Minimum wage rise and undercutting may have brought cleaning giant Reflections Group down

A $26 increase in the minimum wage may have been the final straw that sent Reflections Group into receivership, according to industry observers, who say a culture of undercutting means margins are now razor thin.

The Melbourne-based company was placed in the hands of KordaMentha on Wednesday and was advertised for sale in major newspapers this morning. With $150 million in revenue and about 3,500 employees, it is one of the largest cleaning contractors in Australia with a big client base in the shopping centre and education sectors.

It is not known how big the company’s debt are, although it is believed secured creditor BOS International is owed tens of millions of dollars, and the Australian Taxation Office is owed more than $10 million.

Jim Downey of Melbourne insolvency firm JP Downey & Co was appointed administrator prior to KordaMentha’s appointment as receivers and will now focus on securing the best return for unsecured creditors.

While he declined to discuss the total debts owed by Reflections Group, he said initial feedback suggested the cleaning industry is beset by very thin margins.

“It’s a highly competitive game.”

Industry experts agree. John Laws, executive director of the Australian Cleaning Contractors’ Association, says he has been trying to warn the industry that constant undercutting of prices is making the sector unsustainable.

“It’s getting worse. To get jobs, most people just come in undercut their rivals’ price by 10%. It’s been something that warning bells have been going off 10 years.”

Laws says part of the problem is that barriers to entry are very low – basically anyone can buy some equipment and set themselves up as a cleaning contractor.

But he also says the industry is being buffeted by labour cost interests. The $26 increase in the minimum wage that came into effect July 1 represented a 4.5% rise in contractors’ wages bills.

Laws says the industry faces another rise in labour costs in January, when the transitional arrangements introduced under a new national cleaners award will see a 3% increase in wages.

The increases are coming straight off profit margins, as most contractors work under fixed contracts.

“It’s a major problem because cleaning is labour – you are basically selling an hour of labour. The smart clients know this and try to get you on fixed contracts for three years,” Laws says.

“Contractors can either walk away from a job or try to build in wage increases, which is usually done at 3% a year. But at the moment we are having two pay increases a year,” Laws says.

Downey says the first meeting of creditors will be help August 23 in Melbourne.