Consolidations in the Coatings Industry to Accelerate Growth in Europe

Many European coatings companies have been reporting revenue increases in the first half of this year which have been lower than rises in volume sales of their products.

The discrepancy is partly due to weak demand which has been putting downward pressure on prices, as well as currency effects. But a key factor is stronger competition as companies battle for greater market share through acquisitions and marketing and  sales investments.

The competition should intensify, particularly as a result of expansion initiatives by U.S. companies in Europe and its peripheral markets.

Sherwin-Williams has made clear that an objective behind its takeover of Valspar to make it the world’s largest coatings company is to accelerate its growth in both Europe and Asia.
PPG and Axalta are also seeking a stronger presence in Europe by taking advantage of what they perceive as gaps in a regional market which continues to be fragmented.

However  enlargement ambitions are not just confined to U.S.  companies.  Most of  the big coatings  and many medium-sized players in the European coatings sector have now adopted strategies of growth through acquisition.

The exceptions are European companies which have been pursuing a  strategy of sales and profits growth through expansions into markets outside Europe without the need for takeovers.  “While we remain focused on controlling costs, Jotun remains committed to our organic growth strategy, which applies to both existing and new markets,” said Morten Fon, president and chief executive of  the Norwegian-based coatings producer.

Jotun, which reported a 5 percent and 21 percent rise in sales and operating profit respectively in the first four months of this year,  has  been investing during the period 6 percent of  revenue in the Middle East and Asia, mainly in new factories. 

Opportunities for takeovers in Europe, particularly of the bolt-on variety,  are thought likely to become more numerous as the less financially robust producers  are unable to benefit much more from low interest rates, static labour costs  and cheaper raw materials.

Medium-sized and even small coatings companies are seeking openings to move into new national market and into niche segments in end-use sectors in industrial   and protective coatings.

Organic growth has become more difficult to achieve in Europe at a time of continued  slow rises in  GDP.   In the 17-country euro currency area, GDP is forecast to go up by only 1.5 percent this year.  In countries like Italy growth is predicted to be below 1 percent, whereas it is forecast to be close to 3 percent  in Spain.

In  some non-euro countries the picture is relatively bright  with the economies of Sweden expected to expand by 3.5 percent and Poland by 3.3 percent.  However a recession in Russia, stemming  from the fall in the prices for oil and gas, its main exports, is having a negative effect on some neighboring Eastern European economies.

Much of the acquisition, divestment and marketing and sales strategies of coatings businesses  in Europe are being shaped by these  variations in the performances of national economies as well as different trends in end-use markets.

Tikkurila, whose revenues declined by close to 1 percent in the  first  half of the year despite  a growth in volume sales in its main Scandinavian and Eastern European markets, is maintaining market and sales expenditure in its growing Scandinavian outlets.

However it is pursuing a decentralizing policy in parts of Eastern Europe.  It concluded in June the sale of its Ukraine and Belarus operations to local management, which will continue to distribute Tikkurila’s products in the two countries.

Tikkurila expects that the greater freedom given to local managers will help boost sales. “Based on the good experience from a similar type of change in our business model in the Czech Republic, Hungary, Romania and Slovakia in 2012, we have decided to develop and streamline our operations in Ukraine and Belarus with an entrepreneurial distributor- driven model,” said Erkki Järvinen, Tikkurila’s president and chief executive.

The economic downturn in Russia has not deterred foreign coatings companies investing  in the country.  AkzoNoble has been increasing production capacity for protective coating at Lipetsk.

The expansion, which will mean that production is concentrated on fewer, larger sites in Russia, will bolster  AkzoNobel’s supplies of  protective coatings to regional oil and gas, mining, power and infrastructure markets, as well as marine coatings for ship building, maintenance and repair.

Teknos, the Finnish industrial and decorative coatings producer,  acquired last year the Russian metal  coatings business OOO Trading  Company Massco. In June this year it strengthened its position in the German industrial coatings sector with the takeover  of  Feidal Coatings’ industrial coatings operation.

Feidal, based in Duisberg, Germany,  is effectively being broken up after its private owner revealed the business did not have the resources to keep the company “in its existing form.”

Meffert AG, Bad Kreuznach, Germany, announced in August it was acquiring the German decorative paints business of Feidal.  Meffert, which has annual turnover of  around €330 million ( $373 million),  is an example of a company which is now putting more emphasis on growth by acquisition.  Klaus Meffert, the company’s chairman, told staff in July that he was optimistic about the second half of the year because of the  number of  consolidation initiatives currently being negotiated by Meffert.

One strategy being followed by some companies is to extend the reach of distribution channels by expanding retail chains and other outlets like car body shops. 

CIN Group, the Portuguese decorative, industrial and protective coatings  company, now  has around 120 decorative paints stores including six megastores and around 20 superstores after  new  openings in Spain, France  and Belgium.

In the automotive refinish sector, Axalta announced in August it had taken over the Dutch distributor Geeraets Autolak.  The company has also opened in Germany a European technical support centre for vehicle refinishing.

Axalta, formerly DuPont’s performance coatings business which after being sold to the equity fund  Carlyle Group in 2013 is now 95 percent owned by financial institutions, has centralized its European operations by establishing a European headquarters in Basle, Switzerland.

Europe’s coatings sector will now be bracing itself  for the impact of the Sherwin-Williams / Valspar  merger on the region.  Just before Sherwin-Williams announced its planned takeover of  Valspar earlier this year, Valspar itself had acquired the Italian coil coatings operator ISVA Vernici to expand  its coil activities in southern Europe, North Africa and the Middle East.

There could be similar moves in a variety of coatings sectors in Europe by the combined company once the Sherwin-Willams/Valspar  acquisition is wrapped up, due  early next year.