must have a good marketing program in place to serve the BSC."

Besides the growth of the BSC, Mr. Boynick noted that consolidation will continue to have an impact on the I&I sector. JohnsonDiversey is the most notable, which teamed the No. 2 (DiverseyLever) and No. 3 (Johnson Wax Professional) players in the industry. Prior to that move, however, Johnson acquired Butcher and U.S. Chemical to improve its position in market segments. Meanwhile, DiverseyLever had purchased AutoChlor. "JohnsonDiversey is the leader in in janitorial and No. 2 in food service and laundry," noted Mr. Boynick. "Now the challenge is to pull it all together."

Occupancy rates declined 3.6% to 59.5% in the first six months of 2002, according to Smith Travel Research.

Market leader Ecolab has had its own series of challenges as it bounces back from a difficult 2001. In January, Ecolab said it would cut its workforce by about 2%, or between 350 and 450 jobs, and take a charge as it moves to streamline operations. That cost-cutting, along with stronger sales, helped Ecolab's third quarter earnings rise 25%. The company said continued cost cuts in the fourth quarter will enable it to post a 20% gain in per share results over the year-ago period.

"We continued our strong earnings performance as aggressive efforts focusing on new account sales in key hospitality markets, improved divisional operations and excellent cost savings actions led the quarter," said Allan L. Schuman, Ecolab's chairman and chief executive officer. "We again demonstrated our excellent business and geographic balance as we leveraged market growth opportunities and offset slower business elsewhere."

Third quarter sales for Ecolab's U.S. cleaning and sanitizing operations rose 5% over the third quarter of 2001 to $426 million, with healthy gains in institutional and Kay operations and improved growth in food & beverage. U.S. other services sales increased 18% to $82 million in the third quarter; excluding acquisitions, sales rose 5%.

Sales of Ecolab's international cleaning and sanitizing operations include the results of operations in Europe (formerly the Henkel-Ecolab joint venture, which was acquired at the end of 2001). Reported international sales rose 190% in the third quarter when measured at fixed currency rates. Excluding acquisitions, sales rose 1% at fixed rates. With the travel industry getting back on its feet, Ecolab expects consolidated sales (in fixed currencies and adjusted for acquisitions) to increase 12-14% in the fourth quarter 2002 over pro forma sales for the fourth quarter 2001.

Ecolab Buys Terminix in Europe
To build its pest elimination business in Europe, Ecolab purchased Terminix Limited, a London-based provider of commercial pest elimination and property services throughout the UK and Ireland. Terminix Limited, which had sales of approximately $65 million last year, was a subsidiary of The Service-Master Company, Downer's Grove, IL.

New products too, have helped boost sales. Through the third quarter of 2002, Ecolab has introduced about 30 new products. One of these introductions included Harmony, a flexible cleaning system for conveyor car washes. The Harmony line includes 11 products designed to work together for maximum effectiveness and superior results.

"The Harmony product line is the first-ever complete system of its kind for the conveyor car wash industry," said John Trotter, vice president and general manager of Ecolab's vehicle care division. "This comprehensive offering is an outcome of Ecolab's ongoing commitment to research and development of new technologies for the industry."

Harmony products include presoaks, surfactant boosts, polishes and a drying agent for advanced start-to-finish cleaning. According to Ecolab, interference can occur between the different products, diminishing the overall effectiveness of the cleaning process. But Harmony products were designed to work together and the overall effect is cleaner, shinier, drier cars.

Within the housekeeping segment, Ecolab earlier this year introduced Oasis Select 4 dilution system. The new system includes four new products: a fabric odor eliminator, a heavy-duty alkaline bathroom cleaner and two new odor counteractants. The Oasis Select 4 system includes cleaning products for floor, bathroom, glass, carpet and exterior plus sanitizers, air fresheners and all-purpose cleaners. New products added to the system include Oasis 270 Up N' Away fabric odor eliminator, which is a heavy-duty institutional fabric odor neutralizer that safely absorbs odors on clothing, carpets, curtains, rugs and other fabrics.

Also new is Oasis 302 heavy-duty alkaline bathroom cleaner, which is a daily cleaner for areas that have soft to medium water hardness and require an alkaline instead of an acid cleaner. Two new fragrances were added to the odor counteractants product line, Oasis 272 Juniper Splash and Oasis 274 Ocean Waves, to offer more fresh and clean fragrances for counteracting malodors in rooms.

In March, Ecolab introduced Soil-A-Way, a new line of products specifically for independent food service retailers and regional chains. The line includes products that meet nearly every foodservice cleaning need, from machine detergents to floor cleaners, in convenient pack sizes. The product line includes high-temp and low-temp machine detergent and rinse agents, pot and pan, presoak, quat sanitizer, floor cleaner and glass cleaner.

All products come in both one-gallon and 2.5-gallon sizes, tailored to meet the independent foodservice segment needs. The products feature self-sealing, closed-bag packaging and controlled dispensing with a touch of a button.

"Soil-A-Way is a superior chemistry that is dispensed, giving the customer control over waste and misuse," said Juan Colmenares, product line manager, machine warewashing, Ecolab institutional division. "Our customers like Soil-A-Way because it's an attractive value proposition, which is translated into excellent products and valuable Ecolab service for the right price. Plus the product line has a functional design, which delivers space savings with a professional look."

A Recovery in Travel?
Several sectors have been hurt by a combination of terrorist attacks and economic turmoil, but none was harder hit than the U.S. lodging and travel industries; but both are seeing signs of recovery. According to Smith Travel Research, in the first six months of 2002, occupancy declined 3.6% to 59.5%, while room rate slipped 4.0% to $84.80.

