Christine Canning Esposito10.16.06
A year ago, the U.S. housing market was one of the hottest parts of the U.S. economy. Low interest rates and creative mortgage packages were fueling new and existing home sales. As a result, several downstream industries, from moving companies to architectural paint makers, were reaping the rewards.
A year later, the residential real estate market has cooled substantially (with talk of "bubbles bursting" in select areas), marked by rising interest rates (and foreclosures). According to the U.S. Commerce Department, sales of new homes in July fell 21.6% from the record monthly high set in July 2005, and, on a year-to-date basis, new home sales were down 14.2% compared with the first seven months of 2005.
But the good news is, a slow down in new home sales has only a minimal impact on the decorative paint market.
"Slowing sales of new homes, in and of itself, should not be cause for too great a concern. The vast majority of architectural paint sold in the U.S. is for maintenance or repaint," said Scott Detiveaux, senior consultant with Orr & Boss, Inc.
However, recent reports on existing home sales-a significant influencer of maintenance paint demand-are cause for more concern.
The National Association of Realtors reported that total existing home sales in July-including single-family, townhomes, condominiums and co-ops- dropped 4.1% from June and were down 11.2% from July 2005.
This isn't a welcome development, especially when combined with sluggish new structure sales.
"A slowing market for both new and existing homes will have a negative effect on the market," said Detiveaux.
Still, Detiveaux predicted that although growth will slow towards the end of year, the overall architectural paint market in 2006 "should still top 2005 in terms of total volume," largely due to a strong first half of the year.
Another factor that continues to shape the market is the price of raw materials as well as energy and transportation. "It is clear that raw materials prices have increased and will keep increasing," one coatings executive told Coatings World. "There is no secret in this respect. In order to remain competitive these increases need to be passed on to our customers."
Companies appear to be making more advances in their effort to curb skyrocketing costs by raising selling prices and zeroing in on any fat that can be removed from their processes. The goal: minimize the total cost of transforming a product from raw materials to finished goods in their customer's hands.
"First, paint companies have had some success in passing along price increases," noted Detiveaux. "Average wholesale prices for paint have risen over the past year at greater pace than the inflation rate. Second, companies are really [examining] the overall supply chain. They are looking to remove costs and improve efficiencies across the board. This includes not only manufacturing and distribution but functions such as planning, scheduling and forecasting as well."
Industry consultant and Coatings World contributor Phil Phillips of Chemark Consulting believes paint makers haven't truly recovered from the impact these price hikes have had.
"First, it is important to repeat the fact that all formulators-small, medium or large-have not fully recovered the costs of raw material increases over the past two years. Therefore, the paint and coatings industry has not regained the so-called equilibrium it 'enjoyed' three-plus years ago when feedstocks were more predictable and steady in their demand for increased prices," Phillips said.
The larger formulators, of course, have had greater "push-back" power to leverage against these more recent raw material cost increases.
"The ICIs and Sherwin-Williams Companies of the world also have an advantage in brand power in the retail market that assists them in raising retail prices to the consumer. However, even the 'bigs' have not fully recovered this rapid raw material influx of costs," Phillips continued.
Passing along price increases isn't an issue relegated to U.S. paint makers alone.
Eirik Kristensen, regional marketing manager, Jotun U.A.E., also acknowledged the need to pass along some of the increased costs. "The demand in our market combined with numerous other external factors has definitely had an impact on the raw materials," said Kristensen. "Jotun has tried to avoid a price increase on our products, but the steep rise in raw materials has forced the industry to take action and make some small adjustments."
Benjamin Moore reports that it has made a serious effort to keep costs in check for its customers, even as it transitioned its premium Moorlife, Moorgard and Moorglo to 100% acrylic products, improving hide and mildew resistance and offering a lifetime warranty.
