Adjusting to the “New Norm” in 2011

Window and door companies foresee continued challenges, but opportunities too, in the coming year
Christina Lewellen
December 8, 2010
FEATURE ARTICLE | Markets & Trends

Many window and door companies view 2011 as the year to fully embrace the “new norm” of today’s marketplace. At this point in the extended economic downturn, no one is expecting a speedy recovery or a return to the unsustainable highs of the building craze.

So instead, manufacturers and dealers have settled into a new way of doing business—they are positioning themselves to take advantage of the opportunities that do exist in the market and with a cost structure that’s more closely aligned with current business conditions.

“We are going to have to reinvent what our markets and customers are,” says Matthew O’Shea, director of marketing for GlassCraft Door Co. “We will not be going back to the highs of a few years ago. Even if the house starts come back, we are still going to be doing business differently.”

“Most manufacturers that have been in business for 15-plus years are stronger companies than they were before the industry retreated,” says Tyson Schwartz, VP of sales and marketing at Gorell Windows & Doors. “Companies, including Gorell, are more efficient production-wise, and we continue to look for new and innovative window options that will spur growth.”

“Getting used to this new norm” is going to be the industry’s biggest challenge in 2011, predicts Kevin Surace, CEO of Serious Materials. “People should stop thinking ‘recovery’ and settle in to make great businesses in this environment,” he says. “That means right-sizing organizations, as well as focusing on growth areas.”

No doubt, 2011 will bring with it some significant challenges. “As the market improves, the industry has to continue to confront a downturn in consumer confidence regarding the investment value of homes,” says Keith Early, director of marketing at ODL Inc.
“The biggest challenges will continue to be the high level of housing inventory and unemployment,” predicts Carole Reams, senior marketing manager for PGT Industries. “When these two show significant improvement, then consumer confidence has a better chance of improving as well.”

Many industry representatives choose to focus on reasons to be optimistic in 2011. “We firmly believe that the worst is over and behind us, and the future is bright and full of promising business to come,” says Jeff Witkin, executive vice president for Philadelphia-based Northeast Building Products.

“I could easily draw a comparison between an erratic heartbeat and our sales pattern over the past two years,” reports William Driver, president of American Windows & Doors, a dealer in the state of Washington. “I am starting to feel the slight hint of a beat of regular business once again. This is more than welcome for our company.”

“Several of the industry forecasts have been extremely positive,” notes Schwartz. “Many are calling for a nice increase in business for several years. We certainly are seeing this and are forecasting this to continue into [2011].”

Even those in particularly hard-hit areas are looking forward to moving through 2011. “We are located in Central Florida along the I-4 corridor, which was one of the hardest hit areas of the country, especially in foreclosures,” notes John Wilding, president and COO of Florida-based dealer FAS Windows & Doors. “We are simply focused on getting our region back up to speed. We can only improve from here.”

MARKET FORECASTS
In the new construction realm, housing starts are still just a shadow of the 2 million level of the boom years, the numbers are trending upward. The National Association of Home Builders’ forecast indicates that 2010 will likely wrap up with a little more than 600,000 total housing starts for the year (about 100,000 fewer than NAHB expected to see in 2010 when the year began). In 2011, NAHB expects to see new construction to move up toward around 739,000 units for the year—this number includes both single-family and multifamily starts (Table 1). The association’s outlook for 2012 is even better, when economists expect to break the 1 million mark in starts.

In fact, NAHB’s researchers contend that annual single-family housing production in 2008 and 2009 fell about 1 million units short of the housing that would be needed in a normally-functioning economy. This means builders will have some catching up to do when the economy and household formations edge back toward historic trend levels. “The single-family housing market in the U.S. currently finds itself in a significantly underbuilt state,” says Bob Jones, a Michigan homebuilder and current NAHB chairman. “Pent-up demand for housing will at some point need to be worked off, pushing single-family production in a positive direction.”

In the remodeling realm, experts see more impressive strengthening. Researchers at Harvard’s Joint Center for Housing Studies see “substantive growth” in remodeling spending in 2011 after three years of declines. “The downturn in home improvement activity has pushed spending below its long-term trend,” says Eric Belsky, managing director. “A recovering economy should stabilize house prices and consumer confidence levels, encouraging homeowners to reinvest in their homes and undertake deferred repairs and replacements.”

More optimism for this market can be seen in the IHS Global Insight/Home Improvement Research Institute Product Market Forecast (Table 2). It sees slow-and-steady growth in home improvement spending for the next few years. That research shows an annual growth rate of around 5 percent for the years 2011 through 2015. The total home improvement products market could be worth around $340 billion by the year 2015, analysts predict.

TAX CREDITS
While home improvement categories in general are expected to post gains in 2011 and beyond, the window and door industry has already seen a rebound in this market thanks to a $1,500 Federal tax credit available the past two years. As this issue goes to press, it is still uncertain whether the government incentive will be extended, but no one doubts it has had an impact and that impact will continue to be felt.
“The Federal energy tax credit available to consumers under the 2009 American Recovery and Reinvestment Act definitely raised the awareness of energy efficiency options in windows,” says Sid Spear, VP of sales and marketing for Simonton Windows. “This has been a positive educational experience for homeowners.” Whether the tax credit expired or not, he adds, “We believe homeowners will carry that knowledge with them for future window purchases.”

“Consumers’ interest has been piqued by ways to save on monthly expenses,” agrees Carole Reams, senior marketing manager for PGT Industries. “Tax credits for energy efficient improvements have generated consumer interest in purchasing those products.”