"Operating environment challenges have slowed the U.S. lodging industry's improvement in the first half of 2002," said Mark Lomanno, president of Smith Travel Research in a statement. "Based on current performance trends and assuming continued growth in the U.S. economy and no terrorist attacks on the U.S. mainland, we believe that full year 2002 industry operating performance will improve slightly versus 2001."

Similarly, PKF Consulting, Atlanta, released a report last month predicting that hotels will see demand for their rooms outstrip supply next year-provided there is no war with Iraq.

No matter how the economy is doing, the consumer's appetite for eating away from home continues to grow and that's good news for food service suppliers. The National Restaurant Association (NRA) expects the industry will see modest but improved sales growth this year.

Total industry sales are projected to reach a record $407.8 billion in 2002-an increase of 3.9%. Real sales, after adjusting for inflation, are projected to advance 1.4% and represent continued growth opportunities for both restaurant operators and their suppliers, according to NRA.

The association said that the 1.4% real gain for 2002 in restaurant-industry sales is higher than the 0.8% real advance posted in the recessionary environment of 2001, reflected anticipated improvements in the nation's economy. Dining out will remain an essential and important component of contemporary lifestyles that consumers are less willing to sacrifice now than in prior periods of economic slowdown, said NRA.

Is the travel industry ready to soar again?
One of the key issues for food service operators is drain maintenance and State Chemical continues to focus on its 24/7 drain program.

"We developed a program approach rather than just another product push," noted Dr. Westerman. "We offer not just a drain cleaner, but an entire system. It's a pump that feeds the product, the service and an overall maintainance program. Customer response has been great and the sales rep response has been great."

Cleaning Up in Car Wash
Although some companies felt the effects of Sept. 11 and the economic slowdown in the U.S., Mr. Harding insisted that business remained strong at Acuity Brands. "We're very diversified, so overall we had a good year despite troubles. In fact, our retail business remained strong and expanded."

Within the car wash segment, Acuity teamed up with Clorox to introduce a professional line under the Armor All brand name. "We formed a separate business unit with dedicated sales people to sell the Armor All Professional brand to the car wash market," said Mr. Harding. "We think there is a large percentage of customers who want to buy on brand."

Meanwhile in retail channels, Acuity remains a premier vendor to Home Depot. At the same time Acuity introduced its Selig Commercial brand in Tru Value stores and Enforcer is available at Lowe's. "We're riding the Big Box wave," said Mr. Harding. "Our retail business is accelerating as consumers do more to take care of their current homes or clean up a home they've just purchased."

A Growing Wipes Business
Whether for home use or institutional cleaning, wipes are becoming an increasingly important segment (see What's Up with Wipes? p. 62 in this issue). Acuity is capitalizing on this trend with the introduction of wipes for I&I customers. Products include degreasing industrial wipes and grafitti-removing wipes for schools, government and public places.

"We've already seen how successful wipes are on the consumer side, now we want to bring the same technology to I&I. Hand cleaning was already popular in I&I, but we've added stainless steel cleaning formulas and equipment degreasers," said Mr. Harding. "It will be interesting to see how the market develops, especially in the hospitality segment where there has traditionally been a lot of product waste."

Mr. Harding predicted that wipes will take market share away from ready-to-use products that are packaged in quart trigger sprayers. "Wipes are a very good alternative for those people using a trigger sprayer and paper towel," he insisted.

Graeme Armstrong, president of JohnsonDiversey Europe, agreed that wipes are a key growth area for the I&I market. At the recent World Conference on Detergents sponsored by the American Oil Chemists Society, Mr. Armstrong told Happi that sales of wipes are growing 4 to 5 times faster than the overall market. What's the reason for the dramatic gains? It just might be that I&I personnel are starting to understand what consumers have already known for some time-wipes are easy to use, require no training and no mixing of chemicals. All of them are key attributes when one considers the extremely high employee turnover rate in the I&I cleaning industry.

But wipes aren't the only growing category for Acuity Brands. Mr. Harding said that there has been a positive response to the company's line of biological cleaners for concrete, floors and drain maintenance.

In the past, companies used solvents to break up oils and grease. But biological cleaners provide continuous cleaning action and are environmentally-preferable in many instances.

"We are the sole vendor of biological drain cleaners at Burger King," said Mr. Harding. "Biological cleaners will continue to gain market share, especially in the food preparation segment."

In the food processing segment, Acuity has expanded its non-chlorine product offerings. "There is so much attention being paid to processing plant hygiene right now," noted Mr. Harding, "so we're in the right place with the right product. We've married efficacy with a environmentally acceptable solution."

Primary new products from Chase include a disinfectant/lubricant/ coolant spray targeted to manual and electric hair clippers, a new insecticide that kills fire ants, carpenter ants and several other crawling insects and metered air fresheners with a new formula, and in a broader range of fragrances, noted Ms. Cabrera.

Dr. Westerman noted that State Chemical updates its product line every month with new fragrances. In addition, the company is developing some environmentally-preferable products as well as a corporate-wide ISO 14000 certification.

"Environmentally-preferable is not important to all of our customers, but it is to the larger ones," she noted. "We're trying to develop some innovative products that work just as well as traditional ones."

Although the I&I market has been hurt by the slowdown in travel and the weakness in the U.S. economy, industry experts insist that the market remains lucrative for those companies willing to do the necessary footwork.

"I&I is very segmented. Anybody who wants to be successful has to be willing to get the door slammed in his face," noted Steve Swigart of Spartan Chemical. "You have to keep running and focus on sales."