Architectural and Decorative Coatings Market

By Christine Esposito | August 11, 2005

Companies are optimistic about the prospects for 2005. But how will rising raw material and packaging component prices affect their business?

As in years past, architectural and decorative coatings manufacturers are optimistic about the future. They are rolling out new products and making improvements to their retail shops, all aimed at enticing customers to pick their products over the competition's. With mortgage rates hovering at historically low levels, housing starts and resale numbers remained positive in 2004, and many companies are predicting double-digit sales growth again in 2005.

But there's a major issue at hand: the rising cost, and in some cases, availability, of key materials.

Continued Growth in 2005
As a group, architectural and decorative paint manufacturers Coatings World spoke with were quite pleased by their 2004 performance. Firms large and small reported gains last year, and most are bullish about 2005.

"We have a strong year in terms of our total gallon sales going up," said Todd Braden, vice president of marketing at Portland, OR-based Rodda Paint, which merged with Cloverdale Paint of Surrey, B.C., Canada in the third quarter of 2004.

According to Braden, the full effects of the Cloverdale deal should bolster its performance in 2005 thanks to an expanded roster of products. "We won't really see the effects of that until 2005," said Braden. "With the new breadbasket of products, we're shooting for increases in 2005. We will finally be able to call on new customer-types that we didn't call on before."

It was also a good year for Ace Paint, which recorded wholesale sales in fiscal 2004 approximately 5.5% over 2003. "This was fueled by strong results both internationally as well as in Ace's 2,300 stores that showcase the Color Your Life paint and d�cor program," said Dick Bristol, director, Ace Paint. "We are excited about 2005 and believe it will be a strong year for domestic as well as international paint sales for Ace Hardware."

Tom Dougherty, marketing manager, Pittsburgh Paints, also reported a good year for PPG's architectural operations. "2004 was another strong year for our architectural finishes business unit across all three channels in which we participate-national accounts, independent dealers and store business. All three legs had solid years," he said. Dougherty is expecting double-digit growth in 2005.

Posting back-to-back years of positive performance is Dunn-Edwards. However, Mother Nature may have curtailed the company's sales a bit in the final quarter of 2004. "Over the last two years, we've seen double-digit growth. That is what we were expecting in 2004. But due to inclement weather in October, we may fall just below double-digit growth this year," said Tim Bosveld, vice president of marketing for the Los Angeles-CA paint maker.

Kevin J. Skelly, marketing manager, PARA Paint (part of Canadian paint manufacturer Sico), pointed to the continued popularity of home design as a boon for the decorative paint industry. "Although the paint business is a very mature industry, there is a lot of interest in the home and design. This has had a good impact on the industry in general. The only sore spot was outdoors. The weather was terrible, which had an impact on our shipments," Skelly said.

The Big Issue: Rising Costs
Consumers may say they love color, but companies such as Dunn-Edwards know neutrals remain a top choice for interior applications. Photo: Dunn-Edwards.
While companies are optimistic about 2005, the paint industry is abuzz with a pressing issue. The basic chemicals and packaging components used by the paint and coatings industry are going through a period of dramatic price escalation that the market hasn't witnessed in years. Add to that the rising cost of fuel, which affects transportation costs, and escalating health care costs, and it's easy to see how it takes more cash to do business today than it did only a few months ago. So are decorative coatings makers feeling the squeeze?

"Absolutely," said Bosveld. "We've been hit with substantial raw material increases from resins, pigments and container suppliers too. Cost increases to the company are substantial."

"We've experienced tremendous inflation," said Rick Barnard, operations and technical manager at Rodda Paint. "As we see oil prices dance, we see the cost of our product dance too."

Larger companies haven't escaped the increases.

"We're feeling the squeeze that all companies are," said Dougherty of Pittsburgh Paint. "Some of the price increases are unprecedented."

All raw materials prices are on the rise-latex polymers are up 20-25%, solvents are up 50%, titanium dioxide (TiO2) is up 15% and epoxies have jumped more than 30% this year, according to industry sources. Packaging has been affected as well. Some reported that their steel pricing has risen between six and 10% over the past six months alone.

There's also been talk about availability and supply issues with some materials.

"Steel has increased in price and is difficult to get. TiO2 is the same; the price has continued in an upward tend, while availability has diminished. Most binders/monomers have shown this," said Barnard. "It's become difficult to stomach those cost increases."

"These are pricing increases the industry hasn't seen in the last five years or even longer," noted Bosveld, who said Dunn-Edwards has heard reports about spot outages and shortages, but has not been affected.

Often, the larger the customer, the easier it is for them maintain sufficient supply when availability gets tight.

"We're fortunate that the foresight and diligent efforts of our purchasing department have enabled us to avoid allocation issues this far," said Dougherty.

Other companies haven't been as lucky, but have been able to make it work.

"In 2004, we had some products on allocation, but we were able to ride out the storm," said Barnard, noting that Rodda experienced allocations with most latex producers.

The bad news is, most players are expecting more of the same. As a result, companies are looking to build their relationships down the supply chain.

"It looks like through the first half of 2005, there will be no easing of it," said Dougherty.

"We'll see this in other product mixes in 2005," said Barnard. "We've been very aggressive in working with our suppliers in 2004, shoring up some very good relationships going forward."

In addition, concerns over supply are forcing companies to look more closely at how they use their current products. "A perfect example is TiO2, one of the top two highest volume raw materials that we consume," said Bristol. "It's causing us to look at alternatives and optimization of usage in formulas."

