COVER STORY: Centex Pest Management: Contender or Pretender

Contender or pretender? That’s what PCOs are asking themselves about Centex Corporation, the latest in a series of “Fortune 500” companies that have entered the pest control industry with an eye towards unseating Orkin and Terminix for national market dominance. The last to try, Sears Roebuck & Company, failed miserably, divesting its pest control operations last year in the wake of rapidly declining revenues, management uncertainty and a desire to focus on its core business – retail sales. 

Will Centex, a Wall Street darling for the past decade, suffer the same fate? Bob Wanzer, president of the company’s pest control division, doesn’t think so. “We’re very confident about our business model,” says the former TruGreen/Chemlawn executive with an MBA from the University of New Haven. However, to fully understand Centex’s business model and its strategic objectives for the pest control industry, one must first understand the roots of its business … homebuilding.

BUILD IT AND THEY WILL COME. Centex Corporation entered the pest control industry in 1996, announcing the formation of Centex Pest Management as part of its HomeTeam Services Division with little fanfare. Like Waste Management 15 years before, few people inside the industry were familiar with the Dallas-based firm that had made its name – and its fortune – in the highly fragmented homebuilding field.

Centex is one of the nation’s largest homebuilders, currently building homes in more than 400 neighborhoods in 23 states, with the highest concentration of those homes in the Sun Belt, coincidentally the pest control industry’s largest, most lucrative market.

Centex is also one of the most highly regarded commercial contractors in the United States, responsible for such high-profile projects as the Orlando International Airport, NASA Mission Control in Houston, Disney’s Coronado Springs Resort, and Texas Stadium, home of the Dallas Cowboys.

Centex and its subsidiaries, a $6.7 billion company employing more than 15,000 people nationwide, is involved in five core businesses – contracting and construction services, construction products, financial services, investment real estate, and home services, including structural pest control. Its rapidly growing pest control and lawn care operations account for approximately $89 million in revenue and employ 1,600 people nationwide. Its service mix is approximately 52 percent general pest control, 28 percent termite control and 20 percent turf and ornamental.

Contrary to its low profile, Centex Pest Management is the fourth largest pest control company in the United States, boasting more than 200,000 recurring customers and projecting $7 million in internal growth in 2002. The company currently operates 42 branch offices in eight states. While Wanzer admits Centex Pest Management is a bit of an unknown right now, that should change as the company continues to expand its market reach, raising its profile throughout the United States largely through acquisitions.

“When I go to some of the national meetings, I’ll have people come up to me and ask, ‘Now, what is it that you guys are trying to accomplish?’” Wanzer says. “I think that’s because a lot of other companies have tried to get into the pest control business and been unsuccessful,” a sentiment shared by industry veteran Rick Rogers, a former president of the Texas Pest Control Association who says many in the industry view Centex as an “outsider.”

What people don’t know, however, is Centex spent several years studying the business dynamics and potential profitability of the pest control industry long before investing a dime in the market. As a result, Rogers – who served three years as president of Centex Pest Management before starting his own consulting business – says the company knew exactly what it was getting into.

“They went in and studied the industry thoroughly,” Rogers says. “They had done a lot of planning (before expanding into the pest control industry).”
And since entering the market six years ago, Centex executives have never looked back, embarking on an aggressive acquisition campaign that has fueled the company’s rapid growth. In the past year alone, Centex has purchased more than a dozen pest control companies throughout the United States, including the $20 million Unified Services operation in Atlanta, Ga., its largest acquisition to date.

Learning from Waste Man-agement’s mistakes, however, Centex has been highly selective in targeting which businesses to bring into the fold, pursuing only those firms that share its corporate culture, treatment protocols and financial performance standards. For example, since Centex specializes in quarterly service, “the last thing we want to do is go out and purchase some annual service companies,” Wanzer said. “So we really look at companies that fit our model.”

“If a company was not growing or it was going backwards, Centex walked away from it,” according to Rogers, who was brought on board in the early years of the business to give the company credibility for its acquisition efforts. “They didn’t care who it was. They were not going to pay more than what the company was worth.”

Rob Swartz, chairman and CEO of Centex HomeTeam Services, says the company’s conservative approach to acquisitions is consistent with its corporate culture, which promotes “sustained growth” over rapid expansion at the expense of quality. “We passed on a number of acquisitions last year,” he says, because the firms didn’t fit Centex’s corporate culture. “They would have been short-term wins, but long-term struggles, so we chose not to take that path.”