"The most interesting part, is we didn't raise the price," said Kurt Denman, brand manager with Benjamin Moore. "We are investing in what is in the can itself. It was a conscious decision, and one we didn't come to easily. In addition to the significant cost of improvements to the formulations, there is no denying cost of raw materials, energy and transportation have gone up dramatically. We have been trying to hold pricing, so we didn't have to be so reactionary to it. Hopefully it will come around; we hope those key cost drivers will begin to stabilize."
In the meantime, the higher cost of doing business and steep competition continues to impact the remaining crop of smaller-sized, regional and specialty architectural/deco coatings companies.
According to Phillips, smaller manufacturers have even greater issues with the cost pass-through aspect, as they lack the buying and brand power of their larger competitors. In these rapidly increasing cost times, Phillips said, the big companies "have a significant opportunity to enhance their shares and cause even more rapid consolidation as a result."
Two recent acquisitions, centered on firms with successful architectural/decorative paint operations, are proof the quick pace of consolidation continues.
In August, PPG acquired San Bernardino, CA-based Spectra-Tone, an architectural paint and coatings manufacturer. With the deal, PPG adds a manufacturing location in San Bernardino and 22 company-owned service centers in the western U.S., which substantially expands its retail presence in that market.
Just prior to the PPG/Spectra-Tone deal, Akzo Nobel scooped up another independent when it acquired The Flood Company, the venerable firm that specializes in exterior wood finishes.
The deal substantially increases Akzo Nobel's existing share of the U.S. wood care market-where it already sells its Sikkens brand-and adds $55 million in annual sales to its coffers.
"Following on from the acquisition of Sico, Canada's leading decorative coatings company, this transaction allows Akzo Nobel to exploit another attractive segment of the North American coatings market," said Hans Wijers, Akzo Nobel CEO and member of the board of management responsible for Coatings, in a statement. "Acquiring Flood and its successful portfolio of products will now enable us to create a focused retailer, dealer, professional contractor and consumer wood care business and reinforce our current market position in the U.S., making us one of the leading players in this sector."
Noting the number of M&A moves in the architectural market, Detiveaux of Orr & Boss said players involved in these deals have a significant opportunity. "If done properly, integration of an acquired business offers an excellent opportunity to reduce overall costs," he said.
And, it can also offer the acquired company greater opportunities, as noted by Anthony Ciepiel, Flood's president and COO. In addition to scale and power of a "multi-billion global brand in the diversified businesses of coatings and chemicals," Akzo's financial resources will "allow the Flood brand to take on a leadership position in the premium exterior wood care and specialty coatings industry," he said.
Having a fortified stable of products that meets customer and regulatory demands is essential if a coatings company is to thrive in the exterior paint market. Firms are getting there via acquisition and in-house formulation efforts.
Akzo's purchase of Flood truly enhances its exterior expertise, as exterior products account for nearly 90% of Flood's total sales. In addition, it gives the company a range of products for the restoration of vinyl siding and shutters marketed under the Restora banner, and key distribution in big-box stores.
Benjamin Moore has also bolstered its exterior offerings, replacing its existing Moorwood stain line with its new Benjamin Moore Exterior Stain line. The main factor pushing the overhaul was VOC laws. According to Denman, the Montvale, NJ-based firm expanded the portfolio using the latest technology, offering separate formulations optimized to perform in OTC markets which have more stringent VOC regulations.
"We have had to bring some down to the 250 range," said Denman. This has created a learning curve with application issues, which affects contractors and consumers alike.
Managing changes that stem from regulatory-driven efforts remain paramount for paint makers, and often that leads the discussion right back to cost issues. "The cost of raw materials in the lower VOC formulations can be significantly higher than raw materials used in older technology," said Denman. Previously, when a firm needed to increase the solvent in a paint stain, it was an inexpensive part of the formulation.
"It has shifted the paradigm a bit. Exempt solvents can add significant costs when building lower VOC alkyd-based paints and stains," he added.
