Top 5 Consolidating Industries

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1 January August Top Follow 5 Consolidating head Master Industries page A August 2015 By Darryle Ulama, Andrew Alvarez and Nick Petrillo By analyzing more than 1,000 US industries across its database, IBISWorld has identified five industries poised for consolidation The motivating factors behind consolidation vary by industry Industry consolidation is characterized by the amalgamation of smaller operators into larger companies, resulting in fewer but more powerful industry participants. Consolidation activity usually signifies an industry in the mature phase of its life cycle, as established operators acquire competitors in an effort to strengthen their market position. The rationale for consolidation includes greater negotiating power with suppliers and customers, access to new technology and practices and the expansion of product lines. By analyzing more than 1,000 US industries across its database, IBISWorld has identified five industries that are poised for continued consolidation in The motivating factors behind consolidation vary by industry, ranging from lower consumption trends in the Cigarette & Tobacco Manufacturing industry to the need to expand capacity for the Wireless Telecommunications Carriers industry. IBISWorld expects consolidation to impact the operating environment of these five industries going forward. Telecomm Carriers The Wireless Telecommunications Carriers industry operates and maintains switching and transmission facilities to provide direct communication services through radio-based cellular networks. The industry serves users of cellular mobile phones, pagers and other wireless communication devices. Rapid growth in both the functionality and popularity of mobile phones has fueled annualized revenue growth of 2.8%, reaching an estimated $248.7 billion over the five years to Despite steady revenue growth, the industry has aggressively consolidated over the past five years; total industry enterprises declined at an annualized rate of 2.3% to 771 operators over the five-year period, while industry employment grew at a slim 0.9% annualized rate to total 264,674 workers. Mergers and acquisitions among wireless telecommunications carriers are common and help growing operators expand cellular coverage areas, improve profitability and avoid redundant investments to cellular infrastructure. Since two competing providers within a regional area may build proprietary cell towers or pay separate leases on preexisting towers, mergers can eliminate these costs and consolidate the customer base of two otherwise competing companies. The United States Department of Justice and the Federal Communications Commission have vocally opposed mergers of national carriers such as the proposed info@ibisworld.com

2 August merger between AT&T and T-Mobile due to antitrust concerns. However, industry consolidation will likely continue over the next five years among independent regional carriers that have fallen behind national carriers in their deployment of dependable 4G LTE coverage areas. Cigarette and Tobacco The Cigarette and Tobacco Manufacturing industry acquires raw materials from tobacco growers, paper and fiber manufacturers, tobacco stemmers and tobacco redryers to produce cigarettes, cigars, loose pipe tobacco, smokeless tobacco and e-cigarettes. Wavering consumer spending on tobacco is expected to lead to minimal annualized revenue growth of just 0.2%, to reach an estimated $43.5 billion in Therefore, the industry s largest tobacco producers have looked toward mergers and acquisitions as a method of generating additional revenue. Over the past five years, the industry has experienced annualized 0.9% and 0.6% declines in establishments and employment, respectively. Continual declines in spending on tobacco have led the industry s largest manufacturers to acquire and aggressively market preexisting brands as the primary method of revenue growth. Industry leader Altria Group s $10.0-billion acquisition of UST inc. in 2008 represented the then-largest merger in the industry s history and greatly expanded Altria s brand portfolio, which boasted industry-leading cigarette brand Marlboro, to include leading smokeless brands Skoal and Copenhagen. In 2014, the industry s second-largest manufacturer Reynolds American Inc. followed this strategy by announcing its intended purchase of Lorillard Tobacco Company. The deal will expand the company s brand portfolio to include cigarette brands Newport, Maverick, Old Gold, Kent, True and others. Due to extremely high barriers to entry for new tobacco manufacturers, the industry s market share concentration will likely continue to increase going forward. Domestic Airlines The Domestic Airlines industry has enjoyed robust revenue and profit growth over the past five years, buoyed by growing travel spending and the recent decline in oil prices. In 2015, IBISWorld expects the industry to generate $157.1 billion in revenue and to employ 375,664 individuals. The industry s top operators include American Airlines, Delta Airlines, United Continental and Southwest Airlines, which collectively account for Consolidating industries* Industry 2015 revenue ($ million) Market share of top four operators Enterprises (2015) Enterprises (2020) Wireless Telecomm Carriers 248, % Cigarette & Tobacco Manufacturing 43, % Domestic Airlines 157, % Gas Stations 106,252.2 <10.0% 10,719 9,496 Medical Device Manufacturing 40, % *IBISWorld estimates

