iRobot: Why Clean When You Can Code?
By: Kevin Meng & Richard Yang
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Clean Break
Automation is rapidly developing in everyday life, and iRobot is a company that has capitalized on this shift. Founded in 1990 and based in Bedford, Massachusetts, iRobot is a leading global consumer robot company focused on the development of household cleaning solutions, such as the Roomba and Braava. The Roomba is a vacuum robot, with models priced between $250-$1,099, while the Braava is a mopping robot, with models priced between $199-$450.
The global robotic vacuum and mopping industry is predicted to be valued at $15.4 billion by 2028, representing a CAGR of 23.2 percent from 2021. However, with immense growth comes increased competition. Although they remain as the top player in the industry, iRobot’s North American market share declined from 85 percent in 2017 to 75 percent in 2020. This was driven by more entrants into the market, such as low-cost competitors like Ecovacs. Despite iRobot’s falling market share, the company has had an overall positive net income growth for the past five years. There is an opportunity for iRobot to look elsewhere to maintain their high net income growth post COVID-19 by servicing companies in the cleaning service industry and facilities with stringent cleaning requirements.
Rummaging Around the Room(ba)
The cleaning industry has recently been struggling with labour shortages as well as high employee turnover. Due to COVID-19, job responsibilities have become increasingly tough, leading to poor staff retention. Sanitation staff were faced with higher cleaning frequencies and standards, which led to overworking. With overworking and poor service, most cleaning companies experienced more than a 50 percent annual customer churn rate. In this environment, cleaning companies need to have the ability to consistently provide high-quality service in order to maintain their contracts and strong relations with clients.
While higher wages could retain more employees, a wage increase would significantly hurt a company’s profitability in this labour-intensive sector, where wages are 43.6 percent of total revenue with an average profit margin of 4 percent. The cleaning industry is a highly saturated and mature space that is resistant to change, leading to risk-averse behaviour. Additionally, switching costs for customers are extremely low, resulting in low customer loyalty — clients are highly sensitive to changes in quality. The competitiveness of the industry means that any reduction in quality leads to a loss of customers. Therefore, cleaning companies need a solution to increase and maintain service quality while minimizing wage expenses to improve profitability. With short-term labour shortage issues, the need for consistent cleaning results, and the prevalence of low profit margins, iRobot could step in to change the cleaning industry landscape.
Hip, Hip, Bravaa!
Given these challenges, there is an opportunity for iRobot to introduce a product line focused on industrial cleaning robots. These robots, while larger and more powerful, would utilize the same mapping and navigation technologies found in its consumer robots. In addition to cleaning companies, iRobot should target hospitals and hotels. These aforementioned industries have a focus on cleanliness and sanitation in their operations, which means that they are exposed to human capital risks caused by labour shortages in the janitorial industry. Although iRobot will not be able to eliminate janitorial jobs entirely, they can play a key role in improving utilization rates and increasing consistency. As a result, custodial employees can spend more of their time on more valuable activities such as disinfecting high-touch surfaces and reducing potential for cross-contamination in high-risk areas.
yRobot?
iRobot should utilize its established reputation and customer trust in the residential space to secure commercial customers. Since automation within commercial cleaning is still in its infancy, trust and reputation are big considerations for clients when investing in a new product. Having been in the industry since 1990, iRobot is the most established consumer robot company. Its products have a strong reputation for quality and reliability among its residential customers, which makes iRobot the safest choice for commercial clients, many of whom are risk-averse.
Expanding into the commercial sector also helps iRobot take advantage of its economies of scale. Unlike existing competitors within the industry, iRobot has established manufacturing processes, supply chains, and a vast international distribution network. Their existing IP and relationships can be easily transferred to a new segment, allowing iRobot to reduce fixed operating expenses as a proportion of sales and improve profit margins.
iRobot also boasts industry-leading mapping and navigation technologies developed for cluttered home environments. With little fundamental physical differences between homes and commercial spaces, these technologies can be transferred smoothly to commercial settings with minimal modifications. Furthermore, with its consumer-facing success, iRobot has the most comprehensive and intuitive user experience in the industry, making it easy for even inexperienced commercial customers to set-up and use. This is especially beneficial for cleaning companies, hospitals, and hotels, where the main operators of the machines will be custodial staff. These technologies are supported and continuously improved by spatial, sensor, and usage data that iRobot gathers through its residential segment, which is a key competitive advantage. Its core technologies are also protected by over 1,500 patents, whereas its closest competitors, Neato and Ecovacs, only have 23 and 80 patents respectively.
The Need for Clean
The pandemic has led to increasingly stringent hygiene guidelines in the healthcare and hospitality space. As a result, there is an unprecedented incentive for clients to integrate advanced cleaning technologies. A study demonstrated that procedures which embrace advanced cleaning technology also improve indoor air quality, through a 52 percent decrease in airborne dust and a 40 percent decrease in bacteria colony formation, among other benefits.
Furthermore, diversifying iRobot’s customer base can protect them from risks and fluctuations inherent to consumer-facing products. Unlike household consumers, industrial customers provide a more stable source of cash flow. For instance, a hospital with a greater need for consistent hygiene is more likely to become a long-term client as opposed to a household consumer. Additionally, given that many industrial cleaning companies have annualized contracts, there is an incentive for the companies to lease rather than purchase equipment. iRobot currently has the iRobot Select program, which is a subscription-based program allowing household consumers to receive a different model every three years. The company could expand this idea for a flexible option for cleaning clients.
From Grease to Lease
Although other competitors like Avidbots, Tennant, and Ecovacs offer similar solutions for commercial uses, iRobot holds over $200 million in cash with no debt and spent $156 million on research and development in 2020. This strong financial capability can be put towards marketing and sales efforts coinciding with its market entry. With 75 percent market share, the company also holds the most brand awareness in the cleaning robotics industry. iRobot is uniquely positioned as the largest consumer robotics brand, both in terms of financial capability and existing IP, to successfully educate potential commercial clients on the benefits of supplementing custodial staff with powerful cleaning robots.
To best capitalize on the commercial opportunity, iRobot should use its experience from the iRobot Select program to primarily sell commercial machines through lease contracts. This pricing structure allows customers to experiment with the product and gives them the ability to cancel past the leasing period should they wish to do so, which minimizes the financial risk for customers. Additionally, given the unpredictable and competitive nature of bidding on cleaning contracts, leasing can provide flexible cost controls for companies during periods without contract work. Although there may be some consumers who are more risk-tolerant, the low profit margin nature of the cleaning industry suggests that customers would gravitate toward more flexible and lower-risk options.
From iRobot’s perspective, this proposal will initially incur a variety of costs, the biggest being research and development. More costs would include rent for additional warehousing and wages for technicians to service and repair robots. With a minimum lease length of one year, there is also a need for delivery as robots change hands between renters. Furthermore, iRobot would need to expand their manufacturing facilities to account for higher production volume. However, given iRobot’s strong balance sheet, it can afford to pursue this opportunity to capture significant market share in a largely untapped segment.
A Squeaky Clean Ending
iRobot has a unique opportunity to expand into the commercial cleaning industry in North America, where there are labour shortages and thin profit margins. iRobot could manufacture industrial-sized robotic cleaners which can help automate current business processes in a variety of cleaning companies. Not only will this offload labour costs, which make a significant portion of operating expenses, robots can also improve the quality of service provided. With increasingly stringent hygiene measures, iRobot’s products can help companies manage the additional cleaning load. Roomba’s motto was once “Let Robots Do Dirty Work,” and this statement could continuously be realized in a new playing field for iRobot.