As U.S.-based companies reformulate based on regional VOC requirements, time is ticking for European companies to get in compliance with the European Directive 2004 / 42 / CE, which sets out limitations on emissions of VOC due to the use of organic solvents in most decorative paint. Companies must adapt their ranges in two steps, with the first deadline just months away.
Other issues European coatings makers continue to face include the Biocides Product Directive and increasing performance requirements. SigmaKalon takes an international approach with project teams that include R&D, marketing and supply.
"Clearly in these international projects focus is given to innovative solutions to achieve in parallel VOC compliance together with additional improved product characteristics," said Kees van der Kolk, general manager Deco R&D for SigmaKalon.
Sigma has had success with products for mineral substrates and wood substrates. The first, Pancrytex and Imprimtex, are hydro pliolite-based products sold in France under the Seigneurie banner. The latter is the Sigma Continuous product line (offered in the Dutch market), which provides a longer application window even under adverse weather conditions, which minimizes downtime for professional painters.
To create more robust products for exterior applications, there must be a strong focus on R&D and a willingness to experiment and utilize top-notch materials, say industry leaders in the U.S. and overseas.
"New technology and newly developed binders have helped us in developing harder and tougher paint which will stand up to the harsh climate for an increased number of years," noted Kristensen of Jotun U.A.E., which has recently launched Jotashield Thermo, a pure acrylic exterior coating that has been independently proven by the Dubai Municipality to reduce heat absorbed by walls. Special glass beads deflect the sun's heat, cooling the interiors and saving energy, according to the company.
At its Flanders, NJ facility, Benjamin Moore is constantly evaluating new raw materials and technology including binders, resins, colorants and other additives.
"The objective," Denman said, "is to leverage the absolute best ingredients available."
Last month, PPG Industries broke ground in McCarran, NV on a 95,000-sq.-foot architectural coatings manufacturing facility. Expected to begin production near the end of 2007, the facility will manufacture more than 15 million gallons of water-based latex paint per year at full capacity. Brands will include Olympic, Lucite, Pittsburgh and others.
"This new paint manufacturing facility will enable PPG to better serve the expanding networks of Lowe's stores, PPG company-owned stores and independent dealers in 12 western states," said Scott Sinetar, vice president,
A year later, the residential real estate market has cooled substantially (with talk of "bubbles bursting" in select areas), marked by rising interest rates (and foreclosures). According to the U.S. Commerce Department, sales of new homes in July fell 21.6% from the record monthly high set in July 2005, and, on a year-to-date basis, new home sales were down 14.2% compared with the first seven months of 2005.
But the good news is, a slow down in new home sales has only a minimal impact on the decorative paint market.
"Slowing sales of new homes, in and of itself, should not be cause for too great a concern. The vast majority of architectural paint sold in the U.S. is for maintenance or repaint," said Scott Detiveaux, senior consultant with Orr & Boss, Inc.
However, recent reports on existing home sales-a significant influencer of maintenance paint demand-are cause for more concern.
The National Association of Realtors reported that total existing home sales in July-including single-family, townhomes, condominiums and co-ops- dropped 4.1% from June and were down 11.2% from July 2005.
This isn't a welcome development, especially when combined with sluggish new structure sales.
"A slowing market for both new and existing homes will have a negative effect on the market," said Detiveaux.
Still, Detiveaux predicted that although growth will slow towards the end of year, the overall architectural paint market in 2006 "should still top 2005 in terms of total volume," largely due to a strong first half of the year.
Price Pressures Persist
Another factor that continues to shape the market is the price of raw materials as well as energy and transportation. "It is clear that raw materials prices have increased and will keep increasing," one coatings executive told Coatings World. "There is no secret in this respect. In order to remain competitive these increases need to be passed on to our customers."
Companies appear to be making more advances in their effort to curb skyrocketing costs by raising selling prices and zeroing in on any fat that can be removed from their processes. The goal: minimize the total cost of transforming a product from raw materials to finished goods in their customer's hands.