And there’s no indication the company plans to change its philosophy in the near future, despite being flush with cash as a result of a surprisingly strong housing market. “We cannot say in the next 12 months that we are going to do X millions of dollars in acquisitions,” Swartz said. “It depends on the market. We may do very little in acquisitions in the next 12 months or we may do $25 to $50 million worth.”

One thing is certain, however, the company is focusing its acquisition efforts in those parts of the country where Centex has a strong homebuilding presence, including the South, West and Southeast, in addition to the mid-Atlantic states and California. “We think there are plenty of growth opportunities in those areas for years to come,” Swartz said.

MONEY IS NO OBJECT. Regardless of where the company plans to focus its acquisition efforts, cash won’t be a problem. “Money with them is not an issue,” according to one industry insider contacted by PCT who is familiar with the organization. “My personal opinion is that as far as Centex is concerned there’s nothing too big for them to buy. They have that kind of cash available.”

And the numbers don’t lie. Centex ranked #281 in this year’s “Fortune 500” list with revenues of $6.7 billion, just ahead of such well-known corporate icons as Campbell Soup and Apple Computers. Even more impressive, from 1996 to 2001 profits have grown at an annualized rate of 38.4 percent, ranking in the top 10 of all companies featured on the “Fortune 500.”

Conversely, ServiceMaster – the parent company of Terminix International – was ranked 308th on this year’s list with profits of $155 million, a 10.8 percent decline from 2000 levels.

Despite the economic uncertainty of the past six months, Centex’s long-term financial prospects look solid as well, particularly in its core market. Caroline Baum, a columnist for Bloomberg News, points out that demand for housing is largely determined by demographics and employment, and both of these trends are positive thanks to a recovering job market and the fact “Baby Boomers” are reaching their peak home ownership years, purchasing the “step-up” homes most coveted by Centex.

“There’s no question that housing has been on a roll,” Baum wrote in a recent column. “Sales of new and existing homes both set records last year of 900,000 and 5.25 million, respectively. The fact that housing, the economy’s designated leader, didn’t weaken during the current recession is something of a record as well.”

Scott Soler, an industry analyst at Morgan Stanley Dean Witter, says there should be a “fairly strong, resilient housing market at least through 2007,” a trend echoed by Centex Chairman and CEO Laurence Hirsch. Writing in the com-pany’s 2001 Annual Report, Hirsch said, “During the next decade, the projected growth in the demand for new homes will provide Centex Homes with the opportunity to profitably deploy more capital than it generates. That’s why we’ve complemented Centex Homes with Contracting and Construction Services and CTX Mortgage, whose own rapid expansion will result in the generation of significant amounts of free cash flow. Other operations such as Centex HomeTeam Services have reached critical operational mass and will also become cash producers over the next few years.”

According to Hirsch, this expansion of its already broad range of products and services will allow Centex to strengthen the “bond of trust” with homebuyers, resulting in lifelong customers. “We can provide them with a mortgage, title and other insurance, pest control, chemical lawn care and security services, as well as home equity loans,” he wrote. “That’s why we’re confident that the Centex portfolio of companies gives us a substantial advantage over our more singularly focused competitors.”

STRATEGIC POSITIONING. As mentioned previously, a diverse “home services” product mix, combined with an aggressive acquisitions strategy, is a key element of Centex’s long-term positioning. Another important component of the company’s strategic plan is its “Tubes in the Wall” and “Tubes under the Slab” technology, a treatment program that doesn’t require residents to be home, making it particularly attractive to dual-income households.

Centex purchased the patented Pest Defense Tubes in the Wall System in 1996, in part because it wanted to differentiate the company’s pest control service from its two largest competitors, Orkin and Terminix, while leveraging its leadership position in the homebuilding market. “It really ties us to Centex and to other homebuilders, which is an area that we feel very comfortable,” Wanzer said.  

For PCOs unfamiliar with the product, the Pest Defense System is an innovative, although not universally embraced, way to target household pests where they live – inside walls. Installed during the construction process, the Tubes in the Wall system is a network of small plastic tubing installed in designated walls throughout the home. The tubes are perforated at regular intervals and linked to service ports conveniently located on the outside of the structure. This allows Centex Pest Management technicians to inject precise amounts of pest control materials into the tubes every three months, controlling pests without entering the home, while limiting exposure to people and pets. “It’s less invasive,” observes Swartz. “We still treat the perimeter of the home every quarter after shooting the wall voids, so it really delivers an outstanding service.”

