Logistic companies are typically perceived as cyclical and economically sensitive, suffering losses in poor economic conditions because of lower utilization rates. However, Brink's (NYSE:BCO), a global secure logistics company providing services such as armored vehicle transportation of cash, is a totally different animal. It boasts an impeccable financial track record, having been profitable and cash flow positive for the past decade. There are two factors contributing to Brink's consistent profitability: brand loyalty and switching costs.
Based on 2011 internal estimates by Brink's, it has an estimated 23% of the global secure logistics market share; this makes it the market leader in a fragmented market. Furthermore, Rome wasn't built in a single day – the Brink's brand celebrated its 150th anniversary in 2009. There are three key indicators of Brink's branding power.
Brink's has grown its top line by a three-year and five-year CAGR of 3.6% and 7%, respectively. Even during the global financial crisis, Brink's revenues dropped by less than 1% in 2008 and 2009. Furthermore, Brink's market share has increased from 19% in 2009 to 23% in 2011, based on internal estimates. Its revenue stability points to a high degree of customer captivity.
Brink's also maintained its gross margins within a narrow range of 18%-21% for the past five years. This suggests that the company has some degree of pricing power.
Brink's is also able to successfully extend its brand to other adjacent products and services outside of its core cash-in-transit services. These include secure long‐distance transport of valuables, money processing, vaulting, and payment services. In fact, Brink's increased its revenue contribution from such services from 33% in 2009 to 36% in 2012.
This is a clear indication that it has successfully extended its brand to new markets. It is also possible to draw parallels with Virgin Group, which has leveraged its strong brand name in diverse areas such as travel, financial services, food and beverages, and telecommunications.
High switching costs
The significant time, effort, and resources that a customer has to expend in order to switch to a new supplier are referred to as switching costs. When switching costs are high, customers are more likely to stay with their current service provider. This leads to greater revenue stability.
Cash and valuables such as jewelry, diamonds, and precious metals are typically of the objects that security logistics services protect. Any cost savings from using a less expensive logistics company won't be sufficient to offset the significant losses involved in the event of a theft or a robbery.
Brink's is also exploring the possibility of reentering the U.S. home security market. Its former home security business was spun off in 2008 and was subsequently acquired and merged with Tyco's security business under ADT (NYSE: ADT).
In the home security business, ADT benefits from a different set of switching costs in the form of contractual commitments. Its customers typically sign three-year contracts with automatic renewals for successive 30-day periods. They also pay ADT monthly following the initial installation fee, with more than 50% of customers opting for automated payment methods. There is also a penalty for early termination. As a result, ADT loses less than 15% of its subscribers every year, with most of the losses attributed to customer relocation.
Another of Brink's security peers is Checkpoint Systems (NYSE:CKP.DL), a provider of loss prevention solutions to companies in the retail and apparel industry that minimizes retail theft. Checkpoint's technology allows its customers to use a single RFID tag for both inventory management and loss prevention.
The integrated and customized nature of Checkpoint's solutions means that its clients have to devote significant amount of energies to IT support and training. If its clients were to switch to a new loss prevention services provider, they will have to incur both direct and indirect costs in terms of downtime, productivity loss, and retraining.
While the sources of switching costs vary for Brink's and its peers, the underlying principle is the same. As long as you can make it difficult and painful for your customers to switch, you are more likely to retain your customers.
Foolish final thoughts
It doesn't matter what industry or business you are in. The key to consistent profitability lies in strong brand equity and making it costly to end customer-supplier relationships, and Brink's is a good role model in this regard. Its consistent profitability speaks volumes in an uncertain global economy, making Brink's a secure investment for investors' portfolios.