"First, paint companies have had some success in passing along price increases," noted Detiveaux. "Average wholesale prices for paint have risen over the past year at greater pace than the inflation rate. Second, companies are really [examining] the overall supply chain. They are looking to remove costs and improve efficiencies across the board. This includes not only manufacturing and distribution but functions such as planning, scheduling and forecasting as well."
Industry consultant and Coatings World contributor Phil Phillips of Chemark Consulting believes paint makers haven't truly recovered from the impact these price hikes have had.
"First, it is important to repeat the fact that all formulators-small, medium or large-have not fully recovered the costs of raw material increases over the past two years. Therefore, the paint and coatings industry has not regained the so-called equilibrium it 'enjoyed' three-plus years ago when feedstocks were more predictable and steady in their demand for increased prices," Phillips said.
The larger formulators, of course, have had greater "push-back" power to leverage against these more recent raw material cost increases.
"The ICIs and Sherwin-Williams Companies of the world also have an advantage in brand power in the retail market that assists them in raising retail prices to the consumer. However, even the 'bigs' have not fully recovered this rapid raw material influx of costs," Phillips continued.
Passing along price increases isn't an issue relegated to U.S. paint makers alone.
Eirik Kristensen, regional marketing manager, Jotun U.A.E., also acknowledged the need to pass along some of the increased costs. "The demand in our market combined with numerous other external factors has definitely had an impact on the raw materials," said Kristensen. "Jotun has tried to avoid a price increase on our products, but the steep rise in raw materials has forced the industry to take action and make some small adjustments."
Benjamin Moore reports that it has made a serious effort to keep costs in check for its customers, even as it transitioned its premium Moorlife, Moorgard and Moorglo to 100% acrylic products, improving hide and mildew resistance and offering a lifetime warranty.
"The most interesting part, is we didn't raise the price," said Kurt Denman, brand manager with Benjamin Moore. "We are investing in what is in the can itself. It was a conscious decision, and one we didn't come to easily. In addition to the significant cost of improvements to the formulations, there is no denying cost of raw materials, energy and transportation have gone up dramatically. We have been trying to hold pricing, so we didn't have to be so reactionary to it. Hopefully it will come around; we hope those key cost drivers will begin to stabilize."
In the meantime, the higher cost of doing business and steep competition continues to impact the remaining crop of smaller-sized, regional and specialty architectural/deco coatings companies.
According to Phillips, smaller manufacturers have even greater issues with the cost pass-through aspect, as they lack the buying and brand power of their larger competitors. In these rapidly increasing cost times, Phillips said, the big companies "have a significant opportunity to enhance their shares and cause even more rapid consolidation as a result."
Two recent acquisitions, centered on firms with successful architectural/decorative paint operations, are proof the quick pace of consolidation continues.
In August, PPG acquired San Bernardino, CA-based Spectra-Tone, an architectural paint and coatings manufacturer. With the deal, PPG adds a manufacturing location in San Bernardino and 22 company-owned service centers in the western U.S., which substantially expands its retail presence in that market.
Just prior to the PPG/Spectra-Tone deal, Akzo Nobel scooped up another independent when it acquired The Flood Company, the venerable firm that specializes in exterior wood finishes.
The deal substantially increases Akzo Nobel's existing share of the U.S. wood care market-where it already sells its Sikkens brand-and adds $55 million in annual sales to its coffers.
"Following on from the acquisition of Sico, Canada's leading decorative coatings company, this transaction allows Akzo Nobel to exploit another attractive segment of the North American coatings market," said Hans Wijers, Akzo Nobel CEO and member of the board of management responsible for Coatings, in a statement. "Acquiring Flood and its successful portfolio of products will now enable us to create a focused retailer, dealer, professional contractor and consumer wood care business and reinforce our current market position in the U.S., making us one of the leading players in this sector."
