The U.S. architectural paint industry, barely inching along in a slumping economy, is singing the blues



Last year, songwriter Tom Waits released a CD titled "New Coat of Paint," which contained the piano blues of recording artist Floyd Dixon. The U.S. architectural paint industry, barely inching along in a slumping economy, is also singing the blues these days. According to its latest report on the U.S. Architectural Coatings Market, Frost & Sullivan indicates that the $7.06 billion market is estimated to grow at only a 2.8% compound annual growth rate (CAGR) during the 2000-2005 forecast period (see Table 1).

Few paint makers are taking solace in the fact that the architectural paint market is somewhat recession-proof because remodeling occurs even when the economy turns sour. Paint companies have been able to abide by the 1999 National Rule for Architectural Coatings from the EPA. However, they are seeing stricter air quality standards from the South Coast Air Quality Management District (SCAQMD) and shuddering at their potential adoption by the Ozone Transport Commission (OTC), which regulates air pollution limits for the Northeast and Mid-Atlantic states. Many coating manufacturers who may be considering expanding into new markets are having second thoughts about undergoing more reformulation, developing new compliant labels, and dealing with other regulations, such as waste disposal.

Adding to their headaches is a changing retail landscape, altering the marketing dynamics for paint companies. As shown in Table 2, when architectural coating revenues are viewed on the basis of store-type channel, some interesting shifts are occurring. In 2001, almost 50% of paint revenues come from stores owned by paint companies, vs. about 29% from independent paint dealers, and more than 21% from the "big boxes"-which includes not only home centers, but mass-merchandising chains, such as Wal-Mart and K-Mart. While company-owned stores and the big boxes will likely show CAGR levels of 3.7% and 3%, respectively, revenue growth from independent dealers will crawl at a snail's pace CAGR of only 1.2%.

While some independents are doing well in the face of such competition, others are not. Opinions vary as to why this is so, but a major red flag remains atop the flagpole - independent dealers lack the financial clout they need. These dealers attempt to court both serious do-it-yourselfers (DIYers) as well as professional contractors by providing them with good service support. For many such dealers, it's not working effectively enough. For one thing, well-staffed and well-financed stores, such as those owned by Sherwin-Williams, are doing a great job in servicing the professional market. Home centers, such as The Home Depot, on the other hand, are not only expanding the number of outlets but are also devoting more attention to DIYers as well as charging them the same price for paint that contractors would pay.

Table 3 shows that coating revenue growth is relatively stronger for the professional segment. In 2001, DIY will account for about 36% of revenues, but grow at a CAGR of 1.8%. Conversely, the professional segment, representing 64%, will grow at 3.2%. While homeowners continue to remodel, fewer of them are willing to do the job themselves - preferring instead to hire painting or remodeling contractors. Exterior painting requires more time and effort than interior projects. Also important is the fact that the U.S. population is aging, with the 40+ years group growing faster than the rest of the country (see Table 4). These factors would help explain why exterior paints, accounting for 39.2% of architectural coating revenues, are growing somewhat slower than interior (see Table 5). Of course, renewed interest in faux-finishing techniques for home interiors is also supporting this shift in explaining the relative importance of these two major paint segments.

Increasing consolidation in the paint industry is posing a challenge for paint retailers by providing fewer choices for them in the marketplace. An independent paint dealer, for example, may be faced with discontinuance of a popular local paint brand because the small paint firm can no longer compete-forcing the dealer to promote a lesser-known brand. These dealers are further challenged into aligning themselves with smaller but more aggressive paint companies, trying to differentiate themselves from sellers of national brands. Consolidation also poses a major problem for smaller paint firms that are not already strongly entrenched in niche markets. Larger, consolidated firms can negotiate better contracts with suppliers and more lucrative arrangements with retailers, leaving smaller paint companies struggling for survival.

Higher energy costs are also adding to the woes of architectural paint firms. Particularly noteworthy is the rising cost of latex binders used in acrylic and vinyl-acrylic resins since petroleum price hikes impact the cost of propylene, a key feedstock for acrylic chemistry. The cost of other key ingredients, such as titanium dioxide, has also been rising. Paint makers cannot easily pass on such increases to the customer due to stern resistance from retailers, particularly the big boxes.

Surging fuel prices are escalating the cost of the paint manufacturing process, as well as driving up the cost of transportation. When one considers that the cost of gasoline rose 21% between 1999 and 2000 and that each gallon of paint weighs an average of almost 11 lbs, it is easy to see how this is dramatically affecting freight costs. Even larger firms with strategically placed warehouses and multiple plant locations have to spend considerable time and expense in planning and consolidating plant shipments and weighing those costs against warehousing and storage expenses.

Obviously, the architectural paint market is a mature one, and the challenge is that competition will become far more intense, since carving out new, untapped markets will be difficult. Instead, any significant growth will have to come at the expense of taking market share away from others. In addition, new market entrants will be discouraged as large paint companies engage in aggressive product proliferation and price-cutting as a result of a combination of product reformulation and streamlined production.

While market expansion can also come about through new product development, truly revolutionary products in the architectural coatings market are rare. Instead, paint companies are doing an admirable job in developing product differentiation based on perceived differences rather than on technological breakthroughs. For instance, companies have taken glazes and marketed them as faux finishes to take advantage of growing consumer interest in sponging or ragging their walls to achieve a different effect. Others have been successful in garnering consumer interest in marketing paints geared for a kid's bedroom, using "fun" graphics on the label. Many are enticing homeowners with a much larger color palette, showing them examples of room decors that provide them with ideas for self-expression.

The architectural coatings industry is a giant, and a slow-moving one at that. While it represents a market filled with challenges, it also is one filled with opportunities. It is anyone's guess how the market will shape up once it shakes off the current sluggishness of the economy. We just have to see what happens after the paint dries.