Playing the field: How concentrated is the UK self storage industry?

Industry concentration, and what it tells us

“Industry concentration” is a measure of the number of individual businesses that offer the same product or service. The figure is derived from a complex mathematical calculation, which we’ll look at later. It is a useful indicator of how many companies share a market.

In theory, the less an industry is concentrated in the hands of just a few players, the more competitive it will become, as each company has more rivals it can lose business to. This should make them all lower their prices in a bid to undercut the competition.

Some industries are more concentrated than others, for a variety of reasons such as whether new businesses can easily enter the market, and the dominance that large firms can achieve through branding and economies of scale.

Measuring Industry Concentration

It is useful for economists and competition regulators to be able to measure how heavily concentrated an industry is. This is often done using a formula called the Herfindahl Index.

The Herfindahl Index works by adding together the squares of all the market share percentages from within the industry being measured. This gives a numerical score between 0 and 1; the higher the figure, the more the industry is concentrated.

To demonstrate, an industry is not very competitive if 80% of market share is controlled by a single firm, with its two rivals each having 10%. The Herfindahl Index would represent this as:

0.8² + 0.1² + 0.1² = 0.66

0.66 is quite a high reading on the Herfindahl scale, and any merger that would result in one company having such a high score would likely be blocked by the Office of Fair Trading. Indeed, it is EU policy to investigate any merger that would alter the index within an industry by as little as 0.025.

Self Storage Industry Concentration

The easiest way to evaluate concentration within the self storage industry is to use – as a measure of market share – the number of storage centres each firm has.

Storage.co.uk research suggests there are 1196 self storage locations in the UK, operated by 587 firms. An obvious indication of the market not being very concentrated comes from the fact that 475 of these – just over 80% – are run on a single-site basis.

The firm with the most centres (Safestore) has 102 of them. This amounts to just 8.53% of the total, a low figure for the largest company’s market share.

The other large firms own a similarly small percentage of the total number of storage centres: Big Yellow has 6.94%; Access 5.02%, and Lok’nStore and Shurgard each have 2.01%. Each of the 475 single-site operators accounts for just 0.08% of the market.

Given these extremely small numbers, it can come as little surprise that the final Herfindahl Index for the UK self storage industry is 0.08, a number that should indicate a very strong level of competition.

Self Storage: appearances can be deceptive

So why is it that the self storage industry has the appearance of being very concentrated, with people usually having only heard of Big Yellow and the other large chains? This impression is clearly misleading, but not entirely wrong. For a number of reasons, the Herfindahl Index is an imperfect way of measuring industry concentration:

1) How many stores each company owns doesn’t indicate market share – or how much money the company makes from running them – as revenues are unevenly divided in favour of the large companies. They tend to run bigger centres with more units that have higher occupancy levels, generating a bigger share of industry profits.

2) The Herfindahl Index measures supply, which is spread across the country. Demand is focussed on the South-East, especially London, where the big chains dominate because they can afford the more expensive land. As this is where most people who are aware of self storage live, it also fuels a perception that the big companies dominate the market.

3) Elsewhere, particularly around cities, branches of the large firms dominate, giving them a much bigger share of the local market than they have of the national one overall.

4) The big companies spend much more on branding and national advertising campaigns than the small ones do, allowing them to become much better known.

Competitive – and likely to stay that way

Despite these minor limitations in the methodology, this research does indicate two important facets of the UK self storage industry. One is that it is thoroughly competitive, despite appearances, with low-cost barriers to entry enabling many small companies to compete with the established giants.

The other is that the UK industry is becoming more like America. There, the vast majority of self storage places have always been so-called ‘Mom and Pop’ enterprises: small, family-run companies that cater for local and passing trade.

These account for 90% of all the self storage centres across the pond, a figure now only 10% ahead of the situation here. Whilst British consumers may never develop a love of self storage that’s as intense as their American counterparts’, it seems the country’s entrepreneurs do not feel the same way.

2 Responses to “Playing the field: How concentrated is the UK self storage industry?”

1. Mark says:

   June 2, 2010 at 2:23 pm

   I am confused 475 out of 1196 is not 80% it is 40%?

2. David says:

   June 2, 2010 at 3:17 pm

   That would be correct, but what 80% refers to in the blog is 475 out of 587 companies who run the UK’s 1196 storage centres. The point is that 80% of storage companies only own one site.