Noting the number of M&A moves in the architectural market, Detiveaux of Orr & Boss said players involved in these deals have a significant opportunity. "If done properly, integration of an acquired business offers an excellent opportunity to reduce overall costs," he said.
And, it can also offer the acquired company greater opportunities, as noted by Anthony Ciepiel, Flood's president and COO. In addition to scale and power of a "multi-billion global brand in the diversified businesses of coatings and chemicals," Akzo's financial resources will "allow the Flood brand to take on a leadership position in the premium exterior wood care and specialty coatings industry," he said.
Expanding Product Rosters
Having a fortified stable of products that meets customer and regulatory demands is essential if a coatings company is to thrive in the exterior paint market. Firms are getting there via acquisition and in-house formulation efforts.
Akzo's purchase of Flood truly enhances its exterior expertise, as exterior products account for nearly 90% of Flood's total sales. In addition, it gives the company a range of products for the restoration of vinyl siding and shutters marketed under the Restora banner, and key distribution in big-box stores.
Benjamin Moore has expanded its exterior stains, offering different formulations optimized to perform in OTC markets which have more stringent VOC regulations. |
"We have had to bring some down to the 250 range," said Denman. This has created a learning curve with application issues, which affects contractors and consumers alike.
Managing changes that stem from regulatory-driven efforts remain paramount for paint makers, and often that leads the discussion right back to cost issues. "The cost of raw materials in the lower VOC formulations can be significantly higher than raw materials used in older technology," said Denman. Previously, when a firm needed to increase the solvent in a paint stain, it was an inexpensive part of the formulation.
"It has shifted the paradigm a bit. Exempt solvents can add significant costs when building lower VOC alkyd-based paints and stains," he added.
As U.S.-based companies reformulate based on regional VOC requirements, time is ticking for European companies to get in compliance with the European Directive 2004 / 42 / CE, which sets out limitations on emissions of VOC due to the use of organic solvents in most decorative paint. Companies must adapt their ranges in two steps, with the first deadline just months away.
Other issues European coatings makers continue to face include the Biocides Product Directive and increasing performance requirements. SigmaKalon takes an international approach with project teams that include R&D, marketing and supply.
"Clearly in these international projects focus is given to innovative solutions to achieve in parallel VOC compliance together with additional improved product characteristics," said Kees van der Kolk, general manager Deco R&D for SigmaKalon.
Sigma has had success with products for mineral substrates and wood substrates. The first, Pancrytex and Imprimtex, are hydro pliolite-based products sold in France under the Seigneurie banner. The latter is the Sigma Continuous product line (offered in the Dutch market), which provides a longer application window even under adverse weather conditions, which minimizes downtime for professional painters.
To create more robust products for exterior applications, there must be a strong focus on R&D and a willingness to experiment and utilize top-notch materials, say industry leaders in the U.S. and overseas.
"New technology and newly developed binders have helped us in developing harder and tougher paint which will stand up to the harsh climate for an increased number of years," noted Kristensen of Jotun U.A.E., which has recently launched Jotashield Thermo, a pure acrylic exterior coating that has been independently proven by the Dubai Municipality to reduce heat absorbed by walls. Special glass beads deflect the sun's heat, cooling the interiors and saving energy, according to the company.
At its Flanders, NJ facility, Benjamin Moore is constantly evaluating new raw materials and technology including binders, resins, colorants and other additives.
"The objective," Denman said, "is to leverage the absolute best ingredients available."
PPG Goes West
Last month, PPG Industries broke ground in McCarran, NV on a 95,000-sq.-foot architectural coatings manufacturing facility. Expected to begin production near the end of 2007, the facility will manufacture more than 15 million gallons of water-based latex paint per year at full capacity. Brands will include Olympic, Lucite, Pittsburgh and others.
"This new paint manufacturing facility will enable PPG to better serve the expanding networks of Lowe's stores, PPG company-owned stores and independent dealers in 12 western states," said Scott Sinetar, vice president,
