Still a Great Business to Be In

by John G. Swanson
January 1, 2007
COLUMN : Opening Remarks

There’s no doubt 2006 was a tough year for many in the window and door industry. The impact of the downturn in new housing was made clear by announcements of layoffs at year-end. 

Of course, it wasn’t bad for everyone. Some regions—those less driven by speculative home buying—didn’t see the huge drops. Look to Western Canada and you’ll see markets in some regions kept going strong. Those companies focusing on remodeling and replacement did not feel the effects of the new housing slowdown as much, although the ripple effects were there.

So where do we go from here? Short-term, the picture is mixed. Most economists and experts see new housing bottoming out and recovering sometime within the next 6 to 12 months.

Remodeling and replacement will be stronger, but it’s also going to be a more competitive market, with more companies focusing on opportunities there.

Looking at the long term, I thought I would highlight some of the projections and opinions of financial analysts who study the building products and window and door industries. “We think this is a great industry to be in for the next 10 to 20 years,” said Michael Collins of Jordan Knaupf Co., in a recent Webinar broadcast to industry executives. 

“The window and door industry holds substantial potential for wealth creation over the medium- and long-term,” wrote Tom Doyal of P&M Corporate Finance LLC in a report on the North American industry. Both investment bankers offered words of encouragement—and some words of caution.

The encouraging words concern the new housing market. “New and existing home sales are lower relative to 2005, but are still very robust from a historical perspective,” says Doyal. Home-ownership rates remain high and increasing consumer income, immigration and flexible mortgage rates should support strong long-term demand.

Collins emphasizes basic demographic trends—population growth specifically—in pointing to strong, long-term demand for new housing. Immigration will help fuel an increase in the U.S. population from 250 million to 300 million over the next 35 years. While there may be up years and down years, there will be a steady need for more houses.

Of course, remodeling and replacement account for about half of the window and door market, and that business will continue to grow too, the investment bankers assume. An existing housing stock that continues to grow larger and older will assure activity continues in this segment. Additionally, Doyal notes, aging baby boomers continue to show a willingness to spend more on the products they buy for their homes.

The cautions that both investment bankers offer concern the fact that, as Doyal summarized, “the industry is changing and competition is becoming more intense.” On this front, both Collins and Doyal point to two trends companies need to address—the likelihood of more products coming from overseas and the growing importance of brand recognition.

Suppliers of hardware, extrusions and a variety of products are already battling Chinese competitors, Collins noted. Window and door manufacturers are probably about three years away from the same battle, he predicts, and they should be preparing themselves now.

Chinese manufacturers will have a tough time competing in some market segments, but product areas that involve long production runs and lots of labor present clear opportunities for them.

Manufacturers need to ask, “How many of our customers would be willing to place orders six to eight weeks in advance for a 30 to 50 percent discount?,” Collins suggests. Even if the answer is relatively few, window and door makers need to look not just at the Chinese, but other North American manufacturers that will likely target their business to avoid competing head-to-head with China. 

One strategy that would enable companies to compete more effectively is to focus on brand strength. Doyal suggests branding is increasingly critical to success in the window and door business, going forward. He sees opportunities not just for big national brands, but also points to manufacturers and distributors that have established strong regional identities. 

Doyal also points to the emergence of Generations X and Y creating opportunities for new branding strategies. Accounting for a growing percentage of the homeowner base, these younger generations typically want a higher degree of customization to meet specific needs. They also make buying decisions that are influenced by the Internet and “experiential” marketing experiences. This combination of factors creates new opportunities for companies to establish their brand now in a business that is still wide open.

So, it might not be an easy business, but investment bankers think windows and doors are a good business to be in. Apparently, a lot of window and door executives do too. According to the Industry Pulse, our new annual survey highlighted in the following pages, expectations may be more modest than they were a year ago, but most window and door companies see growth ahead for 2007.

Given the short-term picture for housing, I think that’s pretty good. It makes me even more optimistic for the future.