Based on a study commissioned by Centex, the Tubes in the Wall system has a perceived value of $700 to a new homebuyer. Since the homebuilding industry works on such tight margins, the builder pays some portion of the cost of installation, while Centex acquires the recurring revenue, the most valuable part of the transaction. “Without divulging too much of the financial model, we have a greater than 80% sign-up rate for the pest control service,” Swartz says. “And consumers … quit at very low rates. They’re very happy with the service. The system is attractive because it is targeted, convenient, easy to apply, effective and affordable.”

Even more important, the high close rate has allowed Centex to dominate the pest control marketplace in those neighborhoods where they construct homes. “Their profit margins are far greater than any of us doing conventional pest control business will ever be able to achieve because we can’t get that route density,” observes Rick Rogers, vice-president of operations for Myers Services, Dallas, Texas. “No way can I, Terminix or anyone else get an entire neighborhood to use our service.”

Yet not everyone is convinced the Tubes in the Wall system is the way to go, no matter how attractive the business model. “As far as selling something, it’s a good wicket, there’s no doubt about that,” observes Rick Beard, executive vice-president of Massey Services, Maitland, Fla. “Whenever you get beyond the wicket aspect of selling something, however, and get into the technology of it, that’s where the rubber meets the road.

“One of the reasons we stayed away from the system is I believe that long-term environmentally, that’s not where the business is headed,” he added. “The business is headed for less and less pesticide usage inside homes and buildings since the majority of our pest problems come from the exterior. If you get one of those systems inside the wrong house and you get someone who claims to be pesticide sensitive, your potential contingent liability could be astronomical. From that standpoint, it’s not a system that we feel is the future of our business.”

Clearly, that’s not a concern shared by Centex, which continues to drive sales of the system, while monitoring the performance of the technology. “Tubes in the Wall is an effective delivery system,” Wanzer says. “The pest control materials are injected into the wall voids between the interior and exterior walls, not inside the kitchen or sprayed on baseboards,” making them inaccessible to people and pets.

The company currently has about 52,000 Tubes in the Wall customers on the books to complement its 81,000 “conventional” pest control clients. Surprisingly, Centex builders throughout the United States aren’t required to install the Tubes in the Wall system. “It’s a division by division decision,” Wanzer said. However, they’ve seen enough value in the system that it is being installed in every market served by Centex.

AN EXPANDING MARKET. Not satisfied to rely on internal growth, Centex is aggressively marketing its Tubes in the Wall technology to non-affiliated builders, installing the system for “competitors” if they’re interested in offering the service. “What’s happened is that other builders in the cities that Centex builds in either had to offer the product or explain to their customers why they couldn’t buy it,” Rogers says, resulting in an ever-expanding pool of potential customers.

The company’s marketing efforts in this area of business development have clearly paid off. For the first time in its history Centex installed more units in non-affiliated homes than in affiliated homes in the fourth quarter of 2001, according to Wanzer. “It’s an educational process,” he said. “In Houston, we have four out of the top 10 builders in that market doing installs. As the value becomes more known to the public and homebuilders, we expect demand to continue to grow.”

That’s not to say, however, that the Tubes in the Wall technology is without its challenges. “I don’t want to minimize the need to have trained installers,” Swartz said. “You also need to have an office that is very diligent in scheduling and billing homebuilders. It’s not unusual to install the system four to six months prior to homeowners taking occupancy and then delivering the initial (pest control) service, so you have an immediate capital outlay long before you see revenue,” something that isn’t particularly appealing to many PCOs.

“I think that the issues of route density, capital outlay, the logistics of working with homebuilders, and the billing issues with homebuilders requires a set of skills that is pretty unique,” Swartz added. “It took us two years in one office to work this out.”

Centex has been so pleased with consumer response to its Tubes in the Wall system that it has expanded the service to include pre-construction termite treatments, another important market for pest management professionals. The company’s patented Tubes under the Slab system complements conventional liquid termiticide treatments and the Sentricon Termite Colony Elimination System it offers throughout its market area. (Editor’s note: Centex currently has 21,000 Sentricon customers on its books, making it one of the largest Sentricon Partner companies in the Dow AgroSciences portfolio.)

The Tubes under the Slab system features a network of perforated tubes around plumbing pipes, expansion joints and other critical areas where termites and insects are likely to enter, allowing Centex to provide additional treatments as warranted without invasive termite treatments, according to Swartz. “We will continue to grow our Tubes in the Wall and Tubes under the Slab business,” he said, giving the company “a meaningful growth number” through the builder channel.

