The Circular File

Pricing Generally a Little Weaker Than Expectations

Generally, pricing was a little weaker than anticipated, and in most cases, sequentially just a bit lower. Although the lower CPI was consistently cited as the primary culprit, bits and pieces of other anecdotal information pointed to a more competitive pricing environment, at least in certain markets. This is somewhat ironic, and frankly a bit puzzling, as by all reports the industry is on the cusp of overall volumes turning positive. Certainly, lower CPI index-based pricing pressure is a big dampener on absolute price levels, and it effects between 40%-50% of the overall business. CPI remains mired around 1%, versus the roughly 2.5% underlying CPI assumption, when expectations for pricing for the year were first set.

Competitive Landscape Heats Up in Spots

The competitive dynamic with regard to pricing has worsened in pockets, though we would not characterize it as a generalized material deterioration. There appears to be a couple of factors involved, with different players having different pressure points that they are reacting to. Republic Services noted lower pricing in several of the geographic markets where it was required to divest assets when it merged with Allied Waste. Republic, where possible, rerouted waste out of the landfills it had to divest and into its other landfills. Waste Connections acquired the bulk of the divested landfills from the merged company, and it is (understandably) ramping volumes back into these landfills in a still weak volume environment, which causes dislocation (price pressure) in the local market, at least temporarily. As a result, several urban markets have become more competitive “hot spots”, such as Los Angeles and Houston. At the same time, the municipal, or franchise, markets are under increasing price pressure for several reasons beyond the aforementioned CPI indexed-based pricing issue. First, severe fiscal budget issues are forcing some municipalities to ask for price concessions, or more services for the same price, or higher fees —anything to either get more revenue from, or reduce the cost of, their solid waste program. (Often the solid waste company can negotiate for a longer contract in return, however.) Secondly, a number of the mid-size regionals who have grown more aggressively have often done so via obtaining more municipal contracts, particularly in the Southeast and Florida. It appears that Waste Management is now making more of a concerted effort to hang on to its municipal business than it had several years ago.