First Half of 2018 Proves Challenging for European Coatings Companies

The European economy recorded its fastest growth rate in 2017 with all 28 member states in the European Union expanding their economies for the first time in ten years.

The pace of growth has slowed this year.  But EU growth will continue to remain strong over the year and into 2019, according to the latest economic forecast of the European Commission, the EU executive.

However, for coatings companies in Europe, the outlook is not so promising.  Some are reporting declining sales in volume terms with revenue increasing only after they push up their selling prices.  With most coatings producers, profitability is being squeezed by the relentless rise in raw material costs which analysts reckon are unlikely to decline or even level out completely in the short to medium term.

Coatings companies are trying to offset raw material costs by pushing up their product prices.  But they are also having to rely on cost savings and productivity programs.

This is particularly the case with producers of construction and decorative paints which are finding their sales disrupted by poor weather or a rising trend of undercutting of sales prices by retailers, especially those operating online.

This is necessitating the adoption of new business models in which there is a greater emphasis on services as a way of justifying higher selling prices.

Over the last two to three years the European construction sector has been the region’s “engine of growth” with an annual expansion well above average GDP, according to Euroconstruct, a market research consultancy and conference organizer.  But over the next two years construction output will dip back below GDP levels, it warns.

In northern Europe, the construction sectors – as well as decorative paint producers – was hit hard by the effects of a harsh winter in the first quarter of this year.

Despite a stable economy in Germany with increased investment and consumption at a high level, the coatings sector in the country, which is Europe’s largest coatings market, was struggling in the first half of the year.

“The (coatings) market in Germany is stagnant,” said the Germany coatings association (VdL) in a revised, downwards forecast for the year.  “For the paints and printing industry, 2018 started poorly despite a positive economic environment. Mainly due to bad weather in March, there was a clear negative in construction coatings in the first quarter.  The market developed quite well only in industrial applications.”

VdL is now predicting that this year’s demand for construction coatings will go up by 1.5 percent, furniture and wood coatings 1.3 percent, machine and electrical equipment coatings by 5.8 percent, protective coatings by 3.5 percent, while auto coatings will be static.

In the UK where snow and ice halted the usual upsurge in construction activity in March, building paint volume dropped by 1.5 percent in the first quarter, but rose by 2.1 percent by value as a result of higher selling prices, according to the paints expert panel of Builders Merchants Building Index (BMBI).   The panel is warning that demand for new housing will be impacted this year by a decline in house prices.

In its latest report, BMBI highlights discounting by online selling sites as being among the major pressures on the decorative paints sectors.

In the UK and other decorative paints market, Amazon’s entry into paints and other DIY products sector is being seen as a threat to existing supply chains.  In some markets, these are also disrupted by groups of discounting stores able to take advantage of the availability of surplus supplies of paints or of opportunities to sell at high volumes with low margins.

In the UK one leading retail discounter has acquired several stores up for sale as a result of Homebase, one of the country’s leading home improvement chains, being sold to an investment company for a nominal £1 ($1.3) after running into financial difficulties following its acquisition by the Australian conglomerate Wesfarmers.

Among coatings producers, as well as established DIY retailers, their response to discounters has been to promote themselves even more as services providers while at the same strengthening their own distribution operations.

AkzoNobel, the leader in the UK and European decorative markets, has been strengthening and expanding its Dulux Decorator Centres in the UK, named after its leading decorative brand and aimed mainly at selling more products but also services to professional painters. It is also boosting the activities of its Dulux Academy in the country which runs training courses for apprentices to consultants.

In June 2018, AkzoNobel announced it was taking over Fabryo Corporation of Romania, in a move which would make itself the leader of the Romanian decorative market. But a big impetus behind the acquisition was Fabryo’s closeness to customers through its distribution centers.  “The strong sales and distribution capabilities of Fabryo will help us to further improve our business in the region,” said Ruud Joosten, AkzoNobel’s chief operating officer.

Other leading decorative coatings companies have reacted to decreases to sales and profitability by making moves to bolster their distribution capabilities. Cromology, which is number two in the decorative sector in France and also claims market leadership in southern Europe through its top rankings in Italy, Spain and Portugal, has shaken up its senior management after a 1.3 percent decline in organic revenue last year and 6.5 percent in the first quarter of  2018.

Wendel Group, the French investment group, which is Cromology’s majority’s shareholder, announced in June that after a ‘strategic evaluation’ it was replacing Gilles Nauche as chief executive and appointing as chairman Pierre Pouletty, a specialist in distribution.

One of the biggest restructuring initiatives of 2018 in the European decorative market is likely to be Hempel’s planned takeover of JW Ostendorf (JWO) of  Germany which is a pioneer in low-cost coatings production but in keeping close contacts with customers.

Privately owned Hempel of Denmark had been mainly a specialist in protective and marine coatings until it gained a significant presence in the decorative sector with the takeover in 2011 of Crown Paints of the UK. Now through the takeover of JWO, also privately owned, it will become a leading player in the European and worldwide decorative market.

For Hempel among the attractions of JWO as a takeover target has been its position as a leading producer of own-label products, particularly to retailers, which has put the German company in close contact with the needs of end-user customers.

The Danish producer has indicated that it is aiming to do more decorative acquisitions. “We have grown our decorative business significantly and sent a signal that we are ready to do more in Europe and globally,” said Henrik Andersen, president and chief executive.

More consolidation seems likely among coatings producers in Europe, particularly in the decorative sector, as at one end of the supply chain they are having to combat rising raw material costs and among the retail outlets increasing discounting.