And growth is what pleasing stockholders and working for a “Fortune 500” company is all about. That’s why Centex is so optimistic about its business plan, the only one of its kind in the industry. Through a combination of targeted acquisitions, quarterly monitoring of customer satisfaction levels (see related story at right), patented technology and low customer acquisition costs by leveraging its position in the homebuilding market, Centex believes it is poised to become the next major player on the national stage. “We will deliver over one million home services this year,” Swartz says, “and we believe that number will easily grow to several million services in the next few years.”

Whether or not the company is successful, like anything else in business, will be determined by how well it executes its strategic plan. “I don’t think there’s any doubt that Centex is a well-run organization,” observes Massey’s Rick Beard, “and it’s a valid business model, but your ability to truly grow a company internally is how you build a sustainable business. The key to whether or not they’re going to be successful is if they can put all the cultures (resulting from their acquisitions) together and create a common culture, and then be able to make the business profitable and stand on its own. All acquisitions at some point must provide a return on investment.”

Will history repeat itself? Will Centex suffer the same fate as Sears Roebuck & Company and Waste Management, two other Wall Street heavyweights that entered the industry with great promise, but departed several years later licking their wounds? Rick Rogers, for one, doesn’t think so. “In my opinion, it’s the best top managed down company that I’ve ever been involved with in the industry. I think they’re in it to be one of the top two or three players in the market.”

Tom Wright, president of B&G Chemical & Equipment, a well-known product distributor based in Centex’s own backyard of Dallas, agrees. “I don’t see anything standing in their way to becoming as large as they want to be,” he said.

Ultimately, will Centex be able to “close the deal” and rival Orkin and Terminix for market dominance? Only time will tell, but it’s going to be fun to watch.

The author is publisher of PCT magazine and can be contacted at dmoreland@pctonline.com.

CUSTOMER SATISFACTION A PRIORITY

Centex HomeTeam Services is serious about customer service. So serious, in fact, that they invest more than a quarter-million-dollars annually on independent third-party research to track customer satisfaction levels throughout the sprawling organization.

“We have an outside company that interviews 3 to 4 percent of our customers in each branch office on a quarterly basis,” said Bob Wanzer, president of the company’s pest control operations. Customers are asked to rate the company in 13 key areas, with the most important category being “likelihood to recommend.”

“If somebody is going to recommend you, they have got to be happy with your service,” according to Wanzer. “It’s a tremendous focus of our organization.” If the company identifies a customer service problem in a particular branch office or a decline in customer retention rates, “we will actually stop the growth in that office until we get the quality back.”

In the following article, Wanzer describes the key components of Centex’s customer service program, as well as the corporate culture that spawned the initiative:

“As an outgrowth of intensified competition, companies today in a variety of industries are working to establish stronger and more enduring bonds with their customers. Attracting customers is now viewed only as an intermediate step in the marketing process. Keeping and making them into better customers is the key to achieving shareholder value. The basic concept of relationship management is to convert customers into relationship customers. Our customer loyalty model enables us to differentiate our people, products and services in the marketplace.

“Relationship management requires a significant commitment of resources to develop and measure ongoing company performance as perceived by customers. It also takes a willingness to create a quality culture driven by continuous improvement. Customers evaluate our company’s performance on a number of key business metrics like technician quality, treatment- and service-related interactions, as well as additional business attributes. Our customers provide us with information that when combined with additional research tools enable us to clearly pinpoint improvement opportunities and prioritize which factors impact the customer relationship.

“In essence, if we had only one dollar to spend on improving, we would know with exact certainty where to spend it, giving us the biggest ‘bang for the buck’ instead of scattering resources on opportunities that are important but do not impact the customer relationship. Performance ratings impact customer outcomes such as: continue to use our company in the future, buy additional products, or recommend our service and products to others. The preferred outcome is to have many loyal customers who are willing to become more dependent on the company. This ‘deepening dependency’ is reflected in increased demand for the products/services already being purchased and/or a willingness to purchase additional items from the company.

“Customer satisfaction and continuous improvement is not an event to our employees, but a culture at Centex Pest Management. Our customers and employees have enabled us to make significant improvement in marketing and customer retention. As the chart above illustrates, our quality efforts have created loyal customers, establishing us as a quality pest management company.”