Europe Reports

Housing slump hits paint makers

By Sean Milmo | August 28, 2008

Decorative paint is a big topic at the moment in Europe due to the state of the housing market.

Suppliers of decorative paints in Europe were expecting to be severely affected by the credit crunch but so far their sales figures are better than expected with few suffering any major drops in revenues in the region.

The housing markets in many Western European countries and also parts of Eastern Europe have slumped as a result of a squeeze on lending, which has been exacerbated by curbs on consumer expenditure stemming from an economic slowdown. Construction of new homes has declined sharply in many areas.

Coatings companies have so far been able to ride out the turbulence in the sector with the help of their long-term strategy of encouraging householders to use DIY as a means of keeping up with fashion and being responsive to color trends.

"The rate at which people move into new homes obviously still has an influence on sales of decorate paints because it is time when houses are redecorated," said Edward Appleby, Rohm and Haas' manager for market research and communications in Europe.

"But the DIY market for paints is being driven much more now by creativity and the need among people to have colors on their walls which they like," he continued. "DIY painting is about creating your own space and your own sense of inspired living. This is a trend in consumer behavior which will tend to carry on regardless of what happens in the housing market, although large redecoration jobs may be postponed because of the economic downturn."

Jotun Group of Norway, which has a strong position in the Scandinavian decorative paints market, believes that a policy of encouraging color awareness has helped it withstand the impact of a depressed housing sector. The company achieved record high sales and profits in the first four months of the year, although this was mainly due to its extensive activities in high-growth markets of the Middle East and Asia.

"The housing market in Scandinavia has been dropping but so far the decline has not affected our figures very much," said Morten Fon, Jotun's president and chief executive. "We are not seeing any growth in the overall decorative paints market in Scandinavia but it has been like that for a while anyway."

"In Sweden we are concentrating on the high end of the decorative coating market where we are seeing good growth this year, " he added. "Most people in this part of the market decorate because they want a change of color and not because they are changing house. The trends in demand are separate from economic trends. We try to make our paints fashionable by promoting different colors."

In Norway, however, where Jotun has approximately 60% of the decorative sector, the company is expecting that the housing downturn will inevitably have some sort of negative impact. "With such a large share of the market, it will be impossible to avoid an effect on sales," Fon said. "Activity in the Norwegian housing market has dropped only recently so any reduction in consumption of paints will come later."

The European national housing markets which have been hit hard by the harsh financial conditions have been those in the UK, Ireland and Spain-all countries which for several years have enjoyed a real estate boom.

In Spain, where house prices have quadrupled over the last ten years, around three quarters a million homes were constructed in 2006-more than the combined total in the UK, France and Germany. Last year new housing permits amounted to 650,000 while this year the number of permits is expected to fall by 40-50%.

In the UK house prices were 11% lower in July than a year ago. Some analysts are predicting they will have tumbled by 20-30% by end of the year. Over the last 12 months the number of new homes being built in the country has fallen by 19%.

"We're doing fine in Europe-except in the UK where consumer confidence showed a marked drop in the first half of 2008," said an official at AkzoNobel, which has strengthened its position as Europe's leading decorative paints company after last year's acquisition of ICI of the UK.

AkzoNobel's decorative paints sales in Europe dropped by one percent in the first half of 2008 to 1.47 billion mainly because of a three percent decline of sales in the UK. This was not only due to the weak DIY sector in the country but also a struggling professional segment hit by the drop in new home starts.

The company has responded to the fall in volume sales in countries like the UK with product innovations, price rises and cost controls. It has introduced a new eco-friendly paint Ecosure with a reduced carbon footprint and packaging with 25% recycled materials.

PPG Industries reported growing sales in the second quarter of its newly formed architectural coatings division, mainly comprising the European operations of Sigma Kalon acquired by PPG last year. Sales rose at a double-digit rate in the quarter against Sigma Kalon's sales in the same period last year. This compared with a low- to mid-single-digit increase in the first quarter.

The rise in PPG's European decorative sales had been helped by Sigma Kalon's big presence in Eastern European markets. Tikkurila, the coatings business of Kemira of Finland, increased its paint sales by eight percent in the first half of the year with the help of its strong position in the Eastern European decorative market.

Nonetheless Tikkurila's performance showed the contrasting trends in decorative sectors even in neighboring countries. While in Baltic states like Estonia sales were under a lot of pressure, they remained buoyant in neighbouring Russia.

"The new construction part of the decorative market in Estonia has shrunk," said Janno Paju, vice president of Tikkurila's Eastern European decorative business. "The real estate boom over the last couple of years with plenty of new houses and apartments has ended because the banks are being careful with credit.

"But in Russia purchasing power and living standards are continuing to increase to an extent that Russian consumers now want to spend money on decorative paints with higher quality materials," Janno continued.

In the first half of the year Empils, a leading Russian paint company supplying mainly the Russian and Ukrainian markets, increased its decorative paints output by 12% in volume terms. Growth rates in decorative sales in much of the rest of Europe are lagging well behind those of the former Soviet Union but at least the decline is not so steep as had been feared.

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