And outside of residential applications, there's huge potential for smart locking systems in the non-residential real estate space.
Take hospitals and banks for example. Building managers want to precisely manage access rights, securely seal off departments, and closely monitor who has cards and where they are located. In these circumstances, smart keys and electromechanical locks offer benefits that traditional keys and locks just can’t match.
With these factors in mind, the smart key and lock sector is primed for growth, with Grand View Research, a US-based research and consultancy company, estimating that the global door lock system market will grow by a CAGR of 32.3% to reach USD 7.9 billion by 2023, with growth expected to be particularly strong for government and industrial applications 3.
Keys to a growth opportunity
As to who is best placed to benefit, Allegion, a US-listed security system company, looks well-positioned.
Allegion supplies mechanical and electro-mechanical locks, as well as door closers, doors, frame and access control systems. The company has an approximate global market share of 4%.
Access control is a fragmented market with many small, local players. Though smaller than leaders Assa Abloy and DoKa, Allegion leads in non-residential new build (especially in education and healthcare) and the electro-mechanical locks markets.
Unlike other tech-driven sectors, pricing power remains relatively strong in the industry, with Assa and Allegion reporting consistent annual price increases of 1% during the past decade.
Strong pricing partly comes from local regulations. In education and healthcare sectors, local markets have particular standards and product approval processes, e.g. to control access to a school building, and only a few products get approval. Given the limited size of the opportunity, it is probably not worth a new entrant trying to break in, so there is a limited amount of competition and better pricing power for firms like Allegion.
Another factor that supports pricing is Allegion's use of third party distributors. End users don't usually choose the product in non-residential lock markets, and a third party specifier working for the architect will specify the exact type of lock that should be used. Specifiers don't pay for the item and are largely price insensitive. Locks are also a tiny proportion of the overall cost of the project and the builder/project manager then has to acquire that exact item, even if it costs more than alternatives.
Pricing issues aside, Allegion has strong growth potential. Principally, this is because it is a leading player and has the scale to develop new products, while small local players will struggle to do so.
Allegion is also a mainly US business, so has the opportunity to scale up in overseas markets through M&A. M&A has typically been very successful in this sector, as there are a huge number of fragmented competitors, so deal prices are relatively modest, while synergies from deals are high. We note that Allegion has been acquisitive in the past year, and we wouldn't rule out further deals given the fragmented nature of the industry.
In our view, the combined factors of a differentiated product with clear advantages over traditional methods, plus strong prospects for growth in residential and non-residential markets, and Allegion's strong positioning make a strong case for the future, and our strategies are positioned accordingly.