While companies look to make the most of the situation, no company is willing to risk its reputation. "We are always out in the market looking for new suppliers and technology, said Barnard. "But Rodda won't jeopardize the quality of our products."

Keeping products performing at optimum levels has become more essential in the decorative and architectural coatings market. Not only are contractors very particular about what they use, DIYers have become more savvy, and expect more from their paint (see side bar on page 32).

As prices for materials move upward, paint makers are left in a quandary. Do they raise their prices?

Some companies Coatings World spoke with instituted price increases in 2004 and some plan to make modest increases this year. Paint companies are also trying to lower their own operating costs wherever possible and are opting to absorb some of the increases rather than pass them on to their customers.

"We are implementing a modest cost increase to our retailers in January, absorbing some of the increase within our manufacturing process. Our retail pricing will remain the same," said Bristol.

For companies that are heavily focused on the professional painters' market, increasing prices is difficult as their customers are very much impacted by the same issues, such as rising transportation and health care costs.

"We can only pass along so many costs to contractors," said Bosveld of Dunn-Edwards.

"We've haven't been able to pass those on, and we hope we never have to," said Braden. "In March and November we issued minimal price increases. What we are hearing from commercial contractors out there is that as they try to incorporate [the increases], they are finding that in the bidding process, not everyone is increasing their costs. It's hard for a lot of these customers to increase their prices."

Despite the difficult arena regarding pricing and availability, paint makers are focused on the big picture, and they remain positive about 2005.

"We believe the industry will have to weather pricing volatility at least throughout 2005," said Bristol. "Yet it is not deterring us from moving forward with our strategies."

Manor Hall's Timeless boasts a lifetime warranty.
As people remain fascinated with fix-it and design shows, they are becoming more savvy about the products they use. Today, DIYers expect more from the paint they buy-better colors, washability and stain-resistance, long-lasting performance and lower VOCs. And they want the job to be done fast. Some of the newest products in the marketplace are longer-lasting, offer greater color choice and are easier to use.

In terms of performance and longevity, consumers can't get much better than a coating that will last a lifetime. That's just what some paint companies are offering. Pittsburgh Paints has launched Manor Hall Timeless, a super premium exterior paint featuring a 100% cross-linked acrylic resin found in two-component high-performance coatings. The formulation, which has a lifetime warranty, also boasts exceptional adhesion, four-way mildew and algae resistance and low temperature application.

Rodda, too, has added a new product with a lifetime warranty. Ultimate is a water-based exterior coating using acrylic and silicone technology. "The performance has exceeded customer's expectations," said Todd Braden, vice president of marketing. "There are a lot of marketed products like it out there, but this has a totally different resin technology. The end result is it performs like a waterproof coating."

Ahead of the Pack(aging) AGAIN
Another innovation in packaging from Sherwin-Williams is Dutch Boy's new Ready-to-Roll container. The project-sized container has a built-in roller tray and holds 2.5 gallons of paint.
For color-savvy customers, Dunn-Edwards has launched the new Perfect Palette color system, featuring 1,696 colors, including 100 shades of white, 96 deep, rich accent colors and 100 classic shades taken from the company's previous system. According to Tim Bosveld, vice president of marketing, Dunn-Edwards is using highly concentrated and separate colorants for oil- and water-based paints in the new system, which was unveiled late last year.

The paint can itself has undergone another makeover at Sherwin-William's Dutch Boy division. The company has added the new Ready to Roll project-sized paint container, which features a convenient built-in roller tray. The lightweight, recyclable plastic container, which holds 2.5 gallons of paint, eliminates having to pour paint into a roller tray, providing for time savings and an overall cleaner project, according to the company. It also has a wide and deep opening to the paint well which provides plenty of access space for a nine-inch roller and up to a four-inch brush, allowing two DIYers to work from the same can.

Innovation goes beyond new color collections
Stiff competition will continue to drive decorative paint makers throughout 2005. As companies look to get a leg up in the marketplace, they are not only expanding color palettes and enhancing in-store displays, but are using cutting-edge computer and now wireless technologies to entice customers to chose their paint.

Sheffield, England-based LightWork Design, a supplier of rendering solutions for advanced 3D computer graphics, has released a complete set of Benjamin Moore colors and finishes in its LightWorks Archive (LWA) format. This allows users of CAD applications the power to accurately select, render and specify Benjamin Moore colors.

But what makes the LWA application even more functional, according to Carl Minchew, Benjamin Moore's director of color technology, is that it goes beyond color selection, allowing users to visualize sheen. "The release of Benjamin Moore products in LWA format allows our customers to accurately visualize not only our paint colors but also the gloss levels, further assisting them in selecting the perfect Benjamin Moore finish for their designs, as well as precisely specificying the use of our paints in their final design document," he said.

Resene Paints of New Zealand has inked an accord with WordDial, a mobile Internet service provider to tap into the rapidly expanding WAP-mobile user marketplace, which will reportedly represent one billion users this year. According to Karen Warman, marketing manager at Resene, the mobile web site technology will enable customers to take Resene paint shop resources with them wherever they are.

Customers will "literally carry the Resene shops around with them and can access information and services anywhere," said Warman. "For example, if a customer is out shopping for curtains or other furnishings, they can download and view color swatches on their mobile phone for matching reference or product information compatibility. Or they can find shop locations, direction maps or contact details," she said.

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