“The energy tax credit was a win-win situation for everybody,” says Greg Irving, vice president of Soft-Lite LLC. “It gave our industry a boost while benefitting homeowners with reduced energy costs.”

With both homeowners and the industry expecting the tax credits to expire at the end of 2010, many manufacturers reported a strong uptick in orders in the final months of the year. Companies are now trying to gauge expectations for next year based on having the credits, or not having them. “We budgeted for some growth in 2011, but not as much as we experienced in 2010 due to the energy tax credits going away.”
“The tax credit has been a great boost for the industry,” says Gorell’s Schwartz. “Ideally, I would like us to have the same tax credit for another year or two. The industry has gotten back on its feet, but we aren’t quite running yet.”

“Not having the $1,500 tax credit will negatively affect business in the first quarter of the year,” says Terry Rex of B.F. Rich. Given the high priority of energy efficiency in the Obama Administration, however, he expects some energy tax credit to be extended or reestablished.

“It appears the ARRA federal tax rebate program helped window sales [in 2010], and we are hopeful it will be extended—either in its current form or one which is more rewarding for the homeowner,” says Jim Barreira, executive vice president and general manager of Harvey Building Products. “We continue to monitor legislation and [hope for] a more organized and clearly-communicated government approach in 2011, one that the trade and homeowners can easily understand and leverage.”

GOVERNMENT INFLUENCE
The government may have benefited the industry with tax credits, but it also presented a challenge in 2010 with the Environmental Protection Agency’s new lead-safe work requirements, which will to continue to affect business this year, some say. “I feel the biggest challenges this industry will experience will be from the government—both from the energy tax credits going away and the RRP lead law being imposed for its first full year,” says FAS’s Wilding. “Both examples I just mentioned are business killers and will not help our industry grow.”

While most report that home improvement companies support lead-safe work practices in concept, it’s tough competing against companies or individuals that don’t abide by the hard-to-enforce rules. “This puts the home improvement company that is trying to do the right thing at a pricing disadvantage,” Schwartz says.

The government can be difficult to predict, which makes solid forecasting difficult for most window and door companies. The ones to succeed will likely be nimble enough to respond to changes. “With the change in D.C. (post elections), lead-safe may get scaled back,” predicts Serious Materials’ Surace.

Many companies will be watching EPA, not only on the lead issue, but also because of changes in the Energy Star program. “Stricter Energy Star guidelines continue to be on our radar,” says ODL’s Early. “The bar was raised in 2010 and we’re monitoring evolving standards that would take effect in 2013. Going forward, we may find that it makes more sense to have some, but not all, of our categorized products follow Energy Star trends.”

GlassCraft’s O’Shea suggests that the growing number of regulations is making this industry tougher to enter. Manufacturers are spending more money to keep up with Energy Star requirements and other testing and certifications, which makes it tricky for smaller companies to keep up, he says. “We may be making a better door, window or product, but we are also making the list of companies that can build the door or window and keep paying the extra fees smaller and smaller,” he notes. “Is it really a good thing for everyone if there are only a handful of window and door companies left? It is going to be very difficult for any start-up company to break into this new, over-regulated industry.”

Taxes may also be holding back companies from investing in a true recovered state this year, notes Gorell’s Schwartz. “I have traveled the country calling on hundreds of small businesses,” he shares. “Almost every single home improvement company that I speak to about hiring tells me the same thing: ‘I am not going to do anything until I know how much my taxes are going to be.’ And many say that if taxes go up, they will just have to make do with less people. They want to hire people, but with the uncertainty of taxes, they are extremely cautious.”

THE UPSHOT
Looking forward, companies are preparing to prosper no matter what the government does in 2011. “We feel that the tax credits provided the start, and now homeowners are educated enough to understand the importance of high-performing window and door products to help save money,” says Northeast’s Witkin. “If the government does not continue with some sort of stimulus package for our industry, manufacturers will have to create new strategies to gain market share and continue growth,” says Soft-Lite’s Irving.

Beyond the tax credit issue, many see other reasons for optimism, particularly on the remodeling and replacement side of the business. “Market conditions are making it more difficult for many younger families to move up. Similarly, many baby boomers are having to age in place,” says ODL’s Early. “While these groups may not be on the move, more are going the R&R route to get the style, energy efficiency and other values they want from their homes.”

“I think we will see a major drive for replacement work; homeowners are staying put,” agrees Steven Butner, owner/president of Indiana dealer Energy Secure Solutions.

The tendency in the past few years for Americans to save money may also help the window and door industry, says Harvey’s Barreira. “Strong personal savings rates over the past year-plus should eventually make homeowners more willing to spend money on delayed or necessary maintenance and/or upgrades,” he says. “Despite the past several years’ slowdown in R&R spending, roofs and other essential home products have continued to age and need professional attention.”

Gorell’s Schwartz already sees homeowners relying less on credit and equity than in the boom years. “We may be seeing a ‘new normal’ as far as financing goes,” he says. “Dealers are doing more cash deals than ever before, meaning the homeowner already has the money to pay for the job. This has resulted in smaller order sizes and a ‘pay as you go’ mentality.”

The market is improving, most agree, with many noting that opportunities are expanding with higher performance products, as well as increased demand for superior looking products with upgrade aesthetic features. “We are excited that the future,” concludes Witken. “Our industry will be more focused on value-added performance products and less on price.”
 

Contact Christina Lewellen, senior editor, at clewellen@glass.org.