3 August % of total revenue in Between 2009 and 2015, the number of operators has declined at an annualized rate of 0.7% as a result of bankruptcies, consolidation and downsizing. Recently, operators have enjoyed record profit due to lower fuel costs, special fees and high demand. Consolidation in the Domestic Airlines industry began with the Airline Deregulation Act of 1978, which terminated federal regulation of passenger airfares and allowed the entrance of low-cost carriers. The past decade contended with the reduction of the number of major domestic airlines from 10 to four, creating an industry dominated by a handful of operators. This was achieved through a series of successive mergers, including American and US Airways in 2013, AirTran and Southwest in 2011, United and Continental in 2010, and Northwest and Delta in The industry is quickly approaching an oligopolistic structure, which critics believe has lowered competitive pressure. The critics point to ever-higher fares and fees and poor airport performance as evidence of this. Although the industry has already attained high market share concentration, consolidation activity will likely continue going forward. Gas Stations The Gas Stations industry comprises gas stations that primarily retail automotive fuel, as well as offer repair services and a small range of replacement parts. Industry revenue is sensitive to trends in oil prices (which depend on global supply and demand), along with disposable income levels and driving habits. Over the past five years, total vehicle miles increased, as more Americans returned to work, bolstering purchases of gasoline. However, significant drops in the world price of crude oil has resulted in substantial revenue loss over the latter half of the five-year period. As a result, IBISWorld anticipates industry revenue to decrease at an annualized rate of 2.7% to $106.3 billion during the five years to 2015, including a 19.0% decrease in 2015 alone. Therefore, many industry operators have aggressively consolidated in order to develop economies of scale and remain competitive. Consequently, over the past five years, industry establishments and employment have experienced annualized declines of 4.6% and 5.1% to 13,920 and 120,226, respectively. The growing popularity of fuel-efficient cars will place downward pressure on revenue growth, increasing competition among industry operators over the next five years. Additionally, major oil companies will further reduce their footprint in the gas retailing business by selling off locations, closing unprofitable establishments and concentrating on regions where gas retailing is most profitable. Distributors that supply stations with vehicle fuel are anticipated to purchase some of these retail sites, further expanding their involvement in the oil and gas business. However, most distributors are expected to opt for more profitable stations with multipump capacity in high-traffic locations, rather than a larger number of stand-alone gas stations. Consequently, the number of industry establishments is expected to decline at a faster pace than enterprises over the next five years, suggesting an increase in consolidation within the Gas Stations industry. Medical Device Manufacturing The Medical Device Manufacturing industry includes manufacturers of magnetic resonance imaging equipment, medical ultrasound equipment, pacemakers, hearing aids, electrocardiographs, electromedical endoscopic equipment, among others. Medical devices are essential healthcare

4 August About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call products; as a result, they generally protect their producers from significant revenue volatility. However, these products also come with high price tags, which makes the industry vulnerable to economic downturns. Over the five years to 2015, industry revenue is expected to increase at an average annual rate of 3.5%, reaching $40.1 billion. An aging population, the expansion of healthcare coverage and technological advances are expected to bolster market growth, causing revenue to increase 3.8% in 2015 alone. However, shorter product life cycles and higher costs of developing new technology have driven industry consolidation, as both of these trends encourage large players to acquire new technologies from small companies. Therefore, the total number of industry operators is expected to decline 5.1% per year on average in the five years to 2015, to total 552 enterprises. Customer consolidation has also primarily driven mergers and acquisitions within the industry, as manufacturers are more likely to win contracts with large purchasing organizations if they can offer a wide product assortment. The Patient Protection and Affordable Care Act s 2.3% excise tax on the sale of medical devices will also continue to drag down average industry profit margins, while continued globalization will affect the composition of the industry going forward, as companies increasingly outsource manufacturing, research, development and other operations. These trends are expected to exacerbate the consolidation movement that the industry has experienced over the previous five-year period, further reducing the overall amount of operators over the five years to Contact: Media Relations media@ibisworld.com IBISWorld Sales & Subscriptions Phone:

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